Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period (16 weeks) ended October 9, 2010
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
_____
to
_____
Commission File No. 0-785
NASH-FINCH COMPANY
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE
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41-0431960 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification No.) |
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7600 France Avenue South, |
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P.O. Box 355 |
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Minneapolis, Minnesota
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55440-0355 |
(Address of principal executive offices)
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(Zip Code) |
(952) 832-0534
(Registrant’s telephone number including area code)
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 þ No o
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 during the proceeding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
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.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of November 8, 2010, 12,167,555 shares of Common Stock of the Registrant were outstanding.
PART I. — FINANCIAL INFORMATION
ITEM 1. Financial Statements
NASH-FINCH COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
(In thousands, except per share amounts)
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16 Weeks Ended |
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40 Weeks Ended |
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October 9, |
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October 10, |
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October 9, |
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October 10, |
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2010 |
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2009 |
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2010 |
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2009 |
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Sales |
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$ |
1,510,881 |
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1,633,304 |
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$ |
3,845,191 |
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3,990,218 |
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Cost of sales |
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1,388,926 |
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1,504,350 |
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3,537,079 |
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3,667,116 |
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Gross profit |
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121,955 |
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128,954 |
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308,112 |
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323,102 |
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Other costs and expenses: |
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Selling, general and administrative |
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81,119 |
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84,716 |
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208,601 |
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222,055 |
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Gain on acquisition of a business |
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— |
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— |
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— |
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(6,682 |
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Gain on litigation settlement |
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— |
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(7,630 |
) |
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— |
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(7,630 |
) |
Depreciation and amortization |
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10,883 |
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12,592 |
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27,638 |
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31,299 |
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Interest expense |
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7,123 |
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7,621 |
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17,747 |
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18,765 |
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Total other costs and expenses |
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99,125 |
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97,299 |
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253,986 |
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257,807 |
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Earnings before income taxes |
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22,830 |
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31,655 |
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54,126 |
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65,295 |
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Income tax expense |
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7,484 |
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9,728 |
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20,125 |
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19,410 |
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Net earnings |
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$ |
15,346 |
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21,927 |
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$ |
34,001 |
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45,885 |
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Net earnings per share: |
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Basic |
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$ |
1.21 |
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1.68 |
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$ |
2.64 |
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3.53 |
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Diluted |
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$ |
1.18 |
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1.64 |
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$ |
2.57 |
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3.44 |
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Declared dividends per common share |
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$ |
0.18 |
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0.18 |
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$ |
0.54 |
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0.54 |
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Weighted average number of common shares
outstanding and common equivalent shares outstanding: |
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Basic |
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12,656 |
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13,021 |
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12,870 |
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12,998 |
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Diluted |
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13,038 |
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13,377 |
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13,223 |
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13,344 |
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See accompanying notes to consolidated financial statements.
2
NASH-FINCH COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share amounts)
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October 9, |
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January 2, |
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2010 |
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2010 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
785 |
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830 |
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Accounts and notes receivable, net |
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271,489 |
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250,767 |
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Inventories |
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341,405 |
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285,443 |
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Prepaid expenses and other |
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13,188 |
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11,410 |
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Deferred tax asset, net |
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5,592 |
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9,366 |
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Total current assets |
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632,459 |
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557,816 |
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Notes receivable, net |
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21,498 |
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23,343 |
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Property, plant and equipment: |
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Property, plant and equipment |
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653,901 |
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637,167 |
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Less accumulated depreciation and amortization |
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(415,159 |
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(422,529 |
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Net property, plant and equipment |
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238,742 |
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214,638 |
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Goodwill |
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166,545 |
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166,545 |
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Customer contracts and relationships, net |
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18,803 |
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21,062 |
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Investment in direct financing leases |
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3,003 |
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3,185 |
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Other assets |
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11,090 |
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12,947 |
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Total assets |
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$ |
1,092,140 |
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999,536 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Current maturities of long-term debt and capitalized lease obligations |
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$ |
3,170 |
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4,438 |
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Accounts and other payables |
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281,570 |
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240,483 |
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Accrued expenses |
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58,995 |
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60,524 |
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Income taxes payable |
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1,424 |
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3,064 |
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Total current liabilities |
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345,159 |
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308,509 |
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Long-term debt |
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299,363 |
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257,590 |
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Capitalized lease obligations |
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19,408 |
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21,442 |
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Deferred tax liability, net |
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23,057 |
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19,323 |
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Other liabilities |
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41,470 |
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42,113 |
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Commitments and contingencies |
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— |
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— |
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Stockholders’ equity: |
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Preferred stock — no par value. Authorized 500 shares; none issued |
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— |
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— |
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Common stock — $1.66 2/3 par value. Authorized 50,000 shares,
issued 13,676 and 13,675 shares, respectively |
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22,793 |
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22,792 |
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Additional paid-in capital |
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113,089 |
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106,705 |
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Common stock held in trust |
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(1,203 |
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(2,342 |
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Deferred compensation obligations |
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1,203 |
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2,342 |
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Accumulated other comprehensive loss |
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(10,415 |
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(10,756 |
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Retained earnings |
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288,893 |
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261,821 |
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Common stock in treasury, 1,508 and 863 shares, respectively |
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(50,677 |
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(30,003 |
) |
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Total stockholders’ equity |
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363,683 |
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350,559 |
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Total liabilities and stockholders’ equity |
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$ |
1,092,140 |
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999,536 |
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See accompanying notes to consolidated financial statements.
3
NASH-FINCH COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
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40 Weeks Ended |
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October 9, |
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October 10, |
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2010 |
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2009 |
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Operating activities: |
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Net earnings |
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$ |
34,001 |
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45,885 |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Gain on acquisition of a business |
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— |
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(6,682 |
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Gain on litigation settlement |
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— |
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(7,630 |
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Depreciation and amortization |
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27,638 |
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31,299 |
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Amortization of deferred financing costs |
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1,411 |
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1,357 |
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Non-cash convertible debt interest |
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4,058 |
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3,753 |
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Amortization of rebateable loans |
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3,074 |
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3,133 |
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Provision for bad debts |
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216 |
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1,070 |
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Provision for lease reserves |
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291 |
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1,492 |
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Deferred income tax expense (benefit) |
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7,510 |
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(1,237 |
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Gain on sale of real estate and other |
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(423 |
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(1 |
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LIFO credit |
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(76 |
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(732 |
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Asset impairments |
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926 |
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1,738 |
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Share-based compensation |
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6,179 |
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7,421 |
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Deferred compensation |
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838 |
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990 |
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Other |
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(730 |
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(129 |
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Changes in operating assets and liabilities: |
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Accounts and notes receivable |
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(22,593 |
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(38,921 |
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Inventories |
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(55,886 |
) |
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(32,838 |
) |
Prepaid expenses |
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1,887 |
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824 |
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Accounts and other payables |
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14,407 |
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23,294 |
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Accrued expenses |
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(912 |
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(14,529 |
) |
Income taxes payable |
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(5,305 |
) |
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946 |
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Other assets and liabilities |
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(200 |
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1,795 |
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Net cash provided by operating activities |
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16,311 |
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22,298 |
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Investing activities: |
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Disposal of property, plant and equipment |
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575 |
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507 |
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Additions to property, plant and equipment |
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(39,853 |
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(12,563 |
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Business acquired, net of cash |
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— |
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(78,056 |
) |
Loans to customers |
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(1,095 |
) |
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(2,225 |
) |
Payments from customers on loans |
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1,703 |
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3,411 |
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Other |
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(400 |
) |
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(154 |
) |
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Net cash used in investing activities |
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(39,070 |
) |
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(89,080 |
) |
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Financing activities: |
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Proceeds of revolving debt |
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38,000 |
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80,500 |
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Dividends paid |
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(6,739 |
) |
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(6,929 |
) |
Repurchase of Common Stock |
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(20,267 |
) |
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— |
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Payments of long-term debt |
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(264 |
) |
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(248 |
) |
Payments of capitalized lease obligations |
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(3,009 |
) |
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(2,649 |
) |
Increase (decrease) in book overdraft |
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14,993 |
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(1,346 |
) |
Payments of deferred financing costs |
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— |
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(2,706 |
) |
Other |
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— |
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196 |
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Net cash provided by financing activities |
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22,714 |
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66,818 |
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Net increase (decrease) in cash and cash equivalents |
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(45 |
) |
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36 |
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Cash and cash equivalents: |
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Beginning of year |
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830 |
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|
824 |
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End of period |
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$ |
785 |
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|
860 |
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Supplemental schedule of non-cash investing and financing activities: |
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Capital expenditures funded by other payables |
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$ |
8,500 |
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— |
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See accompanying notes to consolidated financial statements.
4
Nash-Finch Company and Subsidiaries
Notes to Consolidated Financial Statements
October 9, 2010
Note 1 — Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for
interim financial information. Accordingly, they do not include all of the information and
footnotes required by U.S. GAAP for complete financial statements. For further information, refer
to the consolidated financial statements and footnotes included in our Annual Report on Form 10-K
for the year ended January 2, 2010.
The accompanying unaudited consolidated financial statements include all adjustments which
are, in the opinion of management, necessary to present fairly the financial position of Nash-Finch
Company and our subsidiaries (“Nash Finch” or “the Company”) at October 9, 2010, and January 2,
2010, the results of operations for the 16 and 40 weeks ended October 9, 2010 (“third quarter
2010”), and October 10, 2009 (“third quarter 2009”), and changes in cash flows for the 40 weeks
ended October 9, 2010, and October 10, 2009. Adjustments consist only of normal recurring items,
except for any items discussed in the notes below. All material intercompany accounts and
transactions have been eliminated in the unaudited consolidated financial statements. Results of
operations for the interim periods presented are not necessarily indicative of the results to be
expected for the full year.
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Note 2 — Acquisition
On January 31, 2009, the Company completed the purchase from GSC Enterprises, Inc. (“GSC”), of
substantially all of the assets relating to three military food distribution centers located in San
Antonio, Texas, Pensacola, Florida, and Junction City, Kansas, serving military commissaries and
exchanges (“Business”). The Company also assumed certain trade payables and accrued expenses
associated with the assets being acquired. The aggregate purchase price paid was $78.1 million in
cash.
The following table summarizes the fair values of the assets acquired and liabilities assumed
of the Business assumed at the acquisition date:
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As of January 31, 2009 |
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(in thousands) |
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Cash and cash equivalents |
|
$ |
47 |
|
Accounts receivable |
|
|
61,285 |
|
Inventories |
|
|
42,061 |
|
Prepaid expenses and other |
|
|
210 |
|
Property, plant and equipment |
|
|
30,294 |
|
Other assets |
|
|
890 |
|
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|
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|
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|
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Total identifiable assets acquired |
|
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134,787 |
|
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Current liabilities |
|
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43,114 |
|
Accrued expenses |
|
|
1,162 |
|
Deferred tax liability, net |
|
|
4,272 |
|
Other long-term liabilities |
|
|
1,456 |
|
|
|
|
|
Total liabilities assumed |
|
|
50,004 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
84,783 |
|
|
|
|
|
5
The fair value of the net assets acquired of $84.8 million exceeded the purchase price of
$78.1 million. Consequently, the Company reassessed the recognition and measurement of
identifiable assets acquired and liabilities assumed and concluded that the valuation procedures
and resulting measures were appropriate. As a result, the Company recognized a gain of $6.7
million (net of tax) in the first quarter 2009 associated with the acquisition of the Business.
The gain is included in the line item “Gain on acquisition of a business” in the Consolidated
Statement of Income.
