DELHAIZE AMERICA INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File number 0-6080

DELHAIZE AMERICA, INC.

(Exact name of registrant as specified in its charter)

NORTH CAROLINA

56-0660192

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

P.O. Box 1330, 2110 Executive Drive, Salisbury, NC 28145-1330

(Address of principal executive office) (Zip Code)

(704) 633-8250

(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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

Outstanding shares of common stock of the Registrant as of August 17 , 2004.

Class A Common Stock – 91,270,348,481

Class B Common Stock - 75,468,935

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) and (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

DELHAIZE AMERICA, INC.

INDEX TO FORM 10-Q

July 3, 2004


			Page
Forward Looking Statements			3-4

PART I.		FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)

		Condensed Consolidated Statements of Income for the 13 weeks ended July 3, 2004 and June 28, 2003	5

		Condensed Consolidated Statements of Income for the 26 weeks ended July 3, 2004 and June 28, 2003	6

		Condensed Consolidated Balance Sheets as of July 3, 2004 and January 3, 2004 (Audited)	7

		Condensed Consolidated Statements of Cash Flows for the 26 weeks ended July 3, 2004 and June 28, 2003	8

		Notes to Condensed Consolidated Financial Statements	9-18

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	18-28

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

	Item 4.	Controls and Procedures	28

PART II.		OTHER INFORMATION

	Item 6.	Exhibits and Reports on Form 8-K	28

Signature			29

Exhibit Index			30

Unless the context otherwise requires, the terms “Delhaize America,” the “Company,” “we,” “us” and “our” refer to Delhaize America, Inc., a North Carolina corporation together with its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes or incorporates by reference “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (“Exchange Act”), and the Private Securities Litigation Reform Act of 1995 about Delhaize America that are subject to risks and uncertainties. All statements included in this quarterly report on Form 10-Q, other than statements of historical fact, which address activities, events or developments that Delhaize America expects or anticipates will or may occur in the future, including, without limitation, statements regarding expansion and growth of its business, anticipated store openings and renovations, future capital expenditures, projected revenue growth or synergies resulting from the share exchange transaction with Delhaize Group, and business strategy, are forward-looking statements. These forward-looking statements generally can be identified as statements that include phrases such as “believe”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, “likely”, “will”, “should” or other similar words or phrases.

Although we believe that these statements are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Given these uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date this quarterly report on Form 10-Q is filed with the Securities and Exchange Commission. We assume no obligation to update or revise them. Important factors that could cause our actual results to differ materially from our expectations include, without limitation:

•

The grocery retailing industry continues to experience fierce competition from other food retailers, supercenters, mass merchandisers, club or warehouse stores, drug stores and restaurants. Our continued success is dependent upon our ability to compete in this industry, develop and implement retailing strategies and continue to reduce operating expenses. The competitive environment may cause us to reduce our prices in order to gain or maintain share of sales, thus reducing margins. While we believe our opportunities for sustained, profitable growth are considerable, unanticipated actions of competitors could impact our sales and net income.

•

Our future results could be adversely affected due to pricing and promotional activities of existing and new competitors, including non-traditional food retailers; our response actions; the state of the economy, including inflationary or deflationary trends in certain commodities; recessionary times in the economy; and our ability to sustain the cost reductions that we have identified and implemented.

•

Our ability to achieve our cost savings goals could be affected by, in addition to other factors described herein, our ability to achieve productivity improvements, shrink reduction, efficiencies in our distribution centers, and other efficiencies created by our logistics projects.

•

Changes in the general business and economic conditions in our operating regions, including the rate of inflation, population growth, and employment and job growth in the markets in which we operate may affect our ability to hire and train qualified employees to operate our stores. This would negatively affect earnings and sales growth. General economic changes may also affect the shopping habits of our customers, which could affect sales and earnings.

•

Consolidation in the food industry is likely to continue and the effects on our business, favorable or unfavorable, cannot be foreseen.

•

Our ability to integrate any companies we acquire or have acquired and achieve operating improvements at those companies will affect our financial results.

