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EX-3 - EXHIBIT 3.1 - NASH FINCH COexhibit3z1.htm
EX-31 - EXHIBIT 31.1 - NASH FINCH COexhibit31z1.htm
EX-31 - EXHIBIT 31.2 - NASH FINCH COexhibit31z2.htm
EX-32 - EXHIBIT 32.1 - NASH FINCH COexhibit32z1.htm
EX-12 - EXHIBIT 12.1 - NASH FINCH COexhibit12z1.htm

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

       

 

X

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period (12 weeks) ended June 18, 2011

 

or

 

     

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ________

 

Commission File No. 0-785

 

NASH-FINCH COMPANY

 

(Exact Name of Registrant as Specified in its Charter)

 

 

   

 DELAWARE

41-0431960

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

 

   

         7600 France Avenue South,

                     P.O. Box 355

             Minneapolis, Minnesota

   

 

   55440-0355

 (Address of principal executive offices)

(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 _X_ No ___

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes _X_ No ___

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer_____ Accelerated filer __X__ Non-accelerated filer ____ Smaller reporting company ____

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ___   No _X_

 

As of July 13, 2011, 12,136,507 shares of Common Stock of the Registrant were outstanding.


 


Index

 

Page No.

 

 

Part I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

Consolidated Statements of Income

2

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Cash Flows

4

 

Notes to Consolidated Financial Statements

5

 

Item 2.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

16

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

25

 

Item 4.

  

Controls and Procedures

25

 

Part II – OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

 

Item 1A.

Risk Factors

25

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

Item 3.

Defaults upon Senior Securities

25

 

Item 4.

(Removed and Reserved)

25

 

Item 5.

Other Information

25

 

Item 6.

Exhibits

26

 

SIGNATURES

27

 

 

 

 

 

 

 

 

 

 


 


PART I. – FINANCIAL INFORMATION

ITEM 1.  Financial Statements

 

NASH-FINCH COMPANY AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

(In thousands, except per share amounts)
                         

 

 

 

 

12 Weeks Ended

 

24 Weeks Ended

 

 

 

 

 

June 18,

 

June 19,

 

June 18,

June 19,

 

 

 

 

 

2011

 

2010

 

2011

2010

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

1,099,575

 

1,154,617

$

2,199,384

2,334,310

 

Cost of sales

 

1,008,998

 

1,060,280

 

2,019,818

2,148,153

 

 

Gross profit

 

     90,577

 

     94,337

 

   179,566

   186,157

 

 

 

 

 

 

 

 

 

 

 

 

Other costs and expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

     60,241

 

     62,835

 

   122,818

   127,482

 

 

Depreciation and amortization

 

       8,367

 

       8,170

 

     16,950

     16,755

 

 

Interest expense

 

      5,355

 

       5,366

 

     10,814

     10,624

 

 

 

Total other costs and expenses

 

     73,963

 

     76,371

 

   150,582

   154,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

 

     16,614

 

     17,966

 

     28,984

     31,296

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

       6,563

 

       7,252

 

     11,452

     12,641

 

Net earnings

$

     10,051

 

    10,714

$

     17,532

     18,655

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per share:

 

 

 

 

 

 

 

 

 

Basic

$

         0.79

 

        0.83

$

         1.38

         1.43

 

 

Diluted

$

         0.77

 

         0.81

$

         1.35

         1.40

 

 

 

 

 

 

 

 

 

 

 

 

Declared dividends per common share

$

         0.18

 

         0.18

$

         0.36

         0.36

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

 

 

 

 

 

 

 

 

  outstanding and common equivalent shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

12,744

 

12,904

 

12,731

13,015

 

 

Diluted

 

13,042

 

13,263

 

13,029

13,352

 

 

 

 

 

 

 

 

 

 

 

 

 See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

2


 NASH-FINCH COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets 

(In thousands, except per share amounts)

             

 

 

 

 

June 18,

 

January 1,

Assets

 

2011

 

2011

Current assets:

 

 (unaudited)

 

 

 

Cash and cash equivalents

$

                659 

 

                830 

 

Accounts and notes receivable, net

 

         240,944 

 

         233,436 

 

Inventories

 

         309,720 

 

         333,146 

 

Prepaid expenses and other

 

           15,334 

 

           15,817 

 

Deferred tax asset, net

 

             7,864 

 

             8,281 

 

 

Total current assets

 

         574,521 

 

         591,510 

 

 

 

 

 

 

 

Notes receivable, net

 

           18,237 

 

           20,350 

Property, plant and equipment:

 

 

 

 

 

Property, plant and equipment

 

         658,259 

 

         649,256 

 

Less accumulated depreciation and amortization

 

       (403,700)

 

       (409,190)

 Net property, plant and equipment

 

         254,559 

 

         240,066 

 

 

 

 

 

 

 

Goodwill

 

         166,856 

 

         167,166 

Customer contracts and relationships, net

 

           16,871 

 

           18,133 

Investment in direct financing leases

 

             2,831 

 

             2,948 

Other assets

 

           10,336 

 

           10,502 

 

 

Total assets

$

      1,044,211 

 

      1,050,675 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt and capital lease obligations

$

             3,001 

 

             3,159 

 

Accounts payable

 

         207,694 

 

         230,082 

 

Accrued expenses

 

           55,356 

 

           60,001 

 

 

Total current liabilities

 

         266,051 

 

         293,242 

 

 

 

 

 

 

 

Long-term debt

 

         299,311 

 

         292,266 

Capital lease obligations

 

           17,113 

 

           18,920 

Deferred tax liability, net

 

           39,179 

 

           36,344 

Other liabilities

 

           30,212 

 

           32,899 

Commitments and contingencies

 

                   -   

 

                   -   

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock - no par value. Authorized 500 shares; none issued

 

                   -   

 

                   -   

 

Common stock - $1.66 2/3 par value. Authorized 50,000 shares;

 

 

 

 

 

 

  issued 13,677 shares

 

           22,796 

 

           22,796 

 

Additional paid-in capital

 

         115,992 

 

         114,799 

 

Common stock held in trust

 

           (1,223)

 

           (1,213)

 

Deferred compensation obligations

 

             1,223 

 

             1,213 

 

Accumulated other comprehensive loss

 

         (10,833)

 

         (10,984)

 

Retained earnings

 

         316,630 

 

         303,584 

 

Common stock in treasury; 1,541 and 1,569 shares, respectively

 

         (52,240)

 

         (53,191)

 

 

  Total stockholders' equity

 

         392,345 

 

         377,004 

 

 

  Total liabilities and stockholders' equity

$

      1,044,211 

 

      1,050,675 

 

 

 

 

 

 

 

 See accompanying notes to consolidated financial statements.

