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Table of Contents

 

 

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 ended September 28, 2013

OR

 

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

For the transition period from                      to                     

Commission File Number 001-35422

 

 

Roundy’s, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   27-2337996

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

875 East Wisconsin Avenue

Milwaukee, Wisconsin 53202

(414) 231-5000

(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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  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   ¨
Non-accelerated filer   x      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

As of November 1, 2013, there were 46,777,414 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding.

 

 

 


Table of Contents

Roundy’s, Inc.

Quarterly Report on Form 10-Q

For the thirteen and thirty-nine week periods ended September 28, 2013

Table of Contents

 

  Part I – Financial Information   

Item 1.

  Financial Statements (Unaudited)      3   
 

Consolidated Statements of Comprehensive Income for the thirteen and thirty-nine weeks ended September 29, 2012 and September 28, 2013

     3   
 

Consolidated Balance Sheets as of December 29, 2012 and September 28, 2013

     4   
 

Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 29, 2012 and September 28, 2013

     5   
 

Notes to Unaudited Consolidated Financial Statements

     6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      14   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      19   

Item 4.

  Controls and Procedures      19   
  Part II – Other Information   

Item 1.

  Legal Proceedings      20   

Item 1A.

  Risk Factors      20   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      20   

Item 3.

  Defaults Upon Senior Securities      20   

Item 4.

  Mine Safety Disclosures      20   

Item 5.

  Other Information      20   

Item 6.

  Exhibits      20   
  Signatures      21   

 

2


Table of Contents

Part I – Financial Information

Item 1. FINANCIAL STATEMENTS

Roundy’s, Inc.

Consolidated Statements of Comprehensive Income

(In thousands, except per share data)

(Unaudited)

 

     Thirteen Weeks Ended      Thirty-nine Weeks Ended  
     September 29,
2012
     September 28,
2013
     September 29,
2012
     September 28,
2013
 

Net Sales

   $ 973,595       $ 984,162       $ 2,908,682       $ 2,947,993   

Costs and Expenses:

           

Cost of sales

     722,432         731,060         2,133,065         2,167,225   

Operating and administrative

     225,907         234,921         676,022         702,078   

Interest:

           

Interest expense, net

     11,597         11,412         37,257         34,464   

Amortization of deferred financing costs

     574         573         1,840         1,720   

Loss on debt extinguishment

     —           —           13,304         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     960,510         977,966         2,861,488         2,905,487   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before Income Taxes

     13,085         6,196         47,194         42,506   

Provision for Income Taxes

     5,152         2,429         18,079         16,620   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

   $ 7,933       $ 3,767       $ 29,115       $ 25,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per common share:

           

Basic

   $ 0.18       $ 0.08       $ 0.68       $ 0.58   

Diluted

   $ 0.18       $ 0.08       $ 0.68       $ 0.57   

Weighted average number of common shares outstanding:

           

Basic

     44,824         44,971         42,455         44,940   

Diluted

     44,976         45,352         42,884         45,157   

Dividends declared per share

   $ 0.23       $ 0.12       $ 0.46       $ 0.36   

Comprehensive Income

   $ 8,603       $ 4,651       $ 31,126       $ 28,089   

See notes to accompanying unaudited consolidated financial statements.

 

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Table of Contents

Roundy’s, Inc.

Consolidated Balance Sheets

(In thousands, except per share data)

 

     December 29,
2012
    September 28,
2013
 
           (Unaudited)  
Assets     

Current Assets:

    

Cash and cash equivalents

   $ 72,889      $ 77,554   

Notes and accounts receivable, less allowance for losses

     33,118        38,483   

Merchandise inventories

     292,673        293,490   

Prepaid expenses

     9,706        8,626   

Deferred income taxes

     5,259        5,453   
  

 

 

   

 

 

 

Total current assets

     413,645        423,606   
  

 

 

   

 

 

 

Property and Equipment, net

     314,044        300,313   

Other Assets:

    

Other assets—net

     46,410        43,193   

Goodwill

     605,986        605,986   
  

 

 

   

 

 

 

Total other assets

     652,396        649,179   
  

 

 

   

 

 

 

Total assets

   $ 1,380,085      $ 1,373,098   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current Liabilities:

    

Accounts payable

   $ 240,392      $ 226,214   

Accrued wages and benefits

     39,540        33,902   

Other accrued expenses

     40,594        50,698   

Current maturities of long-term debt and capital lease obligations

     10,918        11,243   

Income taxes

     2,292        1,586   
  

 

 

   

 

 

 

Total current liabilities

     333,736        323,643   
  

 

 

   

 

 

 

Long-term Debt and Capital Lease Obligations

     685,644        678,306   

Deferred Income Taxes

     59,112        52,840   

Other Liabilities

     108,327        112,016   
  

 

 

   

 

 

 

Total liabilities

     1,186,819        1,166,805   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Shareholders’ Equity:

    

Preferred Stock (5,000 shares authorized at 12/29/12 and 9/28/13, respectively, $0.01 par value, 0 shares at 12/29/12 and 9/28/13, respectively, issued and outstanding)

     —          —     

Common stock (150,000 shares authorized, $0.01 par value, 45,654 shares and 46,791 shares at 12/29/12 and 9/28/13, respectively, issued and outstanding)

     457        468   

Additional paid-in-capital

     114,120        116,083   

Retained earnings

     125,649        134,499   

Accumulated other comprehensive loss

     (46,960     (44,757
  

 

 

   

 

 

 

Total shareholders’ equity

     193,266        206,293   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,380,085      $ 1,373,098   
  

 

 

   

 

 

 

See notes to accompanying unaudited consolidated financial statements.

