Roundy's, Inc. - FORM 10-Q - November 5, 2014

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EX-31.2 - EX-31.2 - Roundy's, Inc.	d809341dex312.htm
EX-32.1 - EX-32.1 - Roundy's, Inc.	d809341dex321.htm
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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 27, 2014

¨	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.

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 October 30, 2014, there were 49,336,894 shares of the registrant’s common stock, par value $0.01 per share, issued and outstanding.

Roundy’s, Inc.

Quarterly Report on Form 10-Q

For the thirteen and thirty-nine week periods ended September 27, 2014

Table of Contents


	Part I – Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ended September 28, 2013 and September 27, 2014	3
	Consolidated Balance Sheets as of December 28, 2013 and September 27, 2014	4
	Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 28, 2013 and September 27, 2014	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
	Part II – Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Mine Safety Disclosures	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
	Signatures	31

Part I – Financial Information

Item 1. FINANCIAL STATEMENTS

Roundy’s, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except per share data)

(Unaudited)


	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	September 28, 2013		September 27, 2014			September 28, 2013		September 27, 2014
Net Sales	$	836,557	$	973,808		$	2,499,899	$	2,779,404
Costs and Expenses:
Cost of sales		623,158		715,582			1,842,788		2,041,721
Operating and administrative		197,739		248,418			590,066		705,667
Goodwill impairment charge		—		280,014			—		280,014
Asset impairment charge		—		—			—		5,050
Interest:
Interest expense, net		9,993		13,277			29,817		39,618
Amortization of deferred financing costs		526		555			1,557		1,687
Loss on debt extinguishment		—		—			—		8,576

		831,416		1,257,846			2,464,228		3,082,333

Income (Loss) from Continuing Operations before Income Taxes		5,141		(284,038	)		35,671		(302,929	)
Provision (Benefit) for Income Taxes		1,964		(34,130	)		13,055		(42,570	)

Net Income (Loss) from Continuing Operations		3,177		(249,908	)		22,616		(260,359	)
Net Income (Loss) from Discontinued Operations, Net of Tax		590		(33,913	)		3,270		(55,644	)

Net Income (Loss)	$	3,767	$	(283,821	)	$	25,886	$	(316,003	)

Basic net earnings (loss) per common share:
Continuing operations	$	0.07	$	(5.19	)	$	0.50	$	(5.47	)
Discontinued operations	$	0.01	$	(0.70	)	$	0.07	$	(1.17	)
Diluted net earnings (loss) per common share:
Continuing operations	$	0.07	$	(5.19	)	$	0.50	$	(5.47	)
Discontinued operations	$	0.01	$	(0.70	)	$	0.07	$	(1.17	)
Weighted average number of common shares outstanding:
Basic		44,971		48,167			44,940		47,590
Diluted		45,352		48,167			45,157		47,590
Dividends declared per share	$	0.12	$	—		$	0.36	$	—
Comprehensive Income (Loss)	$	4,651	$	(283,294	)	$	28,089	$	(314,879	)

See notes to accompanying unaudited consolidated financial statements.

Roundy’s, Inc.

Consolidated Balance Sheets

(In thousands, except per share data)


	December 28, 2013			September 27, 2014
				(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	78,214		$	46,935
Notes and accounts receivable, less allowance for losses		36,700			37,246
Merchandise inventories		268,281			298,645
Prepaid expenses		9,219			7,476
Income taxes receivable		1,704			4,199
Deferred income taxes		13,838			15,086
Current assets of discontinued operations		40,590			575

Total current assets		448,546			410,162

Property and Equipment, net		301,926			321,592
Other Assets:
Other assets—net		59,846			60,382
Long-term assets of discontinued operations		73,698			—
Goodwill		577,537			297,523

Total other assets		711,081			357,905

Total assets	$	1,461,553		$	1,089,659

Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	221,013		$	226,495
Accrued wages and benefits		31,240			36,447
Other accrued expenses		42,541			57,639
Current maturities of long-term debt and capital lease obligations		1,322			6,030
Income taxes		615			—
Current liabilities of discontinued operations		45,694			11,783

Total current liabilities		342,425			338,394

Long-term Debt and Capital Lease Obligations		717,997			650,436
Deferred Income Taxes		76,285			21,743
Other Liabilities		70,248			66,018
Long-term Liabilities of Discontinued Operations		28,171			79,860

Total liabilities		1,235,126			1,156,451

Commitments and Contingencies
Shareholders’ Equity:
Preferred Stock (5,000 shares authorized at 12/28/13 and 9/27/14, respectively, $0.01 par value, 0 shares at 12/28/13 and 9/27/14, respectively, issued and outstanding)		—			—
Common stock (150,000 shares authorized, $0.01 par value, 46,777 shares and 49,337 shares at 12/28/13 and 9/27/14, respectively, issued and outstanding)		468			493
Additional paid-in-capital		116,874			138,994
Retained earnings (accumulated deficit)		137,545			(178,943	)
Accumulated other comprehensive loss		(28,460	)		(27,336	)

Total shareholders’ equity (deficit)		226,427			(66,792	)

Total liabilities and shareholders’ equity	$	1,461,553		$	1,089,659

See notes to accompanying unaudited consolidated financial statements.

Roundy’s, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Thirty-nine Weeks Ended
	September 28, 2013			September 27, 2014
Cash Flows From Operating Activities:
Net income (loss)	$	25,886		$	(316,003	)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Goodwill impairment charge		—			280,014
Asset impairment charges		—			16,193
Multi-employer pension withdrawal charge		—			49,697
Depreciation of property and equipment and amortization of intangible assets		48,794			51,536
Amortization of deferred financing costs		1,720			1,738
Gain on sale of discontinued operations		—			(1,654	)
Loss on sale of property and equipment		126			272
LIFO charge (benefit)		900			(4,073	)
Deferred income taxes		(771	)		(61,483	)
Loss on debt extinguishment		—			9,048
Amortization of debt discount		1,113			1,788
Stock-based compensation expense		1,975			2,845
Changes in operating assets and liabilities:
Notes and accounts receivable		(5,354	)		1,557
Merchandise inventories		(1,717	)		(4,665	)
Prepaid expenses		1,080			164
Other assets		168			(2,729	)
Accounts payable		(14,178	)		(25,323	)
Accrued expenses and other liabilities		3,376			23,646
Income taxes		(162	)		(6,088	)

Net cash flows provided by operating activities ⁽¹⁾		62,956			16,480

Cash Flows From Investing Activities:
Capital expenditures		(34,014	)		(71,460	)
Proceeds from sale of Rainbow Store Sale		—			76,907
Proceeds from sale of property and equipment		518			569

Net cash flows (used in) provided by investing activities ⁽¹⁾		(33,496	)		6,016

Cash Flows From Financing Activities:
Dividends paid to common shareholders		(16,279	)		(150	)
Payments of withholding taxes for vesting of restricted stock shares		(390	)		(719	)
Borrowings on revolving credit facility		30,000			423,250
Payments made on revolving credit facility		(30,000	)		(423,250	)
Proceeds from long-term borrowings		—			450,800
Payments of debt and capital lease obligations		(8,126	)		(521,344	)
Issuance of common stock, net of issuance costs		—			19,302
Debt issuance and refinancing fees and related expenses		—			(5,628	)

Net cash flows used in financing activities⁽¹⁾		(24,795	)		(57,739	)

Net increase (decrease) in Cash and Cash Equivalents		4,665			(35,243	)
Cash and Cash Equivalents, Beginning of Period⁽²⁾		72,889			82,178

Cash and Cash Equivalents, End of Period ⁽²⁾	$	77,554		$	46,935

Supplemental Cash Flow Information:
Cash paid for interest	$	30,237		$	37,964
Cash paid for income taxes		17,553			2,459

⁽¹⁾	Includes activities from continuing operations and discontinued operations.

⁽²⁾	Includes cash and cash equivalents included in assets of discontinued operations.

See notes to accompanying unaudited consolidated financial statements.

ROUNDY’S, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. 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 28, 2013.

The accompanying unaudited consolidated financial statements as of September 27, 2014, and for the thirteen and thirty-nine weeks ended September 28, 2013 and September 27, 2014 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 27, 2014 may not necessarily be indicative of the results that may be expected for the entire fiscal year ending January 3, 2015.

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.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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 exists at the reporting date and should be made presuming disallowance of the tax position at the reporting date. ASU No. 2013-11 was effective for reporting periods beginning after December 15, 2013, and are 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, this standard did not have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issues ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU No. 2014-08”). ASU No. 2014-08 changed the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. ASU No. 2014-08 is effective on a prospective basis for all disposals of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company has chosen to not adopt ASU 2014-08 early for the Rainbow Store Sale transaction and the closure of the remaining nine Rainbow stores, and as such, the Company expects this standard will not have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU No. 2014-09”). ASU No. 2014-09 provides guidance for revenue recognition for companies that either enter into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principle of the new guidance is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently assessing the potential impact of ASU No. 2014-09 on its consolidated financial statements.