 

 

 

 

 

3
 


 NASH-FINCH COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(In thousands)

                 

 

 

 

 

 

 

24 Weeks Ended

 

 

 

 

 

 

June 18,

 

June 19,

 

 

 

 

 

 

2011

 

2010

Operating activities:

 

 

 

 

 

Net earnings

$

           17,532 

 

           18,655 

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

           16,950 

 

           16,755 

 

 

 

Amortization of deferred financing costs

 

                845 

 

                846 

 

 

 

Non-cash convertible debt interest

 

             2,610 

 

             2,413 

 

 

 

Amortization of rebateable loans

 

             2,066 

 

             2,531 

 

 

 

Provision for bad debts

 

                779 

 

                433 

 

 

 

Provision for (reversal of) lease reserves

 

                607 

 

              (434)

 

 

 

Deferred income tax expense

 

             3,252 

 

                174 

 

 

 

Loss (gain) on sale of property, plant and equipment

 

             1,422 

 

              (229)

 

 

 

LIFO charge (credit)

 

             2,632 

 

              (362)

 

 

 

Asset impairments

 

                349 

 

                818 

 

 

 

Share-based compensation

 

             2,531 

 

             3,462 

 

 

 

Deferred compensation

 

                609 

 

                463 

 

 

 

Other

 

              (584)

 

              (387)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts and notes receivable

 

           (5,548)

 

           17,099 

 

 

 

Inventories

 

           21,279 

 

         (27,130)

 

 

 

Prepaid expenses

 

              (446)

 

                157 

 

 

 

Accounts payable

 

         (23,230)

 

         (12,992)

 

 

 

Accrued expenses

 

           (4,493)

 

              (804)

 

 

 

Income taxes payable

 

                929 

 

           (6,398)

 

 

 

Other assets and liabilities

 

           (2,599)

 

             2,609 

 

 

 

 

Net cash provided by operating activities

 

           37,492 

 

           17,679 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Disposal of property, plant and equipment

 

             3,074 

 

                347 

 

Additions to property, plant and equipment

 

         (33,110)

 

         (10,369)

 

Business acquired, net of cash

 

           (1,587)

 

                   -   

 

Loans to customers

 

           (2,285)

 

              (600)

 

Payments from customers on loans

 

                672 

 

             1,102 

 

Other

 

 

 

              (902)

 

              (297)

 

 

 

 

Net cash used in investing activities

 

         (34,138)

 

           (9,817)

Financing activities:

 

 

 

 

 

Proceeds of revolving debt

 

             4,700 

 

           10,600 

 

Dividends paid

 

           (4,364)

 

           (4,549)

 

Repurchase of Common Stock

 

                   -   

 

         (15,191)

 

Payments of long-term debt

 

              (251)

 

              (233)

 

Payments of capital lease obligations

 

           (1,577)

 

           (1,839)

 

Increase (decrease) in outstanding checks

 

           (1,526)

 

             3,285 

 

Other

 

 

 

              (507)

 

                   -   

 

 

 

 

Net cash used in financing activities

 

           (3,525)

 

           (7,927)

Net decrease in cash and cash equivalents

 

              (171)

 

                (65)

Cash and cash equivalents:

 

 

 

 

 

 

Beginning of year

 

                830 

 

                830 

 

 

End of period

$

                659 

 

                765 

 

 

 

 

 

See accompanying notes to consolidated financial statements. 

4

 



 

Nash-Finch Company and Subsidiaries

Notes to Consolidated Financial Statements

June 18, 2011

 

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 1, 2011.

 

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 June 18, 2011, and January 1, 2011, the results of operations for the 12 and 24 weeks ended June 18, 2011 (“second quarter 2011”), and June 19, 2010 (“second quarter 2010”), and cash flows for the 24 weeks ended June 18, 2011, and June 19, 2010.  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 – 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 $75.8 million higher on June 18, 2011 and $73.1 million higher on January 1, 2011.  We recorded a LIFO charge of $2.1 million during the second quarter 2011 as compared to a LIFO credit of $0.3 million during the second quarter 2010.  During year-to-date 2011, we recorded a LIFO charge of $2.6 million as compared to a LIFO credit of $0.4 million during year-to-date 2010.        

 

Note 3 – 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 – Compensation-Stock Compensation (“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 $1.4 million during the second quarter 2011 versus $1.9 million during the second quarter 2010.  During year-to-date 2011, share-based compensation expense was $2.5 million as compared to $3.5 million during year-to-date 2010.

 

             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

 

5

 

 


 

 

(as amended and restated on July 14, 2008) (“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 1, 2011 under the caption “Footnote 10 – Share-based Compensation Plans” and in our Definitive Proxy Statement on Form DEF 14A filed on April 15, 2011.

 

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 2011 pursuant to our LTIP.  These units vest at the end of a three-year performance period.  All units under the 2007 plan were settled in shares of our common stock during the second quarter 2010. Under the 2008 plan, 104,111 units vested on January 1, 2011 and were settled in the second quarter 2011 for approximately 122,000 shares of common stock, of which approximately 96,000 were deferred by recipients until termination of employment as provided in the plan.

 

During year-to-date 2011, a total of 109,236 units were granted pursuant to our 2011 LTIP.  Depending on a comparison of the Company’s three-year compound annual growth rate of Consolidated EBITDA results to the Company’s peer group 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 Enterprises, Inc., 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 (i) 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, (ii) a change in control occurs following the six month anniversary of the grant date or (iii) 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.