A contingency of $0.3 million is included in the other long-term liabilities account in the
table above related to a payment the Company would have been required to make in the event a
purchase option was not exercised associated with the sublease of the Pensacola, FL facility prior
to October 10, 2010. The Company determined the range of the potential loss was zero to $1.0
million and the acquisition date fair value of the contingency was $0.3 million based upon a
probability-weighted discounted cash flow valuation technique. The Company exercised the purchase
option during the third quarter 2010. The resulting gain recognized from the settlement of this
contingency of $0.3 million is included on the Selling, general and administrative line on our
Consolidated Statement of Income.
The Company recognized acquisition and integration costs of approximately $0.9 million during
the third quarter 2009. Acquisition and integration costs were $0.7 million and $2.3 million
during year-to-date 2010 and year-to-date 2009, respectively.
Sales of the Business included in the Consolidated Statement of Income for the third quarter
2010 and third quarter 2009 were $219.3 million and $229.2 million, respectively, and were $563.3
million and $508.4 million during year-to-date 2010 and 2009, respectively. Although the Company
has made reasonable efforts to do so, synergies achieved through the integration of the Business
into the Company’s military segment, unallocated interest expense and the allocation of shared
overhead specific to the Business cannot be precisely determined. Accordingly, the Company has
deemed it impracticable to calculate the precise impact the Business has had and will have on the
Company’s net earnings. However, please refer to “Note 13-Segment Reporting” of this Form 10-Q for
a comparison of military segment sales and profit for the third quarter and year-to-date periods of
fiscal 2010 and 2009.
Supplemental pro forma financial information
The unaudited pro forma financial information in the table below combines the historical
results for the Company and the historical results for the Business for the 40 weeks ended October
10, 2009. This pro forma financial information is provided for illustrative purposes only and does
not purport to be indicative of the actual results that would have been achieved by the combined
operations for the period presented or that will be achieved by the combined operations in the
future.
|
|
|
|
|
|
|
40 Weeks Ended |
|
(in thousands, except per share data) |
|
October 10, 2009 |
|
Total revenues |
|
$ |
4,052,508 |
|
Net earnings |
|
|
46,051 |
|
Basic earnings per share |
|
|
3.54 |
|
Diluted earnings per share |
|
|
3.45 |
|
Note 3 — Inventories
We use the LIFO method for valuation of a substantial portion of inventories. An actual
valuation of inventory under the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on
management’s estimates of expected year-end inventory levels and costs. Because these estimates
are subject to many factors beyond management’s control, interim results are subject to the final
year-end LIFO inventory valuation. If the FIFO method had been used, inventories would have been
approximately $73.0 million higher at October 9, 2010, and $73.1 million higher at January 2, 2010.
We recorded a LIFO charge of $0.3 million during the third quarter 2010 as compared to a LIFO
credit of $0.4 million during the third quarter 2009. During year-to-date 2010 and 2009 we
recorded LIFO credits of $0.1 million and $0.7 million, respectively.
6
Note 4 — Share-Based Compensation
We account for share-based compensation awards in accordance with the provisions of Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 (“ASC 718”)
which requires companies to estimate the fair value of share-based payment awards on the date of
grant using an option-pricing model. The value of the portion of the awards ultimately expected to
vest is recognized as expense over the requisite service period. We recognized share-based
compensation expense as a component of selling, general and administrative expense in our
Consolidated Statements of Income in the amount of $6.2 million during year-to-date 2010 versus
$7.4 million during year-to-date 2009.
We have four equity compensation plans under which incentive stock options, non-qualified
stock options and other forms of share-based compensation have been, or may be, granted primarily
to key employees and non-employee members of the Board of Directors. These plans include the 2009
Incentive Award Plan (as Amended and Restated as of March 2, 2010,) (“2009 Plan”), the 2000 Stock
Incentive Plan (“2000 Plan”), the Director Deferred Compensation Plan, and the 1997 Non-Employee
Director Stock Compensation Plan. These plans are more fully described in Part II, Item 8 in our
Annual Report on Form 10-K for the fiscal year ended January 2, 2010 under the caption “Footnote 11
— Share-based Compensation Plans” and in Exhibit 10.1 to our current report on Form 8-K/A dated
March 5, 2010.
As of October 10, 2009, options to purchase 10,000 shares of common stock at a weighted
average price of $35.36 per share were outstanding and exercisable under the 2000 Plan. As of
October 9, 2010, no options are outstanding.
Since 2005, awards have taken the form of performance units (including share units pursuant to
our Long-Term Incentive Plan (“LTIP”)), restricted stock units (“RSUs”) and Stock Appreciation
Rights (“SARs”).
Performance units have been granted during each of fiscal years 2005 through 2010 pursuant to
our LTIP. These units vest at the end of a three-year performance period. All units under the
2006 plan were settled in shares of our common stock during the second quarter 2009. 102,133 units
outstanding under the 2007 plan vested on January 2, 2010 and were settled in the second quarter
2010 for approximately 171,000 shares of common stock, of which approximately 145,000 were deferred
by recipients until termination of employment as provided in the plan.
During year-to-date 2010 and fiscal year 2009, 123,128 and 108,696 units, respectively, were
granted pursuant to our 2010 and 2009 LTIP. Depending on a comparison of the Company’s cumulative
three-year actual EBITDA results to the cumulative three-year strategic plan EBITDA targets and the
Company’s ranking on absolute return on net assets and compound annual growth rate for return on
net assets among the companies in the peer group, a participant could receive a number of shares
ranging from zero to 200% of the number of performance units granted. Because these units can
only be settled in stock, compensation expense (for shares expected to vest) is recorded over the
three-year period for the grant date fair value.
During fiscal 2006 through 2010, RSUs were awarded to certain executives of the Company.
Awards vest in increments over the term of the grant or cliff vest on the fifth anniversary of the
grant date, as designated in the award documents. In addition to the time vesting criteria, awards
granted in 2008 and 2009 to two of the
Company’s executives include performance vesting conditions. The Company records expense for
such awards over the service vesting period if the Company anticipates the performance vesting
conditions will be satisfied.
On December 17, 2008, in connection with the Company’s announcement of its planned acquisition
of certain military distribution assets of GSC, eight executives of the Company were granted a
total of 267,345 SARs with a per share price of $38.44. The SARs are eligible to become vested
during the 36 month period commencing on closing of the acquisition of the GSC assets which was
January 31, 2009. The SARs will vest on the first business day during the vesting period that
follows the date on which the closing prices on NASDAQ for a share of Nash Finch common stock for
the previous 90 market days is at least $55.00 or termination of the executive’s employment due to
death or disability. Upon exercise, the Company will award the executive a number of shares of
restricted stock equal to (a) the product of (i) the number of shares with respect to which the SAR
is exercised and (ii) the excess, if any, of (x) the fair market value per share of common stock on
the date of exercise over (y) the base price per share relating to such SAR, divided by (b) the
fair market value of a share of common stock on the date such SAR is exercised. The restricted
stock shall vest on the first anniversary of the date of exercise so long as the executive remains
continuously employed with the Company.
7
The fair value of SARs is estimated on the date of grant using a modified binomial lattice
model which factors in the market and service vesting conditions. The modified binomial lattice
model used by the Company incorporates a risk-free interest rate based on the 5-year treasury rate
on the date of the grant. The model uses an expected volatility calculated as the daily price
variance over 60, 200 and 400 days prior to grant date using the Fair Market Value (average of
daily high and low market price of Nash Finch common stock) on each day. Dividend yield utilized
in the model is calculated by the Company as the average of the daily yield (as a percent of the
Fair Market Value) over 60, 200 and 400 days prior to the grant date. The modified binomial
lattice model calculated a fair value of $8.44 per SAR which will be recorded over a derived
service period of 3.55 years.
The following assumptions were used to determine the fair value of SARs granted during fiscal
2008:
|
|
|
|
|
Assumptions — SARs Valuation |
|
2008 Grants |
|
|
|
|
|
|
Weighted-average risk-free interest rate |
|
|
1.37 |
% |
Expected dividend yield |
|
|
1.86 |
% |
Expected volatility |
|
|
35 |
% |
Exercise price |
|
$ |
38.44 |
|
Market vesting price (90 consecutive market days at or above
this price) |
|
$ |
55.00 |
|
Contractual term |
|
5.1 years |
|
The following table summarizes activity in our share-based compensation plans during the
year-to-date period 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
Performance |
|
|
Average |
|
|
|
|
|
|
|
Remaining |
|
|
Based Grants |
|
|
Remaining |
|
|
|
Service Based |
|
|
Restriction/ |
|
|
(LTIP & |
|
|
Restriction/ |
|
|
|
Grants (Board |
|
|
Vesting Period |
|
|
Performance |
|
|
Vesting Period |
|
(in thousands, except vesting periods) |
|
Units and RSUs) |
|
|
(Years) |
|
|
RSUs) |
|
|
(Years) |
|
|
Outstanding at January 2, 2010 |
|
|
606.8 |
|
|
|
1.0 |
|
|
|
408.1 |
|
|
|
1.0 |
|
Granted |
|
|
33.1 |
|
|
|
|
|
|
|
123.6 |
|
|
|
|
|
Forfeited/cancelled |
|
|
— |
|
|
|
|
|
|
|
(8.3 |
) |
|
|
|
|
Restrictions lapsed/ units settled |
|
|
(35.6 |
) |
|
|
|
|
|
|
(102.1 |
) |
|
|
|
|
Shares deferred upon vesting/settlement &
dividend equivalents on deferred shares* |
|
|
39.8 |
|
|
|
|
|
|
|
150.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 9, 2010 |
|
|
644.1 |
|
|
|
0.7 |
|
|
|
571.3 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable/unrestricted at January 2, 2010 |
|
|
273.6 |
|
|
|
|
|
|
|
170.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable/unrestricted at October 9, 2010 |
|
|
313.4 |
|
|
|
|
|
|
|
218.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
“Shares deferred upon vesting/settlement” above are net of the performance adjustment factor
applied to the “units settled” for the participants that deferred shares as provided in the
plan. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Stock |
|
|
Average |
|
|
|
Appreciation |
|
|
Base/Exercise |
|
(in thousands, except per share amounts) |
|
Rights |
|
|
Price Per SAR |
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2010 |
|
|
267.3 |
|
|
$ |
38.44 |
|
Granted |
|
|
— |
|
|
|
|
|
Exercised/restrictions lapsed |
|
|
— |
|
|
|
|
|
Forfeited/cancelled |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 9, 2010 |
|
|
267.3 |
|
|
|
38.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable/unrestricted at January 2, 2010 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable/unrestricted at October 9, 2010 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of time vesting equity units and performance
vesting units granted during year-to-date 2010 was $35.78 and $35.75, respectively.
8
Note 5 — Fair Value Measurements
ASC Topic 820 (“ASC 820”) defines fair value, establishes a framework for measuring fair value
and expands disclosures about financial and non-financial assets and liabilities recorded at fair
value. It also applies under other accounting pronouncements that require or permit fair value
measurements.
The fair value hierarchy for disclosure of fair value measurements under ASC 820 is as
follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Quoted prices, other than quoted prices included in Level 1, which are observable
for the assets or liabilities, either directly or indirectly.
Level 3: Inputs that are unobservable for the assets or liabilities.
Our outstanding interest rate swap agreements are classified within level 2 of the valuation
hierarchy as readily observable market parameters are available to use as the basis of the fair
value measurement. As of October 9, 2010, we have recorded a fair value liability of $0.6 million
in relation to our outstanding interest rate swap agreements as compared to $1.1 million as of
January 2, 2010, which is included in accrued expenses on our Consolidated Balance Sheet.
Other Financial Assets and Liabilities
Financial assets with carrying values approximating fair value include cash and cash
equivalents and accounts receivable. Financial liabilities with carrying values approximating fair
value include accounts payable and outstanding checks. The carrying value of these financial assets
and liabilities approximates fair value due to their short maturities.
The fair value of notes receivable approximates the carrying value at October 9, 2010 and
January 2, 2010. Substantially all notes receivable are based on floating interest rates which
adjust to changes in market rates.