3. OFFERING OF COMMON STOCK

On February 12, 2014, the Company completed a public offering of 10,170,989 shares of its common stock at a price of $7.00 per share, which included 2,948,113 shares sold by Roundy’s and 7,222,876 shares sold by existing shareholders. The Company received approximately $20.6 million in gross proceeds from the offering, or approximately $19.3 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds were used for general corporate purposes, including funding working capital and operating expenses as well as capital expenditures related to the eleven Dominick’s stores acquired from Safeway during the fourth quarter of 2013.

4. ACQUISITION

On December 20, 2013, the Company acquired eleven Dominick’s stores from Safeway in a $36 million cash transaction (the “Chicago Stores Acquisition”). As a result of the transaction, the Company assumed the operating leases for ten of the stores and a capital lease liability for one store. As of September 27, 2014, the Company has re-opened ten of these stores under the Company’s Mariano’s banner and the Company expects that the additional store will be converted to the Mariano’s banner and will open during the fourth quarter of Fiscal 2014. The transaction enables the Company to expand its presence in the Chicago market and accelerate the number of Mariano’s locations, the Company’s growth banner. The Company paid an amount in excess of the fair value of the assets acquired and recorded goodwill of approximately $4.3 million. The amount of goodwill recorded in connection with the transaction is deductible for tax purposes over a 15-year period.

The transaction was accounted for as a business combination under Accounting Standards Codification 805. As such, the purchase price was allocated based on a fair value appraisal by a third party valuation firm. The fair value calculations of property under capital lease and the favorable lease rights were based on estimated market rents for those leased properties, which the Company considers to be Level 2 within the fair value hierarchy. The fair value calculations of the customer lists were based on the estimated profitability of the sales associated with the acquired customers. The fair value calculations of the equipment and leasehold improvements were based on the estimated replacement cost. The Company considers the inputs used in the fair value calculations of the equipment, leasehold improvements and customer lists to be Level 3 within the fair value hierarchy.

The purchase price was allocated as follows (in thousands):


Consideration
Purchase price	$	36,000
Capital lease liability assumed		7,765

Total Consideration	$	43,765

Assets Acquired
Equipment	$	9,706
Leasehold improvements		6,859
Property under capital lease		8,608
Intangible assets:
Favorable lease rights		11,216
Customer lists		3,116
Goodwill		4,260

Fair Value of Assets Acquired	$	43,765

The favorable lease rights will be amortized over the lease term of the acquired stores. The customer lists will be amortized over an expected life of 5 years. Other than the capital lease liability assumed, there were no other liabilities assumed in the transaction.

During the third quarter of 2014, the Company recognized a net of tax loss of $0.3 million related to the write-off of certain Dominick’s equipment which the Company did not deploy.

5. DISCONTINUED OPERATIONS

During the second quarter of 2014, the Company entered into definitive agreements to sell 18 Rainbow stores in the Minneapolis / St. Paul market to a group of local grocery retailers (“Buyers”), including SUPERVALU INC. (“Rainbow Store Sale”). The aggregate sale price for the 18 Rainbow stores was $65 million in cash plus the proceeds from inventory that was sold to the Buyers at the closing of the Rainbow Store Sale. The total proceeds received from the Rainbow Store Sale were $76.9 million. In addition, as part of the transaction, the Buyers assumed the lease obligations and certain multi-employer pension liabilities related to the acquired stores.

As a condition to the sale agreement, the Company entered into sublease agreements for four of the 18 Rainbow stores for a five year period. The amount of the sublease rent payments that will be received from the Buyers are less than the minimum lease payments for these stores. The sublease payments are not considered significant to the operations of these stores, and as such, the Company does not have significant continuing cash flows.

In addition, during the second quarter of 2014, the Company announced its intention to exit the Minneapolis / St. Paul market entirely. The remaining nine Rainbow stores not included in the Rainbow Store Sale were closed during the third quarter of 2014. During the second quarter of 2014, the Company evaluated the future cash flows expected from this long-lived asset group and recorded a non-cash impairment charge of $11.1 million related to the assets of the nine Rainbow stores that were closed. There was no further impairment recorded during the third quarter of 2014.

The 27 Rainbow stores that were either included in the Rainbow Store Sale or closed during the third quarter of 2014 are included in discontinued operations in the Consolidated Statements of Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ending September 27, 2014. The remaining assets and liabilities of the 27 Rainbow stores are presented as assets and liabilities of discontinued operations in the Consolidated Balance Sheet as of September 27, 2014. The Consolidated Balance Sheet as of December 28, 2013 and the Consolidated Statements of Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ending September 28, 2013, have been reclassified to conform with the current year presentation.

The Company has included all direct costs and an amount of allocated interest expense (including amortization of deferred financing costs) for the 27 Rainbow stores within net income (loss) from discontinued operations. Interest was allocated based on the ratio of the net assets of the 27 Rainbow stores as of the end of each quarter to the net assets of the total Company. For the thirteen and thirty-nine weeks ended September 28, 2013, the Company allocated $1.5 million and $4.8 million of interest, respectively, to discontinued operations. For the thirteen and thirty-nine weeks ended September 27, 2014, the Company allocated $0.6 million and $3.2 million of interest, respectively, to discontinued operations.

As a result of the Rainbow Store Sale and the exit from the Minneapolis / St. Paul market, the Company expects to incur a withdrawal liability related to the multi-employer pension plans in which the effected employees participate. The Company recorded a charge of $25.8 million during the second quarter of 2014, for the estimated multi-employer pension withdrawal liability related to the 18 Rainbow stores that were sold, which represents the Company’s best estimate absent demand letters from the multi-employer plans. During the third quarter of 2014, the Company determined that the liability was probable and recorded a charge of $23.9 million for the estimated multi-employer pension withdrawal liability related to the remaining nine Rainbow stores that were closed in the third quarter. Demand letters from the impacted multi-employer pension plans may be received in 2015, or later and the ultimate withdrawal liability may change from the currently estimated amount. Any future charge will be recorded in the period when the change is identified. The Company expects the liability will be paid out in quarterly installments, which vary by plan, over a period of up to 20 years. The net present value of the liability was determined using a risk free interest rate. The Company has not made any payments for the withdrawal liability during the thirteen and thirty-nine weeks ended September 27, 2014. The liability for the estimated multi-employer pension withdrawal is included within other liabilities in the liabilities of discontinued operations as presented below.

The Company also recorded a $10.0 million closed facility charge during the third quarter of 2014 related principally to the lease agreements for the nine closed store locations. In addition, the Company incurred severance expense of approximately $2.2 million to the employees of the Rainbow stores that were sold or closed during the third quarter of 2014.

During the second quarter of 2014, the Company recorded a $1.4 million charge to adjust the carrying value of certain inventories at the 18 Rainbow stores to the expected purchase price from the Buyers. No such charges were recorded during the third quarter of 2014. The finalization of the Rainbow Store Sale resulted in an overall gain of $1.7 million for the thirty-nine weeks ended September 27, 2014.

Net income (loss) from discontinued operations, net of tax, as presented in the Consolidated Statements of Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ending September 28, 2013 and September 27, 2014 is as follows (in thousands):


	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	September 28, 2013		September 27, 2014			September 28, 2013		September 27, 2014
Net Sales	$	147,605	$	18,611		$	448,094	$	290,986

Income (loss) from discontinued operations, before income taxes:	$	1,055	$	(45,751	)	$	6,835	$	(79,840	)
Gain on disposal of operations, before income taxes:		—		3,010			—		1,654

Total income (loss) from discontinued operations before income taxes		1,055		(42,741	)		6,835		(78,186	)
Income taxes (benefit) on discontinued operations		465		(8,828	)		3,565		(22,542	)

Income (loss) from discontinued operations, net of tax	$	590	$	(33,913	)	$	3,270	$	(55,644	)

The Consolidated Balance Sheet as of December 28, 2013 has been reclassified to reflect assets and liabilities of discontinued operations. The assets and liabilities of discontinued operations as of December 28, 2013 and September 27, 2014 include the following:


	December 28, 2013		September 27, 2014
Assets of discontinued operations:
Cash and cash equivalents	$	3,964	$	—
Notes and accounts receivable		2,137		35
Merchandise inventories		33,841		—
Prepaid expenses		648		—
Property and equipment, net		41,049		540
Goodwill		32,649		—

Total assets of discontinued operations	$	114,288	$	575

Current assets of discontinued operations	$	40,590	$	575
Long-term assets of discontinued operations	$	73,698	$	—
Liabilities of discontinued operations:
Accounts payable	$	30,572	$	—
Accrued wages and benefits		7,412		—
Other accrued expenses		4,292		9,342
Current maturities of capital lease obligations		3,418		2,441
Long-term capital lease obligations		19,728		14,456
Other liabilities		8,443		65,404

Total liabilities of discontinued operations	$	73,865	$	91,643

Current liabilities of discontinued operations	$	45,694	$	11,783
Long-term liabilities of discontinued operations	$	28,171	$	79,860

6. STEVENS POINT

On July 1, 2014 the Company announced the closure of its Stevens Point Distribution Center (“Stevens Point Warehouse”). The Stevens Point Warehouse was closed in the third quarter of 2014 and is currently being marketed for sale.