 

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 is 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:

6

 


 

 

     

Assumptions - SARs Valuation

 

 

 

 

 

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 2011:

 

                 

(in thousands, except vesting periods)

 

Service Based Grants (Board Units and RSUs)

 

Weighted Average Remaining Restriction/ Vesting Period (Years)

 

Performance Based Grants (LTIP & Performance RSUs)

 

Weighted Average Remaining Restriction/ Vesting Period (Years)

 

 

 

 

 

 

 

 

Outstanding at January 1, 2011

646.5 

 

0.6

 

568.8 

 

0.7

Granted

 

11.6 

 

 

109.5 

 

 

Forfeited/cancelled

 

-

 

 

 

(16.1)

 

 

Restrictions lapsed/ units settled

 

(33.2)

 

 

 

(104.1)

 

 

Shares deferred upon vesting/settlement & dividend equivalents on deferred shares(1)

 

36.6 

 

 

 

96.4 

 

 

Outstanding at June 18, 2011

 

661.5 

 

0.3

 

654.5 

 

0.8

 

 

 

 

 

 

 

 

 

Exercisable/unrestricted at January 1, 2011

 

322.1 

 

 

 

323.7 

 

 

Exercisable/unrestricted at June 18,2011

 

358.6 

  

 

 

316.0 

 

 

 

(1)

“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.

 

         

(in thousands, except per share amounts)

 

Stock Appreciation Rights

 

Weighted Average Base/Exercise Price Per SAR

 

 

 

 

 

Outstanding at January 1, 2011

 

267.3

$

38.44

Granted

 

-

 

 

Exercised/restrictions lapsed

 

 -

 

 

Forfeited/cancelled

 

 -

 

 

Outstanding at June 18, 2011

 

267.3

 

38.44

 

 

 

 

 

Exercisable/unrestricted at January 1, 2011

 

-

 

 

Exercisable/unrestricted at June 18, 2011

 

-

 

 

 

The weighted-average grant-date fair value of time vesting equity units and performance vesting units granted during year-to-date 2011 was $35.58 and $39.69, respectively.  

 

Note 4 – Fair Value Measurements

 

     ASC Topic 820 – Fair Value Measurement (“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:

 

7

 


 

 

   Level 1: Quoted prices (adjusted) 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 June 18, 2011, we have recorded a fair value liability of $0.2 million in relation to our outstanding interest rate swap agreements as compared to $0.4 million as of January 1, 2011, 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 June 18, 2011 and January 1, 2011.  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 June 18, 2011, had a carrying value and fair value of $300.0 million and $305.6 million, respectively, and at January 1, 2011, had a carrying value and fair value of $292.9 million and $305.6 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 Topic 360 – Property, Plant, and Equipment.  During each of the second quarters 2011 and 2010, asset impairments of $0.3 million were recognized.  For year-to-date 2011 and 2010, asset impairments were $0.3 million and $0.8 million, respectively.  We utilize a discounted cash flow model that incorporates unobservable level 3 inputs to test for long-lived asset impairment.  

 

Note 5 – 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.  

 

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 June 18, 2011, and January 1, 2011, we had recorded a fair value liability of $0.2 million and $0.4 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 – Derivatives and Hedging (“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 $0.1 million and $0.3 million during the second quarters of fiscal 2011 and 2010, respectively, and resulted in net payments of $0.3 million and $0.5 million during year-to-date 2011 and 2010, respectively, which are included in interest expense on our Consolidated Statement of Income.

 

8

 


 

As of June 18, 2011, we had two outstanding interest rate swap agreements with notional amounts totaling $17.5 million as compared to $35.0 million as of June 19, 2010, as follows (amounts in thousands):

 

         

 

Notional

Effective Date

Termination Date

Fixed Rate

 

 $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

 

 $15,000          

10/15/2009

10/15/2010

3.38%

 

     7,500          

10/15/2010

10/15/2011

3.38%

 

Note 6 – Other Comprehensive Income

 

Other comprehensive income for the periods presented includes market value adjustments to reflect derivative instruments at fair value, pursuant to ASC 815.   The components of comprehensive income are as follows:

 

                     

 

 

12 Weeks

 

 

24 Weeks

 

 

 

Ended

 

 

Ended

 

(In thousands)

 

June 18,
2011

 

June 19,
2010

 

 

June 18,
2011

 

June 19,
2010

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

$

10,051

 

10,714

 

 

     17,532

 

        18,655

 

Change in fair value of derivatives, net of  tax

 

75

(1)

 115

(2)

 

        151

(3)

            186

(4)

Comprehensive income

$

10,126

 

        10,829

 

 

       17,683

 

         18,841

 

 

 

 

 

 

 

 

 

 

 

 

(1) Net of tax of $48.

 

 

 

 

 

 

 

 

 

 

(2) Net of tax of $74.

 

 

 

 

 

 

 

 

 

 

(3) Net of tax of $97.

 

 

 

 

 

 

 

 

 

 

(4) Net of tax of $119.

 

 

 

 

 

 

 

 

 

 

 

The gains reported in other comprehensive income during the second quarter and year-to-date periods of 2011 and 2010 reflect a change in fair value of our outstanding interest rate swap agreements during the respective periods.  Please refer to “Note 5 - Derivatives” of this Form 10-Q for information related to our interest rate swap agreements.

 

Note 7 – Long-term Debt and Bank Credit Facilities

 

Total debt outstanding was comprised of the following:

 

         

(In thousands)

 

June 18, 2011

 

January 1, 2011

 

 

 

 

 

Asset-backed credit agreement:

 

 

 

 

   Revolving credit

$

158,800 

 

154,100 

Senior subordinated convertible debt, 3.50% due in 2035

 

139,320 

 

136,710 

Industrial development bonds, 5.60% to 6.00% due in various installments through 2014

 

 

1,620 

 

 

1,830 

Notes payable and mortgage notes, 7.95% due in various installments through 2013

 

 255 

 

 296 

Total debt

 

299,995 

 

292,936 

  Less current maturities

 

(684)

 

(670)

      Long-term debt

$

299,311 

 

292,266 


Asset-backed Credit Agreement

 

9

 

 


 

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 June 18, 2011, 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 June 18, 2011, $169.4 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $11.8 million of outstanding letters of credit primarily supporting workers’ compensation obligations. 

 

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 filed with the SEC for the fiscal year ended January 1, 2011, for additional information regarding the notes.