Long-term debt, which includes the current maturities of long-term debt, at October 9, 2010,
had a carrying value and fair value of $300.0 million and $296.9 million, respectively, and at
January 2, 2010, had a carrying value and fair value of $258.2 million and $255.0 million,
respectively. The fair value is based on interest rates that are currently available to us for
issuance of debt with similar terms and remaining maturities.
We account for the impairment of long-lived assets in accordance with ASC Subtopic 360-10-35.
During the third quarter 2010 we recognized asset impairments of $0.1 million as compared to asset
impairment of $0.8 million during the third quarter 2009. For year-to-date 2010 and 2009 assets
impairments were $0.9 million and $1.7 million, respectively. We utilize a discounted cash flow
model that incorporates unobservable level 3 inputs to test for long-lived asset impairment.
Note 6 — Derivatives
We have market risk exposure to changing interest rates primarily as a result of our borrowing
activities and commodity price risk associated with anticipated purchases of diesel fuel. Our
objective in managing our exposure to changes in interest rates and commodity prices is to reduce
fluctuations in earnings and cash flows. From time-to-time we use derivative instruments,
primarily interest rate and commodity swap agreements, to manage risk exposures when appropriate,
based on market conditions. We do not enter into derivative agreements for trading or other
speculative purposes, nor are we a party to any leveraged derivative instrument.
9
The interest rate swap agreements are designated as cash flow hedges and are reflected at fair
value in our Consolidated Balance Sheet and the related gains or losses on these contracts are
deferred in stockholders’ equity as a component of other comprehensive income. As of October 9,
2010, and January 2, 2010, we had recorded a fair value liability of $0.6 million and $1.1 million,
respectively, which are included in accrued expenses in our Consolidated Balance Sheet. Deferred
gains and losses are amortized as an adjustment to interest expense over the same period in which
the related items being hedged are recognized in income. However, to the extent that any of these
contracts are not considered to be effective in accordance with ASC Topic 815 (“ASC 815”) in
offsetting the change in the value of the items being hedged, any changes in fair value relating to
the ineffective portion of these contracts are immediately recognized in income. Our two
outstanding interest rate swaps have been considered effective in accordance with ASC 815 since
they began during fiscal 2008.
Our interest rate swap agreements resulted in net payments of approximately $0.3 million and
$0.5 million during the third quarters of fiscal 2010 and 2009, respectively, and resulted in net
payments of $0.9 million and $1.2 million during year-to-date 2010 and year-to-date 2009,
respectively, which are included in interest expense on our Consolidated Statement of Income.
As of October 9, 2010, we had two outstanding interest rate swap agreements with notional
amounts totaling $35.0 million as compared to $52.5 million as of October 10, 2009. The notional
amounts of the two outstanding swaps are reduced as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Effective Date |
|
|
Termination Date |
|
|
Fixed Rate |
|
|
|
|
$30,000 |
|
|
|
10/15/2008 |
|
|
|
10/15/2009 |
|
|
|
3.49% |
|
|
|
|
20,000 |
|
|
|
10/15/2009 |
|
|
|
10/15/2010 |
|
|
|
3.49% |
|
|
|
|
10,000 |
|
|
|
10/15/2010 |
|
|
|
10/15/2011 |
|
|
|
3.49% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Effective Date |
|
|
Termination Date |
|
|
Fixed Rate |
|
|
|
|
$22,500 |
|
|
|
10/15/2008 |
|
|
|
10/15/2009 |
|
|
|
3.38% |
|
|
|
|
15,000 |
|
|
|
10/15/2009 |
|
|
|
10/15/2010 |
|
|
|
3.38% |
|
|
|
|
7,500 |
|
|
|
10/15/2010 |
|
|
|
10/15/2011 |
|
|
|
3.38% |
|
In addition to the previously discussed interest rate and commodity swap agreements, from
time-to-time we enter into fixed price fuel supply agreements to support our food distribution
segment. On January 1, 2009, we entered into an agreement which required us to purchase a total of
252,000 gallons of diesel fuel per month at prices ranging from $1.90 to $1.98 per gallon. The
term of the agreement was for one year and expired on
December 31, 2009. This fixed price fuel agreement qualified for the “normal purchase” exception
under ASC 815, therefore the fuel purchases under the contract were expensed as incurred as an
increase to cost of sales.
Note 7 — Other Comprehensive Income
Other comprehensive income consists of market value adjustments to reflect derivative
instruments at fair value, pursuant to ASC 815. The components of comprehensive income are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 Weeks Ended |
|
|
Year-to-date Ended |
|
|
|
October 9, |
|
|
October 10, |
|
|
October 9, |
|
|
October 10, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
15,346 |
|
|
|
21,927 |
|
|
|
34,001 |
|
|
|
45,885 |
|
Change in fair value of derivatives, net of tax |
|
|
154 |
(1) |
|
|
23 |
(2) |
|
|
341 |
(3) |
|
|
302 |
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
15,500 |
|
|
|
21,950 |
|
|
|
34,342 |
|
|
|
46,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of tax of $99. |
|
(2) |
|
Net of tax of $15. |
|
(3) |
|
Net of tax of $218. |
|
(4) |
|
Net of tax of $193. |
The gain reported in other comprehensive income during the third quarter and year-to-date
periods of 2010 and 2009 reflect a change in fair value of our outstanding interest rate swap
agreements during the respective periods. During the third quarter and year-to-date periods of
2010 and 2009, our outstanding interest rate swap agreements were designated as cash flow hedges.
Please refer to “Note 6 — Derivatives” of this Form 10-Q for information related to our interest
rate swap agreements.
10
Note 8 — Long-term Debt and Bank Credit Facilities
Total debt outstanding was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
October 9, |
|
|
January 2, |
|
(In thousands) |
|
2010 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Asset-backed credit agreement: |
|
|
|
|
|
|
|
|
Revolving credit |
|
$ |
162,100 |
|
|
|
124,100 |
|
Senior subordinated convertible debt, 3.50% due in 2035 |
|
|
135,422 |
|
|
|
131,364 |
|
Industrial development bonds, 5.60% to 5.75% due in various
installments through 2014 |
|
|
2,170 |
|
|
|
2,365 |
|
Notes payable and mortgage notes, 7.95% due in various
installments through 2013 |
|
|
319 |
|
|
|
388 |
|
|
|
|
|
|
|
|
Total debt |
|
|
300,011 |
|
|
|
258,217 |
|
Less current maturities |
|
|
(648 |
) |
|
|
(627 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
299,363 |
|
|
|
257,590 |
|
|
|
|
|
|
|
|
Asset-backed Credit Agreement
Our credit agreement is an asset-backed loan consisting of a $340.0 million revolving credit
facility, which includes a $50.0 million letter of credit sub-facility (the “Revolving Credit
Facility”). Provided no default is then existing or would arise, the Company may from
time-to-time, request that the Revolving Credit Facility be increased by an aggregate amount (for
all such requests) not to exceed $110.0 million. The Revolving Credit Facility has a 5-year term
and will be due and payable in full on April 11, 2013. The Company can elect, at the
time of borrowing, for loans to bear interest at a rate equal to the base rate, as defined in
the credit agreement, or LIBOR plus a margin. The LIBOR interest rate margin was 2.00% as of
October 9, 2010, and can vary quarterly in 0.25% increments between three pricing levels ranging
from 1.75% to 2.25% based on the excess availability, which is defined in the credit agreement as
(a) the lesser of (i) the borrowing base; or (ii) the aggregate commitments; minus (b) the
aggregate of the outstanding credit extensions. As of October 9, 2010, $157.6 million was
available under the Revolving Credit Facility after giving effect to outstanding borrowings and to
$20.3 million of outstanding letters of credit primarily supporting workers’ compensation
obligations and real estate purchases.
The credit agreement contains no financial covenants unless and until (i) the continuance of
an event of default under the credit agreement, or (ii) the failure of the Company to maintain
excess availability (a) greater than 10% of the borrowing base for more than two (2) consecutive
business days or (b) greater than 7.5% of the borrowing base at any time, in which event, the
Company must comply with a trailing 12-month basis consolidated fixed charge covenant ratio of
1.0:1.0, which ratio shall continue to be tested each month thereafter until excess availability
exceeds 10% of the borrowing base for 90 consecutive days.
The credit agreement contains standard covenants requiring the Company and its subsidiaries,
among other things, to maintain collateral, comply with applicable laws, keep proper books and
records, preserve the corporate existence, maintain insurance, and pay taxes in a timely manner.
Events of default under the credit agreement are usual and customary for transactions of this type
including, among other things: (a) any failure to pay principal there under when due or to pay
interest or fees on the due date; (b) material misrepresentations; (c) default under other
agreements governing material indebtedness of the Company; (d) default in the performance or
observation of any covenants; (e) any event of insolvency or bankruptcy; (f) any final judgments or
orders to pay more than $15.0 million that remain unsecured or unpaid; (g) change of control, as
defined in the credit agreement; and (h) any failure of a collateral document, after delivery
thereof, to create a valid mortgage or first-priority lien.
We are currently in compliance with all covenants contained within the credit agreement.
Senior Subordinated Convertible Debt
To finance a portion of the acquisition of distribution centers in 2005, we sold $150.1
million in aggregate issue price (or $322.0 million aggregate principal amount at maturity) of
senior subordinated convertible notes due in 2035. The notes are our unsecured senior subordinated
obligations and rank junior to our existing and future senior indebtedness, including borrowings
under our Revolving Credit Facility. See our Annual Report on Form 10-K for the fiscal year ended
January 2, 2010, for additional information regarding the notes.
11
Note 9 — Guarantees
We have guaranteed debt and lease obligations of certain food distribution customers. In the
event these retailers are unable to meet their debt service payments or otherwise experience an
event of default, we would be unconditionally liable for the outstanding balance of their debt and
lease obligations ($10.4 million as of October 9, 2010, as compared to $13.5 million as of January
2, 2010), which would be due in accordance with the underlying agreements.
We have entered into debt and lease guarantees on behalf of certain food distribution
customers that are accounted for under ASC Topic 460 (“ASC 460”). ASC 460 provides that at the
time a company issues a guarantee, the company must recognize an initial liability for the fair
value of the obligation it assumes under that guarantee. The maximum undiscounted payments we
would be required to make in the event of default under the guarantees is $7.6 million, which is
included in the $10.4 million total referenced above. These guarantees are secured by certain
business assets and personal guarantees of the respective customers. We believe these customers
will be able to perform under their respective agreements and that no payments will be required and
no loss will be incurred under the guarantees. As required by ASC 460, a liability representing
the fair value of the obligations assumed under the guarantees of $1.0 million is included in the
accompanying consolidated financial statements for the guarantees accounted for under ASC 460. All
of the other guarantees were issued prior to December 31, 2002 and therefore not subject to the
recognition and measurement provisions of ASC 460.
We have also assigned various leases to other entities. If the assignees were to become
unable to continue making payments under the assigned leases, we estimate our maximum potential
obligation with respect to the assigned leases to be $9.5 million as of October 9, 2010 as compared
to $8.0 million as of January 2, 2010.
Note 10 — Income Taxes
For the third quarter 2010 and 2009 our tax expense was $7.5 million and $9.7 million,
respectively. Year-to-date 2010 and 2009 tax expense was $20.1 million and $19.4 million,
respectively.
The provision for income taxes reflects the Company’s estimate of the effective rate expected
to be applicable for the full fiscal year, adjusted for any discrete events, which are reported in
the period that they occur. This estimate is re-evaluated each quarter based on the Company’s
estimated tax expense for the full fiscal year. The third quarter 2010 effective tax rate was
impacted by the reversal of previously unrecognized tax benefits primarily due to statute of
limitations expirations. For the third quarter 2009, the effective tax rate was reflective of the
effects from the settlement of 2009 uncertain tax positions including the release of certain income
tax contingency reserves related to these discrete events. Additionally, the third quarter 2009
reflects the one time tax effect on the gain from the settlement of the legal litigation with
Roundy’s. For the third quarter 2010 and 2009, the effective tax rate was 32.8% and 30.7%,
respectively.