 

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Table of Contents

Roundy’s, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     Thirty-nine Weeks Ended  
     September 29, 2012     September 28, 2013  

Cash Flows From Operating Activities:

    

Net income

   $ 29,115      $ 25,886   

Adjustments to reconcile net income to net cash flows provided by operating activities:

    

Depreciation and amortization, including deferred financing costs

     49,832        50,514   

(Gain) loss on sale of property and equipment

     (123     126   

LIFO charges

     1,500        900   

Amortization of debt discount

     1,008        1,113   

Stock-based compensation expense

     1,053        1,975   

Loss on debt extinguishment

     13,304        —     

Deferred income taxes

     392        (771

Changes in operating assets and liabilities:

    

Notes and accounts receivable

     (1,739     (5,354

Merchandise inventories

     (11,800     (1,717

Prepaid expenses

     92        1,080   

Other assets

     113        168   

Accounts payable

     (23,052     (14,178

Accrued expenses and other liabilities

     (12,492     3,376   

Income taxes

     1,171        (162
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     48,374        62,956   
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Capital expenditures

     (40,434     (34,014

Proceeds from sale of property and equipment

     129        518   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (40,305     (33,496
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Borrowings on revolving credit facility

     9,750        30,000   

Payments made on revolving credit facility

     (9,750     (30,000

Proceeds from long-term borrowings

     664,875        —     

Payments of debt and capital lease obligations

     (790,575     (8,126

Dividends paid to common shareholders

     (20,619     (16,279

Payments of withholding taxes for vesting of restricted stock shares

     —          (390

Issuance of common stock, net of issuance costs

     112,540        —     

Debt issuance and refinancing fees and related expenses

     (18,166     —     
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (51,945     (24,795
  

 

 

   

 

 

 

Net (decrease) increase in Cash and Cash Equivalents

     (43,876     4,665   

Cash and Cash Equivalents, Beginning of Period

     87,068        72,889   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 43,192      $ 77,554   
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Cash paid for interest

   $ 42,239      $ 30,237   

Cash paid for income taxes

     16,516        17,553   

See notes to accompanying unaudited consolidated financial statements.

 

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Table of Contents

ROUNDY’S, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Roundy’s, Inc. (“Roundy’s” or the “Company”) is a corporation formed in 2010 for the purpose of owning and operating Roundy’s Acquisition Corp. and its 100% owned subsidiary, Roundy’s Supermarkets, Inc. (“RSI”).

Roundy’s is a leading food retailer in the state of Wisconsin. As of September 28, 2013, Roundy’s owned and operated 161 retail grocery stores, of which 121 are located in Wisconsin, 29 are located in Minnesota and 11 are located in Illinois. Roundy’s also distributes a full line of food and non-food products from three wholesale distribution centers and provides services to one independent licensee retail grocery store in Wisconsin.

Initial Public Offering – On February 7, 2012, Roundy’s priced its initial public offering (the “IPO”) of its common stock which began trading on the New York Stock Exchange on February 8, 2012. On February 13, 2012, Roundy’s completed the offering of 22,059,091 shares of its common stock at a price of $8.50 per share, which included 14,705,883 shares sold by Roundy’s and 7,353,208 shares sold by existing shareholders. Roundy’s received approximately $125.0 million in gross proceeds from the IPO, or approximately $111.8 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds of Roundy’s IPO were used to pay down RSI’s existing debt (see the Long-Term Debt footnote below).

A summary of Roundy’s capitalization upon closing of the IPO is as follows (in thousands):

 

Common stock issued and outstanding at December 31, 2011

     27,072   

Conversion of preferred stock into common stock prior to IPO

     3,050   

Rounding of partial shares held prior to stock split

     (4

Sale of common stock through IPO

     14,706   
  

 

 

 

Common stock issued and outstanding at IPO, February 7, 2012

     44,824   
  

 

 

 

On January 24, 2012, the Board of Directors approved an amendment to the articles of incorporation to increase the number of shares Roundy’s is authorized to issue to 150,000,000 shares of common stock and 5,000,000 shares of preferred stock, and to convert all of its outstanding preferred stock into shares of common stock on a one-for-one basis. Subsequent to the preferred stock conversion, the Board of Directors approved an approximately 292.2-for-one stock split on all common shares outstanding as of that date. In accordance with applicable accounting rules, the Company has restated all of the historical common share and per share amounts to give retroactive effect to this 292.2-for-one common stock split but have not given retroactive effect to the conversion of preferred stock into common stock. Therefore, the 10,439 shares of outstanding preferred stock outstanding on January 24, 2012 are reflected as having been converted and then subsequently split on that date.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and do not include all of the information and footnotes required for complete, audited financial statements. For further information, refer to the consolidated financial statements and footnotes included in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 29, 2012.

The accompanying unaudited consolidated financial statements as of September 28, 2013, and for the thirteen and thirty-nine weeks ended September 29, 2012 and September 28, 2013 reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results of Roundy’s, Inc. and its subsidiaries. All material intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements. The results of operations for the thirteen and thirty-nine weeks ended September 28, 2013 may not necessarily be indicative of the results that may be expected for the entire fiscal year ending December 28, 2013.

Unless the context otherwise indicates, all references in these financial statements to the “Company,” or “Roundy’s,” or similar words are to Roundy’s, Inc.

 

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Table of Contents

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” ASU No. 2012-02 permits an entity to first assess qualitative factors to determine whether certain events and circumstances exist that indicate it is more likely than not that an indefinite-lived intangible asset is impaired. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If as a result of the qualitative assessment it is determined that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the company is not required to take further action and calculate the fair value of the asset. ASU No. 2012-02 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not anticipate this standard will have an impact on its consolidated financial statements.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income”. ASU No. 2013-02 requires companies to provide additional information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, companies are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. This ASU does not change the requirements for reporting net income or other comprehensive income. Because the standard only affects the presentation of comprehensive income and does not affect what is included in comprehensive income, this standard did not have a material effect on the Company’s consolidated financial statements. The Company adopted this at the beginning of fiscal 2013 and has included disclosures in the footnotes.

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes” (“ASU No. 2013-11”). ASU No. 2013-11 requires companies to present unrecognized tax benefits as a reduction of the deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, if net settlement is required or expected. To the extent that net settlement is not required or expected, the unrecognized tax benefit must be presented as a liability. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. ASU No. 2013-11 is effective for reporting periods beginning after December 15, 2013, and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Because this standard only affects the presentation of unrecognized tax benefits and not the measurement of an unrecognized tax benefit, the Company expects this standard will not have a material impact on its consolidated financial statements.

4. FAIR VALUE

Fair value measurements are categorized into one of three levels as defined by US GAAP. The three levels are defined as follows:

Level 1 – Unadjusted quoted prices are available in active markets for identical assets or liabilities that can be accessed at the measurement date;

Level 2 – Inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability;

Level 3 – Unobservable inputs for which little or no market activity exists.

The Company has one item carried at (or adjusted to) fair value in the consolidated financial statements, which is an interest rate hedge of $0.4 million. Interest rate hedges are valued using forward curves and volatility levels as determined on the basis of observable market inputs when available and on the basis of estimates when observable market inputs are not available. These forward curves are classified as Level 2 within the fair value hierarchy.