As a result of these actions, the Company evaluated the recoverability of this long-lived asset group and recorded a non-cash impairment charge of $5.1 million for the assets at the Stevens Point Warehouse during the second quarter of 2014. The fair value of the long-lived asset group was calculated using level 2 market data inputs.

The Company consolidated its supply chain operations previously performed at the Stevens Point Warehouse into its Oconomowoc warehouse during the third quarter of 2014.

Given the timing and nature of the expected sale of the Stevens Point Warehouse, the criteria required to be considered held for sale as of September 27, 2014 were not met, and as such, the assets of the Stevens Point Warehouse are not classified as held for sale in the Company’s Consolidated Balance Sheet as of September 27, 2014.

The Company recorded severance and other one-time charges of $1.8 million related to the closure of the Stevens Point Warehouse during the third quarter of 2014. Other one-time charges included costs to transfer inventory and equipment from the Stevens Point Warehouse to the Oconomowoc warehouse, as well as miscellaneous expenses required to prepare the Steven’s Point Warehouse for sale.

7. 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 as of September 27, 2014, which is an interest rate derivative liability of $0.7 million, compared to a liability of $0.4 million as of December 28, 2013. Interest rate derivatives 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 27, 2014. Based on estimated market rents for those leased properties which are recorded as capital leases, the fair value of capital lease obligations is approximately $28.2 million and $22.5 million, as of December 28, 2013 and September 27, 2014, respectively. Included in the fair value of capital lease obligations is $16.0 million and $11.7 million as of December 28, 2013 and September 27, 2014, respectively, related to the capital lease obligations for the nine Rainbow stores that were closed during the third quarter of 2014 and are included in liabilities of discontinued operations on the Consolidated Balance Sheet. Based on recent open market transactions of the Company’s term loan and the 10.250% Senior Secured Notes due in 2020 (the “2020 Notes”), the fair value of long-term debt, including current maturities, is approximately $732.7 million and $624.6 million as of December 28, 2013 and September 27, 2014, respectively. The Company considers the fair value of the capital leases, term loan and 2020 Notes to be Level 2 within the fair value hierarchy. The determination of fair value of certain tangible and intangible assets for purposes as discussed in Note 9 was based on Level 3 inputs.

8. INVENTORIES

The Company uses the LIFO method of valuation for a portion of its inventories. If the FIFO method had been used, inventories would have been approximately $24.4 million higher on December 28, 2013 and $20.4 million higher on September 27, 2014. During the third quarter of 2014, the Company recognized a benefit of $5.2 million ($3.1 million, net of income tax) for the reduction of the Company’s LIFO reserve due to the disposition of inventory as a result of the closure of the Stevens Point Warehouse.

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.

9. GOODWILL

Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. The carrying value of goodwill is evaluated for impairment annually on the first day of the third quarter or whenever events occur or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount.

We have determined that the Company has two financial reporting units. The two financial reporting units identified by the Company are related to the Company’s core business in Wisconsin comprised of the Pick ’n Save, Copps, Metro Market banners and the Company’s Mariano’s business in Illinois.

The fair value of our financial reporting units is determined by using an income approach based on the discounted cash flows of the reporting unit and a market approach based on comparable market values of the reporting unit, which are considered Level 3 inputs. Projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. If the fair value of the reporting unit is less than its carrying amount, the fair value of the implied goodwill is calculated as the difference between the fair value of the reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An impairment charge is recorded for any excess of the carrying amount of goodwill over the implied fair value.

During the third quarter of fiscal 2014, our market capitalization experienced a significant decline. As a result, management believed that there were circumstances evident which indicated that the fair value of our reporting units could be below their carrying amounts. With the assistance of a third party valuation firm, we completed the first step of the impairment evaluation process in comparing the fair value of our reporting units to their carrying value. At that time the carrying value exceeded the fair value of our financial reporting units and therefore, the Company completed the second step of the impairment evaluation. The second step calculates the implied fair value of the goodwill, which is compared to the carrying value of goodwill. The implied fair value of goodwill is calculated by valuing all of the tangible and intangible assets of the financial reporting units at the hypothetical fair value, assuming the financial reporting units had been acquired in a business combination. The excess fair value of the financial reporting unit over the fair value of their identifiable assets and liabilities is the implied fair value of the goodwill. Based upon the calculation of the implied fair value of goodwill, it was determined that the carrying value of the goodwill exceeded the implied fair value of goodwill, which resulted in a non-cash, pre-tax impairment charge of $280.0 million ($247.1 million, net of income taxes) during the third quarter of 2014.

The testing for impairment of goodwill requires the extensive use of management judgment and financial estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities.

A summary of changes in the Company’s goodwill during the thirty-nine weeks ended September 27, 2014 is as follows (in thousands):


Balance at December 28, 2013:
Goodwill	$	730,986
Accumulated impairment losses		(120,800	)

Net Goodwill at December 28, 2013		610,186
Activity during the year:
Goodwill allocated to Rainbow Store Sale	$	(32,649	)
Goodwill impairment loss		(280,014	)

Goodwill as of September 27, 2014		297,523
Adjusted balance at September 27, 2014:
Goodwill		698,337
Accumulated impairment losses		(400,814	)

Balance at September 27, 2014:	$	297,523

10. LONG-TERM DEBT

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


	December 28, 2013		September 27, 2014
Term Loan	$	516,875	$	458,850
Second Lien Notes		200,000		200,000
Revolving Credit Facility		—		—
Capital Lease Obligations, 7.6% to 10%, due 2014 to 2031		12,958		12,143
Other long-term debt		1,255		1,095

		731,088		672,088
Less: Unamortized discount on Term Loan		5,793		10,288
Less: Unamortized discount on Second Lien Notes		5,976		5,334
Less: Current maturities		1,322		6,030

Long-term debt, net of current maturities	$	717,997	$	650,436

On March 3, 2014, Roundy’s Supermarkets, Inc. (“RSI”), the wholly owned operating subsidiary of the Company, refinanced its existing credit facilities (the “2014 Refinancing”), and entered into two new credit facilities, a $460 million term loan (the “New Term Facility”) and a $220 million asset-based revolving credit facility (the “New Revolving Facility”, together with the New Term Facility, the “2014 Credit Facilities”). The Company used the proceeds from the New Term Facility, together with existing cash, to repay the Company’s existing term loan, including all accrued interest thereon and related costs, fees and expenses. The New Term Facility was issued with a 2.0% discount, which will be amortized over the seven year term of the New Term Facility. The New Term Facility has a maturity date of March 3, 2021; provided that the maturity date will accelerate to September 15, 2020 if our 10.250% Senior Secured Notes due in 2020 (the “2020 Notes”) are not refinanced in full prior to September 15, 2020. The New Revolving Facility has a maturity date of March 3, 2019.

The New Term Facility bears interest, at the Company’s option, at (i) adjusted LIBOR (subject to a minimum floor of 1.00%) plus 4.75% or (ii) a base rate plus 3.75%.

Mandatory prepayments under the New Term Facility will be required with (i) 50% of adjusted excess cash flow (which percentage shall be reduced to 25% and to 0% upon achievement of certain leverage ratios); (ii) 100% of the net cash proceeds of assets sales or other non-ordinary course dispositions of certain property by the 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 certain indebtedness not otherwise permitted to be incurred under the New Term Facility credit agreement.

Borrowings under the New Term Facility are guaranteed, subject to certain exceptions, by the Company and certain of the Company’s direct and indirect, wholly owned domestic restricted subsidiaries and are secured by substantially all the RSI’s and such guarantors’ assets (subject to certain exceptions) on a first-priority basis, except that with respect to New Revolving Facility Priority Collateral (defined below) such assets are secured on a second-priority basis, in each case subject to certain exceptions and to the terms of the First Lien Intercreditor Agreement described below.

The New Revolving Facility bears interest, at the Company’s option, at (i) adjusted LIBOR plus a margin of 1.50% – 2.00% per annum or (ii) base rate plus a margin of 0.50% – 1.00% per annum. In either case, the margin is based on RSI’s utilization of the New Revolving Facility. In addition, there is a quarterly fee payable in an amount equal to either 0.25% or 0.375% per annum of the undrawn portion of the New Revolving Facility. The Company may use borrowings under the New Revolving Facility for ongoing working capital and general corporate purposes and any other use not prohibited by the revolving credit agreement. Borrowing availability under the New Revolving Facility at any time is based on the value of certain eligible inventory, accounts receivable and pharmacy prescription files and is subject to additional reserves and other adjustments.