The total amount of unrecognized tax benefits as of end of the third quarter 2010 was $11.6
million. The net decrease in unrecognized tax benefits of $1.7 million since June 19, 2010 was due
to a $2.4 million decrease in the unrecognized tax benefits relating to expiration of the statute
of limitations. This was offset by a $0.7 million increase in unrecognized tax benefits as a
result of tax positions taken in prior periods. The total amount of tax benefits that if
recognized would impact the effective tax rate was $3.9 million at the end of the third quarter
2010. We recognize interest and penalties accrued related to unrecognized tax benefits in income
tax expense. At the end of the third quarter 2010, we had approximately $1.7 million for the
payment of interest and penalties accrued.
During the next 12 months, the Company anticipates the federal and various state and local
statutes of limitation to expire. Due to the uncertain response of the taxing authorities, an
estimate of the range of possible outcomes cannot be reasonably estimated at this time. Audit
outcomes and the timing of audit settlements are subject to significant uncertainty.
The Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various state and local jurisdictions. With few exceptions, we are no longer
subject to U.S. federal, state or local examinations by tax authorities for years 2006 and prior.
We are currently under audit by the Internal Revenue Service for our fiscal year 2008.
12
Note 11 — Pension and Other Postretirement Benefits
The following tables present the components of our pension and postretirement net periodic
benefit cost:
16 Weeks Ended October 9, 2010, and October 10, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
680 |
|
|
|
716 |
|
|
|
12 |
|
|
|
15 |
|
Expected return on plan assets |
|
|
(570 |
) |
|
|
(551 |
) |
|
|
— |
|
|
|
— |
|
Amortization of prior service cost |
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
|
|
(25 |
) |
Recognized actuarial loss (gain) |
|
|
431 |
|
|
|
422 |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
541 |
|
|
|
587 |
|
|
|
1 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
40 Weeks Ended October 9, 2010, and October 10, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
1,701 |
|
|
|
1,790 |
|
|
|
30 |
|
|
|
37 |
|
Expected return on plan assets |
|
|
(1,427 |
) |
|
|
(1,377 |
) |
|
|
— |
|
|
|
— |
|
Amortization of prior service cost |
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
(63 |
) |
Recognized actuarial loss (gain) |
|
|
1,078 |
|
|
|
1,054 |
|
|
|
(5 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,352 |
|
|
|
1,467 |
|
|
|
2 |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic benefit cost for the first three
quarters of 2010 and first three quarter of 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Weighted-average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.60 |
% |
|
|
6.30 |
% |
|
|
5.60 |
% |
|
|
6.30 |
% |
Expected return on plan assets |
|
|
6.50 |
% |
|
|
7.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Total contributions to our pension plan in fiscal 2010 are expected to be $0.9 million.
Multi-employer pension plan
Certain of our unionized employees are covered by the Central States Southeast and Southwest
Areas Pension Funds (“the Plan”), a multi-employer pension plan. Contributions are determined in
accordance with the provisions of negotiated union contracts and are generally based on the number
of hours worked. In fiscal 2009, the Company contributed $3.5 million to the Plan. Based on the
most recent information available we believe the present value of actuarial accrued liabilities of
the Plan substantially exceeds the value of the assets held in trust to pay benefits. The
underfunding is not a direct obligation or liability of the Company. Moreover, if the Company were
to exit certain markets or otherwise cease making contributions to the Plan, the Company could
trigger a substantial withdrawal liability. However, the amount of any increase in contributions
will depend upon several factors, including the number of employers contributing to the Plan,
results of the Company’s collective bargaining efforts, investment returns on assets held by the
Plan, actions taken by the trustees of the Plan, and actions that the Federal government may take.
We are currently unable to reasonably estimate a liability. Any adjustment for withdrawal
liability will be recorded when it is probable that a liability exists and can be reasonably
estimated.
13
Note 12— Earnings Per Share
The following table reflects the calculation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended |
|
|
Year-to-Date Ended |
|
|
|
October 9, |
|
|
October 10, |
|
|
October 9, |
|
|
October 10, |
|
(In thousands, except per share amounts) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
15,346 |
|
|
|
21,927 |
|
|
|
34,001 |
|
|
|
45,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share-basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
12,656 |
|
|
|
13,021 |
|
|
|
12,870 |
|
|
|
12,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share-basic |
|
$ |
1.21 |
|
|
|
1.68 |
|
|
|
2.64 |
|
|
|
3.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share-diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
12,656 |
|
|
|
13,021 |
|
|
|
12,870 |
|
|
|
12,998 |
|
Dilutive impact of options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Shares contingently issuable |
|
|
382 |
|
|
|
356 |
|
|
|
353 |
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares and potential dilutive shares outstanding |
|
|
13,038 |
|
|
|
13,377 |
|
|
|
13,223 |
|
|
|
13,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share-diluted |
|
$ |
1.18 |
|
|
|
1.64 |
|
|
|
2.57 |
|
|
|
3.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options excluded from calculation
(weighted-average amount for
period) |
|
|
— |
|
|
|
10 |
|
|
|
— |
|
|
|
5 |
|
Certain options and SARs were excluded from the calculation of diluted net earnings per share
because the exercise price was greater than the market price of the stock and would have been
anti-dilutive under the treasury stock method.
The senior subordinated convertible notes due 2035 will be convertible at the option of the
holder, only upon the occurrence of certain events, at an adjusted conversion rate of 9.5222 shares
(initially 9.3120) of our common stock per $1,000 principal amount at maturity of notes (equal to
an adjusted conversion price of approximately $48.95 per share). Upon conversion, we will pay the
holder the conversion value in cash up to the accreted principal amount of the note and the excess
conversion value, if any, in cash, stock or both, at our option. The notes are only dilutive above
their accreted value and for all periods presented the weighted average market price of the
Company’s stock did not exceed the accreted value. Therefore, the notes are not dilutive to
earnings per share for any of the periods presented.
During the second quarter 2010 and 2009, performance units granted under the 2007 LTIP Plan
and 2006 LTIP Plan, respectively, were settled in shares of common stock, some of which were
deferred by executives as required by the plans. Vested shares deferred by executives are included
in the calculation of basic earnings per share. Other performance units and RSUs granted during
2007, 2008, 2009 and 2010 pursuant to the 2000 Plan and 2009 Plan will be settled in shares of Nash
Finch common stock. Unvested RSUs are not included in basic earnings per share until vested. All
shares of time-restricted stock are included in diluted earnings per share using the treasury stock
method, if dilutive. Performance units granted for the LTIP are only issuable if certain
performance criteria are met, making these shares contingently issuable under ASC Topic 260.
Therefore, the performance units are included in diluted earnings per share at the payout
percentage based on performance criteria results as of the end of the respective reporting period
and then accounted for using the treasury stock method, if dilutive. For the third quarter 2010,
approximately 170,000 shares related to the LTIP and 212,000 shares related to RSUs were included
under “shares contingently issuable” in the calculation of diluted EPS as compared to 201,000
shares related to the LTIP and 155,000 shares related to RSUs during the third quarter 2009. For
year-to-date 2010, approximately 142,000 shares related to the LTIP and 211,000 shares related to
RSUs were included under “shares contingently issuable” in the calculation of diluted EPS as
compared to 190,000 shares related to the LTIP and 155,000 shares related to RSUs during
year-to-date 2009.
14
Note 13 — Segment Reporting
We sell and distribute products that are typically found in supermarkets and operate three
reportable operating segments. Our food distribution segment consists of 14 distribution centers
that sell to independently operated retail food stores, our corporate owned stores and other
customers. During the third quarter 2010, we closed our food distribution center in Bridgeport,
Michigan. The military segment consists primarily of six distribution centers that distribute
products exclusively to military commissaries and exchanges. During the third quarter 2010, our
military distribution center in Columbus, Georgia, which is now included in the six distribution
centers noted above, became operational. Excluded from the military distribution center totals are
three military
distribution centers we purchased during the third quarter 2010 in Bloomington, Indiana and
Oklahoma City, Oklahoma. The Bloomington, Indiana facility is scheduled to become operational
during the fourth fiscal quarter of 2010 while Oklahoma City, Oklahoma, which consists of two
adjacent properties, is scheduled to become operational during fiscal 2012. The retail segment
consists of 53 corporate-owned stores that sell directly to the consumer. We closed one retail
store during the third quarter 2010.
In fiscal 2010, the Company revised its calculation of segment profit and unallocated
corporate overhead to present segment profitability on a fully-allocated basis, with the exception
of costs associated with corporate debt and other discrete items as shown in the “as adjusted”
columns below. In addition, LIFO expenses or credits are now allocated to the business segments.