Note 8 – 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 ($9.0 million as of June 18, 2011, as compared to $9.4 million as of January 1, 2011), 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 - Guarantees (“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 $6.5 million, which is included in the $9.0 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 $0.9 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 are therefore not subject to the recognition and measurement provisions of ASC 460.

 

10

 

 


 

 

 

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 $10.5 million as of June 18, 2011 as compared to $8.9 million as of January 1, 2011.

 

Note 9 – Income Taxes

 

For the second quarter 2011 and 2010, our tax expense was $6.6 million and $7.3 million, respectively.  During year-to-date 2011 and 2010, our tax expense was $11.5 million and $12.6 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.  During the second quarter 2010, the Company filed reports with various taxingauthorities which resulted in the refunds of tax payments.  The effect of these discrete events in the second quarter was $0.1 million. For both the second quarter and year-to-date periods of 2011, the effective tax rate was 39.5% as compared to 40.4% for each of the second quarter and year-to-date periods of 2010.   

 

The total amount of unrecognized tax benefits as of the end of the second quarter 2011 was $1.9 million.  The net increase in unrecognized tax benefits of $0.1 million since March 26, 2011 is due to the 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 $0.4 million at the end of the second quarter 2011.  We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.  At the end of the second quarter 2011, we had approximately $0.1 million for the payment of interest and penalties accrued.

 

We do not expect our unrecognized tax benefits to change significantly over the next 12 months. 

 

The company or its subsidiaries file 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.

 

Note 10 – Pension and Other Postretirement Benefits

 

The following tables present the components of our pension and postretirement net periodic benefit cost:

 

                 

12 Weeks Ended June 18, 2011 and June 19, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Benefits

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Interest cost

$

490 

 

510 

 

 

Expected return on plan assets

 

(433)

 

(428)

 

                   -

 

-

Amortization of prior service cost

 

-

 

-

 

(5)

 

(7)

Recognized actuarial loss (gain)

 

363 

 

323 

 

(3)

 

(1)

Net periodic benefit cost

$

420 

 

405 

 

-

 

 

                 

24 Weeks Ended June 18, 2011, and June 19, 2010:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Benefits

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Interest cost

$

979 

 

1,020 

 

16 

 

18 

Expected return on plan assets

 

(866)

 

(856)

 

-

 

-

Amortization of prior service cost

 

-

 

-

 

(10)

 

(14)

Recognized actuarial loss (gain)

 

727 

 

647 

 

(7)

 

(3)

Net periodic benefit cost

$

840 

 

811 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

Weighted-average assumptions used to determine net periodic benefit cost for the second quarter and year-to-date periods of 2011 and 2010 are as follows:

 

11

 

 


 

                 

 

 

Pension Benefits

 

Other Benefits

 

 

2011

 

2010

 

2011

 

2010

Weighted-average assumptions:

 

 

 

 

 

 

 

 

Discount rate

 

5.10%

 

5.60%

 

5.10%

 

5.60%

Expected return on plan assets

 

6.00%

 

6.50%

 

N/A

 

N/A

Rate of compensation increase

 

N/A

 

N/A

 

N/A

 

N/A

 

 

Total contributions to our pension plan in fiscal 2011 are expected to be $4.6 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 2010, the Company contributed $3.3 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 withdrawal liability.  Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated.

 

A more detailed discussion of the risks associated with the Plan are contained in Part I, Item 1A, “Risk Factors,” of our Annual Report filed with the SEC on Form 10-K for the fiscal year ended January 1, 2011.

 

Note 11– Earnings Per Share

 

The following table reflects the calculation of basic and diluted earnings per share:

 

                 

 

 

Second Quarter

 

Year-to-Date

Ended

 Ended

(In thousands, except per share amounts)

 

June 18, 2011

 

June 19, 2010

 

June 18, 2011

 

June 19, 2010

 

 

 

 

 

 

 

 

 

Net earnings

$

10,051

 

10,714

 

17,532

 

18,655

 

 

 

 

 

 

 

 

 

Net earnings per share-basic:

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

12,744

 

12,904

 

12,731

 

13,015

 

 

 

 

 

 

 

 

 

Net earnings per share-basic

$

0.79

 

0.83

 

1.38

 

1.43

 

 

 

 

 

 

 

 

 

Net earnings per share-diluted:

 

 

 

 

 

 

 

 

Weighted-average shares outstanding

 

12,744

 

12,904

 

12,731

 

13,015

Shares contingently issuable

 

298

 

359

 

298

 

337

Weighted-average shares and potential dilutive shares outstanding

 

13,042

 

13,263

 

13,029

 

13,352

 

 

 

 

 

 

 

 

 

Net earnings per share-diluted

$

0.77

 

0.81

 

1.35

 

1.40

 

SARs are 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 in 2035 will be convertible at the option of the holder, only upon the occurrence of certain events, at an adjusted conversion rate of 9.6224 shares (initially 9.3120) of our

12

 

 


 

common stock per $1,000 principal amount at maturity of notes (equal to an adjusted conversion price of approximately $48.44 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 quarters of 2011 and 2010, performance units granted under the 2008 LTIP Plan and 2007 LTIP Plan, respectively, were settled in shares of common stock, some of which were deferred by executives as required by the plan.  Vested shares deferred by executives and board members are included in the calculation of basic earnings per share.  Other performance units and RSUs granted during 2007, 2008, 2009, 2010 and 2011 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 – Earnings Per Share.  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 second quarter 2011, approximately 60,000 shares related to the LTIP and 238,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS as compared to approximately 143,000 shares related to the LTIP and 216,000 shares related to RSUs during the second quarter 2010.  For year-to-date 2011, approximately 54,000 shares related to the LTIP and 244,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS as compared to approximately 127,000 shares related to the LTIP and 210,000 shares related to RSUs during year-to-date 2010.

