XNAS:NAFC Quarterly Report 10-Q Filing - 3/24/2012

Effective Date 3/24/2012

 

 

Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

                                                                                              (Mark One)

 

x

 

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

 

 

 

For the quarterly period (12 weeks) ended March 24, 2012

 

or

 

¨

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

 

 

 

For the transition period from ______ to ________

 

Commission File No. 0-785

 

NASH-FINCH COMPANY

 

(Exact Name of Registrant as Specified in its Charter)

 

 

DELAWARE

41-0431960

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

 

7600 France Avenue South,

P.O. Box 355

Minneapolis, Minnesota

 

55440-0355

(Address of principal executive offices)

(Zip Code)

 

(952) 832-0534

(Registrant's telephone number including area code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___

 

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

 

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

 

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

 

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

 

As of April 18, 2012, 12,221,082 shares of Common Stock of the Registrant were outstanding.

 

 



 

 

 

Table of Contents

NASH-FINCH COMPANY

 

Index

 

 

 

 

 

Page No.

Part I –  FINANCIAL INFORMATION

 

 

 

 

 

Item 1.   Financial Statements  

 

 

 

 

 

Consolidated Statements of Income

 

2

Consolidated Statements of Comprehensive Income

 

3

Consolidated Balance Sheets

 

4

Consolidated Statements of Cash Flows

 

5

Notes to Consolidated Financial Statements

 

6

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

 

14

 

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

 

20

 

 

 

Item 4.   Controls and Procedures

 

20

 

 

 

Part II –  OTHER INFORMATION 

 

 

 

 

 

Item 1.     Legal Proceedings

 

20

 

 

 

Item 1A.  Risk Factors

 

20

 

 

 

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

 

20

 

 

 

Item 3.     Defaults upon Senior Securities

 

20

 

 

 

Item 4.     Mine Safety Disclosures

 

20

 

 

 

Item 5.     Other Information

 

20

 

 

 

Item 6.     Exhibits

 

21

 

 

 

SIGNATURES

 

22

 

 

 

1

 


 
 

 

Table of Contents

PART I. – FINANCIAL INFORMATION

ITEM 1.  Financial Statements

 

 

NASH-FINCH COMPANY AND SUBSIDIARIES

         

Consolidated Statements of Income (unaudited)

         

(In thousands, except per share amounts)

         
           
   

12 Weeks Ended

 
   

March 24,

 

March 26,

 
   

2012

 

2011

 
           

Sales

$

1,058,634

 

1,099,809

 

Cost of sales

 

977,911

 

1,010,820

 

Gross profit

 

80,723

 

88,989

 
           

Other costs and expenses:

         

Selling, general and administrative

 

58,312

 

62,577

 

Depreciation and amortization

 

8,204

 

8,583

 

Interest expense

 

5,138

 

5,459

 

Total other costs and expenses

 

71,654

 

76,619

 
           

Earnings before income taxes

 

9,069

 

12,370

 
           

Income tax expense

 

3,615

 

4,889

 

Net earnings

$

5,454

 

7,481

 
           

Net earnings per share:

         

Basic

$

0.42

 

0.59

 

Diluted

$

0.42

 

0.57

 
           

Declared dividends per common share

$

0.18

 

0.18

 
           

Weighted average number of common shares outstanding and common equivalent shares outstanding:

         

Basic

 

12,951

 

12,719

 

Diluted

 

13,135

 

13,016

 
           

See accompanying notes to consolidated financial statements.

 

 

 

2



Table of Contents

 

 

 

 

 

 

NASH-FINCH COMPANY AND SUBSIDIARIES

         

Consolidated Statements of Comprehensive Income (unaudited)

     

(In thousands, except per share amounts)

         
       

12 Weeks Ended

 

(In thousands)

   

 

March 24, 2012

 

March 26, 2011

 

               

Net earnings

$

5,454

 

7,481

 

Change in fair value of derivatives, net of tax  of $0 and $48, respectively

 

-

 

76

 

Comprehensive income

$

5,454

 

7,557

 
See accompanying notes to consolidated financial statements.