Management believes the revised calculation of segment profit more accurately represents the
operating profitability of the reporting segments, on a pre-tax basis. The revision had no impact
on the Company’s consolidated financial statements in any period presented. Previously, interest
expense was included in unallocated corporate overhead. Certain prior year amounts shown below
have been revised to conform to the current year presentation. Amounts related to fiscal 2009
periods after the third quarter will be revised as shown the next time those periods are presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3rd Quarter 2009 |
|
|
4th Quarter 2009 |
|
|
|
Segment profit |
|
|
Segment profit |
|
|
|
As |
|
|
As |
|
|
As |
|
|
As |
|
(In thousands) |
|
adjusted |
|
|
reported |
|
|
adjusted |
|
|
reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Distribution |
|
$ |
15,181 |
|
|
|
27,302 |
|
|
|
11,495 |
|
|
|
20,611 |
|
Military |
|
|
13,448 |
|
|
|
15,183 |
|
|
|
10,146 |
|
|
|
11,400 |
|
Retail |
|
|
1,937 |
|
|
|
5,882 |
|
|
|
(1,449 |
) |
|
|
2,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit |
|
|
30,566 |
|
|
|
48,367 |
|
|
|
20,192 |
|
|
|
34,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment of inventory to
LIFO |
|
|
— |
|
|
|
445 |
|
|
|
— |
|
|
|
2,301 |
|
Gain on acquisition of a
business |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Gain on litigation settlement |
|
|
7,630 |
|
|
|
7,630 |
|
|
|
— |
|
|
|
— |
|
Goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
(50,927 |
) |
|
|
(50,927 |
) |
Special charge |
|
|
— |
|
|
|
— |
|
|
|
(6,020 |
) |
|
|
(6,020 |
) |
Interest |
|
|
(6,541 |
) |
|
|
— |
|
|
|
(4,790 |
) |
|
|
— |
|
Unallocated corporate overhead |
|
|
— |
|
|
|
(24,787 |
) |
|
|
— |
|
|
|
(21,291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
$ |
31,655 |
|
|
|
31,655 |
|
|
|
(41,545 |
) |
|
|
(41,545 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3rd Quarter 2009 |
|
|
|
|
|
|
Year-to-date |
|
|
Fiscal 2009 |
|
|
|
Segment profit |
|
|
Segment profit |
|
|
|
As |
|
|
As |
|
|
As |
|
|
As |
|
(In thousands) |
|
adjusted |
|
|
reported |
|
|
adjusted |
|
|
reported |
|
|
Food Distribution |
|
$ |
31,671 |
|
|
|
67,505 |
|
|
|
43,166 |
|
|
|
88,116 |
|
Military |
|
|
32,774 |
|
|
|
38,317 |
|
|
|
42,920 |
|
|
|
49,717 |
|
Retail |
|
|
2,676 |
|
|
|
13,507 |
|
|
|
1,227 |
|
|
|
15,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit |
|
|
67,121 |
|
|
|
119,329 |
|
|
|
87,313 |
|
|
|
153,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment of inventory to
LIFO |
|
|
— |
|
|
|
732 |
|
|
|
— |
|
|
|
3,033 |
|
Gain on acquisition of a
business |
|
|
6,682 |
|
|
|
6,682 |
|
|
|
6,682 |
|
|
|
6,682 |
|
Gain on litigation settlement |
|
|
7,630 |
|
|
|
7,630 |
|
|
|
7,630 |
|
|
|
7,630 |
|
Goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
(50,927 |
) |
|
|
(50,927 |
) |
Special charge |
|
|
— |
|
|
|
— |
|
|
|
(6,020 |
) |
|
|
(6,020 |
) |
Interest |
|
|
(16,138 |
) |
|
|
— |
|
|
|
(20,928 |
) |
|
|
— |
|
Unallocated corporate overhead |
|
|
— |
|
|
|
(69,078 |
) |
|
|
— |
|
|
|
(90,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
$ |
65,295 |
|
|
|
65,295 |
|
|
|
23,750 |
|
|
|
23,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the major segments of the business is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended |
|
|
|
October 9, 2010 |
|
|
October 10, 2009 |
|
|
|
Sales from |
|
|
Inter- |
|
|
|
|
|
|
Sales from |
|
|
Inter- |
|
|
|
|
|
|
external |
|
|
segment |
|
|
Segment |
|
|
external |
|
|
segment |
|
|
Segment |
|
(In thousands) |
|
customers |
|
|
sales |
|
|
profit |
|
|
customers |
|
|
sales |
|
|
profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Distribution |
|
$ |
731,503 |
|
|
|
78,439 |
|
|
|
12,848 |
|
|
|
818,202 |
|
|
|
90,231 |
|
|
|
15,181 |
|
Military |
|
|
620,822 |
|
|
|
— |
|
|
|
12,822 |
|
|
|
637,056 |
|
|
|
— |
|
|
|
13,448 |
|
Retail |
|
|
158,556 |
|
|
|
— |
|
|
|
2,824 |
|
|
|
178,046 |
|
|
|
— |
|
|
|
1,937 |
|
Eliminations |
|
|
— |
|
|
|
(78,439 |
) |
|
|
— |
|
|
|
— |
|
|
|
(90,231 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,510,881 |
|
|
|
— |
|
|
|
28,494 |
|
|
|
1,633,304 |
|
|
|
— |
|
|
|
30,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Ended |
|
|
|
October 9, 2010 |
|
|
October 10, 2009 |
|
|
|
Sales from |
|
|
Inter- |
|
|
|
|
|
|
Sales from |
|
|
Inter- |
|
|
|
|
|
|
external |
|
|
segment |
|
|
Segment |
|
|
external |
|
|
segment |
|
|
Segment |
|
(In thousands) |
|
customers |
|
|
sales |
|
|
profit |
|
|
customers |
|
|
sales |
|
|
profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Distribution |
|
$ |
1,889,511 |
|
|
|
198,092 |
|
|
|
27,228 |
|
|
|
2,040,013 |
|
|
|
224,000 |
|
|
|
31,671 |
|
Military |
|
|
1,555,407 |
|
|
|
— |
|
|
|
36,157 |
|
|
|
1,508,312 |
|
|
|
— |
|
|
|
32,774 |
|
Retail |
|
|
400,273 |
|
|
|
— |
|
|
|
5,440 |
|
|
|
441,893 |
|
|
|
— |
|
|
|
2,676 |
|
Eliminations |
|
|
— |
|
|
|
(198,092 |
) |
|
|
— |
|
|
|
— |
|
|
|
(224,000 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,845,191 |
|
|
|
— |
|
|
|
68,825 |
|
|
|
3,990,218 |
|
|
|
— |
|
|
|
67,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Reconciliation to Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended |
|
|
Year-to-Date Ended |
|
|
|
October 9, |
|
|
October 10, |
|
|
October 9, |
|
|
October 10, |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit |
|
$ |
28,494 |
|
|
|
30,566 |
|
|
|
68,825 |
|
|
|
67,121 |
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on acquisition of a business |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,682 |
|
Gain on litigation settlement |
|
|
— |
|
|
|
7,630 |
|
|
|
— |
|
|
|
7,630 |
|
Interest |
|
|
(5,664 |
) |
|
|
(6,541 |
) |
|
|
(14,699 |
) |
|
|
(16,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
$ |
22,830 |
|
|
|
31,655 |
|
|
|
54,126 |
|
|
|
65,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14 — Share Repurchase
On November 10, 2009, our Board of Directors approved a share repurchase program authorizing
the Company to spend up to $25.0 million to purchase shares of the Company’s common stock. The
program took effect on November 16, 2009, and will continue until the earlier to occur of (i) the
date that the aggregate purchases under the program reach $25.0 million, or (ii) December 31, 2010.
During the third quarter 2010, we repurchased a total of 141,023 shares for $5.0 million, at an
average price per share of $35.11 and during year-to-date 2010, we have repurchased 582,735 shares
for $20.3 million, at an average price per share of $34.78. Since the program’s inception, we have
repurchased a total of 613,455 shares for $21.3 million, at an average price per share of $34.70.
The average prices per share referenced above include commissions.
Note 15 — Military Real Estate Purchases
During the third quarter 2010, we purchased three properties for the expansion of our military
food distribution business in Bloomington, Indiana and Oklahoma City, Oklahoma. The Bloomington,
Indiana facility is approximately 303,000 square feet and Oklahoma City, Oklahoma consists of two
adjacent properties with 538,000 combined square feet. In addition, we exercised an option to
purchase the real estate of our existing military food distribution facility in Pensacola, Florida
for $9.5 million, which had previously been leased.
We utilized our Revolving Credit Facility to finance the purchase of the facilities in
Bloomington, Indiana and Oklahoma City, Oklahoma for a combined total of $16.0 million. We made a
$1.0 million earnest money payment to the sellers of the Pensacola, Florida facility at the time we
exercised the purchase option with the remaining $8.5 million included on the accounts and other
payables line on our Consolidated Balance Sheet.
Note 16 — Legal Proceedings
We are engaged from time-to-time in routine legal proceedings incidental to our business. We
do not believe that these routine legal proceedings, taken as a whole, will have a material impact
on our business or financial condition.
17
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Information and Cautionary Factors
This report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements relate to trends and events that may affect our future financial position
and operating results. Any statement contained in this report that is not statements of historical
fact may be deemed forward-looking statements. For example, words such as “may,” “will,” “should,”
“likely,” “expect,” “anticipate,” “estimate,” “believe,” “intend, “ “potential” or “plan,” or
comparable terminology, are intended to identify forward-looking statements. Such statements are
based upon current expectations, estimates and assumptions, and entail various risks and
uncertainties that could cause actual results to differ materially from those expressed in such
forward-looking statements. Important factors known to us that could cause or contribute to
material differences include, but are not limited to the following:
• |
|
the effect of competition on our food distribution, military and retail businesses; |
• |
|
general sensitivity to economic conditions, including the uncertainty related to the current
state of the economy in the U.S. and worldwide economic slowdown; continued disruptions to the
credit and financial markets in the U.S. and worldwide; changes in market interest rates;
continued volatility in energy prices and food commodities; |
• |
|
macroeconomic and geopolitical events affecting commerce generally; |
• |
|
changes in consumer buying and spending patterns; |
• |
|
our ability to identify and execute plans to expand our food distribution, military and
retail operations; |
• |
|
possible changes in the military commissary system, including those stemming from the
redeployment of forces, congressional action and funding levels; |
• |
|
our ability to identify and execute plans to improve the competitive position of our retail
operations; |
• |
|
the success or failure of strategic plans, new business ventures or initiatives; |
• |
|
our ability to successfully integrate and manage current or future businesses we acquire,
including the ability to manage credit risks and retain the customers of those operations; |
• |
|
changes in credit risk from financial accommodations extended to new or existing customers; |
• |
|
significant changes in the nature of vendor promotional programs and the allocation of funds
among the programs; |
• |
|
limitations on financial and operating flexibility due to debt levels and debt instrument
covenants; |
• |
|
legal, governmental, legislative or administrative proceedings, disputes, or actions that
result in adverse outcomes; |
• |
|
failure of our internal control over financial reporting; |
|
• |
|
changes in accounting standards; |
|
• |
|
technology failures that may have a material adverse effect on our business; |
|
• |
|
severe weather and natural disasters that may impact our supply chain; |
|
• |
|
unionization of a significant portion of our workforce; |
• |
|
costs related to a multi-employer pension plan which has liabilities in excess of plan
assets; |
• |
|
changes in health care, pension and wage costs and labor relations issues; |
• |
|
product liability claims, including claims concerning food and prepared food products; |
• |
|
threats or potential threats to security; and |
• |
|
unanticipated problems with product procurement. |
A more detailed discussion of many of these factors, as well as other factors, that could
affect the Company’s results is contained in Part I, Item 1A, “Risk Factors,” of our Annual Report
on Form 10-K for the fiscal year ended January 2, 2010. You should carefully consider each of these
factors and all of the other information in this report. We believe that all forward-looking
statements are based upon reasonable assumptions when made. However, we caution that it is
impossible to predict actual results or outcomes and that accordingly you should not place undue
reliance on these statements. Forward-looking statements speak only as of the date when made and
we undertake no obligation to revise or update these statements in light of subsequent events or
developments. Actual results and outcomes may differ materially from anticipated results or
outcomes discussed in forward-looking statements. You are advised, however, to consult any future
disclosures we make on related subjects in future reports to the Securities and Exchange Commission
(“SEC”).
18
Overview
In terms of revenue, we are the second largest publicly traded wholesale food distributor in
the United States serving the retail grocery industry and the military commissary and exchange
systems. Our business consists of three primary operating segments: food distribution, military
food distribution and retail.
In November 2006, we announced the launch of a strategic plan, Operation Fresh Start, designed
to sharpen our focus and provide a strong platform to support growth initiatives. Our strategic
plan is built upon extensive knowledge of current industry, consumer and market trends, and
formulated to differentiate the Company. The strategic plan includes long-term initiatives to
increase revenues and earnings, improve productivity and cost efficiencies of our Food
Distribution, Retail, and Military business segments, and leverage our corporate support services.
The Company has strategic initiatives to improve working capital, manage debt, and increase
shareholder value through capital expenditures with acceptable returns on investment. Several
important elements of the strategic plan include:
|
• |
|
Supply chain services focused on supporting our businesses with warehouse
management, inbound and outbound transportation management and customized solutions for
each business; |
|
• |
|
Growing the Military business segment through acquisition and expansion of products
and services, as well as creating warehousing and transportation cost efficiencies with
a long-term distribution center strategic plan; |
|
• |
|
Providing our independent retail customers with high level of order fulfillment,
broad product selection including leveraging the Our Family brand, support services
emphasizing best-in-class offerings in marketing, advertising, merchandising, store
design and construction, market research, retail store support, retail pricing and
license agreement opportunities; and |
|
• |
|
Retail formats designed to appeal to the needs of today’s consumers. |
In addition to the strategic initiatives already in progress, our 2010 initiatives consist of
the following:
|
• |
|
Implement our military distribution center network expansion including opening a new
distribution center, completing the integration of three distribution facilities
acquired from GSC Enterprises, and identifying alternative locations for future
expansion; |
|
• |
|
Complete supply chain and center store initiatives within our food distribution
segment; |
|
• |
|
Implement new cost reduction and profit improvement initiatives; and |
|
• |
|
Identify acquisitions that support our strategic plan. |
Our food distribution segment sells and distributes a wide variety of nationally branded and
private label grocery products and perishable food products from 14 distribution centers to
approximately 1,700 independent retail locations located in 28 states across the United States.