The carrying values of the Company’s cash and cash equivalents, notes and accounts receivable and accounts payable approximated fair value as of September 28, 2013. Based on estimated market rents for those leased properties which are recorded as capital leases, the fair value of capital lease obligations is approximately $20.3 million, as of September 28, 2013. Based on recent open market transactions of the Company’s term loan, the fair value of long-term debt, including current maturities, is approximately $657.9 million as of September 28, 2013. The Company considers the fair value of the capital leases and term loan to be Level 2 within the fair value hierarchy.

5. INVENTORIES

The Company uses the LIFO method for valuation of a portion of inventories. If the FIFO method had been used, inventories would have been approximately $24.4 million higher on September 28, 2013 and $23.5 million higher on December 29, 2012.

 

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Table of Contents

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.

6. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

 

     December 29,
2012
     September 28,
2013
 

Term Loan

   $ 671,625       $ 666,563   

Capital Lease Obligations, 7.6% to 10%, due 2013 to 2027

     32,298         29,373   

Other long-term debt

     1,445         1,307   
  

 

 

    

 

 

 
     705,368         697,243   

Less: Unamortized discount on Term Loan

     8,806         7,694   

Less: Current maturities

     10,918         11,243   
  

 

 

    

 

 

 

Long-term debt, net of current maturities

   $ 685,644       $ 678,306   
  

 

 

    

 

 

 

In connection with the IPO on February 13, 2012, RSI entered into a new senior credit facility (the “Refinancing”), consisting of a $675 million term loan (the ‘‘Term Facility’’) and a $125 million revolving credit facility (the ‘‘Revolving Facility’’ and together with the Term Facility, the ‘‘Credit Facilities”) with the Term Facility maturing in February 2019 and the Revolving Facility maturing in February 2017. The Company used the net proceeds from the IPO, together with borrowings under the Credit Facilities, to refinance RSI’s existing indebtedness and to pay accrued interest thereon and related prepayment premiums.

Borrowings under the Credit Facilities bear interest, at the Company’s option, at (i) adjusted LIBOR (subject to a 1.25% floor) plus 4.5% or (ii) an alternate base rate plus 3.5%. In addition, there is a fee payable quarterly in an amount equal to 0.5% per annum of the undrawn portion of the Revolving Facility. The terms of the Credit Facilities contain customary provisions regarding prepayments and restrictive covenants. The Credit Facilities are secured by substantially all of the Company’s tangible and intangible assets.

In connection with the Refinancing, the Company recognized a loss on debt extinguishment of $13.3 million, which consists primarily of the write-off of $4.5 million of previously capitalized financing costs, the write-off of the remaining unamortized discount of $2.1 million on the old second lien loan that was repaid, prepayment premiums on the old first and second lien loans that were repaid and certain fees and expenses of $2.0 million related to the Credit Facilities.

As of September 28, 2013, there were no outstanding borrowings under the Revolving Facility. Outstanding letters of credit, totaling $27.5 million on September 28, 2013, reduce availability under the Revolving Facility.

Prior to the Refinancing, the Company’s long-term debt included a first lien senior credit facility consisting of a term loan and $95 million revolving credit agreement (together, the “First Lien Credit Agreement) and a second lien credit facility (“Second Lien Credit Agreement”). The Company’s first and second lien loans and the revolving credit facility bore interest based upon LIBOR or base rate options. Under the LIBOR option for the extended first lien loan and extended revolving credit facility, the applicable rate was LIBOR (subject to a floor of 2.0%) plus 5.00% and under the base rate option for the extended first lien loan and extended revolving credit facility, the applicable rate of interest was the base rate plus 4.00%. For the non-extended portion of the first lien loan which matured in November 2011, the applicable rate of interest was LIBOR plus 3.50% and under the base rate option, the applicable interest rate was the base rate plus 2.50%. On April 16, 2010, the Company borrowed $150 million under the Second Lien Credit Agreement to pay dividends to its preferred and common shareholders. This second lien loan was issued at a 2% discount and was to mature in April 2016. This second lien loan bore interest based upon LIBOR or base rate options. Under the LIBOR option of the second lien loan, the applicable rate was LIBOR (subject to a floor of 2%) plus 8.0% and under the base rate option, the applicable rate was the base rate plus 7.0%.

The Company’s credit agreement contains various restrictive covenants which, among other things: (i) prohibit it from prepaying other indebtedness; (ii) require it to maintain specified financial ratios; and (iii) limit its capital expenditures. In addition, the credit agreement limits the Company’s ability to declare or pay dividends.

At September 28, 2013, the Company was in compliance with all financial covenants relating to its indebtedness.

 

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Table of Contents

7. DERIVATIVE FINANCIAL INSTRUMENTS

The Company accounts for derivatives in accordance with the provisions of FASB ASC Topic 815 “Derivatives and Hedging” (“ASC 815”). ASC 815 requires companies to recognize all of its derivative instruments as either an asset or liability in the balance sheet at fair value. Changes in the fair value of derivative instruments designated as cash flow hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects, and are reclassified into earnings in the period in which the hedged transaction affects earnings. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings.

The Company is exposed to market risk from interest rate fluctuations. In order to manage this risk from interest rate fluctuations, on August 27, 2013, the Company entered into a one-year forward starting interest rate swap, which will mature on August 27, 2016, to hedge cash flows related to interest payments on $75 million of its term loan (the “Swap”). The Swap involves the receipt of floating interest rate amounts in exchange for fixed rate interest payments over the duration of the Swap without an exchange of the underlying principal amount. In accordance with ASC 815, the Company has designated the Swap as a cash flow hedge. The Company has not entered into any other hedging instruments.

As of September 28, 2013, the Company has recorded $0.4 million in other assets in the Company’s Consolidated Balance Sheet, which represents the fair value of the Swap on that date. As of September 28, 2013, the Company recorded $0.2 million in accumulated other comprehensive income in the Company’s Consolidated Balance Sheet, which represents gain on the effective portion of the Swap, net of tax, on that date.

The Company had no derivatives as of December 29, 2012 and September 29, 2012.

During the thirteen and thirty-nine weeks ended September 28, 2013 there were no amounts reclassified into earnings because the hedged transaction has not yet occurred. Beginning in the period that the hedged transaction affects earnings, the Company will record these reclassifications into earnings within the interest expense line item in the Consolidated Statement of Comprehensive Income.