 

 

3


 

NASH-FINCH COMPANY AND SUBSIDIARIES

       

Consolidated Balance Sheets

       

(In thousands, except per share amounts)

       

   

March 24,

 

December 31,

 

   

2012

 

2011

  (unaudited)

Assets

 

Current assets:

 

 

   

 Cash

 

$

700

 

773

 Accounts and notes receivable, net

 

 

246,603

 

243,763

 Inventories

 

 

322,386

 

308,621

 Prepaid expenses and other

 

 

15,859

 

17,329

 Deferred tax asset, net

 

 

6,157

 

6,896

Total current assets

 

 

591,705

 

577,382

     

 

 

 

Notes receivable, net

 

23,442

 

23,221

Property, plant and equipment:

 

 

 

 

 Property, plant and equipment

 

 

688,060

 

686,794

 Less accumulated depreciation and amortization

 

 

(418,486)

 

(413,695)

Net property, plant and equipment

 

269,574

 

273,099

     

 

 

 

Goodwill

 

 

171,092

 

170,941

Customer contracts and relationships, net

 

14,863

 

15,399

Investment in direct financing leases

 

2,603

 

2,677

Other assets

 

11,240

 

11,049

Total assets

 

$

1,084,519

 

1,073,768

           

Liabilities and Stockholders' Equity

       

Current liabilities:

       

Current maturities of long-term debt and capital lease obligations

 

$

2,533

 

2,932

Accounts payable

 

 

234,898

 

234,722

Accrued expenses

 

 

49,199

 

61,459

 Total current liabilities

 

 

286,630

 

299,113

     

 

 

 

Long-term debt

 

298,146

 

278,546

Capital lease obligations

 

15,358

 

15,905

Deferred tax liability, net

 

41,002

 

40,671

Other liabilities

 

35,657

 

34,910

Commitments and contingencies

 

-

 

-

     

 

 

 

Stockholders' equity:

 

 

 

 

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

 

 

-

 

-

Common stock - $1.66 2/3 par value. Authorized 50,000 shares; issued 13,751 and 13,727 shares, respectively

 

 

22,918

 

22,878

 Additional paid-in capital

 

 

118,191

 

118,222

 Common stock held in trust

 

 

(1,254)

 

(1,254)

 Deferred compensation obligations

 

 

1,254

 

1,254

 Accumulated other comprehensive loss

 

 

(14,707)

 

(14,707)

 Retained earnings

 

 

333,564

 

330,470

 Common stock in treasury; 1,541 shares

 

 

(52,240)

 

(52,240)

Total stockholders' equity

 

 

407,726

 

404,623

Total liabilities and stockholders' equity

 

$

1,084,519

 

1,073,768

           

See accompanying notes to consolidated financial statements.

 

 

4


 
 

 

NASH-FINCH COMPANY AND SUBSIDIARIES

       

Consolidated Statements of Cash Flows (unaudited)

       

(In thousands)

       
     

12 Weeks Ended

     

March 24,

 

March 26,

     

2012

 

2011

Operating activities:

       

Net earnings

 

$

5,454

 

7,481

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

 

8,204

 

8,583

Amortization of deferred financing costs

 

 

290

 

423

Non-cash convertible debt interest

 

 

1,390

 

1,292

Rebateable loans

 

 

1,155

 

1,204

Provision for (recovery of) bad debts

 

 

(279)

 

444

Provision for lease reserves

 

 

-

 

448

Deferred income tax expense

 

 

277

 

1,976

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

 

 

(476)

 

1,775

LIFO charge

 

 

182

 

501

Asset impairments

 

 

62

 

-

Share-based compensation

 

 

1,094

 

1,159

Deferred compensation

 

 

353

 

332

Other

 

 

(45)

 

(111)

Changes in operating assets and liabilities, net of effects of acquisitions:

 

       

Accounts and notes receivable

 

 

(2,556)

 

(5,687)

Inventories

 

 

(13,946)

 

5,098

Prepaid expenses

 

 

(1,721)

 

(688)

Accounts payable

 

 

(9,768)

 

(10,232)

Accrued expenses

 

 

(11,167)

 

(9,485)

Income taxes payable

 

 

2,699

 

732

Other assets and liabilities

 

 

(169)

 

369

Net cash provided by (used in) operating activities

   

(18,967)

 

5,614

           

Investing activities:

       

 Disposal of property, plant and equipment

 

 

635

 

323

Additions to property, plant and equipment

 

 

(4,063)

 

(28,966)

Loans to customers

 

 

(1,560)

 

(519)

Payments from customers on loans

 

 

251

 

336

Corporate-owned life insurance, net

 

 

(178)

 

(153)

Other

   

(151)

 

-

Net cash used in investing activities

   

(5,066)

 

(28,979)

Financing activities:

       

Proceeds from revolving debt

 