Several of our distribution centers also distribute products to military commissaries and exchanges
located in their respective geographic areas. During the third quarter of fiscal 2010 we closed
our Bridgeport, Michigan food distribution center.
Our military segment contracts with manufacturers and food brokers to distribute a wide
variety of grocery products to military commissaries and exchanges located in the United States and
the District of Columbia, and in Europe, Puerto Rico, Cuba, the Azores and Egypt. We have over 30
years of experience acting as a distributor to U.S. military commissaries and exchanges. On
January 31, 2009, we completed the purchase from GSC Enterprises, Inc., of substantially all of the
assets relating to three wholesale food distribution centers located in San Antonio, Texas,
Pensacola, Florida, and Junction City, Kansas, including all inventory and customer contracts
related to the purchased facilities (“GSC acquisition”). On December 1, 2009, we announced our
purchase of a facility in Columbus, Georgia, which began servicing military commissaries and
exchanges in the third fiscal quarter of 2010. During the third quarter of fiscal 2010, we three
purchased facilities in Bloomington, Indiana and Oklahoma City, Oklahoma. We anticipate the
Bloomington, Indiana facility will begin servicing military commissaries and exchanges during the
fourth fiscal quarter of 2010 and the two adjacent facilities in Oklahoma City, Oklahoma will
become operational in fiscal 2012.
19
Our retail segment operated 53 corporate-owned stores primarily in the Upper Midwest as of
October 9, 2010. Primarily due to highly competitive conditions in which supercenters and other
alternative formats compete for price conscious customers, we closed one retail store in 2010 and
four retail stores in 2009. We are implementing initiatives of varying scope and duration with a
view toward improving our response to and
performance under these highly competitive conditions. These initiatives include designing
and reformatting some of our retail stores into alternative formats to increase overall retail
sales performance. As we continue to assess the impact of performance improvement initiatives and
the operating results of individual stores, we may need to recognize additional impairments of
long-lived assets and goodwill associated with our retail segment, and may incur restructuring or
other charges in connection with closure or sales activities. The retail segment yields a higher
gross profit percent of sales and higher selling, general and administrative (“SG&A”) expenses as a
percent of sales compared to our food distribution and military segments. Thus, changes in sales
of the retail segment can have a disproportionate impact on consolidated gross profit and SG&A as
compared to similar changes in sales in our food distribution and military segments.
Results of Operations
Sales
The following tables summarize our sales activity for the 16 weeks ended October 9, 2010
(“third quarter 2010”), compared to the 16 weeks ended October 10, 2009 (“third quarter 2009”), and
the 40 weeks ended October 9, 2010 (“year-to-date 2010”), compared to the 40 weeks ended October
10, 2009 (“year-to-date 2009”):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third quarter 2010 |
|
|
Third quarter 2009 |
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Increase/(Decrease) |
|
(In thousands) |
|
Sales |
|
|
Sales |
|
|
Sales |
|
|
Sales |
|
|
$ |
|
|
% |
|
Segment Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Distribution |
|
$ |
731,503 |
|
|
|
48.4 |
% |
|
|
818,202 |
|
|
|
50.1 |
% |
|
|
(86,699 |
) |
|
|
(10.6 |
%) |
Military |
|
|
620,822 |
|
|
|
41.1 |
% |
|
|
637,056 |
|
|
|
39.0 |
% |
|
|
(16,234 |
) |
|
|
(2.5 |
%) |
Retail |
|
|
158,556 |
|
|
|
10.5 |
% |
|
|
178,046 |
|
|
|
10.9 |
% |
|
|
(19,490 |
) |
|
|
(10.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
1,510,881 |
|
|
|
100.0 |
% |
|
|
1,633,304 |
|
|
|
100.0 |
% |
|
|
(122,423 |
) |
|
|
(7.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date 2010 |
|
|
Year-to-date 2009 |
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
Increase/(Decrease) |
|
(In thousands) |
|
Sales |
|
|
Sales |
|
|
Sales |
|
|
Sales |
|
|
$ |
|
|
% |
|
Segment Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Distribution |
|
$ |
1,889,511 |
|
|
|
49.1 |
% |
|
|
2,040,013 |
|
|
|
51.1 |
% |
|
|
(150,502 |
) |
|
|
(7.4 |
%) |
Military |
|
|
1,555,407 |
|
|
|
40.5 |
% |
|
|
1,508,312 |
|
|
|
37.8 |
% |
|
|
47,095 |
|
|
|
3.1 |
% |
Retail |
|
|
400,273 |
|
|
|
10.4 |
% |
|
|
441,893 |
|
|
|
11.1 |
% |
|
|
(41,620 |
) |
|
|
(9.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales |
|
$ |
3,845,191 |
|
|
|
100.0 |
% |
|
|
3,990,218 |
|
|
|
100.0 |
% |
|
|
(145,027 |
) |
|
|
(3.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company sales declined 7.5% during the third quarter 2010 as compared to the comparable
prior year period. Excluding the previously announced transition of a portion of a food
distribution customer buying group to another supplier during the second quarter 2010, total
Company sales declined 4.9% during the third quarter 2010.
Total Company sales declined 3.6% during year-to-date 2010 as compared to the comparable prior
year period. However, excluding the additional sales of $59.4 million attributable to acquired
military locations during the first quarter 2010 and the previously announced transition of a
portion of a food distribution customer buying group to another supplier during the second quarter
2010, total Company sales declined 3.7% during year-to-date 2010.
The decrease in food distribution sales for the third quarter 2010 of 10.6% is primarily
attributable to the previously announced transition of a portion of a food distribution customer
buying group to another supplier during the second quarter 2010 which accounted for $44.6 million
in sales during the third quarter 2009 and a decline in comparable sales to existing customers.
Excluding the impact of the customer transition, food distribution sales declined 5.4%. The
decrease in comparable sales to existing customers was partially attributable to deflation in
certain product categories.
20
Food distribution sales declined 7.4% during year-to-date 2010 which is primarily attributable
to a decrease in comparable sales to existing customers and the previously announced transition of
a portion of a food distribution customer buying group to another supplier during the second
quarter 2010 which accounted for $60.8 million during year-to-date 2009. Excluding the impact of
this customer, food distribution sales declined 4.5%. The decrease in comparable sales to existing
customers during year-to-date 2010 was partially attributable to deflation in certain product
categories.
Military segment sales were down 2.5% during the third quarter 2010 as compared to the prior
year, primarily due to timing differences between the quarters relating to export shipments and to
a lesser extent from a reduction in domestic sales promotions. Domestic sales declined 1.6%
decline while overseas sales declined 6.3% as compared to the comparable prior year quarter.
Year-to-date military sales increased 3.1% in comparison to the prior year. However,
excluding the additional sales attributable to the acquired locations during the first quarter 2010
of $59.4 million, year-to-date comparable military segment sales decreased by 0.8% in comparison to
the prior year. The comparable decrease in year-to-date military segment sales is due to a 1.3%
decrease in domestic sales which was partially offset by a 1.3% increase in sales overseas.
Domestic and overseas sales represented the following percentages of military segment sales.
Note that the business acquired through the GSC acquisition services domestic military bases only.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-date |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Domestic |
|
|
81.2 |
% |
|
|
80.4 |
% |
|
|
81.0 |
% |
|
|
80.6 |
% |
Overseas |
|
|
18.8 |
% |
|
|
19.6 |
% |
|
|
19.0 |
% |
|
|
19.4 |
% |
Retail sales were down 10.9% and 9.4% during the third quarter and year-to-date 2010,
respectively, as compared to the comparable prior year periods. Same store sales were down 6.3%
and 4.9% during the third quarter and year-to-date 2010, respectively. Same store sales compare
retail sales for stores which were in operation for the same number of weeks in the comparative
periods. In addition, we have closed four retail stores since the beginning of the third quarter
2009.
During the third quarters of 2010 and 2009, our corporate store count changed as follows:
|
|
|
|
|
|
|
|
|
|
|
Third quarter |
|
|
Third quarter |
|
|
|
2010 |
|
|
2009 |
|
Number of stores at beginning of period |
|
|
54 |
|
|
|
57 |
|
Closed stores |
|
|
(1 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Number of stores at end of period |
|
|
53 |
|
|
|
57 |
|
|
|
|
|
|
|
|
During year-to-date 2010 and 2009, our corporate store count changed as follows:
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
|
Year-to-date |
|
|
|
2010 |
|
|
2009 |
|
Number of stores at beginning of period |
|
|
54 |
|
|
|
57 |
|
New stores |
|
|
— |
|
|
|
1 |
|
Closed stores |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Number of stores at end of period |
|
|
53 |
|
|
|
57 |
|
|
|
|
|
|
|
|
21
Consolidated Gross Profit
Consolidated gross profit was 8.1% of sales for the third quarter 2010 compared to 7.9% of
sales for the third quarter 2009. Our gross profit margin improved by 0.3% of sales during the
third quarter, which was driven primarily by higher gross margin performance in our food
distribution and military segments. However, our
overall gross profit margin was negatively affected by 0.1% of sales in the third quarter 2010
due to a sales mix shift between our business segments between the years. This was due to a higher
percentage of 2010 sales occurring in the military segment which have a lower gross profit margin
than the retail and food distribution segments.
Consolidated gross profit was 8.0% of sales for year-to-date 2010 compared to 8.1% of sales
for the year-to-date 2009. Our overall gross profit margin was negatively affected by 0.2% of
sales during year-to-date 2010 due to a sales mix shift between our business segments between the
years. This was due to a higher percentage of 2010 sales occurring in the military segment, due
primarily to the GSC acquisition, which have a lower gross profit margin than the retail and food
distribution segments. However, the impact of the sales mix shift was partially offset by higher
gross margin performance in our food distribution and military segments.
Consolidated Selling, General and Administrative Expenses
Consolidated SG&A for the third quarter 2010 was 5.4% of sales as compared to 5.2% of sales
during the third quarter 2009. Our SG&A was negatively impacted by year-over-year increases in
non-cash stock compensation of $1.0 million, employee insurance costs of $0.7 million and $0.7
million in workers compensation claim costs, or in total 0.2% of sales. However, our SG&A
benefited by 0.1% of sales during the third quarter 2010 due to the sales mix shift between our
business segments due to the higher level of military sales relative to the other business segments
in 2009.
Consolidated SG&A for year-to-date 2010 was 5.4% of sales as compared to 5.6% of sales during
year-to-date 2009. Our SG&A margin benefited by 0.2% of sales during year-to-date 2010 due to the
sales mix shift between our business segments due to the higher level of military sales relative to
the other business segments in 2009.
Gain on Acquisition of a Business
A gain on the acquisition of a business of $6.7 million (net of tax) was recognized during the
first quarter 2009 related to the GSC acquisition. The fair value of the identifiable assets
acquired and liabilities assumed of $84.8 million exceeded the fair value of the purchase price of
the business of $78.1 million. Consequently, we reassessed the recognition and measurement of
identifiable assets acquired and liabilities assumed and concluded that the valuation procedures
and resulting measures were appropriate.
Gain on Litigation Settlement
A gain of $7.6 million was recognized in the third quarter 2009 related to the settlement of
litigation in connection with our 2005 acquisition of certain distribution centers and other assets
from Roundy’s Supermarkets, Inc. A more detailed discussion of this litigation settlement is
contained in Part I, Item 3, “Legal Proceedings,” of our Annual Report on Form 10-K for the fiscal
year ended January 2, 2010.
Depreciation and Amortization Expense
Depreciation and amortization expense was $10.9 million for the third quarter 2010 as compared
to $12.6 million during the comparable prior year period. Depreciation and amortization expense
was $27.6 million during year-to-date 2010 as compared to $31.3 million during year-to-date 2009.