Borrowings under the New Revolving Facility are guaranteed, subject to certain exceptions, by the Company and certain of the Company’s direct and indirect, wholly owned domestic restricted subsidiaries and are secured by substantially all the RSI’s and such guarantors’ assets (subject to certain exceptions), in the case of certain assets designated as New Revolving Facility priority collateral including accounts, inventory, cash, deposit accounts, certain payment intangibles and other related assets (“New Revolving Facility Priority Collateral”) on a first-priority basis, and on a second-priority basis with respect to other assets, in each case subject to certain exceptions and to the terms of the First Lien Intercreditor Agreement described below.

On March 3, 2014, RSI and the Company entered into a First Lien Intercreditor Agreement (the “First Lien Intercreditor Agreement”), which establishes the relative lien priorities and rights of the secured parties under the New Revolving Facility and the New Term Facility. Pursuant to the First Lien Intercreditor Agreement, the obligations under the New Revolving Facility are secured with a first priority lien on the New Revolving Facility Priority Collateral and a second priority lien on the other assets constituting collateral, and the obligations under the New Term Facility are secured with a second priority lien on the New Revolving Facility Priority Collateral and a first priority lien on all other collateral (in each case, subject to certain exceptions and limitations).

In connection with the 2014 Refinancing, the Company recognized a loss on debt extinguishment of $9.0 million (of which $8.6 million is related to continuing operations), which consisted primarily of the write-off of $4.8 million of previously capitalized financing costs, the $3.6 million write-off of a portion of the unamortized discount on the 2012 Term Loan, and certain fees and expenses of $0.6 million related to the New Term Facility. The Company capitalized $4.0 million and $0.8 million of financing costs related to the New Revolving Facility and New Term Facility, respectively, both of which will be amortized over the term of the respective term of each credit facility.

The terms of the 2014 Credit Facilities contain customary affirmative covenants and are also secured by substantially all of RSI’s tangible and intangible assets. The terms of the 2014 Credit Facilities also contain customary negative covenants, including restrictions on (i) dividends on, and redemptions of, equity interest and other restricted payment; (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) negative pledges and restrictions on subsidiary distributions; and (viii) optional payments and modifications of certain debt instruments.

At September 27, 2014, the Company was in compliance with all covenants relating to its indebtedness.

As of September 27, 2014, there were outstanding letters of credit, totaling $29.6 million under the New Revolving Facility, which reduce borrowing availability.

Prior to the 2014 Refinancing, the Company’s long-term debt included a senior credit facility consisting of a $675 million term loan (the ‘‘2012 Term Loan’’) and a $125 million revolving credit facility (the ‘‘2012 Revolving Facility’’ and together with the 2012 Term Loan, the ‘‘2012 Credit Facilities”). Borrowings under the 2012 Credit Facilities bore 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%.

On December 9, 2013, RSI amended its credit agreement governing the 2012 Credit Facilities to, among other things, permit the occurrence of the issuance of the 2020 Notes and the second-priority liens securing the 2020 Notes and related obligations and to revise certain financial maintenance and other covenants.

On December 20, 2013, RSI completed the private placement of $200 million of the 2020 Notes that mature on December 15, 2020. The Company will pay interest at a rate of 10.25% on the 2020 Notes semiannually, commencing on June 15, 2014. The 2020 Notes were issued with a 3.01% discount, which will be amortized over the seven year term of the 2020 Notes. The Company capitalized $4.6 million of financing costs related to the issuance of the 2020 Notes which will be also amortized over the seven year term of the 2020 Notes.

The Company used the net proceeds from the issuance of the 2020 Notes to prepay approximately $148 million in principal amount of the Company’s 2012 Term Loan and to fund the Chicago Stores Acquisition. The Company capitalized $0.6 million related to an amendment fee paid to lenders of the 2012 Credit Facilities. In addition, the Company expensed $3.5 of unamortized loan costs, including $2.0 million of previously capitalized financing costs and $1.5 million of the unamortized discount on the 2012 Term Loan.

The 2020 Notes are unconditionally guaranteed, jointly and severally, on a senior basis, by (i) RSI’s indirect parent company Roundy’s, Inc., (ii) RSI’s direct parent company Roundy’s Acquisition Corp. and (iii) each of RSI’s domestic restricted subsidiaries owned on the date of original issuance of the 2020 Notes, and are secured by a second priority security interest in substantially all of our and the Guarantors’ assets, which security interests rank junior to the security interests in such assets that secure our 2014 Credit Facilities. The 2020 Notes and the guarantees thereof are secured by a second priority lien on substantially all the assets owned by RSI and the guarantors, subject to permitted liens and certain exceptions. These liens are junior in priority to the first-priority liens on the same collateral securing the 2014 Credit Facilities (as well as certain hedging and cash management obligations owed to lenders thereunder or their affiliates) and to certain other permitted liens under the indenture.

At any time prior to December 15, 2016, the Company may redeem up to 35% of the 2020 Notes with the net cash proceeds received by the Company from any equity offering at a price of 110.250% of the principal amount of the 2020 Notes, plus accrued and unpaid interest.

At any time and from time to time on or after December 15, 2016, the Company may redeem the 2020 Notes, in whole or in part, at the following redemption prices (expressed as percentages of the principal amount) plus accrued and unpaid interest:


12-month period commencing on December 15 in year
2016	107.688	%
2017	105.125	%
2018	102.563	%
2019 and thereafter	100	%

11. 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 27, 2014, the Company has recorded $0.7 million in other liabilities in the Company’s Consolidated Balance Sheet, which represents the fair value of the Swap on that date. As of September 27, 2014, the Company has $0.4 million in accumulated other comprehensive loss recorded on the Company’s Consolidated Balance Sheet, which represents a loss on the effective portion of the Swap, net of tax, on that date. The Company does not expect the amount of losses that will be reclassified into earnings over the next twelve months to be material. The fair value of the Swap as of December 28, 2013 was a liability of $0.4 million.

On March 3, 2014, the Company completed the 2014 Refinancing. Due to a change in certain of the critical terms of the New Term Facility, specifically the change in the interest rate floor, a certain portion of the Swap was deemed ineffective for the thirty-nine weeks ended September 27, 2014. The amount is considered immaterial.

During the thirteen and thirty-nine weeks ended September 27, 2014 there were no amounts reclassified into current period earnings.

12. EMPLOYEE BENEFIT PLANS

Net pension income in the thirteen and thirty-nine weeks ended September 28, 2013 and September 27, 2014 included the following components (in thousands):


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 28, 2013			September 27, 2014			September 28, 2013			September 27, 2014
Service cost	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation		1,839			2,234			5,517			6,315
Expected return on plan assets		(3,287	)		(3,563	)		(9,861	)		(10,690	)
Amortization of net actuarial loss		1,099			870			3,297			2,084

Net pension income from continuing operations	$	(349	)	$	(459	)	$	(1,047	)	$	(2,291	)

As of September 27, 2014, the Company had a letter of credit posted in favor of the Pension Benefit Guaranty Corporation in the amount of $10 million.

The Company expects its pension plan contributions for the year ending January 3, 2015 to be approximately $0.8 million.

13. INCOME TAXES

The Company’s effective tax rate for continuing operations for the thirteen weeks ended September 27, 2014 is a tax benefit of (12.0%). The Company’s effective tax rate for continuing operations for the thirty-nine weeks ended September 27, 2014 was a tax benefit of (14.1%). The provision for income taxes and effective tax rate for the thirteen and thirty-nine weeks ended September 27, 2014 reflects the impact of the goodwill impairment charge recorded during the third quarter of 2014, the majority of which is non-deductible for tax purposes.

The Company’s effective tax rate for continuing operations for the thirteen and thirty-nine weeks ended September 28, 2013 was 38.2% and 36.6%, respectively.

As a result of the goodwill impairment recorded during the third quarter of 2014, the Company evaluated if it would have sufficient taxable income to utilize existing deferred tax assets. The Company evaluated available positive and negative evidence to make this evaluation. As a result of the goodwill impairment recorded in the third quarter of 2014, the company is in a three year cumulative book loss, which is considered negative evidence. As a result, the Company evaluated the projected taxable income to determine if its deferred tax asset will be realized within the filing of future income tax returns.

This evaluation resulted in the Company recording a $1.2 million valuation allowance related to certain federal income tax credits that are no longer considered probable of being fully utilized prior to expiration. Of this amount, $1.0 million is included in the provision for income taxes from continuing operations. The amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the credit carryforward period differ from the estimates utilized in the analysis performed during the third quarter of 2014.