 

18,600

 

22,600

Dividends paid

 

 

(2,198)

 

(2,180)

Payments of long-term debt

 

 

(765)

 

(16)

Payments of capitalized lease obligations

 

 

(571)

 

(574)

Increase in outstanding checks

 

 

9,396

 

3,457

Payments of deferred financing costs

 

 

(41)

 

-

Tax benefit from share-based compensation

 

 

66

 

-

Other

   

(527)

 

-

Net cash provided by financing activities

   

23,960

 

23,287

Net decrease in cash

   

(73)

 

(78)

Cash at beginning of year

   

773

 

830

Cash at end of period

 

$

700

 

752

           

See accompanying notes to consolidated financial statements.

 

 

5


 
 

Nash-Finch Company and Subsidiaries

Notes to Consolidated Financial Statements

March 24, 2012

 

Note 1 – Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  For further information, refer to the consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

                The accompanying unaudited consolidated financial statements include all adjustments which are, in the opinion of management, necessary to present fairly the financial position of Nash-Finch Company and our subsidiaries (“Nash Finch” or “the Company”) at March 24, 2012, and December 31, 2011, the results of operations for the 12 weeks ended March 24, 2012 (“first quarter 2012”), and March 26, 2011 (“first quarter 2011”), and cash flows for the first quarter 2012 and 2011.  Adjustments consist only of normal recurring items, except for any items discussed in the notes below.  All material intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements.  Results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.


                The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

Note 2 – Inventories

We use the LIFO method for valuation of a substantial portion of inventories.  An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs.  Because these estimates are subject to many factors beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation.  If the FIFO method had been used, inventories would have been approximately $87.5 million higher on March 24, 2012 and $87.3 million higher on December 31, 2011.  We recorded a LIFO charge of $0.2 million during the first quarter 2012 as compared to a LIFO charge of $0.5 million during the first quarter 2011.

 

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Table of Contents

               

Note 3 – Share-Based Compensation

 

The Company is required to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.  The value of the portion of the awards ultimately expected to vest is recognized as expense over the requisite service period.  We recognized share-based compensation expense as a component of selling, general and administrative expense in our Consolidated Statements of Income in the amount of $1.1 million during the first quarter 2012 versus $1.2 million during the first quarter 2011.

 

We have four equity compensation plans under which incentive stock options, non-qualified stock options and other forms of share-based compensation have been, or may be, granted primarily to key employees and non-employee members of the Board of Directors.  These plans include the 2009 Incentive Award Plan (as Amended and Restated as of March 2, 2010) (“2009 Plan”), the 2000 Stock Incentive Plan (as amended and restated on July 14, 2008) (“2000 Plan”), the Director Deferred Compensation Plan, and the 1997 Non-Employee Director Stock Compensation Plan.  These plans are more fully described in Part II, Item 8 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 under the caption “Footnote 10 – Share-based Compensation Plans” and in our Definitive Proxy Statement on Schedule 14A filed on April 4, 2012.

 

Since 2005, awards have taken the form of performance units (including share units pursuant to our Long-Term Incentive Plan (“LTIP”), restricted stock units (“RSUs”) and Stock Appreciation Rights (“SARs”)). 

 

Performance units have been granted during each of fiscal years 2005 through 2012 pursuant to our LTIP.  These units vest at the end of a three-year performance period.  104,111 units under the 2008 plan were settled for approximately 122,000 shares of our common stock during the second quarter 2011, of which approximately 96,000 were deferred by recipients until termination of employment as provided in the plan.  On December 31, 2011 the 90,670 units outstanding under the 2009 LTIP vested and were cancelled without conversion to shares of common stock because the Company did not achieve the performance metrics of the 2009 LTIP.

 

During the first quarter of 2012, a total of 207,035 units were granted pursuant to our 2012 LTIP.  Depending on a comparison of the Company’s three-year compound annual growth rate of Consolidated EBITDA results to the Company’s peer group and the Company’s ranking on absolute return on net assets and compound annual growth rate for return on net assets among the companies in the peer group, a participant could receive a number of shares ranging from zero to 200% of the number of performance units granted.   Compensation expense equal to the grant date fair value (for shares expected to vest) is recorded over the three-year performance period as the units can only be settled in stock. 