 

Note 12 – Segment Reporting

 

We sell and distribute products that are typically found in supermarkets and operate three reportable operating segments.  The military segment consists of seven distribution centers that distribute products to military commissaries and exchanges and one shared facility which services both military and independent food distribution customers.  During fiscal 2010, our military distribution centers in Columbus, Georgia and Bloomington, Indiana became operational.  Excluded from the military distribution center total are two adjacent military distribution centers we purchased during the third quarter of fiscal 2010 in Oklahoma City, Oklahoma, which are scheduled to become operational during fiscal 2012.  Our food distribution segment consists of 14 distribution centers that sell to independently operated retail food stores, our corporate owned stores and other customers.  The retail segment consists of 46 corporate-owned stores that sell directly to the consumer.  During the second quarter 2011, we closed two and sold four retail stores.  

 

During fiscal 2009 and fiscal 2010, we acquired facilities in Columbus, Georgia, Bloomington, Indiana and Oklahoma City, Oklahoma for expansion of our military distribution business.  We have historically serviced military commissaries and exchanges outside of the military segment’s distribution network through distribution centers that are included in our food distribution segment.  The revenue and segment profit associated with this business had previously been reported in the food distribution segment.  We are currently in the process of transitioning the military business serviced by the food distribution segment to military distribution facilities and are scheduled to have all of the business transitioned during fiscal 2012.  Accordingly, we revised our segment reporting during the fourth quarter of fiscal 2010 to include this business in our military segment, which impacts quarterly amounts previously reported during fiscal 2010.  This revision had no impact on our consolidated financial statements in any period presented.

 

Certain prior year amounts shown below have been revised to conform to the current year presentation.  Quarterly periods presented after the second quarter 2011 will be revised as shown the next time those periods are presented.

13
 


                       

 

 

 

 

 

Year-to-date

 

 

 

 

 

2nd Quarter 2010

 

2nd Quarter 2010

 

3rd Quarter 2010

(In thousands)

As

adjusted

 

As

reported

 

As

adjusted

 

As

reported

 

As

adjusted

 

As

reported

 

 

 

 

 

 

 

 

 

 

 

 

Segment revenue:

 

 

 

 

 

 

 

 

 

 

 

  Military

 $

515,785

 

456,588

 

1,055,419

 

934,585

 

699,655

 

620,822

  Food Distribution

514,982

 

574,179

 

1,037,174

 

1,158,008

 

652,670

 

731,503

  Retail

123,850

 

123,850

 

241,717

 

241,717

 

158,556

 

158,556

Total revenue

$

1,154,617

 

1,154,617

 

2,334,310

 

2,334,310

 

1,510,881

 

1,510,881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment profit:

 

 

 

 

 

 

 

 

 

 

 

  Military

$

12,663

 

11,519

 

25,581

 

23,335

 

14,270

 

12,822

  Food Distribution

7,636

 

8,581

 

12,540

 

14,380

 

11,666

 

12,848

  Retail

2,190

 

2,389

 

2,210

 

2,616

 

2,558

 

2,824

Total segment profit

 $

22,489

 

22,489

 

40,331

 

40,331

 

28,494

 

28,494

 

 

 

 

 

 

 

 

 

 

 

 

 

A summary of the major segments of the business is as follows:

 

                         

 

 

Second Quarter Ended

 

 

June 18, 2011

 

June 19, 2010

(In thousands)

 

Sales from external customers

 

Inter-segment sales

 

Segment profit

 

Sales from external customers

 

Inter-segment sales

 

Segment profit

 

 

 

 

 

 

 

 

 

 

 

 

Military

$

529,141

 

-

 

11,285

 

515,785

 

-

 

12,663

Food Distribution

 

459,465

 

55,313 

 

7,709

 

514,982

 

61,361 

 

7,636

Retail

 

110,969

 

-

 

2,128

 

123,850

 

-

 

2,190

Eliminations

 

-

 

(55,313)

 

-

 

-

 

(61,361)

 

-

  Total

$

1,099,575

 

-

 

21,122

 

1,154,617

 

-

 

22,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                         

 

 

Year-to-Date Ended

 

 

June 18, 2011

 

June 19, 2010

(In thousands)

 

Sales from external customers

 

Inter-segment sales

 

Segment profit

 

Sales from external customers

 

Inter-segment sales

 

Segment profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Military

$

1,066,581

 

-

 

23,432

 

1,055,419

 

-

 

25,581

Food Distribution

 

909,772

 

110,235 

 

13,554

 

1,037,174

 

119,653 

 

12,540

Retail

 

223,031

 

-

 

1,144

 

241,717

 

-

 

2,210

Eliminations

 

-

 

(110,235)

 

-

 

-

 

(119,653)

 

-

  Total

$

2,199,384

 

-

 

38,130

 

2,334,310

 

  -

 

40,331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                 

Reconciliation to Consolidated Statements of Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Second Quarter Ended

 

 Year-to-Date Ended

 

 

June 18,

 

June 19,

 

June 18,

 

June 19,

(In thousands)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Total segment profit

$

21,122 

 

22,489 

 

38,130 

 

40,331 

Unallocated amounts:

 

 

 

 

 

 

 

 

    Interest

 

(4,508)

 

(4,523)

 

(9,146)

 

(9,035)

Earnings before income taxes

$

16,614 

 

17,966 

 

28,984 

 

31,296 

 

 

 

 

 

 

 

 

 

 

14

 

 


 

Note 13 – 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.

 

 


 15


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 a statement of historical fact may be deemed a forward-looking statement.  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; 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;

our ability to identify and remediate any material weakness in our internal controls that could affect our ability to detect and prevent fraud, expose us to litigation, or prepare financial statements and reports in a timely manner;

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;

unanticipated problems with product procurement; and

maintaining our reputation and corporate image.

 

             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 1, 2011. 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”).

 

16

 

 


 

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: military food distribution, 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 is formulated to differentiate the Company.  The strategic plan includes long-term initiatives to increase revenues and earnings, improve productivity and cost efficiencies of our military, food distribution and retail 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 a 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 2011 initiatives consist of the following:           

·        Continue implementation of our military distribution center network expansion;

·        Execute supply chain and center store initiatives within our food distribution segment;

·        Implement cost reduction and profit improvement initiatives; and

·        Identify aquisitions that support our strategic plan.