14. 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 one multi-employer pension plan based on obligations arising from its collective bargaining agreement covering certain supply chain employees. This plan is underfunded as of September 27, 2014. This plan provides 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.

As discussed in Note 5, as a result of the Rainbow Store Sale and the exit from the Minneapolis / St. Paul market, the Company expects to incur a withdrawal liability related to the three multi-employer pension plans in which the effected employees participate.

In connection with the exit or sale of its independent distribution business and the Rainbow Store Sale, the Company has assigned leases and subleases for retail stores which expire at various dates through 2033. 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 $57.0 million. The Company believes the likelihood of a liability related to these assigned leases and subleases is remote.

15. 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, 2013, the entire amount reclassified from accumulated other comprehensive loss was comprised of the net amortization of actuarial losses on employee benefit plans. During the thirteen and thirty-nine weeks ended September 27, 2014, 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 and September 27, 2014, pension income is included within operating and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income (Loss). During the thirteen and thirty-nine weeks ended September 27, 2014, there was no impact on net income (loss) 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		375			—			375
Income tax expense		(150	)		—			(150	)

Net other comprehensive loss before reclassifications		225			—			225
Reclassifications:
Actuarial loss		—			1,099			1,099

Total reclassifications before taxes		—			1,099			1,099
Income tax benefit		—			(440	)		(440	)

Net amounts reclassified from accumulated comprehensive income		—			659			659

Other comprehensive income		225			659			884

Balance at September 28, 2013	$	225		$	(44,982	)	$	(44,757	)

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		375			—			375
Income tax expense		(150	)		—			(150	)

Net other comprehensive loss before reclassifications		225			—			225
Reclassifications:
Actuarial loss		—			3,297			3,297

Total reclassifications before taxes		—			3,297			3,297
Income tax benefit		—			(1,319	)		(1,319	)

Net amounts reclassified from accumulated comprehensive income		—			1,978			1,978

Other comprehensive income		225			1,978			2,203

Balance at September 28, 2013	$	225		$	(44,982	)	$	(44,757	)

The change in accumulated other comprehensive loss by component for the thirteen weeks ended September 27, 2014 consisted of the following (in thousands):


	Derivatives			Defined Benefit Pension Plans			Total
Balance at June 28, 2014	$	(395	)	$	(27,468	)	$	(27,863	)

Other comprehensive income before reclassifications		8			—			8
Income tax expense		(3	)		—			(3	)

Net other comprehensive loss before reclassifications		5			—			5
Reclassifications:
Actuarial loss		—			870			870

Total reclassifications before taxes		—			870			870
Income tax benefit		—			(348	)		(348	)

Net amounts reclassified from accumulated comprehensive income		—			522			522

Other comprehensive (loss) income		5			522			527

Balance at September 27, 2014	$	(390	)	$	(26,946	)	$	(27,336	)

The change in accumulated other comprehensive loss by component for the thirty-nine weeks ended September 27, 2014 consisted of the following (in thousands):


	Derivatives			Defined Benefit Pension Plans			Total
Balance at December 28, 2013	$	(264	)	$	(28,196	)	$	(28,460	)

Other comprehensive loss before reclassifications		(211	)		—			(211	)
Income tax benefit		85			—			85

Net other comprehensive loss before reclassifications		(126	)		—			(126	)
Reclassifications:
Actuarial loss		—			2,084			2,084

Total reclassifications before taxes		—			2,084			2,084
Income tax benefit		—			(834	)		(834	)

Net amounts reclassified from accumulated comprehensive income		—			1,250			1,250

Other comprehensive (loss) income		(126	)		1,250			1,124

Balance at September 27, 2014	$	(390	)	$	(26,946	)	$	(27,336	)

16. EARNINGS PER SHARE

The Company had one class of common stock as of September 27, 2014.

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. For the thirteen and thirty-nine weeks ended September 27, 2014, there were restricted shares outstanding of approximately 268,335 and 305,102 shares, respectively, that were excluded because their inclusion would have had an anti-dilutive effect on earnings per share.

As of September 27, 2014, there were 1,041,337 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 28, 2013		September 27, 2014			September 28, 2013		September 27, 2014
Net earnings (loss) per common share—basic:
Net Income (Loss) from continuing operations	$	3,177	$	(249,908	)	$	22,616	$	(260,359	)
Net Income (Loss) from discontinued operations		590		(33,913	)		3,270		(55,644	)

Net Income (Loss)	$	3,767	$	(283,821	)	$	25,886	$	(316,003	)

Basic weighted average common shares outstanding		44,971		48,167			44,940		47,590
Net earnings (loss) per common share from continuing operations- basic	$	0.07	$	(5.19	)	$	0.50	$	(5.47	)

Net earnings (loss) per common share from discontinued operations- basic	$	0.01	$	(0.70	)	$	0.07	$	(1.17	)

Net earnings (loss) per common share—diluted:
Weighted-average shares outstanding		44,971		48,167			44,940		47,590
Effect of dilutive securities—nonvested restricted stock shares and restricted stock units		381		—			217		—

Weighted-average shares and potential dilutive shares outstanding		45,352		48,167			45,157		47,590

Net earnings (loss) per common share from continuing operations—diluted	$	0.07	$	(5.19	)	$	0.50	$	(5.47	)

Net earnings (loss) per common share from discontinued operations—diluted	$	0.01	$	(0.70	)	$	0.07	$	(1.17	)

17. SHARE-BASED COMPENSATION

The Company’s 2012 Incentive Compensation Plan (“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 27, 2014 there were 2,902,631 remaining shares available for issuance, which assumes that all of the 2014 restricted stock unit grants discussed below vest at the maximum amount.

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 $2.8 million for the thirteen and thirty-nine weeks ended September 27, 2014, respectively, compared to $0.8 million and $2.0 million for the thirteen and thirty-nine weeks ended September 28, 2013, as operating and administrative expenses in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company paid no dividends on restricted stock shares during the thirteen weeks ended September 27, 2014 and $0.2 million of dividends on restricted stock shares that vested during the thirty-nine weeks ended September 27, 2014, compared to no dividends and $0.1 million of dividends on restricted stock during the thirteen and thirty-nine weeks ended September 28, 2013.

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, 2013 and 2014 vests over one year.

During the second quarter of 2013, the Company granted 770,366 shares of restricted stock that will vest upon the achievement of certain market performance metrics (the “2013 Market Awards”) and 452,725 shares of stock (the “2013 Time-Based Awards”) that will vest based upon the passage of time, in each case to certain employees and non-employee directors under the Plan. The 2013 Time-Based restricted stock vests ratably over three years for employees from the date of the grant. The 2013 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 2013 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 vesting will be determined based on the TSR metric and operating income results at the conclusion of the third year. The fair value of the 2013 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 2013 Time-Based Awards was determined based on the stock price as of the date of the grant.

The unvested restricted shares granted under the Plan generally have all the rights of a stockholder, including the right to receive dividends and the right to vote the shares. All of the unvested restricted stock vests upon certain changes of control of the Company.

The change in the number of restricted stock shares outstanding consisted of the following:


	Restricted Shares Outstanding (in thousands)			Weighted-average grant-date fair value per share
Outstanding, December 28, 2013		1,800		$	5.78
Granted		—			—
Vested		(338	)		7.53
Cancelled or Expired		(293	)		5.42

Outstanding, September 27, 2014		1,169			5.36

During the first quarter of 2014, the Company granted 990,540 restricted stock units that will convert to common stock upon vesting. Of the total units granted, 543,180 units will vest based upon the passage of time (the “2014 Time-Based Awards”), 212,175 units (with a maximum of 424,350 shares of common stock issuable) will vest based upon certain market performance metrics related to TSR (the “2014 Market Awards”) and 235,185 units (with a maximum of 470,370 shares of common stock issuable) will vest based upon certain operating income performance metrics (the “2014 Performance Awards”). The 2014 Time-Based Awards vest over three years for employees and one year for non-employee directors. The 2014 Market Awards will vest after three years if certain specified market conditions are met based on the TSR performance of the Company as compared to a peer group. The number of 2014 Market Awards that will ultimately convert from units to shares will be determined based on the TSR metric at the conclusion of the third year and could be up to 200% of the number of units originally granted. The 2014 Performance Awards will vest after three years if certain operating income performance metrics of the Company are met during Fiscal 2014. The number of 2014 Performance Awards that will ultimately convert from units to shares will be determined based on the operating income performance metrics during Fiscal 2014 and vest at the conclusion of the third year and could be up to 200% of the number of units originally granted. The fair value of the 2014 Market Awards was determined to be $6.85 per unit (or $3.43 per share for the maximum 424,350 shares of common stock issuable), 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 over the 2.1 years following the IPO and the peer group average volatility for the 0.7 year period prior to the IPO and a 2.8 year risk-free interest rate of 0.82%. The fair value of the 2014 Time-Based and 2014 Performance Awards was determined based on the stock price as of the date of the grant.