 


7

 


 
 

During fiscal 2006 through 2010, RSUs were awarded to certain executives of the Company.  Awards vest in increments over the term of the grant or cliff vest on the fifth anniversary of the grant date, as designated in the award documents.  In addition to the time vesting criteria, awards granted in 2008 and 2009 to two of the Company’s executives include performance vesting conditions.  The Company records expense for such awards over the service vesting period if the Company anticipates the performance vesting conditions will be satisfied.

 

On December 17, 2008, in connection with the Company’s announcement of its planned acquisition of certain military distribution assets of GSC Enterprises, Inc., certain key executives of the Company were granted a total of 267,345 SARs with a per share price of $38.44.  As a result of the expiration of the vesting period of the grant on January 31, 2012, all remaining compensation expense to be recorded for this grant was expensed in the first quarter of fiscal 2012.

 

                As of December 31, 2011 approximately 267,300 SARs with a weighted average base/exercise price per SAR of $38.44 were outstanding and unvested.  No SARs were granted or exercised during the first quarter 2012, however approximately 23,800 SARs were forfeited by a recipient due to termination of employment.  The closing price per share of Nash Finch common stock was below the minimum of $55.00 required for 90 consecutive market days before January 31, 2012 for the SARs to be exercisable.  Therefore, the remaining 243,500 SARs expired unexercised.  The Company wrote-off the related deferred tax asset of approximately $0.8 million with an offsetting entry to paid-in capital during the first quarter of fiscal 2012.

 

The following table summarizes activity in our share-based compensation plans during the first quarter of 2012:

 

(in thousands, except vesting periods)

 

Service Based Grants (Board Units and RSUs)

 

Weighted Average Remaining Restriction/ Vesting Period (Years)

 

Performance Based Grants (LTIP & Performance RSUs)

 

Weighted Average Remaining Restriction/ Vesting Period (Years)

Outstanding at December 31, 2011

 

597.9

 

0.2

 

568.2

 

0.7

Granted

 

0.8

 

 

 

207.2

 

 

Forfeited/cancelled

 

-

     

(25.6)

   

Restrictions lapsed/ units settled

 

(47.4)

     

-

   

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

 

8.8

 

 

 

2.1

 

 

Outstanding at March 24, 2012

 

560.1

 

0.2

 

751.9

 

1.1

   

 

 

 

 

 

 

 

Exercisable/unrestricted at December 31, 2011

 

468.4

 

 

 

319.9

 

 

Exercisable/unrestricted at March 24, 2012

 

477.2

 

 

 

322.0

 

 

                 

 

(1)       “Shares deferred upon vesting/settlement” above are net of the performance adjustment factor applied to the “units settled” for the participants that deferred shares as provided in the plan.

 

The weighted-average grant-date fair value of time vesting equity units and performance vesting units granted during the first quarter of 2012 was $28.05 and $29.30, respectively. 

 


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Table of Contents


Note 4 – Fair Value Measurements

 

We account for instruments recorded at fair value under the established fair value framework.  The framework also applies under other accounting pronouncements that require or permit fair value measurements.  

 

The fair value hierarchy for disclosure of fair value measurements is as follows:

Level 1:  Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:  Quoted prices, other than quoted prices included in Level 1, which are observable for the assets or liabilities, either directly or indirectly.

Level 3:  Inputs that are unobservable for the assets or liabilities.

 

As of March 24, 2012 and December 31, 2011, we are not a party to any financial instruments that would be subject to a fair value measurement. 

 

Other Financial Assets and Liabilities  

 

 Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable.  Financial liabilities with carrying values approximating fair value include accounts payable and outstanding checks. The carrying value of these financial assets and liabilities approximates fair value due to their short maturities.

 

The fair value of notes receivable approximates the carrying value at March 24, 2012 and December 31, 2011.  Substantially all notes receivable are based on floating interest rates which adjust to changes in market rates.

 

Long-term debt, which includes the current maturities of long-term debt, at March 24, 2012, had a carrying value and fair value of $298.4 million and $298.6 million, respectively, and at December 31, 2011, had a carrying value and fair value of $279.1 million and $276.3 million, respectively. The fair value is based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities.

 

During the first quarter of 2012, we recognized $0.1 million in asset impairments as compared to no asset impairments during the first quarter of 2011.  We utilize a discounted cash flow model that incorporates unobservable level 3 inputs to test for long-lived asset impairment. 