•

Increases in the cost of inputs, such as utility costs or raw material costs and increased product costs, and increased labor and labor related (e.g., health and welfare and pension) costs could negatively impact financial ratios.

•

Adverse weather conditions could increase the cost our suppliers charge for their products, decrease or increase the customer demand for certain products, interrupt operations at affected stores, or interrupt operations of our suppliers.

•

We are subject to labor relations issues, including union organizing activities, that could result in an increase in costs or lead to a strike, thus impairing operations and decreasing sales. We are also subject to labor relations issues at entities involved in our supply chain, including both suppliers and those involved in transportation and shipping.

•

Changes in laws and regulations, including changes in accounting standards, taxation requirements, and environmental laws may have a material impact on our financial statements.

•

Our future results could be adversely affected by issues affecting the food distribution and retail industry generally, such as food safety concerns, an increase in consumers eating away from home and the manner in which vendors target their promotional dollars.

•

Our comparable store sales growth could be affected by increases or decreases in private-label sales, the impact of our new store openings, as well as competitors’ openings.

•

We have estimated our exposure to the claims and litigation arising in the normal course of business and believe we have made adequate provisions for them. Unexpected outcomes in these matters could result in an adverse effect on our earnings.

•

Interest expense on variable rate borrowings will vary with changes in capital markets and the amount of debt that we have outstanding. However, the majority of our long-term notes payable bear an effective fixed interest rate. On this debt, we bear the risk that the required payments will exceed those based on current market rates.

•

Our capital expenditures could differ from our estimate if we are unsuccessful in acquiring suitable sites for new stores, if development costs vary from those budgeted, or if significant projects are not completed in the time frame expected or on budget.

•

Depreciation and amortization expenses may vary from our estimates due to the timing of new store openings.

•

LIFO charges and credits will be affected by changes in the cost of inventory

•

We are self-insured for workers’ compensation, general liability, vehicle accident and druggist claims. Maximum retention, including defense costs per occurrence, ranges from (i) $0.5 million to $1.0 million per accident for workers’ compensation, (ii) $5.0 million per accident for automobile liability and (iii) $2.0 million per accident for general liability, with an additional $5.0 million retention in excess of the primary $2.0 million general liability retention for druggist liability. We are insured for costs related to covered claims, including defense costs, in excess of these retentions. It is possible that the final resolution of some of these claims may require us to make significant expenditures in excess of our existing reserves over an extended period of time and in a range of amounts that cannot be reasonably estimated. Pursuant to our self-insurance program, self-insured reserves related to workers’ compensation, general liability and auto coverage are reinsured by Pride Reinsurance Company (“Pride”), an Irish reinsurance captive, owned by an affiliated company of Delhaize Group. Premiums are transferred annually to Pride through Delhaize Insurance Co., a subsidiary of Delhaize America.

•

Our access to capital markets on favorable terms and leasing costs could be negatively affected by the company’s financial performance and by conditions of the financial and credit markets.

Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in or contemplated or implied by forward-looking statements made by us or our representatives.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DELHAIZE AMERICA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

For the 13 weeks ended July 3, 2004 and June 28, 2003

(Dollars in thousands)


	13 Weeks Ended July 3, 2004		13 Weeks Ended June 28, 2003
Net sales and other revenues	$	3,999,188	$	3,743,232
Cost of goods sold		2,974,578		2,809,322
Selling and administrative expenses		804,376		751,123

Operating income		220,234		182,787
Interest expense		80,094		78,731

Income from continuing operations before income taxes		140,140		104,056
Provision for income taxes		51,752		37,878

Income from continuing operations		88,388		66,178
Loss from discontinued operations, net of tax		2,232		5,550

Net income	$	86,156	$	60,628

See notes to unaudited condensed consolidated financial statements.