8. EMPLOYEE BENEFIT PLANS

Net pension expense (income) in the thirteen and thirty-nine weeks ended September 29, 2012 and September 28, 2013 included the following components (in thousands):

 

     Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     September 29,
2012
    September 28,
2013
    September 29,
2012
    September 28,
2013
 

Service cost

   $ 137      $ —        $ 412      $ —     

Interest cost on projected benefit obligation

     1,956        1,839        5,869        5,517   

Expected return on plan assets

     (3,068     (3,287     (9,204     (9,861

Amortization of net actuarial loss

     1,117        1,099        3,351        3,297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net pension expense (income)

   $ 142      $ (349   $ 428      $ (1,047
  

 

 

   

 

 

   

 

 

   

 

 

 

On April 28, 2010, the Company amended its agreement with the Pension Benefit Guaranty Corporation (“PBGC”) dated November 3, 2005, whereby, among other things, it agreed to contribute $7.5 million in April 2010, $5 million in April 2011 and $2.5 million in April 2012 to its primary pension plan. In addition, in April 2010 the Company increased the amount of the letter of credit it had posted in favor of the PBGC to $12.5 million from $10 million, for the benefit of the pension plan. During 2012, the Company was allowed to reduce the letter of credit, and as of September 28, 2013, the amount was $10 million.

The Company expects its pension plan contributions for the year ending December 28, 2013 to be approximately $1.4 million.

During the fourth quarter of 2012, The Company recognized a charge of $1.0 million related to an expected liability for the withdrawal of approximately 3% of its employees who participate in the United Food and Commercial Workers Unions and Employers Pension Fund (“UFCW Fund”). These employees have resumed participation in the UFCW Fund and the Company has therefore recognized a $1.0 million benefit during the third quarter of 2013 related to the reversal of the liability that was established in the fourth quarter of 2012.

9. INCOME TAXES

The Company’s effective tax rate for the thirty-nine weeks ended September 28, 2013 was favorably impacted by the settlement of certain tax matters during 2013. Our estimated tax rate is approximately 40% before discrete items.

 

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10. COMMITMENTS AND CONTINGENCIES

Various lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against the Company. While the ultimate effect of such actions cannot be predicted with certainty, management believes that their outcome will not result in a material adverse effect on the consolidated financial position, operating results or liquidity of the Company.

The Company contributes to four multi-employer pension plans based on obligations arising from its collective bargaining agreements covering supply chain and certain store union employees. Three of these plans are underfunded as of September 28, 2013. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed by employers and unions. The trustees are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.

Because the Company is one of a number of employers contributing to these plans, it is difficult to ascertain what its share of the underfunding would be, although the Company anticipates that its contributions to these plans may increase. If the Company chooses to exit a plan, any adjustment for a withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined.

In connection with the exit or sale of its independent distribution business, the Company has assigned leases and subleases for retail stores which expire at various dates through 2021. A remaining potential obligation exists in the event of a default under the assigned leases and subleases by the assignee. The potential obligations include rent, real estate taxes, common area costs and other sundry expenses. The future minimum lease payments are approximately $5.9 million. The Company believes the likelihood of a liability related to these assigned leases and subleases is remote.

 

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11. ACCUMULATED OTHER COMPREHENSIVE LOSS

The Company’s accumulated other comprehensive loss is comprised of the adjustments for employee benefit plans and derivatives. During the thirteen and thirty-nine weeks ended September 28, 3013, the amount reclassified from accumulated other comprehensive loss was comprised of the net amortization of actuarial losses on employee benefit plans and the net fair value of derivatives. During the thirteen and thirty-nine weeks ended September 28, 2013, pension income is included within operating and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income. During the thirteen and thirty-nine weeks ended September 28, 2013, there was no impact on net income from the Company’s derivatives.

The change in accumulated other comprehensive loss by component for the thirteen weeks ended September 28, 2013 consisted of the following (in thousands):

 

     Derivatives      Defined Benefit
Pension Plans
    Total  

Balance at June 29, 2013

   $ —         $ (45,641   $ (45,641
  

 

 

    

 

 

   

 

 

 

Other comprehensive income before reclassifications

     —           —          —     

Amounts reclassified from accumulated comprehensive income (1)

     225         659        884   
  

 

 

    

 

 

   

 

 

 

Net current-period other comprehensive income

     225         659        884   
  

 

 

    

 

 

   

 

 

 

Balance at September 28, 2013

   $ 225       $ (44,982   $ (44,757
  

 

 

    

 

 

   

 

 

 

 

(1) Net of tax of $150 and $440 for derivatives and defined benefit pension plans, respectively.

The change in accumulated other comprehensive loss by component for the thirty-nine weeks ended September 28, 2013 consisted of the following (in thousands):

 

     Derivatives      Defined Benefit
Pension Plans
    Total  

Balance at December 29, 2012

   $ —         $ (46,960   $ (46,960
  

 

 

    

 

 

   

 

 

 

Other comprehensive income before reclassifications

     —           —          —     

Amounts reclassified from accumulated comprehensive income (1)

     225         1,978        2,203   
  

 

 

    

 

 

   

 

 

 

Net current-period other comprehensive income

     225         1,978        2,203   
  

 

 

    

 

 

   

 

 

 

Balance at September 28, 2013

   $ 225       $ (44,982   $ (44,757
  

 

 

    

 

 

   

 

 

 

 

(1) Net of tax of $150 and $1,319 for derivatives and defined benefit pension plans, respectively.

 

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12. EARNINGS PER SHARE

The Company had one class of common stock as of September 28, 2013. Prior to the conversion of the Company’s preferred stock to common stock in January 2012, the preferred stock was a participating stock security requiring the use of the two-class method for the computation of basic net earnings per share in accordance with the provisions of ASC 260-10, “Earnings per Share”. For the thirteen and thirty-nine weeks ended September 29, 2012, basic and diluted earnings per share excludes the effect of common stock equivalents and is computed using the two-class computation method, which excludes earnings attributable to the preferred stock preferential payments from total earnings available to common shareholders.

For the thirteen weeks ended September 28, 2013, there were no equity awards excluded from the calculation of earnings per share. For the thirty-nine weeks ended September 28, 2013 there were equity awards outstanding of approximately 6,370 respectively, that were excluded because their inclusion would have had an anti-dilutive effect on earnings per share.

As of September 28, 2013, there were 385,183 contingently issuable shares excluded because their issuance was not considered probable.