 

Note 5 – Long‑term Debt and Bank Credit Facilities

 

Total debt outstanding was comprised of the following:

 

(In thousands)

 

March 24, 2012

 

December 31, 2011

Asset-backed credit agreement:

       

Revolving credit

$

154,000

 

135,400

Senior subordinated convertible debt, 3.50% due in 2035

 

143,871

 

142,481

Industrial development bond, 5.60% due in various

 

 

 

 

installments through 2014

 

495

 

1,260

Total debt

 

298,366

 

279,141

Less current maturities

 

(220)

 

(595)

Long-term debt

$

298,146

 

278,546


Asset-backed Credit Agreement

 

Our credit agreement is an asset-backed loan consisting of a $520.0 million revolving credit facility, which includes a $50.0 million Swing Line sub-facility and a $75.0 million letter of credit sub-facility (the “Revolving Credit Facility”).  We are required by the Credit Agreement to maintain a reserve of $100.0 million with respect to the Senior Subordinated Convertible Debt, which reserve shall increase to $150.0 million on December 15, 2012.  Provided no default is existing or would arise, the Company may from time-to-time, request that the Revolving Credit Facility be increased by an aggregate amount (for all such requests) not to exceed $250.0 million.

 


9

 


 
 

  The Company can elect, at the time of borrowing, for loans to bear interest at a rate equal to the base rate, as defined in the credit agreement, or LIBOR plus a margin. The LIBOR interest rate margin was 1.75% as of March 24, 2012, and can vary quarterly in 0.25% increments between three pricing levels ranging from 1.50% to 2.00% based on the excess availability, which is defined in the credit agreement as (a) the lesser of (i) the borrowing base; or (ii) the aggregate commitments; minus (b) the aggregate of the outstanding credit extensions.  As of March 24, 2012, $252.4 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $13.6 million of outstanding letters of credit primarily supporting workers’ compensation obligations.  The Revolving Credit Facility has a 5-year term and will be due and payable in full on December 21, 2016.

 

                The Credit Agreement contains no financial covenants unless (i) an event of default occurs under the Credit Agreement, or (ii) the failure of the Company to maintain excess availability equal to or greater than 10% of the borrowing base at any time, in which event, the Company must comply with a trailing 12-month basis consolidated fixed charge covenant ratio of 1.0 : 1.0, which ratio shall continue to be tested each period thereafter until excess availability exceeds 10% of the borrowing base for three consecutive fiscal periods.

 

                The Credit Agreement contains usual and customary covenants for a facility of this type requiring the Company and its subsidiaries, among other things, to maintain collateral, comply with applicable laws, keep proper books and records, preserve corporate existence, maintain insurance and pay taxes in a timely manner. Events of default under the Credit Agreement are usual and customary for transactions of this type, subject to, in specific instances, materiality and cure periods including, among other things: (a) any failure to pay principal thereunder when due or to pay interest or fees on the due date; (b) material misrepresentations; (c) default under other agreements governing material indebtedness of the Company; (d) default in the performance or observation of any covenants; (e) any event of insolvency or bankruptcy; (f) any final judgments or orders to pay more than $15.0 million that remain unsecured or unpaid; (g) change of control, as defined in the Credit Agreement; and (h) any failure of a collateral document, after delivery thereof, to create a valid mortgage or first-priority lien.

 

                We are currently in compliance with all covenants contained within the Credit Agreement.

 

Senior Subordinated Convertible Debt

 

To finance a portion of the acquisition of two distribution centers in 2005, we sold $150.1 million in aggregate issue price (or $322.0 million aggregate principal amount at maturity) of senior subordinated convertible notes due in 2035.  The notes are our unsecured senior subordinated obligations and rank junior to our existing and future senior indebtedness, including borrowings under our Revolving Credit Facility.  See our Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2011, for additional information regarding the notes.

Note 6 – Guarantees

                 

We have guaranteed lease obligations of certain food distribution customers.  In the event these retailers are unable to meet their lease payments or otherwise experience an event of default, we would be unconditionally liable for the outstanding balance of their lease obligations ($8.6 million as of March 24, 2012, as compared to $7.9 million in debt and lease obligations as of December 31, 2011), which would be due in accordance with the underlying agreements.

 

For guarantees issued after December 31, 2002, we are required to recognize an initial liability for the fair value of the obligation assumed under the guarantee.  The maximum undiscounted payments we would be required to make in the event of default under these guarantees is $6.4 million, which is included in the $8.6 million total referenced above.  These guarantees are secured by certain business assets and personal guarantees of the respective customers.  We believe these customers will be able to perform under their respective agreements and that no payments will be required and no loss will be incurred under the guarantees.  A liability representing the fair value of the obligations assumed under the guarantees of $0.8 million is included in the accompanying consolidated financial statements.