The change in the number of restricted stock units outstanding consisted of the following:


	Restricted Units Outstanding (in thousands)⁽¹⁾			Weighted-average grant-date fair value per unit
Outstanding, December 28, 2013		—		$	—
Granted		991			6.44
Vested		—			—
Cancelled or Expired		(167	)		6.46

Outstanding, September 27, 2014		824			6.44

(1)	Represents the number of restricted units granted. For the 2014 Market Awards and the 2014 Performance Awards, actual shares issued could be up to 200% of the units granted.

18. 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 from continuing operations of non-perishable, perishable, and non-food items for the thirteen and thirty-nine weeks ended September 28, 2013 and September 27, 2014:


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	September 28, 2013			September 27, 2014			September 28, 2013			September 27, 2014
Non-Perishable Food		46.4	%		43.5	%		47.0	%		44.4	%
Perishable Food		35.8	%		38.8	%		35.6	%		38.2	%
Non-Food		17.8	%		17.7	%		17.4	%		17.4	%

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 27, 2014, we operated 149 grocery stores in Wisconsin and Illinois under the Pick ’n Save, Copps, Metro Market and Mariano’s retail banners, which are served by our two distribution centers and our food processing and preparation commissary. The following table represents our store network as of the end of each of the periods below:


	12/28/2013		3/29/2014		6/28/2014		9/27/2014
Pick ’n Save		93		93		93		93
Copps		25		25		25		25
Mariano’s		13		18		24		27
Metro Market		3		3		4		4
Rainbow		29		27		27		—

Total Company-owned stores		163		166		173		149

In this section, we refer to the thirteen weeks ended September 27, 2014 as the “third quarter 2014” and we refer to the thirteen weeks ended September 28, 2013 as the “third quarter 2013.”

For the third quarter 2014, net sales from continuing operations were $973.8 million, compared to net sales from continuing operations of $836.6 million for the third quarter 2013. The increase in net sales was primarily due to the impact of new stores, partially offset by a decrease in same stores sales.

Net loss per basic and diluted share from continuing operations was $5.19 for the third quarter 2014, compared to earnings per basic and diluted share of $0.07 in the third quarter 2013. Results for the third quarter 2014 included a goodwill impairment charge of approximately $280.0 million ($247.1 million, net of income tax), severance and other one-time costs related to the closure of the Stevens Point Warehouse of approximately $1.8 million ($1.1 million, net of income tax), a $1.0 million valuation allowance for deferred income taxes, losses on the disposition of obsolete assets acquired in the acquisition of the Dominick’s stores of $0.5 million ($0.3 million, net of income tax ), other employee severance costs of $0.1 million ($0.1 million, net of income tax) and a benefit of $5.2 million ($3.1 million, net of income tax) related to the reduction in the LIFO reserve due to the disposition of inventory as a result of the closure of the Stevens Point Warehouse.

For the thirty-nine weeks ending September 27, 2014, net loss per basic and diluted share from continuing operations was $5.47, compared to earnings per basic and diluted share of $0.50 for the thirty-nine weeks ending September 28, 2013. Results for the thirty-nine weeks ending September 27, 2014 included a goodwill impairment charge of approximately $280.0 million ($247.1 million, net of income tax), an asset impairment charge of approximately $5.1 million ($3.0 million, net of income tax), severance and other one-time costs of approximately $1.8 million ($1.1 million, net of income tax) related to the closure of the Stevens Point Warehouse, a $1.0 million valuation allowance for deferred income taxes, losses on the disposition of obsolete assets acquired in the acquisition of the Dominick’s stores of $0.5 million ($0.3 million, net of income tax), employee severance costs of $1.2 million ($0.8 million, net of income tax), a loss on debt extinguishment of approximately $8.6 million ($4.7 million, net of income tax) incurred in connection with the debt refinancing in March 2014 and a benefit of $5.2 million ($3.1 million, net of income tax) related to the reduction in the LIFO reserve due to the disposition of inventory as a result of the closure of the Stevens Point Warehouse.

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. In the fourth quarter of 2013, we completed a transaction with Safeway, Inc. to acquire 11 Dominick’s stores in the Chicago area (the “Chicago Stores Acquisition”). During the third quarter of 2014, we opened two of those stores as Mariano’s, and opened one additional Mariano’s store in the Chicago market. As of September 27, 2014, we had 27 stores open in the Chicago market.

Unless otherwise noted, the disclosures in this Management’s Discussion and Analysis of Financial Condition and Results of Operations related to our continuing operations.

RESULTS OF CONTINUING OPERATIONS


(Dollars in thousands)	Thirteen Weeks Ended									Thirty-nine Weeks Ended
	September 28, 2013				September 27, 2014					September 28, 2013				September 27, 2014
Net Sales	$	836,557	100.0	%	$	973,808		100.0	%	$	2,499,899	100.0	%	$	2,779,404		100.0	%
Costs and Expenses:
Cost of sales		623,158	74.5			715,582		73.5			1,842,788	73.7			2,041,721		73.5
Operating and administrative		197,739	23.6			248,418		25.5			590,066	23.6			705,667		25.4
Goodwill impairment charge		—	—			280,014		28.8			—	—			280,014		10.1
Asset impairment charge		—	—			—		—			—	—			5,050		0.2
Interest expense (including amortization of deferred financing costs)		10,519	1.3			13,832		1.4			31,374	1.3			41,305		1.5
Loss on debt extinguishment		—	—			—		—			—	—			8,576		0.3

		831,416	99.4			1,257,846		129.2			2,464,228	98.6			3,082,333		110.9

Income (Loss) from Continuing Operations before Income Taxes		5,141	0.6			(284,038	)	-29.2			35,671	1.4			(302,929	)	-10.9
Provision (Benefit) for Income Taxes		1,964	0.2			(34,130	)	-3.5			13,055	0.5			(42,570	)	-1.5

Net Income (Loss) from Continuing Operations	$	3,177	0.4	%	$	(249,908	)	-25.7	%	$	22,616	0.9	%	$	(260,359	)	-9.4	%

Thirteen Weeks Ended September 27, 2014 Compared With Thirteen Weeks Ended September 28, 2013

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 $973.8 million for the third quarter 2014, an increase of $137.3 million, or 16.4% from $836.6 million for the third quarter 2013. The increase primarily reflects the benefit of new and acquired stores, partially offset by a decrease in same-store sales. Same-store sales from continuing operations declined 2.7%, which was due to a 5.2% decrease in the number of customer transactions, partially offset by a 2.6% increase in average transaction size. Same-store sales continue to be negatively impacted by competitive store openings and the weak economic environment in the Company’s core markets.

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.

Gross profit was $258.2 million for the third quarter 2014, an increase of $44.8 million, or 21.0%, from $213.4 million for the third quarter 2013. Gross profit, as a percentage of net sales, was 26.5% and 25.5% for the third quarter 2014 and 2013, respectively. The increase in gross profit as a percentage of net sales primarily reflects reduced promotional spend, a benefit for the reduction in the LIFO reserve due to the disposition of inventory as a result of the closure of the Stevens Point Warehouse and an increased perishable sales mix, partially offset by increased shrink, including the effect of the higher perishable mix of Illinois stores and the start-up impact of new or acquired Illinois stores.

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 $248.4 million for the third quarter 2014, an increase of $50.7 million, or 25.6%, from $197.7 million for the third quarter 2013. Operating and administrative expenses, as a percentage of net sales, increased to 25.5% for the third quarter 2014 compared with 23.6% for the third quarter 2013. The increase in the rate as a percentage of net sales was primarily due to increased start-up labor costs and higher occupancy and labor costs in new or acquired Illinois stores relative to the chain average. The Company also experienced reduced fixed cost leverage in its core business resulting from lower sales.

Goodwill Impairment Charge. During the third quarter of fiscal 2014, the Company’s market capitalization experienced a significant decline. As a result, management updated its annual review of goodwill for impairment and concluded that the carrying amount of goodwill exceeded its estimated fair value, resulting in a pre-tax, non-cash goodwill impairment charge of $280.0 million ($247.1 million after-tax) during the third quarter 2014.

Interest Expense. Interest expense (including the amortization of deferred financing costs) was $13.8 million for the third quarter 2014, compared to $10.5 million for the third quarter 2013. The increase was due primarily to interest expense on the 2020 Notes, offset by reduced interest expense on our term loan.

Income Taxes. Income tax benefit was $34.1 million for the third quarter 2014, a decrease of $36.1 million from a provision for income taxes of $2.0 million for the third quarter 2013. The effective income tax rate was a benefit of (12.0%) for the third quarter 2014 and 38.2% for the third quarter 2013. The provision for income taxes and effective tax rate for the third quarter 2014 reflects the impact of the goodwill impairment charge recorded during the third quarter 2014, the majority of which is non-deductible for tax purposes, as well as the valuation allowance recorded during the third quarter 2014.