The following table reflects the calculation of basic and diluted earnings per share (in thousands, except per share data):

 

    Thirteen Weeks Ended     Thirty-nine Weeks Ended  
    September 29,
2012
    September 28,
2013
    September 29,
2012
    September 28,
2013
 

Net earnings per common share—basic:

       

Net Income

  $ 7,933      $ 3,767      $ 29,115      $ 25,886   

Deduct: undistributed earnings allocable to convertible preferred stock

    —          —          35        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders

  $ 7,933      $ 3,767      $ 29,080      $ 25,886   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

    44,824        44,971        42,455        44,940   

Net earnings per common share—basic

  $ 0.18      $ 0.08      $ 0.68      $ 0.58   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per common share—diluted:

       

Weighted-average shares outstanding

    44,824        44,971        42,455        44,940   

Dilutive impact of convertible preferred stock

    —          —          268        —     

Effect of dilutive securities—nonvested restricted stock

    152        381        161        217   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares and potential dilutive shares outstanding

    44,976        45,352        42,884        45,157   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per common share—diluted

  $ 0.18      $ 0.08      $ 0.68      $ 0.57   
 

 

 

   

 

 

   

 

 

   

 

 

 

13. SHARE-BASED COMPENSATION

The Company’s 2012 Incentive Compensation Plan (the “Plan”) provides for grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards. An aggregate of 5,656,563 shares of common stock was registered for issuance under the Plan. As of September 28, 2013 there were 3,689,615 remaining shares available for issuance.

The Company accounts for share-based compensation awards in accordance with the provisions of FASB ASC Topic 718, “Compensation – Stock Compensation” which requires companies to estimate the fair value of share-based payment awards on the date of grant. The value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period. The Company recognized total stock-based compensation of $0.8 million and $2.0 million for the thirteen and thirty-nine weeks ended September 28, 2013, respectively, compared to $0.4 million and $1.1 million for the thirteen and thirty-nine weeks ended September 29, 2012, respectively, as operating and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income.

The Company has granted restricted stock to certain employees, as well as to non-employee directors, under the Plan. The service-based restricted stock that was granted to employees in 2012 vests over five years. The service-based restricted stock granted to non-employee directors in 2012 and 2013 vests over one year.

 

 

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During the second quarter of 2013, the Company granted 770,366 shares of restricted stock that will vest upon certain market performance metrics (the “Market Awards”) and 452,725 shares of time-based restricted stock (the “Time-Based Awards”) to certain employees under the Plan. The Time-Based restricted stock vests over three years for employees and one year for non-employee directors. The Market Awards will vest after three years if certain specified market conditions are met. The market-based condition is a comparison of the total shareholder return (“TSR”) of the Company’s stock with the TSR of its peer group over the corresponding three year period as determined by the Compensation Committee of the Company’s Board of Directors. These Market Awards also include a modifier based on the performance of the Company’s operating income as compared to its peer group. The number of shares ultimately vested will be determined based on the TSR metric and operating income results at the conclusion of the third year. The fair value of these Market Awards was determined to be $3.02, which was determined using a Monte Carlo simulation model, which utilizes multiple input variables to determine the probability of the Company meeting the market based condition. These inputs include a stock price volatility assumption that is the weighted average between the Company’s volatility since the IPO and the peer group average volatility for the 1.5 year period prior to the Company’s IPO and a 2.7 year risk-free interest rate of 0.33%. The fair value of the Time-Based Awards was determined based on the stock price as of the date of the grant.

All of the shares granted generally have the rights of a stockholder with respect to the shares, including the right to receive dividends, the right to vote the shares of restricted stock and, conditioned upon full vesting of restricted stock, the right to tender such shares, subject to the conditions and restrictions generally applicable to restricted stock or specifically set forth in the recipient’s stock agreement. All restricted stock granted becomes fully vested upon certain changes of control of the Company.

 

     Restricted Shares
Outstanding
(in thousands)
    Weighted-average
grant-date fair
value per share
 

Outstanding, December 29, 2012

     830      $ 8.56   

Granted

     1,231        4.43   

Vested

     (211     8.70   

Cancelled or Expired

     (37     6.96   
  

 

 

   

Outstanding, September 28, 2013

     1,813      $ 5.77   
  

 

 

   

14. BUSINESS SEGMENTS

The Company has determined that it has one reportable segment. The Company’s revenues are derived predominantly from the sale of food and non-food products at its stores. Non-perishable categories consist of traditional grocery, frozen and dairy products. Perishable food categories include meat, seafood, produce, deli, bakery and floral. Non-food categories include general merchandise, health and beauty supplies, pharmacy, alcohol and tobacco. The following is a summary of the percentage of sales of non-perishable, perishable, and non-food items for the thirteen and thirty-nine weeks ended September 29, 2012 and September 28, 2013:

 

     Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     September 29,
2012
    September 28,
2013
    September 29,
2012
    September 28,
2013
 

Non-Perishable Food

     49.2     47.3     49.5     47.9

Perishable Food

     33.9     35.8     33.9     35.6

Non-Food

     16.9     16.9     16.6     16.5

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We are a leading Midwest supermarket chain founded in 1872. As of September 28, 2013, we operated 161 grocery stores in Wisconsin, Minnesota and Illinois under the Pick ’n Save, Rainbow, Copps, Metro Market and Mariano’s retail banners, which are served by our three strategically located distribution centers and our food processing and preparation commissary. As of September 28, 2013, these stores included 93 Pick ’n Save stores, 29 Rainbow stores, 25 Copps stores, 3 Metro Market stores and 11 Mariano’s stores.

In this section, we refer to the thirteen weeks ended September 28, 2013 as the “third quarter 2013” and we refer to the thirteen weeks ended September 29, 2012 as the “third quarter 2012.”

For the third quarter 2013, net sales were $984.2 million, compared to net sales of $973.6 million for the third quarter 2012. The increase in net sales was primarily due to the impact of new stores, partially offset by a decrease in same stores sales.

Earnings per basic and diluted share was $0.08 and $0.18 in the third quarter 2013 and 2012, respectively. For the thirty-nine weeks ending September 28, 2013 and September 29, 2012, earnings per basic share were $0.58 and $0.68, respectively. For the thirty-nine weeks ending September 28, 2013 and September 29, 2012, earnings per diluted share were $0.57 and $0.68, respectively.

Going forward, we plan to continue to maintain our market leadership and focus on growing same-store sales, opening new stores and increasing our cash flow. We intend to pursue same-store sales growth by continuing to focus on price competitiveness, improving our marketing efforts, selectively remodeling and relocating existing stores and enhancing and expanding our own brand, perishable and prepared food offerings. In addition, we intend to continue our expansion into the Chicago market. We have opened two additional stores early in the fourth quarter of 2013 in that market. As of September 28, 2013, we had 11 stores open in the Chicago market.