 

We have also assigned various leases to other entities.  If the assignees become unable to continue making payments under the assigned leases, we estimate our maximum potential obligation with respect to the assigned leases to be $11.0 million as of March 24, 2012 as compared to $11.4 million as of December 31, 2011.

 

Note 7 – Income Taxes

 

For the first quarter of 2012 and 2011, our tax expense was $3.6 million and $4.9 million, respectively.

The provision for income taxes reflects the Company’s estimate of the effective rate expected to be applicable for the full fiscal year, adjusted for any discrete events, which are reported in the period that they occur.  This estimate is re-evaluated each quarter based on the Company’s estimated tax expense for the full fiscal year.  The first quarter 2012 and 2011 Company effective tax rate was not impacted by the reversal of any previously unrecognized tax benefits due to statute of limitations expirations.  For the first quarter of 2012, the effective tax rate was 39.9%, as compared to 39.5% for the first quarter of 2011.



10

 


 
 

The total amount of unrecognized tax benefits as of the end of the first quarter of 2012 was $2.2 million.  The net increase in unrecognized tax benefits of $0.1 million since December 31, 2011 is due to the increase in unrecognized tax benefits as a result of tax positions taken in prior periods.  The total amount of tax benefits that if recognized would impact the effective tax rate was $0.5 million at the end of the first quarter of 2012.  We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.  At the end of the first quarter of 2012, we had approximately $0.1 million for the payment of interest and penalties accrued.

 

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

 

The Company or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and local jurisdictions.  With few exceptions, we are no longer subject to U.S. federal, state or local examinations by tax authorities for years 2007 and prior. 

 

Note 8 – Pension and Other Postretirement Benefits

 

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

 

12 Weeks Ended March 24, 2012 and March 26, 2011:

           
   

Pension Benefits

 

Other Benefits

(In thousands)

 

2012

 

2011

 

2012

 

2011

                 

Interest cost

$

471

 

490

 

6

 

8

Expected return on plan assets

 

(465)

 

(433)

 

-

 

-

Amortization of prior service cost

 

-

 

-

 

-

 

(5)

Recognized actuarial loss (gain)

 

197

 

363

 

(5)

 

(3)

Net periodic benefit cost

$

203

 

420

 

1

 

-

 

                Weighted-average assumptions used to determine net periodic benefit cost for the first quarter of 2012 and 2011 are as follows:

 

   

Pension Benefits

 

Other Benefits

 

 

2012

 

2011

 

2012

 

2011

Weighted-average assumptions:

               

Discount rate

 

4.35%

 

5.10%

 

4.35%

 

5.10%

Expected return on plan assets

 

6.00%

 

6.00%

 

N/A

 

N/A

Rate of compensation increase

 

N/A

 

N/A

 

N/A

 

N/A

 

                Total contributions to our pension plan in fiscal 2012 are expected to be $3.6 million.

 

Multi-employer pension plan

 

Certain of our unionized employees are covered by the Central States Southeast and Southwest Areas Pension Funds (“the Plan”), a multi-employer pension plan.  Contributions are determined in accordance with the provisions of negotiated union contracts and are generally based on the number of hours worked.  In fiscal 2011, the Company contributed $3.3 million to the Plan.  Based on the most recent information available, we believe the present value of actuarial accrued liabilities of the Plan substantially exceeds the value of the assets held in trust to pay benefits.  The underfunding is not a direct obligation or liability of the Company.  However, if the Company were to exit certain markets or otherwise cease making contributions to the Plan, the Company could trigger a substantial withdrawal liability.  The amount of any increase in contributions will depend upon several factors, including the number of employers contributing to the Plan, results of the Company’s collective bargaining efforts, investment returns on assets held by the Plan, actions taken by the trustees of the Plan, and actions that the Federal government may take.  The Company does not believe it is likely that events requiring recognition of a withdrawal liability will occur.  Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated.

 

A more detailed discussion of the risks associated with the Plan are contained in Part I, Item 1A, “Risk Factors,” of our Annual Report filed with the SEC on Form 10-K for the fiscal year ended December 31, 2011.