 

 

Our military segment contracts with manufacturers to distribute a wide variety of food 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.  During the third quarter of fiscal 2010, we purchased facilities in Bloomington, Indiana and Oklahoma City, Oklahoma for expansion of our military business.  The Bloomington, Indiana facility became operational during the fourth quarter of fiscal 2010, while Oklahoma City, Oklahoma, which consists of two adjacent facilities, is scheduled to become operational during fiscal 2012.  In addition, we purchased the real estate associated with our Pensacola, Florida and Norfolk, Virginia facilities, which had previously been leased, during the third quarter of fiscal 2010 and the first quarter of fiscal 2011, respectively.

                      

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 1,800 independent retail locations located in 28 states, primarily in the Midwest and Southeast regions of the United States.  

 

Our retail segment operated 46 corporate-owned stores primarily in the Upper Midwest as of June 18, 2011.  Primarily due to highly competitive conditions in which supercenters and other alternative formats compete for price conscious customers, we closed two and sold four retail stores during fiscal 2011 and closed two retail stores during fiscal 2010.  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.  

 

17

 

 


Thus, changes in sales of the retail segment can have a disproportionate impact on the consolidated gross profit and SG&A as compared to similar changes in sales in our food distribution and military segments.

 

Results of Operations

 

Sales

 

Sales for our military and food distribution segments for the second quarter and year-to-date periods of fiscal 2010 presented below have been revised to conform to our current year presentation.  Please refer to Part I, Item 1 in this report under Note 12 – “Segment Reporting” of this Form 10-Q for additional information regarding our segment reporting revision.

 

The following tables summarize our sales activity for the 12 weeks ended June 18, 2011 (“second quarter 2011”) compared to the 12 weeks ended June 19, 2010 (“second quarter 2010”) and the 24 weeks ended June 18, 2011 (“year-to-date 2011”) compared to the 24 weeks ended June 19, 2010 (“year-to-date 2010”):

 

                   

 

 

Second quarter 2011

 

Second quarter 2010

 

Increase/(Decrease)

(In thousands)

 

Sales

Percent of Sales

 

Sales

Percent of Sales

 

$

%

Segment Sales:

 

 

 

 

 

 

 

 

 

     Military

$

         529,141

48.1%

 

       515,785

44.7%

 

    13,356 

2.6% 

     Food Distribution

 

         459,465

41.8%

 

       514,982

44.6%

 

  (55,517)

 (10.8%)

     Retail

 

         110,969

10.1%

 

      123,850

10.7%

 

  (12,881)

 (10.4%)

       Total Sales

$

      1,099,575

100.0%

 

    1,154,617

100.0%

 

  (55,042)

 (4.8%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year-to-date 2011

 

Year-to-date 2010

 

Increase/(Decrease)

(In thousands)

 

Sales

Percent of Sales

 

Sales

Percent of Sales

 

$

%

Segment Sales:

 

 

 

 

 

 

 

 

 

     Military

$

      1,066,581

48.5%

 

   1,055,419

45.2%

 

    11,162 

1.1% 

     Food Distribution

 

         909,772

41.4%

 

    1,037,174

44.4%

 

(127,402)

 (12.3%)

     Retail

 

 223,031

10.1%

 

       241,717

10.4%

 

  (18,686)

 (7.7%)

       Total Sales

$

2,199,384

100.0%

 

   2,334,310

100.0%

 

(134,926)

 (5.8%)

 

 

 

 

 

 

 

 

 

 

 

Total Company sales declined 4.8% during the second quarter 2011 as compared to the 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 of fiscal 2010, which accounted for $18.1 million of sales in the prior year period, and the effect of  the sale of four and closing of four corporate-owned retail stores, total Company comparable sales declined 2.5% during the second quarter 2011.  

 

Total Company sales declined 5.8% during year-to-date 2011 as compared to the 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 of fiscal 2010, which accounted for $52.6 million of sales in the prior year period, and the effect of the sale of four and closing of four corporate-owned retail stores, total Company comparable sales declined 3.1% during year-to-date 2011.  

 

Military segment sales increased 2.6% during the second quarter 2011 as compared to the prior year.  However, a larger portion of military sales were performed on consignment during the second quarter 2011, which are not included in our reported net sales.  The year-over-year increase in gross consignment sales was approximately $2.5 million during the second quarter 2011.  Including the impact of consignment sales, comparable military sales increased 3.0% during the second quarter 2011 as compared to the prior year.  Domestic sales increased 1.2% while overseas sales increased 9.5% as compared to the comparable prior year quarter.  

 

Military segment sales increased 1.1% during year-to-date 2011 as compared to the prior year.  However, a larger portion of military sales were performed on consignment during year-to-date 2011, which are not included in our reported net sales.  The year-over-year increase in gross consignment sales was approximately $8.2 million during year-to-date 2011.  Including the impact of consignment sales, comparable military sales increased 1.8%

 

18

 

 


durring year-to-date 2011 as compared to the prior year. Domestic sales increased 0.6% while overseas sales increased 3.2% as compared to the comparable prior year-to-date period.

  Domestic and overseas sales represented the following percentages of military segment sales:  

 

               

 

Second Quarter

 

Year-to-date

 

2011

 

2010

 

2011

 

2010

Domestic

82.2%

 

83.3%

 

82.5%

 

82.8%

Overseas

17.8%

 

16.7%

 

17.5%

 

17.2%

 

 

The decrease in food distribution sales for the second quarter 2011 of 10.8% is partially 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 $18.1 million of additional sales during the second quarter 2010.  Excluding the impact of the customer transition, food distribution sales declined 7.5%, which is the result of sales volume of lost customer accounts exceeding new account gains and a decline in sales to existing customers.

 

The decrease in food distribution sales during year-to-date 2011 of 12.3% is partially 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 $52.6 million of additional sales during year-to-date 2010.  Excluding the impact of the customer transition, food distribution sales declined 7.6%, which is the result of sales volume of lost customer accounts exceeding new account gains and a decline in sales to existing customers.

 

Retail sales declined 10.4% during the second quarter 2011 as compared to the comparable prior year period.  The decline in retail sales is primarily the result of the closure of four stores and the sale of four stores since the beginning of third fiscal quarter of 2010.  In addition, same store sales were down 3.7% during the second quarter 2011.  Same store sales compare retail sales for stores which were in operation for the same number of weeks in the comparative periods.