RESULTS OF OPERATIONS

 

(Dollars in thousands)    Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     September 29, 2012     September 28, 2013     September 29, 2012     September 28, 2013  

Net Sales

   $ 973,595         100.0   $ 984,162         100.0   $ 2,908,682         100.0   $ 2,947,993         100.0

Costs and Expenses:

                    

Cost of sales

     722,432         74.2        731,060         74.3        2,133,065         73.3        2,167,225         73.5   

Operating and administrative

     225,907         23.2        234,921         23.9        676,022         23.2        702,078         23.8   

Interest expense (including amortization of deferred financing costs)

     12,171         1.3        11,985         1.2        39,097         1.3        36,184         1.2   

Loss on debt extinguishment

     —           0.0        —           0.0        13,304         0.5        —           0.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     960,510         98.7        977,966         99.4        2,861,488         98.4        2,905,487         98.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Income before Income Taxes

     13,085         1.3        6,196         0.6        47,194         1.6        42,506         1.4   

Provision for Income Taxes

     5,152         0.5        2,429         0.2        18,079         0.6        16,620         0.6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net Income

   $ 7,933         0.8   $ 3,767         0.4   $ 29,115         1.0   $ 25,886         0.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Thirteen Weeks Ended September 28, 2013 Compared With Thirteen Weeks Ended September 29, 2012

Net Sales. Net sales represent product sales less returns and allowances and sales promotions. We derive our net sales primarily from the operation of retail grocery stores and to a much lesser extent from the independent distribution of food and non-food products to an independently-owned grocery store. We recognize retail sales at the point of sale. We do not record sales taxes as a component of retail revenues as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.

Net sales were $984.2 million for the third quarter 2013, an increase of $10.6 million, or 1.1% from $973.6 million for the third quarter 2012. The increase primarily reflects the benefit of new stores, partially offset by a 3.7% decrease in same-store sales and the effect of three stores closed during 2013. The decline in same-store sales was due to a 4.7% decrease in the number of customer transactions, partially offset by a 1.0% increase in average transaction size. Same-store sales comparisons were negatively impacted by competitive store openings and the weak economic environment that continues to impact customer demand in the Company’s core markets as compared to the prior year period.

Gross Profit. We calculate gross profit as net sales less cost of sales. Cost of sales includes product costs, inbound freight, warehousing costs, receiving and inspection costs, distribution costs, and depreciation and amortization expenses associated with our supply chain operations.

 

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Gross profit was $253.1 million for the third quarter 2013, an increase of $1.9 million, or 0.8%, from $251.2 million for the third quarter 2012. Gross profit, as a percentage of net sales, was 25.7% and 25.8% for the third quarter 2013 and 2012, respectively. The decrease in gross profit as a percentage of net sales primarily reflects increased shrink, partially offset by an increased perishable sales mix.

Operating and Administrative Expenses. Operating and administrative expenses consist primarily of personnel costs, sales and marketing expenses, depreciation and amortization expenses as well as other expenses associated with facilities unrelated to our supply chain network, internal management expenses and expenses for accounting, information systems, legal, business development, human resources, purchasing and other administrative departments.

Operating and administrative expenses were $234.9 million for the third quarter 2013, an increase of $9.0 million, or 4.0%, from $225.9 million for the third quarter 2012. Operating and administrative expenses, as a percentage of net sales, increased to 23.9% for the third quarter 2013 compared with 23.2% for the third quarter 2012. The increase in the rate as a percentage of net sales was primarily due to increased marketing costs related to the roll-out of the Company’s Fresh Perks and Milwaukee renewal marketing campaign, increased bonus expense, increased occupancy and labor costs related to new stores as well as reduced fixed cost leverage in the Company’s core business resulting from lower sales. The increased bonus expense compared to the prior year was primarily due to an accrual adjustment last year that reduced the expense in the prior year quarter.

Interest Expense. Interest expense (including the amortization of deferred financing costs) was $12.0 million for the third quarter 2013, compared to $12.2 million for the third quarter 2012. The decrease was due primarily to reduced interest on our term loan.

Income Taxes. Provision for income taxes was $2.4 million for the third quarter 2013, a decrease of $2.7 million from $5.2 million for the third quarter 2012. The effective income tax rate was 39.2% for the third quarter 2013 and 39.4% for the third quarter 2012.

Thirty-nine Weeks Ended September 28, 2013 Compared With Thirty-nine Weeks Ended September 29, 2012

Net Sales. Net sales were $2,948.0 million for the thirty-nine weeks ended September 28, 2013, an increase of $39.3 million, or 1.4% from $2,908.7 million for the thirty-nine weeks ended September 29, 2012. The increase primarily reflects the benefit of new stores, partially offset by a 2.8% decrease in same-store sales and the effect of three stores closed during 2013. The decline in same-store sales was due to a 4.9% decrease in the number of customer transactions, partially offset by a 2.3% increase in average transaction size. Same-store sales comparisons were negatively impacted by competitive store openings, the mix shift to greater generic pharmacy sales and the weak economic environment that continues to impact customer demand in the Company’s core markets versus the same period last year.

Gross Profit. Gross profit was $780.8 million for the thirty-nine weeks ended September 28, 2013, an increase of $5.2 million, or 0.7%, from $775.6 million for the thirty-nine weeks ended September 29, 2012. Gross profit, as a percentage of net sales, was 26.5% and 26.7% for the thirty-nine weeks ended September 28, 2013 and September 29, 2012, respectively. The decrease in gross profit as a percentage of net sales primarily reflects increased shrink, partially offset by an increased perishable sales mix.

Operating and Administrative Expenses. Operating and administrative expenses were $702.1 million for the thirty-nine weeks ended September 28, 2013, an increase of $26.1 million, or 3.9%, from $676.0 million for the thirty-nine weeks ended September 29, 2012. Operating and administrative expenses, as a percentage of net sales, increased to 23.8% for the thirty-nine weeks ended September 28, 2013 compared with 23.2% for the thirty-nine weeks ended September 29, 2012. The increase in the rate as a percentage of net sales was primarily due to increased occupancy and labor costs related to new stores as well as reduced fixed cost leverage in the Company’s core business resulting from lower sales.

Interest Expense. Interest expense (including the amortization of deferred financing costs) was $36.2 million for the thirty-nine weeks ended September 28, 2013, a decrease of $2.9 million, or 7.5%, from $39.1 million for the thirty-nine weeks ended September 29, 2012. The decrease was primarily due to reduced interest rates on our term loan and decreased levels of indebtedness from our debt refinancing in the first quarter 2012.

Income Taxes. Provision for income taxes was $16.6 million for the thirty-nine weeks ended September 28, 2013, a decrease of $1.5 million from $18.1 million for the thirty-nine weeks ended September 29, 2012. The effective income tax rate was 39.1% for the thirty-nine weeks ended September 28, 2013 and 38.3% for the thirty-nine weeks ended September 29, 2012. The lower effective tax rate during the thirty-nine weeks ended September 29, 2012 was primarily due to the favorable settlement of certain open tax issues.