The decrease during the current year periods as compared to the prior year is attributable to lower
depreciation and amortization expense in our food distribution and retail segments.
Interest Expense
Interest expense was $7.1 million for the third quarter 2010 compared to $7.6 million for the
comparable prior year period. Average borrowing levels decreased from $357.9 million during the
third quarter 2009 to $323.4 million during the third quarter 2010. The effective interest rate
was 4.6% for the third quarter 2010 as compared to 4.7% for the third quarter 2009. Interest
expense was $17.7 million for year-to-date 2010 compared to $18.8 million for the comparable prior
year period. Average borrowing levels decreased from $361.9 million during year-to-date 2009 to
$324.5 million during year-to-date 2010. The effective interest rate was 4.6% for both
year-to-date 2010 and 2009. Certain components of our interest expense are excluded from the
calculation of our effective interest rate as the costs are not directly attributable to our
long-term borrowing rates.
22
The calculation of our effective interest rate excludes non-cash interest required to be
recognized on our senior subordinated convertible notes under Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Subtopic 470-20 (“ASC 470-20”). Non-cash
interest expense recognized under ASC 470-20 was $1.6 million and $1.5 million during the third
quarter 2010 and 2009, respectively, and was $4.1 and $3.8 million for year-to-date 2010 and 2009,
respectively. Additionally, the calculation of our average borrowing levels includes the
unamortized equity component of our senior subordinated convertible notes that is required to be
recognized under ASC 470-20. The inclusion of the unamortized equity component brings the basis in
our senior subordinated convertible notes to $150.1 million for purposes of calculating our average
borrowing levels, or their aggregate issue price, which we are required to pay semi-annual cash
interest on at a rate of 3.50% until March 15, 2013.
Income Taxes
Income tax expense is provided on an interim basis using management’s estimate of the annual
effective rate. Our effective tax rate for the full fiscal year is subject to change and may be
impacted by changes to nondeductible items and tax reserve requirements in relation to our
forecasts of operations, sales mix by taxing jurisdictions, or to changes in tax laws and
regulations. The effective income tax rate was 32.8% and 30.7% for the third quarter 2010 and
third quarter 2009, respectively. The effective income tax rate was 37.2% and 29.7% for
year-to-date 2010 and 2009, respectively.
During the third quarter of 2010, various federal, state and local statutes of limitations
expired. During the third quarter 2009, the Company filed claims with and received refunds from
various tax authorities. Accordingly, the Company reported the effect of these discrete events in
the third quarters 2010 and 2009, respectively. The lower effective tax rate for the third quarter
2010 and 2009 are reflective of the results from the reversal, refunds and the settlement of
uncertain tax positions. The effective rate for the third quarters differed from statutory rates
due to the amount of permanent book tax differences relative to the Company’s pre-tax book income.
We estimate the full year effective tax rate for 2010 will be approximately 38.2% which excludes
the potential impact of discrete events.
Net Earnings
Net earnings for the third quarter 2010 were $15.3 million, or $1.18 per diluted share, as
compared to net earnings of $21.9 million, or $1.64 per diluted share, in the third quarter 2009.
Net earnings for year-to-date 2010 were $34.0 million, or $2.57 per diluted share, as compared to
net earnings of $45.9 million, or $3.44 per diluted share, during year-to-date 2009. Net earnings
in the periods presented in this report were affected by a number of events included in the
discussion above that affected the comparability of results.
Liquidity and Capital Resources
The following table summarizes our cash flow activity and should be read in conjunction with
the Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 Weeks Ended |
|
|
|
|
|
|
October 9, |
|
|
October 10, |
|
|
Increase/ |
|
(In thousands) |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
16,311 |
|
|
|
22,298 |
|
|
|
(5,987 |
) |
Net cash used in investing activities |
|
|
(39,070 |
) |
|
|
(89,080 |
) |
|
|
50,010 |
|
Net cash provided by financing activities |
|
|
22,714 |
|
|
|
66,818 |
|
|
|
(44,104 |
) |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
(45 |
) |
|
|
36 |
|
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities decreased $6.0 million during year-to-date 2010 as
compared to year-to-date 2009. A year-over-year increase in our investment in inventories of $23.0
million, a year-over-year decrease in accounts payable of $8.9 million and a year-over-year
decrease in income taxes payable of $6.3 million were the primary factor contributions to the
decline in cash provided by operating activities as compared to
the prior year. However, these items were partially offset by a year-over-year decrease in
accounts receivable of $16.3 million and a year-over-year increase in accrued expenses of $13.6
million. The year-over-year increase in our investment in inventories is primarily attributable to
our new military food distribution in Columbus, Georgia becoming operational during the third
quarter 2010. The year-over-year decrease in accounts receivable was due primarily to a temporary
timing difference related to our military accounts receivable billing cycle that has accelerated
collections during year-to-date 2010 as compared to the comparable prior year period. The
year-over-year increase in accrued expense was primarily attributable to higher bonus and profit
sharing payments made during year-to-date 2009 as compared to year-to-date 2010.
23
Net cash used in investing activities decreased by $50.0 million during year-to-date 2010 as
compared to the year-to-date 2009. Net cash used in investing activities for year-to-date 2010
consisted primarily of additions to property, plant and equipment of $39.9 million. The additions
to property, plant and equipment during year-to-date 2010 consisted primarily of expansion
activities associated with our military distribution business, including the purchase of new
facilities in Bloomington, Indiana and Oklahoma City, Oklahoma during the third quarter 2010 and
the addition of fixtures and equipment and conversion activities associated with our Columbus,
Georgia facility, which was purchased in December 2009 and became operational during the third
quarter 2010. During the year-to-date 2009, net cash used in investing activities consisted
primarily of the GSC acquisition of $78.1 million and additions to property, plant and equipment of
$12.6 million.
Cash provided by financing activities decreased by $44.1 million during year-to-date 2010 as
compared to year-to-date 2009. During year-to-date 2010, cash provided by financing activities
consisted primarily of proceeds of revolving debt of $38.0 million and an increase in outstanding
checks of $15.0 million, which were partially offset by share repurchases of $20.3 million and
dividend payments of $6.7 million. Cash provided by financing activities during year-to-date 2009
included net borrowings of revolving debt of $80.5 million, primarily due to the GSC acquisition,
which was partially offset by dividend payments of $6.9 million and payments of deferred financing
costs of $2.7 million.
During the remainder of fiscal 2010, we expect that cash flows from operations will be
sufficient to meet our working capital needs and enable us to reduce our debt, with temporary draws
on our credit facility during the year to build inventories for certain holidays. Longer term, we
believe that cash flows from operations, short-term bank borrowing, various types of long-term debt
and lease and equity financing will be adequate to meet our working capital needs, planned capital
expenditures and debt service obligations.
Asset-backed Credit Agreement
Our credit agreement is an asset-backed loan consisting of a $340.0 million revolving credit
facility, which includes a $50.0 million letter of credit sub-facility (the “Revolving Credit
Facility”). Provided no default is then existing or would arise, we may from time-to-time, request
that the Revolving Credit Facility be increased by an aggregate amount (for all such requests) not
to exceed $110.0 million.
The Revolving Credit Facility has a 5-year term and will be due and payable in full on April
11, 2013. We can elect, at the time of borrowing, for loans to bear interest at a rate equal to the
base rate, as defined in the credit agreement, or LIBOR plus a margin. The LIBOR interest rate
margin was 2.00% as of October 9, 2010, and can vary quarterly in 0.25% increments between three
pricing levels ranging from 1.75% to 2.25% based on the excess availability, which is defined in
the credit agreement as (a) the lesser of (i) the borrowing base; or (ii) the aggregate
commitments; minus (b) the aggregate of the outstanding credit extensions.
The credit agreement contains no financial covenants unless and until (i) the continuance of
an event of default under the credit agreement, or (ii) the failure of us to maintain excess
availability (a) greater than 10% of the borrowing base for more than two (2) consecutive business
days or (b) greater than 7.5% of the borrowing base at any time, in which event, we must comply
with a trailing 12-month basis consolidated fixed charge covenant ratio of 1.0:1.0, which ratio
shall continue to be tested each month thereafter until excess availability exceeds 10% of the
borrowing base for 90 consecutive days.
The credit agreement contains standard covenants requiring us, among other things, to maintain
collateral, comply with applicable laws, keep proper books and records, preserve the corporate
existence, maintain insurance, and pay taxes in a timely manner. Events of default under the credit
agreement are usual and customary for transactions of this type including, among other things: (a)
any failure to pay principal thereunder when due or to pay interest or fees on the due date; (b)
material misrepresentations; (c) default under other agreements
governing material indebtedness of the Company; (d) default in the performance or observation of
any covenants; (e) any event of insolvency or bankruptcy; (f) any final judgments or orders to pay
more than $15.0 million that remain unsecured or unpaid; (g) change of control, as defined in the
credit agreement; and (h) any failure of a collateral document, after delivery thereof, to create a
valid mortgage or first-priority lien.
24
At October 9, 2010, $157.6 million was available under the Revolving Credit Facility after
giving effect to outstanding borrowings and to $20.3 million of outstanding letters of credit
primarily supporting workers’ compensation obligations and real estate purchases. We are currently
in compliance with all covenants contained within the credit agreement.
Our Revolving Credit Facility represents one of our primary sources of liquidity, both
short-term and long-term, and the continued availability of credit under that agreement is of
material importance to our ability to fund our capital and working capital needs.
Senior Subordinated Convertible Debt
We also have outstanding $150.1 million in aggregate issue price (or $322.0 million in
aggregate principal amount at maturity) of senior subordinated convertible notes due in 2035. The
notes are unsecured senior subordinated obligations and rank junior to our existing and future
senior indebtedness, including borrowings under our Revolving Credit Facility. Cash interest at
the rate of 3.50% per year is payable semi-annually on the issue price of the notes until March 15,
2013. After that date, cash interest will not be payable, unless contingent cash interest becomes
payable, and original issue discount for non-tax purposes will accrue on the notes daily at a rate
of 3.50% per year until the maturity date of the notes. See our Annual Report on Form 10-K for the
fiscal year ended January 2, 2010, for additional information.
Consolidated EBITDA (Non-GAAP Measurement)
The following is a reconciliation of EBITDA and Consolidated EBITDA to net earnings for the
third quarters and year-to-date periods of 2010 and 2009 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
Qtr 3 |
|
|
Qtr 3 |
|
|
Year-to-Date |
|
|
Year-to-Date |
|
Net earnings |
|
$ |
15,346 |
|
|
|
21,927 |
|
|
$ |
34,001 |
|
|
|
45,885 |
|
Income tax expense |
|
|
7,484 |
|
|
|
9,728 |
|
|
|
20,125 |
|
|
|
19,410 |
|
Interest expense |
|
|
7,123 |
|
|
|
7,621 |
|
|
|
17,747 |
|
|
|
18,765 |
|
Depreciation and amortization |
|
|
10,883 |
|
|
|
12,592 |
|
|
|
27,638 |
|
|
|
31,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
40,836 |
|
|
|
51,868 |
|
|
|
99,511 |
|
|
|
115,359 |
|
LIFO charge (credit) |
|
|
285 |
|
|
|
(445 |
) |
|
|
(76 |
) |
|
|
(732 |
) |
Lease reserves |
|
|
725 |
|
|
|
425 |
|
|
|
291 |
|
|
|
1,491 |
|
Asset impairments |
|
|
108 |
|
|
|
840 |
|
|
|
926 |
|
|
|
1,738 |
|
Gains on sale of real estate |
|
|
— |
|
|
|
(54 |
) |
|
|
— |
|
|
|
(54 |
) |
Share-based compensation |
|
|
2,717 |
|
|
|
1,706 |
|
|
|
6,179 |
|
|
|
7,421 |
|
Subsequent cash payments on non-cash charges |
|
|
(578 |
) |
|
|
(712 |
) |
|
|
(2,287 |
) |
|
|
(2,043 |
) |
Gain on acquisition of a business |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,682 |
) |
Gain on litigation settlement |
|
|
— |
|
|
|
(7,630 |
) |
|
|
— |
|
|
|
(7,630 |
) |
Settlement of pre-acquisition contingency |
|
|
(310 |
) |
|
|
— |
|
|
|
(310 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated EBITDA |
|
$ |
43,783 |
|
|
|
45,998 |
|
|
$ |
104,234 |
|
|
|
108,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA and Consolidated EBITDA are measures used by management to measure operating
performance. EBITDA is defined as net earnings before interest, taxes, depreciation, and
amortization. Consolidated EBITDA excludes certain non-cash charges and other items that
management does not utilize in assessing operating performance and is a metric used to determine
payout of performance units pursuant to our Short-Term and Long-Term Incentive Plans. The above
table reconciles net earnings to EBITDA and Consolidated EBITDA. Not all companies utilize
identical calculations; therefore, the presentation of EBITDA and Consolidated EBITDA may not be
comparable to other identically titled measures of other companies.