 

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Table of Contents

Note 9 – Earnings Per Share

 

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

 

   

First Quarter

Ended

(In thousands, except per share amounts)

 

March 24, 2012

 

March 26, 2011

         

Net earnings

$

5,454

 

7,481

         

Net earnings per share-basic:

       

Weighted-average shares outstanding

 

12,951

 

12,719

         

Net earnings per share-basic

$

0.42

 

0.59

         

Net earnings per share-diluted:

       

Weighted-average shares outstanding

 

12,951

 

12,719

Shares contingently issuable

 

184

 

297

Weighted-average shares and potential dilutive shares outstanding

 

13,135

 

13,016

         

Net earnings per share-diluted

$

0.42

 

0.57

 

                 

                In 2011, SARs were excluded from the calculation of diluted net earnings per share because the exercise price was greater than the market price of the stock and would have been anti-dilutive under the treasury stock method.

 

The senior subordinated convertible notes due in 2035 will be convertible at the option of the holder, only upon the occurrence of certain events, at an adjusted conversion rate of 9.6224 shares (initially 9.3120) of our common stock per $1,000 principal amount at maturity of notes (equal to an adjusted conversion price of approximately $48.44 per share). Upon conversion, we will pay the holder the conversion value in cash up to the accreted principal amount of the note and the excess conversion value, if any, in cash, stock or both, at our option.  The notes are only dilutive above their accreted value and for all periods presented the weighted average market price of the Company’s stock did not exceed the accreted value.  Therefore, the notes are not dilutive to earnings per share for any of the periods presented.  

 

                Vested shares deferred by executives and board members are included in the calculation of basic earnings per share.  Other performance units and RSUs granted between 2007 and 2012 pursuant to the 2000 Plan and 2009 Plan will be settled in shares of Nash Finch common stock.  Unvested RSUs are not included in basic earnings per share until vested.  All shares of time-restricted stock are included in diluted earnings per share using the treasury stock method, if dilutive.  Performance units granted for the LTIP are only issuable if certain performance criteria are met, making these shares contingently issuable..  Therefore, the performance units are included in diluted earnings per share at the payout percentage based on performance criteria results as of the end of the respective reporting period and then accounted for using the treasury stock method, if dilutive.  For the first quarter of 2012, approximately 105,000 shares related to the LTIP and 79,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS as compared to approximately 47,000 shares related to the LTIP and 250,000 shares related to RSUs during the first quarter of 2011.

 

Note 10 – Segment Reporting

 

We sell and distribute products that are typically found in supermarkets and operate three reportable operating segments.  The Military segment consists of eight distribution centers that distribute products to military commissaries and exchanges and one shared facility which services both Military and independent Food Distribution customers.  Included in the Military distribution center total is our facility in Oklahoma City, Oklahoma, which was purchased during 2010 and became operational during the first quarter of fiscal 2012.  Our Food Distribution segment consists of 14 distribution centers that sell to independently operated retail grocery stores, our corporate owned stores and other customers.  As of March 24, 2012, the Retail segment consists of 46 corporate-owned stores that sell directly to the consumer. 

 

12


 

 
 

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

 

   

First Quarter Ended

   

March 24, 2012

 

March 26, 2011

(In thousands)

 

Sales from external customers

 

Inter-segment sales

 

Segment profit

 

Sales from external customers

 

Inter-segment sales

 

Segment profit

                         

Military

$

531,296

 

-

 

10,474

 

537,440

 

-

 

12,147

Food Distribution

 

424,579

 

51,870

 

2,338

 

450,307

 

54,922

 

5,845

Retail

 

102,759

 

-

 

661

 

112,062

 

-

 

(984)

Eliminations

 

-

 

(51,870)

 

-

 

-

 

(54,922)

 

-

Total

$

1,058,634

 

-

 

13,473

 

1,099,809

 

-

 

17,008

 

 

Reconciliation to Consolidated Statements of Income:

   
         
   

First Quarter Ended

   

March 24,

 

March 26,

(In thousands)

 

2012

 

2011

         

Total segment profit

$

13,473

 

17,008

Unallocated amounts:

       

Interest

 

(4,404)

 

(4,638)

Earnings before income taxes

$

9,069

 

12,370

 

 

 

Note 11 – Legal Proceedings

 

We are engaged from time-to-time in routine legal proceedings incidental to our business.  We do not believe that these routine legal proceedings, taken as a whole, will have a material impact on our business or financial condition.