 

Retail sales declined 7.7% during year-to-date 2011 as compared to the comparable prior year period.  The decline in retail sales is primarily the result of the closure of four stores and the sale of four stores since the beginning of the third quarter of fiscal 2010.  In addition, same store sales were down 3.3% during year-to-date 2011.  Same store sales compare retail sales for stores which were in operation for the same number of weeks in the comparative periods.

 

During the second quarters of 2011 and 2010, our corporate store count changed as follows:

 

           

 

 

Second quarter 2011

 

Second quarter  2010

 

Number of stores at beginning of period

 

52

 

54

 

Sold stores

 

(4)

 

-

 

Closed stores

 

(2)

 

-

 

Number of stores at end of period       

 

46

 

54

 

 

During year-to-date 2011 and 2010, our corporate store count changed as follows:

 

           

 

 

Year-to-date
2011

 

Year-to-date  
2010

 

Number of stores at beginning of period

 

52

 

54

 

Sold stores

 

(4)

 

-

 

Closed stores

 

(2)

 

-

 

Number of stores at end of period       

 

46

 

54

 

 

The tables above exclude corporate-owned stand-alone pharmacies and convenience stores.  

 

 

Consolidated Gross Profit

 

19

 

 


 

 

Consolidated gross profit was 8.2% of sales for both the second quarter 2011 and second quarter 2010.  Our gross profit margin improved by 0.3% of sales during the second quarter 2011, which was driven primarily by higher gross margin performance in our food distribution segment.  However, our overall gross profit margin was negatively affected by 0.2% of sales in the second quarter 2011 due to a sales mix shift between our business segments between the years.  This was due to a higher percentage of 2011 sales occurring in the military segment which has a lower gross profit margin than the retail and food distribution segments.

 

Consolidated gross profit was 8.2% of sales for year-to-date 2011 as compared to 8.0% of sales during year-to-date 2010.  Our gross profit margin improved by 0.3% of sales during year-to-date 2011, which was driven primarily by higher gross margin performance in our food distribution segment.  However, our overall gross profit margin was negatively affected by 0.1% of sales during year-to-date 2011 due to a sales mix shift between our business segments between the years.  This was due to a higher percentage of 2011 sales occurring in the military segment which has a lower gross profit margin than the retail and food distribution segments.

 

Consolidated Selling, General and Administrative Expenses

 

Consolidated SG&A for the second quarter 2011 was 5.5% of sales, and was relatively flat in comparison to 5.4% of sales during the second quarter 2010.  Consolidated SG&A for year-to-date 2011 was 5.6% of sales, also relatively flat in comparison to 5.5% of sales during year-to-date 2010. 

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense was $8.4 million for the second quarter 2011 as compared to $8.2 million during the comparable prior year period.  Depreciation and amortization expense for our military segment was approximately $1.0 million higher during the second quarter 2011 as compared to the prior year, which is the result of expansion activities associated with that business.  The increase in military depreciation and amortization was partially offset by a decline of $0.3 million in our food distribution segment and a $0.5 million decline in the retail segment.  

 

Depreciation and amortization expense was $17.0 million for year-to-date 2011 as compared to $16.8 million during the comparable prior year period.  Depreciation and amortization expense for our military segment was approximately $2.0 million higher during year-to-date 2011 as compared to the prior year, which is the result of expansion activities associated with that business.  The increase in military depreciation and amortization was partially offset by a decline of $0.8 million in our food distribution segment and a $1.0 million decline in the retail segment.  

 

Interest Expense

 

Interest expense was $5.4 million for both the second quarters of 2011 and 2010.  Average borrowing levels increased from $335.4 million during the second quarter 2010 to $350.5 million during the second quarter 2011.  The effective interest rate was 4.1% for the second quarter 2011 as compared to 4.5% for the second quarter 2010.  

 

Interest expense was $10.8 million for year-to-date 2011 compared to $10.6 million during the comparable prior year period.  Average borrowing levels increased from $325.2 million during year-to-date 2010 to $356.6 million during year-to-date 2011.  The effective interest rate was 4.1% for year-to-date 2011 as compared to 4.6% during year-to-date 2010.  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.   

 

20

 

 


 

 

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 – Debt-Debt with Conversion and Other Options (“ASC 470-20”).  Non-cash interest expense recognized under ASC 470-20 was $1.3 million and $1.2 million during the second quarters of 2011 and 2010, respectively.  Non-cash interest expense recognized under ASC 470-20 was $2.6 million and $2.4 million during the year-to-date periods of 2011 and 2010, 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, on which we are required to pay semi-annual cash interest 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 changes in tax laws and regulations.  The effective income tax rate was 39.5% and 40.4% for the second quarters of 2011 and 2010, respectively.   The effective income tax rate was also 39.5% and 40.4% for year-to-date 2011 and 2010, respectively.   

 

During the second quarter of 2011, the Company did not file any claims with or receive refunds from any of the various tax authorities.  The effective rate for the second quarter 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 2011 will be approximately 39.5% which excludes the potential impact of discrete events.

 

Net Earnings

 

Net earnings were $10.1 million, or $0.77 per diluted share, during the second quarter 2011 as compared to net earnings of $10.7 million, or $0.81 per diluted share, during the second quarter 2010.  Net earnings for year-to-date 2011 were $17.5 million, or $1.35 per diluted share, as compared to net earnings of $18.7 million, or $1.40 per diluted share, during year-to-date 2010.  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:

 

             

 

 

24 Weeks Ended

 

 

(In thousands)

 

June 18, 2011

 

June 19, 2010

 

Increase/

(Decrease)

 

 

 

 

 

 

 

     Net cash provided by operating activities

$

37,492 

 

17,679 

 

19,813 

     Net cash used in investing activities

 

(34,138)

 

(9,817)

 

(24,321)

     Net cash used in financing activities

 

(3,525)

 

(7,927)

 

4,402 

     Net decrease in cash and cash equivalents

$

(171)

 

(65)

 

(106)

 

 

  Cash provided by operating activities increased $19.8 million during year-to-date 2011 as compared to the prior year.  Inventories declined $21.3 million during year-to-date 2011, as compared to an increase in inventory of $27.1 million in the prior year, which contributed to a $48.4 million year-over-year increase in cash provided by operating activities.  However, this impact was partially offset by a year-over-year increase in our accounts receivable of $22.6 million and year-over-year decline in our accounts payable of $10.2 million.  The year-over-year increase in our accounts receivable was due primarily to a temporary timing difference related to our military accounts receivable billing cycle that accelerated collections into the last week of fiscal 2010 which caused collections in the first quarter 2011 to be lower than the prior year.