 

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Liquidity and Capital Resources

Cash Flows

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):

 

     Thirty-nine Weeks Ended  
     September 29,
2012
    September 28,
2013
 

Net cash provided by operating activities

   $ 48,374      $ 62,956   

Net cash used in investing activities

     (40,305     (33,496

Net cash used in financing activities

     (51,945     (24,795
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (43,876   $ 4,665   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 43,192      $ 77,554   
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $63.0 million for the thirty-nine weeks ended September 28, 2013 compared to $48.4 million for the thirty-nine weeks ended September 29, 2012. The increase was due primarily to decreased inventory levels and the timing of payments for interest, offset by lower net income.

Net Cash Used in Investing Activities. Net cash used in investing activities for the thirty-nine weeks ended September 28, 2013 was $33.5 million compared to $40.3 million for the the thirty-nine weeks ended September 29, 2012. The increase is due to the timing of spending of capital expenditures. Total capital expenditures for Fiscal 2013, excluding acquisitions, are estimated to be approximately $63-68 million.

Net Cash Used in Financing Activities. Net cash used in financing activities for the thirty-nine weeks ended September 28, 2013 was $24.8 million compared to $51.9 million for the for the thirty-nine weeks ended September 29, 2012. Net cash used in the thirty-nine weeks ended September 28, 2013 consisted of dividends paid to shareholders in the amount of $16.3 million and payments of debt and capital lease obligations of $8.1 million. Net cash used in the thirty-nine weeks ended September 29, 2012 consisted of payments of debt and capital lease obligations of $790.6 million, primarily to refinance our existing indebtedness and related financing costs of $18.2 million, offset somewhat by the net proceeds from our term loan of $664.9 million and net proceeds from our initial public offering. In addition, during the thirty-nine weeks ended September 29, 2012, we paid dividends to shareholders in the amount of $20.6 million.

Initial Public Offering

On February 7, 2012, we priced the initial public offering (“IPO”) of our common stock which began trading on the New York Stock Exchange on February 8, 2012. On February 13, 2012, we completed our offering of 22,059,091 shares of our common stock at a price of $8.50 per share, which included 14,705,883 new shares sold by Roundy’s and the sale of 7,353,208 shares from existing shareholders. Roundy’s received approximately $125.0 million in gross proceeds from the IPO, or approximately $111.8 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds of our IPO were used to pay down RSI’s existing debt.

Senior Credit Facility

In connection with the completion of our IPO, Roundy’s Supermarkets, Inc. (“RSI”) entered into a new senior credit facility (the “Refinancing”), consisting of a $675 million term loan (the “Term Facility”) and a $125 million revolving credit facility (the “Revolving Facility” and together with the Term Facility, the “New Credit Facilities”) with the Term Facility maturing in February 2019 and the Revolving Facility maturing in February 2017. We used the net proceeds from the IPO, together with borrowings under the New Credit Facilities, to refinance our existing indebtedness and to pay accrued interest and related prepayment premiums.

Borrowings under the Term Facility and the Revolving Facility bear interest, at our option, at (i) adjusted LIBOR (subject to a 1.25% floor) plus 4.5% or (ii) an alternate base rate plus 3.5%. In addition, there is a fee payable quarterly in an amount equal to 0.5% per annum of the undrawn portion of the Revolving Facility.

All of RSI’s obligations under the Credit Facilities are unconditionally guaranteed (the “Guarantees”) by each of the direct and indirect subsidiaries of the Company (other than any future unrestricted subsidiaries as we may designate, at our discretion, from time to time) (the “Guarantors”).

Additionally, the Credit Facilities and the Guarantees are secured by a first-priority perfected security interest in substantially all present and future assets of RSI and each Guarantor, including accounts receivable, equipment, inventory, general intangibles, intellectual property, investment property and intercompany notes among Guarantors; except that the security interest granted by Roundy’s Acquisition Corp. (the direct parent of RSI) is limited to its right, title and interest in and to the stock and promissory notes of RSI and general intangibles and investment property related thereto, and all proceeds, supporting obligations and products related thereto and all collateral security and guarantees given by any person with respect thereto.

 

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Mandatory prepayments under the Credit Facilities are required with (i) 50% of adjusted excess cash flow (which percentage may be reduced upon achievement and maintenance of certain leverage ratios); (ii) 100% of the net cash proceeds of assets sales or other dispositions of property by RSI and its restricted subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of debt obligations of RSI or its restricted subsidiaries (subject to certain exceptions).

The Credit Facilities contain a number of customary affirmative covenants. The Credit Facilities also contain customary negative covenants, including restrictions on (i) dividends on, and redemptions of, equity interest and other restricted payments (with a permitted basket for cash dividends on common stock in the sum of (a) 70% of excess cash flow calculated on a quarterly basis and (b) $25,000,000, plus a builder basket based on the Company’s retained portion of adjusted excess cash flow measured cumulatively, in each case, subject to pro forma compliance with financial covenants and no default or event of default being continuing,; (ii) liens and sale-leaseback transactions; (iii) loans and investments; (iv) guarantees and hedging agreements; (v) the sale, transfer or disposition of assets and businesses; (vi) transactions with affiliates; (vii) changes in business conducted by the Borrower and its subsidiaries; (viii) payment or amendment of subordinated debt and organizational documents; and (ix) maximum capital expenditures. Excess cash flow is an amount equal to Adjusted EBITDA minus capital expenditures, cash payments of interest, cash payments of taxes, mandatory loan repayments and amortization of capital leases for that period. RSI is also required to comply with the following financial covenants: (i) a maximum total leverage ratio and (ii) a minimum cash interest coverage ratio.

At September 28, 2013, we were in compliance with our financial covenants for all of our indebtedness.

Old Credit Facilities

Prior to the Refinancing, our long-term debt included a first lien senior credit facility consisting of a term loan and $95 million revolving credit agreement (together, the “First Lien Credit Agreement) and a second lien credit facility (“Second Lien Credit Agreement”).

Our first lien loan and the revolving credit facility bore interest based upon LIBOR or base rate options. Under the LIBOR option for the extended first lien loan and extended revolving credit facility, the applicable rate was LIBOR (subject to a floor of 2.0%) plus 5.00% and under the base rate option for the extended first lien loan and extended revolving credit facility, the applicable rate of interest was the base rate plus 4.00%. For the non-extended portion of our first lien loan which matured in November 2011, the applicable rate of interest was LIBOR plus 3.50% and under the base rate option, the applicable interest rate was the base rate plus 2.50%.