Thirty-nine Weeks Ended September 27, 2014 Compared With Thirty-nine Weeks Ended September 28, 2013

Net Sales. Net sales were $2,779.4 million for the thirty-nine weeks ended September 27, 2014, an increase of $279.5 million, or 11.2% from $2.499.9 million for the thirty-nine weeks ended September 28, 2013. The increase primarily reflects the benefit of new and acquired stores, partially offset by a decrease in same-store sales. Same-store sales from continuing operations declined 3.1%, which was due to a 5.2% decrease in the number of customer transactions, partially offset by a 2.2% increase in average transaction size. Same-store sales continue to be negatively impacted by competitive store openings and the weak economic environment in the Company’s core markets.

Gross Profit. Gross profit was $737.7 million for the thirty-nine weeks ended September 27, 2014, an increase of $80.6 million, or 12.3%, from $657.1 million for the thirty-nine weeks ended September 28, 2013. Gross profit, as a percentage of net sales, was 26.5% for the thirty-nine weeks ended September 27, 2014 compared to 26.3% for the thirty-nine weeks ended and September 28, 2013. The increase in gross profit as a percentage of net sales primarily reflects reduced promotional spend, a benefit for the reduction in the LIFO reserve due to the disposition of inventory as a result of the closure of the Stevens Point Warehouse and an increased perishable sales mix, partially offset by increased shrink, including the effect of the higher perishable mix of Illinois stores and the start-up impact of new or acquired Illinois stores.

Operating and Administrative Expenses. Operating and administrative expenses were $705.7 million for the thirty-nine weeks ended September 27, 2014, an increase of $115.6 million, or 19.6%, from $590.1 million for the thirty-nine weeks ended September 28, 2013. Operating and administrative expenses, as a percentage of net sales, increased to 25.4% for the thirty-nine weeks ended September 27, 2014 compared to 23.6% for the thirty-nine weeks ended September 28, 2013. The increase in the rate as a percentage of net sales was primarily due to increased start-up labor costs and higher occupancy and labor costs in new and acquired Illinois stores relative to the chain average. The Company also experienced reduced fixed cost leverage in its core business resulting from lower sales. The Company also incurred $1.1 million in severance charges related to the closure of the Stevens Point Warehouse and $1.3 million in severance charges for corporate employees during the thirty-nine weeks ended September 27, 2014.

Asset Impairment Charges. During the thirty-nine weeks ended September 27, 2014, the Company recognized a non-cash asset impairment charge of $5.1 million related to adjustments to the carrying value of the property and equipment at the Stevens Point distribution facility which closed during the thirty-nine weeks ended September 27, 2014.

Interest Expense. Interest expense (including the amortization of deferred financing costs) was $41.3 million for the thirty-nine weeks ended September 27, 2014, compared to $31.4 million for the thirty-nine weeks ended September 28, 2013. The increase was due primarily to interest expense on the 2020 Notes, offset by reduced interest expense on our term loan.

Loss on Debt Extinguishment. In connection with our debt refinancing in March 2014, we recognized a loss on debt extinguishment of $9.0 million, of which $8.6 million is related to continuing operations.

Income Taxes. Income tax benefit was $42.6 million for the thirty-nine weeks ended September 27, 2014, a decrease of $55.6 million from a provision for income taxes of $13.1 million for the thirty-nine weeks ended September 28, 2013. The effective income tax rate was a benefit of (14.1%) for the thirty-nine weeks ended September 27, 2014 and 36.6% for the thirty-nine weeks ended September 28, 2013. The provision for income taxes and effective tax rate for the thirty-nine weeks ended September 27, 2014 reflects the impact of the goodwill impairment charge recorded during the third quarter 2014, the majority of which is non-deductible for tax purposes, as well as the valuation allowance recorded during the third quarter 2014.

DISCONTINUED OPERATIONS

During the second quarter of 2014, the Company entered into definitive agreements to sell 18 Rainbow stores in the Minneapolis / St. Paul market to a group of local grocery retailers ( “Buyers”), including SUPERVALU INC. (“Rainbow Store Sale”). The aggregate sale price for the 18 Rainbow stores was $65 million in cash plus the proceeds from inventory that was sold to the Buyers at the closing of the Rainbow Store Sale. The total proceeds received from the Rainbow Store Sale were $76.9 million. In addition, as part of the transaction, the Buyers assumed the lease obligations and certain multi-employer pension liabilities related to the acquired stores.

In addition, during the second quarter of 2014, the Company announced its intention to exit the Minneapolis / St. Paul market entirely. The remaining nine Rainbow stores not included in the Rainbow Store Sale were closed during the third quarter of 2014. During the second quarter of 2014, the Company evaluated the future cash flows expected from this long-lived asset group and recorded a non-cash impairment charge of $11.1 million related to the assets of the Rainbow stores that were closed in the third quarter of 2014.


	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	September 28, 2013		September 27, 2014			September 28, 2013		September 27, 2014
Net Sales	$	147,605	$	18,611		$	448,094	$	290,986

Income (loss) from discontinued operations, before income taxes:	$	1,055	$	(45,751	)	$	6,835	$	(79,840	)
Gain on disposal of operations, before income taxes:		—		3,010			—		1,654

Total income (loss) from discontinued operations before income taxes		1,055		(42,741	)		6,835		(78,186	)
Income taxes (benefit) on discontinued operations		465		(8,828	)		3,565		(22,542	)

Income (loss) from discontinued operations, net of tax	$	590	$	(33,913	)	$	3,270	$	(55,644	)

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 28, 2013			September 27, 2014
Net cash provided by operating activities⁽¹⁾	$	62,956		$	16,480
Net cash (used in) provided by investing activities⁽¹⁾		(33,496	)		6,016
Net cash used in financing activities ⁽¹⁾		(24,795	)		(57,739	)

Net increase (decrease) in cash and cash equivalents	$	4,665		$	(35,243	)

Cash and cash equivalents at end of period⁽²⁾	$	77,554		$	46,935

⁽¹⁾	Includes activities from continuing operations and discontinued operations.

⁽²⁾	Includes cash and cash equivalents included in assets of discontinued operations.

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $16.5 million for the thirty-nine weeks ended September 27, 2014 compared to $63.0 million for the thirty-nine weeks ended September 28, 2013. The decrease in cash provided by operating activities was due primarily to lower operating income and higher interest payments, partially offset by lower payments for income taxes.

Net Cash (Used in) Provided by Investing Activities. Net cash provided by investing activities for the thirty-nine weeks ended September 27, 2014 was $6.0 million compared to cash used in investing activities of $33.5 million for the thirty-nine weeks ended September 28, 2013. The increase is primarily due to the proceeds of the Rainbow Store Sale of $76.9 million, partially offset by higher capital expenditures from the remodeling of the Dominick’s stores acquired from Safeway during the fourth quarter of 2013 and timing of capital expenditures for new stores. Total capital expenditures for Fiscal 2014, excluding acquisitions, are estimated to be approximately $90-$95 million.

Net Cash Used in Financing Activities. Net cash used in financing activities for the thirty-nine weeks ended September 27, 2014 was $57.7 million compared to $24.8 million for the thirty-nine weeks ended September 28, 2013. Net cash used in the thirty-nine weeks ended September 27, 2014 primarily consisted of payments of debt and capital lease obligations of $521.3 million primarily to refinance our existing indebtedness and related financing costs of $5.6 million, offset somewhat by the net proceeds from our term loan of $450.8 million and net proceeds from our common stock offering of $19.3 million. Net cash used by financing activities 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.

Offering of Common Stock

On February 12, 2014, we completed a public offering of 10,170,989 shares of our common stock at a price of $7.00 per share, which included 2,948,113 shares sold by Roundy’s and 7,222,876 shares sold by existing shareholders. The Company received approximately $20.6 million in gross proceeds from the offering, or approximately $19.3 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds were used for general corporate purposes, including funding working capital and operating expenses as well as capital expenditures related to the eleven Dominick’s stores acquired from Safeway during the fourth quarter of 2013 in the Chicago Stores Acquisition.

2014 Credit Facilities

On March 3, 2014, Roundy’s Supermarkets, Inc. (“RSI”), the wholly owned operating subsidiary of the Company, refinanced its existing credit facilities (the “2014 Refinancing”), and entered into two new credit facilities, a $460 million term loan (the “New Term Facility”) and a $220 million asset-based revolving credit facility (the “New Revolving Facility”, together with the New Term Facility, the “2014 Credit Facilities”). We used the proceeds from the New Term Facility, together with existing cash, to repay our existing term loan, including all accrued interest thereon and related costs, fees and expenses. The New Term Facility has a maturity date of March 3, 2021; provided that the maturity date will accelerate to September 15, 2020 if our 10.250% Senior Secured Notes due in 2020 (the “2020 Notes”) are not refinanced in full prior to such date. The New Revolving Facility has a maturity date of March 3, 2019.