DELHAIZE AMERICA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

For the 26 weeks ended July 3, 2004 and June 28, 2003

(Dollars in thousands)


	26 Weeks Ended July 3, 2004		26 Weeks Ended June 28, 2003
Net sales and other revenues	$	7,856,810	$	7,371,629
Cost of goods sold		5,834,443		5,558,807
Selling and administrative expenses		1,593,924		1,490,406

Operating income		428,443		322,416
Interest expense		160,163		158,059

Income from continuing operations before income taxes		268,280		164,357
Provision for income taxes		102,721		59,580

Income from continuing operations		165,559		104,777
Loss from discontinued operations, net of tax		55,805		29,641

Income before cumulative effect of change in accounting principle		109,754		75,136
Cumulative effect of change in accounting principle, net of tax		—		10,946

Net income	$	109,754	$	64,190

See notes to unaudited condensed consolidated financial statements.

DELHAIZE AMERICA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of July 3, 2004 and January 3, 2004

(Dollars in thousands)


	July 3, 2004			January 3, 2004
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	629,657		$	313,629
Receivables, net		113,292			111,738
Receivable from affiliate		14,817			14,708
Inventories		1,144,722			1,203,487
Prepaid expenses		72,881			40,586
Deferred tax assets		—			26,491
Other assets		13,841			9,936

Total current assets		1,989,210			1,720,575
Property and equipment, net		2,889,151			2,980,455
Goodwill, net		2,893,431			2,895,541
Other intangibles, net		752,820			775,830
Reinsurance recoverable from affiliate		132,486			129,869
Other assets		151,484			170,741

Total assets	$	8,808,582		$	8,673,011

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	764,888		$	751,122
Payable to affiliate		—			2,118
Accrued expenses		306,114			296,927
Capital lease obligations – current		36,637			35,686
Long term debt – current		17,116			13,036
Other liabilities - current		70,949			55,664
Deferred income taxes		1,007			—
Income taxes payable		13,481			1,154

Total current liabilities		1,210,192			1,155,707
Long-term debt		2,922,115			2,940,135
Capital lease obligations		671,931			685,852
Deferred income taxes		251,088			270,685
Other liabilities		301,184			274,918

Total liabilities		5,356,510			5,327,297

Commitments and contingencies (Note 14)
Shareholders’ equity:
Class A non-voting common stock		163,076			163,076
Class B voting common stock		37,736			37,736
Accumulated other comprehensive loss, net of tax		(60,315	)		(62,901	)
Additional paid-in capital, net of unearned compensation		2,475,162			2,474,412
Retained earnings		836,413			733,391

Total shareholders’ equity		3,452,072			3,345,714

Total liabilities and shareholders’ equity	$	8,808,582		$	8,673,011

See notes to unaudited condensed consolidated financial statements.

DELHAIZE AMERICA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the 26 weeks ended July 3, 2004 and June 28, 2003

(Dollars in thousands)


	26 Weeks Ended July 3, 2004			26 Weeks Ended June 28, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	109,754		$	64,190
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting principle, net of tax (Note 10)		—			10,946
Change in accounting method (Note 10)		—			87,308
Provision for loss on disposal of discontinued operations		72,842			27,844
Streamline charges		—			2,346
Depreciation and amortization		230,577			220,186
Depreciation and amortization - discontinued operations		790			3,397
Amortization of debt fees/costs		996			977
Amortization of debt premium		622			483
Amortization of deferred loss on derivative		4,223			4,145
Amortization and termination of restricted shares		2,083			2,556
Transfer from escrow to fund interest, net of accretion		1,543			—
Accrued interest on interest rate swap		814			(26	)
Loss on disposals of property and capital lease terminations		1,776			1,991
Deferred income taxes provision (benefit)		6,296			(71,824	)
Other		204			699
Changes in operating assets and liabilities which provided (used) cash:
Receivables		(1,554	)		10,807
Net receivable from affiliate		(2,227	)		(7,989	)
Income tax receivable		—			6,036
Inventories		58,765			31,671
Prepaid expenses		(32,295	)		(43,547	)
Other assets		2,728			3,724
Accounts payable		13,766			(29,798	)
Accrued expenses		7,246			25,054
Income taxes payable		14,201			22,893
Other liabilities		(14,524	)		(21,520	)

Total adjustments		368,872			288,359

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