On April 16, 2010, the Company borrowed $150 million under the Second Lien Credit Agreement to pay dividends to our preferred and common shareholders. This second lien loan was issued at a 2% discount and was to mature in April 2016. The second lien loan bore interest based upon LIBOR or base rate options. Under the LIBOR option, the applicable rate was LIBOR (subject to a floor of 2%) plus 8.0% and under the base rate option, the applicable rate was the base rate plus 7.0%.

Non-GAAP Measures

We present Adjusted EBITDA, a non-GAAP measure, to provide investors with a supplemental measure of our operating performance. We define Adjusted EBITDA as earnings before interest expense, provision for income taxes, depreciation and amortization, LIFO charges, amortization of deferred financing costs, non-cash compensation expenses arising from the issuance of stock, costs incurred in connection with our IPO (or subsequent offerings of our Roundy’s common stock), loss on debt extinguishment, certain non-recurring or unusual employee and pension related costs and goodwill impairment charges. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness, tax structures, and methodologies in calculating LIFO expense that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of owned property, and because in our experience, whether a store is new or one that is fully or mostly depreciated does not necessarily correlate to the contribution that such store makes to operating performance. We believe that investors, analysts and other interested parties consider Adjusted EBITDA an important measure of our operating performance. Adjusted EBITDA should not be considered as an alternative to net income as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

 

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To properly and prudently evaluate our business, we encourage you to review our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012 and the reconciliation to Adjusted EBITDA from net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that

investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.

The following is a summary of the calculation of Adjusted EBITDA for the thirteen and thirty-nine weeks ended September 29, 2012 and September 28, 2013 (in thousands):

 

     Thirteen Weeks Ended     Thirty-nine Weeks Ended  
     September 29,
2012
     September 28,
2013
    September 29,
2012
     September 28,
2013
 

Net Income

   $ 7,933       $ 3,767      $ 29,115       $ 25,886   

Interest expense

     11,597         11,412        37,257         34,464   

Provision for income taxes

     5,152         2,429        18,079         16,620   

Depreciation and amortization expense

     15,781         15,983        47,992         48,794   

LIFO charges

     250         230        1,500         900   

Amortization of deferred financing costs

     574         573        1,840         1,720   

Non-cash stock compensation expense

     396         824        1,053         1,975   

Executive recruiting fees and relocation expenses

     484         —          484         —     

Severance to former executives

     904         —          904         —     

One-time IPO expenses

     —           —          519         —     

Reversal of pension withdrawal liability

     —           (1,006     —           (1,006

Loss on debt extinguishment

     —           —          13,304         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ 43,071       $ 34,212      $ 152,047       $ 129,353   
  

 

 

    

 

 

   

 

 

    

 

 

 

Our principal sources of liquidity are cash flows generated from operations and borrowings under our revolving credit facility. Our principal uses of cash are to meet debt service requirements, finance capital expenditures, make acquisitions and provide for working capital. We expect that current excess cash, cash available from operations and funds available under our revolving credit facility will be sufficient to fund our operations, debt service requirements and capital expenditures for at least the next 12 months.

Our ability to make payments on and to refinance our debt, and to fund planned capital expenditures depends on our ability to generate sufficient cash in the future. This, to some extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We believe that, based upon current levels of operations, we will be able to meet our debt service obligations when due. Significant assumptions underlie this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. If our future cash flow from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, on or before maturity. There can be no assurance that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing and future indebtedness may limit our ability to pursue any of these alternatives.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect amounts of assets and liabilities reported in the consolidated financial statements, the disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the year. We believe our estimates and assumptions are reasonable; however, future results could differ from those estimates under different assumptions or conditions.

 

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Critical accounting policies are policies that reflect material judgment and uncertainty and may result in materially different results using different assumptions or conditions. We identified the following critical accounting policies and estimates: inventories, income taxes, discounts and vendor allowances, allowance for losses on receivables, closed facility lease commitments, reserves for self-insurance, employee benefit plans, goodwill, and impairment of long-lived assets. For a detailed discussion of accounting policies, refer to our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We have a market risk exposure to changes in interest rates. We manage interest rate risk through the use of fixed- and variable-interest rate debt. The Credit Facilities provide a floor in the rates under which we are charged interest expense. Currently, the LIBOR rate is below the interest rate floor included in the Credit Facilities. Should the LIBOR rate exceed the floor provided in the Credit Facilities agreement, we would be required to make higher interest payments than we are currently making. We historically have not engaged in interest rate hedging activities related to our interest rate risk, however on August 27, 2013, we entered into a one-year forward starting interest rate swap, which will mature on August 27, 2016, to hedge cash flows related to interest payments on $75 million of the Term Facility. The Swap effectively fixes the interest rate for $75 million of the Term Facility. The Swap involves the receipt of floating interest rate amounts in exchange for fixed rate interest payments over the duration of the Swap without an exchange of the underlying principal amount. In accordance with ASC 815, we designated the Swap as a cash flow hedge. Even after giving effect to the Swap, we are exposed to risks due to fluctuations in the market value of the Swap and changes in interest rates with respect to the portion of our Term Facility that is not covered by the Swap. A one percentage point increase in LIBOR above the 1.25% minimum floor would cause an increase to the interest expense on our borrowings under the Term Facility of approximately $5.9 million, after giving effect to the Swap. We may engage in additional hedging activities related to our interest rate risk from time to time in the future.

There have been no other material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

Item 4. Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”), the Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Roundy’s disclosure controls and procedures as of September 28, 2013, the end of the period covered by this report. Based on that evaluation, Roundy’s Chief Executive Officer and Chief Financial Officer concluded that Roundy’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) were effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the evaluation described above, there were no changes in our internal control over financial reporting during the quarter ended September 28, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II – Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There were no material changes in risk factors for the Company in the period covered by this report. See the discussion of risk factors in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

Reference is made to the separate exhibit index contained on page 22 filed herewith.

 

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Roundy’s, Inc.
By:  

/s/ ROBERT A. MARIANO

  Robert A. Mariano
 

Chairman, President and Chief Executive

Officer and Director

Date: November 8, 2013
By:  

/s/ DARREN W. KARST

  Darren W. Karst
 

Executive Vice President, Chief Financial

Officer and Assistant Secretary

Date: November 8, 2013

 

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Exhibit Index

 

Exhibit

Number

  

Description

  31.1    Certification Statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification Statement of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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