The New Term Facility bears interest, at our option, at (i) adjusted LIBOR (subject to a minimum floor of 1.00%) plus 4.75% or (ii) a base rate plus 3.75%.

The New Revolving Facility bears interest, at our option, at (i) adjusted LIBOR plus a margin of 1.50%-2.00% per annum or (ii) a base rate plus a margin of 0.50%-1.00% per annum. In either case, the margin is based on RSI’s utilization of the New Revolving Facility. In addition, there is a quarterly fee payable in an amount equal to either 0.25% or 0.375% per annum of the undrawn portion of the New Revolving Facility. We may use borrowings under the New Revolving Facility for ongoing working capital and general corporate purposes and any other use not prohibited by the credit agreement governing the New Revolving Facility. Borrowing availability under the New Revolving Facility at any time is based on the value of certain eligible inventory, accounts receivable and pharmacy prescription files and is subject to additional reserves and other adjustments.

The terms of the 2014 Credit Facilities contain customary affirmative covenants. The terms of the 2014 Credit Facilities also contain customary negative covenants, including restrictions on (i) dividends on, and redemptions of, equity interest and other restricted payment; (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) negative pledges and restrictions on subsidiary distributions; and (viii) optional payments and modifications of certain debt instruments.

2020 Notes

On December 20, 2013, RSI completed the private placement of $200 million of 2020 Notes that mature on December 15, 2020. The Company will pay interest at a rate of 10.25% on the 2020 Notes semiannually, commencing on June 15, 2014. The 2020 Notes were issued with a 3.01% discount, which will be amortized over the seven year term of the 2020 Notes. The Company capitalized $4.6 million of financing costs related to the issuance of the 2020 Notes which will be also amortized over the seven year term of the 2020 Notes.

The Company used the net proceeds from the issuance of the 2020 Notes to prepay approximately $148 million in principal amount of the Company’s outstanding term loan and to fund the Chicago Stores Acquisition. The Company capitalized $0.6 million related to an amendment fee paid to lenders of the Credit Facilities. In addition, the Company expensed $3.5 of unamortized loan costs, including $2.0 million of previously capitalized financing costs and $1.5 million of the unamortized discount on the Term Loan.

our and the Guarantors’ assets, which security interests rank junior to the security interests in such assets that secure our 2014 Credit Facilities. The 2020 Notes and the guarantees thereof are secured by a second priority lien on substantially all the assets owned by RSI and the guarantors, subject to permitted liens and certain exceptions. These liens are junior in priority to the first-priority liens on the same collateral securing the 2014 Credit Facilities (as well as certain hedging and cash management obligations owed to lenders thereunder or their affiliates) and to certain other permitted liens under the indenture.

The indenture governing the 2020 Notes generally provides that RSI can pay dividends and make other distributions to its parent companies in an amount not to exceed (i) 50% of RSI’s consolidated net income for the period beginning September 29, 2013 and ending as of the end of the last fiscal quarter before the proposed payment for which financial statements are available, plus (ii) 100% of the aggregate amount of cash and the fair market value of any assets or property received by RSI after December 20, 2013 from the issuance and sale of equity interests of RSI (subject to certain exceptions), plus (iii) 100% of the aggregate amount of cash and the fair market value of any assets or property contributed to the capital of RSI after December 20, 2013, plus (iv) 100% of the aggregate amount received in cash and the fair market value of assets or property received after December 20, 2013 from the sale of certain investments or the sale of certain subsidiaries, provided that certain conditions are satisfied, including that RSI has a consolidated interest coverage ratio of greater than 2.0 to 1.0. The restrictions on dividends and other distributions contained in the indenture are subject to certain exceptions, including (i) the payment of dividends to permit any of its parent companies to pay taxes, general corporate and operating expenses, customary compensation of officers and employees of such parent companies and costs related to an offering of such parent company’s equity and (ii) dividends and other distributions in an aggregate amount not to exceed $10.0 million in any calendar year, with unused amounts being carried forward to future periods.

Prior Credit Facilities

Prior to the 2014 Refinancing, our long-term debt included a senior credit facility consisting of a $675 million term loan (the ‘‘2012 Term Loan’’) and a $125 million revolving credit facility (the ‘‘2012 Revolving Facility’’ and together with the 2012 Term Loan, the ‘‘2012 Credit Facilities”). Borrowings under the 2012 Credit Facilities bore 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%.

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, costs related to acquisitions, costs related to debt financing activities, goodwill and asset impairment charges, loss on the disposition of assets, one-time costs due to the closing of a distribution facility and Adjusted EBITDA from discontinued operations. 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.

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 28, 2013 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 from continuing operations 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 28, 2013 and September 27, 2014 (in thousands):


	Thirteen Weeks Ended
	September 28, 2013								September 27, 2014
	Continuing Operations			Discontinued Operations		Total			Continuing Operations			Discontinued Operations			Total
Net Income (loss)	$	3,177		$	590	$	3,767		$	(249,908	)	$	(33,913	)	$	(283,821	)
Interest expense		9,993			1,419		11,412			13,277			586			13,863
Provision (benefit) for income taxes		1,964			465		2,429			(34,130	)		(8,828	)		(42,958	)
Depreciation and amortization expense		13,820			2,163		15,983			17,271			—			17,271
LIFO charge (benefit)		230			—		230			(4,517	)		—			(4,517	)
Amortization of deferred financing costs		526			47		573			555			—			555
Non-cash stock compensation expense		824			—		824			772			—			772
Employee severance costs		—			—		—			84			2,196			2,280
Goodwill impairment charge		—			—		—			280,014			—			280,014
(Gain)/Loss on disposition of assets		—			—		—			464			(3,010	)		(2,546	)
Stevens Point Severance and one-time costs		—			—		—			1,763			—			1,763
Closed facility charge		—			—		—			—			9,950			9,950
Multi-employer pension withdrawal charge		—			—		—			—			23,901			23,901
Reversal of pension withdrawal liability		(1,006	)		—		(1,006	)		—			—			—
Loss on debt extinguishment		—			—		—			—			—			—

Adjusted EBITDA	$	29,528		$	4,684	$	34,212		$	25,645		$	(9,118	)	$	16,527


	Thirty-nine Weeks Ended
	September 28, 2013								September 27, 2014
	Continuing Operations			Discontinued Operations		Total			Continuing Operations			Discontinued Operations			Total
Net Income (loss)	$	22,616		$	3,270	$	25,886		$	(260,359	)	$	(55,644	)	$	(316,003	)
Interest expense		29,817			4,647		34,464			39,618			2,632			42,250
Provision (benefit) for income taxes		13,055			3,565		16,620			(42,570	)		(22,542	)		(65,112	)
Depreciation and amortization expense		42,202			6,591		48,793			48,065			3,471			51,536
LIFO charge (benefit)		900			—		900			(4,073	)		—			(4,073	)
Amortization of deferred financing costs		1,557			163		1,720			1,687			51			1,738
Non-cash stock compensation expense		1,975			—		1,975			2,845			—			2,845
Employee severance costs		—			—		—			1,251			2,196			3,447
Asset impairment charges		—			—		—			5,050			11,142			16,192
Goodwill impairment charge		—			—		—			280,014			—			280,014
(Gain)/Loss on disposition of assets		—			—		—			464			(1,654	)		(1,190	)
Stevens Point Severance and one-time costs		—			—		—			1,763			—			1,763
Closed facility charge		—			—		—			—			9,950			9,950
Multi-employer pension withdrawal charge		—			—		—			—			49,697			49,697
Reversal of pension withdrawal liability		(1,006	)		—		(1,006	)		—			—			—
Loss on debt extinguishment		—			—		—			8,576			472			9,048

Adjusted EBITDA	$	111,116		$	18,236	$	129,352		$	82,331		$	(229	)	$	82,102

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.

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 28, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no 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 28, 2013.

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 27, 2014, 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 27, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 28, 2013.

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

Results of Operations and Financial Condition.

On November 5, 2014, the Company issued a press release announcing financial information for its third quarter ended September 27, 2014. The press release also included revised quarterly financial information for fiscal 2013 and 2014 which includes 27 Rainbow stores as discontinued operations. A copy of the press release is furnished herewith as Exhibit 99.1. This information shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

Item 6. Exhibits

Reference is made to the separate exhibit index contained on page 32 filed herewith.

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 5, 2014

By:		/s/ MICHAEL P. TURZENSKI
		Michael P. Turzenski
		Group Vice President and Chief Financial Officer

Date: November 5, 2014

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

99.1		Press Release dated November 5, 2014

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company