 

21

 

 


 

Net cash used in investing activities increased by $24.3 million during year-to-date 2011 as compared to the prior year.  Net cash used in investing activities for year-to-date 2011 consisted primarily of additions to property, plant and equipment of $33.1 million.  The additions to property, plant and equipment during year-to-date 2011 consisted primarily of the purchase of the real estate associated with our military distribution facility in Norfolk, Virginia, which was previously a leased location, for $27.6 million.  During year-to-date 2010, net cash used in investing activities consisted primarily of additions to property, plant and equipment of $10.4 million.

 

Cash used in financing activities decreased by $4.4 million during year-to-date 2011 as compared to the prior year.  During year-to-date 2011, cash used in financing activities consisted primarily of dividend payments of $4.4 million, payments of capital lease obligations of $1.5 million and a decrease in outstanding checks of $1.5 million, which were partially offset by proceeds of revolving debt of $4.7 million.  Cash used in financing activities during year-to-date 2010 included share repurchases of $15.2 million and dividend payments of $4.5 million, which were partially offset by proceeds of revolving debt of $10.6 million.

 

During the remainder of fiscal 2011, 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.  There can be no assurance, however, that we will continue to generate cash flows at current levels as our business is sensitive to trends in consumer spending at our customer locations and our owned retail food stores, as well as certain factors outside of our control, including, but not limited to, the current and future state of the U.S. and global economy, competition, recent and potential future disruptions to the credit and financial markets in the U.S. and worldwide and continued volatility in food and energy commodities.  Please see Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K filed with the SEC for the fiscal year ended January 1, 2011, for a more detailed discussion of potential factors that may have an impact on our liquidity and capital resources.

 

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 June 18, 2011, 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.

22

 


As of June 18, 2011, $169.4 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $11.8 million of outstanding letters of credit primarily supporting workers’ compensation obligations.  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 filed with the SEC for the fiscal year ended January 1, 2011, for additional information.

 

Consolidated EBITDA (Non-GAAP Measurement)

 

 The following is a reconciliation of EBITDA and Consolidated EBITDA to net earnings for the second quarters and year-to-date periods of 2011 and 2010 (amounts in thousands):

 

               

 

2011

 

2010

 

2011

 

2010

 

Qtr 2

 

Qtr 2

 

Year-to-Date

 

Year-to-Date

Net earnings

 $        10,051 

 

    10,714 

$

17,532 

 

          18,655 

  Income tax expense

        6,563 

 

      7,252 

 

11,452 

 

          12,641 

  Interest expense

        5,355 

 

      5,366 

 

10,814 

 

          10,624 

  Depreciation and amortization

        8,367 

 

      8,170 

 

16,950 

 

          16,755 

EBITDA

      30,336 

 

    31,502 

 

56,748 

 

          58,675 

  LIFO charge (credit)

        2,131 

 

       (321)

 

2,632 

 

            (361)

  Provision for (reversal of) lease reserves

           159 

 

       (434)

 

607 

 

            (434)

  Asset impairments

           349 

 

         301 

 

349 

 

               818 

  Net loss (gain) on sale of real estate and other assets

        (391)

 

            -   

 

1,405 

 

                   -   

  Share-based compensation

        1,372 

 

      1,857 

 

2,531 

 

            3,462 

  Subsequent cash payments on non-cash charges

       (572)

 

       (969)

 

(1,076)

 

         (1,709)

Consolidated EBITDA

 $        33,384 

 

    31,936 

$

63,196 

 

          60,451 

 

 

 

 

 

 

 

 

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.

 

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


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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 June 18, 2011, and January 1, 2011, we had recorded a fair value liability of $0.2 million and $0.4 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 – Derivatives and Hedging (“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 $0.1 million and $0.3 million during the second quarters of fiscal 2011 and 2010, respectively, and resulted in net payments of $0.3 million and $0.5 million during year-to-date 2011 and 2010, respectively, which are included in interest expense on our Consolidated Statement of Income.

 

As of June 18, 2011, we had two outstanding interest rate swap agreements with notional amounts totaling $17.5 million as compared to $35.0 million as of June 19, 2010, as follows (amounts in thousands):

 

         

 

Notional

Effective Date

Termination Date

Fixed Rate

 

 $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

 

 $15,000

10/15/2009

10/15/2010

3.38%

 

     7,500

10/15/2010

10/15/2011

3.38%

 

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.  

 

Recoverability of Goodwill

 

Our most recent annual impairment test of goodwill was completed during the fourth quarter of fiscal 2010 based on conditions as of the end of our third quarter of fiscal 2010 which resulted in no indication of goodwill impairment for any of our reporting units.  The fair value of the military segment was approximately 54% higher than its carrying value, while food distribution’s fair value exceeded its carrying value by approximately 17% and retail’s fair value was approximately 13% higher than its carrying value.  During the first quarter of 2011, the Company entered into a binding agreement to sell four retail stores which resulted in approximately a $0.3 million reduction in goodwill.

 

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

  


24


 

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 1, 2011, “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 24 weeks ended June 18, 2011.

 

Recently Adopted and Proposed Accounting Standards

 

There have been no developments to recently issued accounting standards from those disclosed in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011.

 

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 1, 2011 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 no changes 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.

 

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 1, 2011.

 

ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds

     

None

 

ITEM 3.  Defaults Upon Senior Securities

     

None

 

ITEM 4.  (Removed and Reserved).

 

ITEM 5.  Other Information

None


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ITEM 6.  Exhibits

 

Exhibits filed or furnished with this Form 10-Q:

 

   

Exhibit No.

 

Description

  3.1

Fifth Restated Certificate of Incorporation of Nash-Finch Company

 

 

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

     

Exhibit No.

Item

Method of Filing

3.1

Fifth Restated Certificate of Incorporation of Nash-Finch Company

Filed herewith

 

 

 

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

 

 
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