Neither EBITDA or Consolidated EBITDA are recognized terms under GAAP and do not purport to be
an alternative to net earnings as an indicator of operating performance or any other GAAP measure.
In addition, EBITDA and Consolidated EBITDA are not intended to be measures of free cash flow for
management’s discretionary use since they do not consider certain cash requirements, such as
interest payments, tax payments and capital expenditures.
25
Derivative Instruments
We have market risk exposure to changing interest rates primarily as a result of our borrowing
activities and commodity price risk associated with anticipated purchases of diesel fuel. Our
objective in managing our exposure to changes in interest rates and commodity prices is to reduce
fluctuations in earnings and cash flows. From time-to-time we use derivative instruments,
primarily interest rate and commodity swap agreements, to manage risk exposures when appropriate,
based on market conditions. We do not enter into derivative agreements for trading or other
speculative purposes, nor are we a party to any leveraged derivative instrument.
The interest rate swap agreements are designated as cash flow hedges and are reflected at fair
value in our Consolidated Balance Sheet and the related gains or losses on these contracts are
deferred in stockholders’ equity as a component of other comprehensive income. As of October 9,
2010, and January 2, 2010, we had recorded a fair value liability of $0.6 million and $1.1 million,
respectively, which was included in accrued expenses in our Consolidated Balance Sheet. Deferred
gains and losses are amortized as an adjustment to interest expense over the same period in which
the related items being hedged are recognized in income. However, to the extent that any of these
contracts are not considered to be effective in accordance with ASC Topic 815 (“ASC 815”) in
offsetting the change in the value of the items being hedged, any changes in fair value relating to
the ineffective portion of these contracts are immediately recognized in income. Our two
outstanding interest rate swaps have been considered effective in accordance with ASC 815 since
they began during fiscal 2008.
Our interest rate swap agreements resulted in net payments of approximately $0.3 million and
$0.5 million during the third quarters of fiscal 2010 and 2009, respectively, and resulted in net
payments of approximately $0.9 million and $1.2 million during year-to-date 2010 and year-to-date
2009, respectively, which are included in interest expense on our Consolidated Statement of Income.
As of October 9, 2010, we had two outstanding interest rate swap agreements with notional
amounts totaling $35.0 million as compared to $52.5 million as of October 10, 2009. The notional
amounts of the two outstanding swaps are reduced as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Effective Date |
|
|
Termination Date |
|
|
Fixed Rate |
|
|
|
|
$30,000 |
|
|
|
10/15/2008 |
|
|
|
10/15/2009 |
|
|
|
3.49% |
|
|
|
|
20,000 |
|
|
|
10/15/2009 |
|
|
|
10/15/2010 |
|
|
|
3.49% |
|
|
|
|
10,000 |
|
|
|
10/15/2010 |
|
|
|
10/15/2011 |
|
|
|
3.49% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Effective Date |
|
|
Termination Date |
|
|
Fixed Rate |
|
|
|
|
$22,500 |
|
|
|
10/15/2008 |
|
|
|
10/15/2009 |
|
|
|
3.38% |
|
|
|
|
15,000 |
|
|
|
10/15/2009 |
|
|
|
10/15/2010 |
|
|
|
3.38% |
|
|
|
|
7,500 |
|
|
|
10/15/2010 |
|
|
|
10/15/2011 |
|
|
|
3.38% |
|
In addition to the previously discussed interest rate and commodity swap agreements, from
time-to-time we enter into fixed price fuel supply agreements to support our food distribution
segment. On January 1, 2009, we entered into an agreement which required us to purchase a total of
252,000 gallons of diesel fuel per month at prices ranging from $1.90 to $1.98 per gallon. The
term of the agreement was for one year and expired on December 31, 2009. This fixed price fuel
agreement qualified for the “normal purchase” exception under ASC 815, therefore the fuel purchases
under the contract were expensed as incurred as an increase to cost of sales.
Off-Balance Sheet Arrangements
As of the date of this report, we do not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, often referred to as
structured finance or special purpose entities,
which are generally established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
26
Recoverability of Goodwill
Our most recent annual impairment test of goodwill was completed during the fourth quarter of
fiscal 2009 based on conditions as of the end of our third quarter of fiscal 2009 and determined
that no indication of impairment existed in our food distribution and military segments. The fair
value of the food distribution segment was approximately 24% higher than its carrying value, while
the military segment’s fair value exceeded its carrying value by over 100%. We determined that an
indication of impairment existed in our retail reporting unit in the first step of the fiscal 2009
impairment analysis which required us to calculate our retail segment’s implied fair value in the
second step of the impairment analysis. Based on retail’s implied fair value we were required to
write-off $50.9 million of goodwill in fiscal 2009.
The fair value for each reporting unit is determined based on an income approach which
incorporates a discounted cash flow analysis which uses significant unobservable inputs, or level 3
inputs, as defined by the fair value hierarchy, and a market approach that utilizes current
earnings multiples of comparable publicly-traded companies. The Company has weighted the valuation
of its reporting units at 70% based on the income approach and 30% based on the market approach.
The Company believes that this weighting is appropriate since it is often difficult to find other
comparable publicly-traded companies that are similar to our reporting units and it is our view
that future discounted cash flows are more reflective of the value of the reporting units.
Critical Accounting Policies and Estimates
Our critical accounting policies are discussed in Part II, Item 7 of our Annual Report on Form
10-K for the fiscal year ended January 2, 2010, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” under the caption “Critical Accounting Policies.” There have
been no material changes to these policies or the estimates used in connection therewith during the
40 weeks ended October 9, 2010.
Recently Adopted and Proposed Accounting Standards
In June 2009, the FASB issued amendments to ASC Topic 810 (“ASC 810”), which addresses the
elimination of the concept of a qualifying special purpose entity. The amended guidance also
replaces the quantitative-based risks and rewards calculation for determining which enterprise has
a controlling financial interest in a variable interest entity with an approach focused on
identifying which enterprise has the power to direct the activities of a variable interest entity
and the obligation to absorb losses of the entity or the right to receive benefits from the entity.
Additionally, the amended guidance provides more timely and useful information about an
enterprise’s involvement with a variable interest entity. Effective January 3, 2010, we adopted
the amended provisions of ASC 810 which had no impact on our consolidated financial statements.
On December 15, 2009, the FASB issued Accounting Standards Update No. 2010-06, Fair Value
Measurements and Disclosures Topic 820 “Improving Disclosures about Fair Value Measurements”. This
ASU requires some new disclosures and clarifies some existing disclosure requirements about fair
value measurement as set forth in ASC Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting. The Company adopted the
provision of ASU 2010-06 effective January 3, 2010. The adoption of this ASU did not have a
material impact on the Company’s consolidated financial statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Our exposure in the financial markets consists of changes in interest rates relative to our
investment in notes receivable, the balance of our debt obligations outstanding and derivatives
employed from time-to-time to manage our exposure to changes in interest rates and diesel fuel
prices. (See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January
2, 2010 and Part I, Item 2 of this report under the caption “Liquidity and Capital Resources”).
ITEM 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.
There were changes, as noted below, in our internal control over financial reporting that
occurred during the period covered by this quarterly report that materially affected our internal
control over financial reporting.
27
On January 31, 2009, the Company completed the purchase from GSC Enterprises, Inc., of
substantially all of the assets relating to three military food distribution centers located in San
Antonio, Texas, Pensacola, Florida and Junction City, Kansas serving military commissaries and
exchanges (“Business”). The acquisition of the Business represents a material change in the
Company’s internal control over financial reporting since management’s last assessment. We have
integrated policies, processes, people, technology and operations in relation to the Business.
Management will continue to evaluate our internal control over financial reporting and will include
the Business as a part of management’s next assessment of the Company’s internal control over
financial reporting.
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
We are engaged from time-to-time in routine legal proceedings incidental to our business. We
do not believe that these routine legal proceedings, taken as a whole, will have a material impact
on our business or financial condition.
ITEM 1A. Risk Factors
There have been no material changes to our risk factors contained in Part I, Item 1A, “Risk
Factors,” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2010.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about shares of common stock the Company acquired
during the third quarter of fiscal 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total number |
|
|
(d) Maximum |
|
|
|
|
|
|
|
|
|
|
|
of shares |
|
|
amount |
|
|
|
(a) Total |
|
|
|
|
|
|
purchased as part |
|
|
remaining that |
|
|
|
number of |
|
|
(b) Average |
|
|
of publicly |
|
|
may be spent |
|
|
|
shares |
|
|
price paid per |
|
|
announced plans |
|
|
under plans or |
|
Period |
|
purchased (1) |
|
|
share (1) |
|
|
or programs (1) |
|
|
programs (1) |
|
Period 7 (June 20, 2010 to July 17, 2010) |
|
|
141,023 |
|
|
$ |
35.11 |
|
|
|
141,023 |
|
|
$ |
3,715,744 |
|
|
|
|
(1) |
|
On November 10, 2009, our Board of Directors approved a share repurchase program to
spend up to $25.0 million to purchase shares of the Company’s common stock. The program
took effect on November 16, 2009 and will continue until the earlier to occur of (i) the
date that the aggregate purchases under the program reach $25.0 million, or (ii) December
31, 2010. Since the program’s inception, we have repurchased a total of 613,455 shares for
$21.3 million, at an average price per share of $34.70. |
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. (Removed and Reserved).
ITEM 5. Other Information
None
28
ITEM 6. Exhibits
Exhibits filed or furnished with this Form 10-Q:
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
12.1 |
|
|
Calculation of Ratio of Earnings to Fixed Charges |
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer |
|
|
|
|
|
|
31.2 |
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer |
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
NASH-FINCH COMPANY
Registrant
|
|
Date: November 16, 2010 |
by: |
/s/ Alec C. Covington
|
|
|
|
Alec C. Covington |
|
|
|
President and Chief Executive Officer |
|
|
Date: November 16, 2010 |
by: |
/s/ Robert B. Dimond
|
|
|
|
Robert B. Dimond |
|
|
|
Executive Vice President and Chief Financial Officer |
|
30
NASH FINCH COMPANY
EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q
For the Quarter Ended October 9, 2010
|
|
|
|
|
|
|
Exhibit |
|
|
|
Method of |
No. |
|
Item |
|
Filing |
|
|
|
|
|
|
|
|
12.1 |
|
|
Calculation of Ratio of Earnings to Fixed Charges
|
|
Filed herewith |
|
|
|
|
|
|
|
|
31.1 |
|
|
Rule 13a-14(a) Certification of the Chief Executive Officer
|
|
Filed herewith |
|
|
|
|
|
|
|
|
31.2 |
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer
|
|
Filed herewith |
|
|
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
|
|
Filed herewith |
31