 

 

Note 12 – Subsequent Event – Acquisition

 

On April 3, 2012, U Save Foods, Inc., a Nash Finch wholly-owned subsidiary, completed an asset purchase from Bag ‘N Save, Inc. of its twelve supermarkets located in Omaha and York, Nebraska.  The Company acquired the inventory, equipment and certain other assets of all locations as well as the real estate of six owned locations. The remaining six stores are leased.  Bag ‘N Save was one of the Company’s largest customers and the acquisition will result in a shift of sales from our Food Distribution business segment to our Retail business segment in future quarters.

 

The aggregate purchase price paid was approximately $29.9 million in cash, and is subject to customary post-closing adjustments based upon changes in the working capital of the purchased businesses through the closing date.

 

The twelve supermarkets represented approximately $148.6 million in annual retail sales for their fiscal year ended December 31, 2011.  No facility closures are expected given the strategic fit of these supermarkets into the Company’s retail network.

 

The acquisition was funded by the Company’s existing asset-backed Revolving Credit Facility.                 

 

 

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

 

Forward Looking Information and Cautionary Factors

 

                This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Such statements relate to trends and events that may affect our future financial position and operating results.  Any statement contained in this report that is not a statement of historical fact may be deemed a forward-looking statement.  For example, words such as “may,” “will,” “should,” “likely,” “expect,” “anticipate,” “estimate,” “believe,” “intend, ” “potential” or “plan,” or comparable terminology, are intended to identify forward‑looking statements.  Such statements are based upon current expectations, estimates and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward‑looking statements.  Important factors known to us that could cause or contribute to material differences include, but are not limited to the following:

 

•   the effect of competition on our food distribution, military and retail businesses;

•   general sensitivity to economic conditions, including the uncertainty related to the current state of the economy in the U.S. and worldwide economic slowdown; disruptions to the credit and financial markets in the U.S. and worldwide; changes in market interest rates; continued volatility in energy prices and food commodities;

   macroeconomic and geopolitical events affecting commerce generally;

•   changes in consumer buying and spending patterns;

•   our ability to identify and execute plans to expand our food distribution, military and retail operations;

•   possible changes in the military commissary system, including those stemming from the redeployment of forces, congressional action and funding levels;

•   our ability to identify and execute plans to improve the competitive position of our retail operations;

•   the success or failure of strategic plans, new business ventures or initiatives;

•   our ability to successfully integrate and manage current or future businesses we acquire, including the ability to manage credit risks and retain the customers of those operations;

   changes in credit risk from financial accommodations extended to new or existing customers;

   significant changes in the nature of vendor promotional programs and the allocation of funds among the programs;

•   limitations on financial and operating flexibility due to debt levels and debt instrument covenants;

•   legal, governmental, legislative or administrative proceedings, disputes, or actions that result in adverse outcomes;

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

•   changes in accounting standards;

•   technology failures that may have a material adverse effect on our business;

•   severe weather and natural disasters that may impact our supply chain;

•   unionization of a significant portion of our workforce;

•   costs related to a multi-employer pension plan which has liabilities in excess of plan assets;

•   changes in health care, pension and wage costs and labor relations issues;

   product liability claims, including claims concerning food and prepared food products;

   threats or potential threats to security;

•   unanticipated problems with product procurement; and

•   maintaining our reputation and corporate image.

 

A more detailed discussion of many of these factors, as well as other factors, that could affect the Company’s results is contained in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. You should carefully consider each of these factors and all of the other information in this report. We believe that all forward-looking statements are based upon reasonable assumptions when made. However, we caution that it is impossible to predict actual results or outcomes and that accordingly you should not place undue reliance on these statements.  Forward-looking statements speak only as of the date when made and we undertake no obligation to revise or update these statements in light of subsequent events or developments.  Actual results and outcomes may differ materially from anticipated results or outcomes discussed in forward-looking statements. You are advised, however, to consult any future disclosures we make on related subjects in future reports to the Securities and Exchange Commission (“SEC”).

 

 

14

 


 
 

Overview

 

In terms of revenue, we are the second largest publicly traded wholesale food distributor in the United States serving the retail grocery industry and the military commissary and exchange systems.  Our business consists of three primary operating segments: Military Food Distribution (“Military”), Food Distribution and Retail.

 

                In November 2006, we announced the launch of a strategic plan, Operation Fresh Start, designed to sharpen our focus and provide a strong platform to support growth initiatives.  Our strategic plan is built upon extensive knowledge of current industry, consumer and market trends, and is formulated to differentiate the Company.  The strategic plan includes long-term initiatives to increase revenues and earnings, improve productivity and cost efficiencies of our military, food distribution and retail business segments, and leverage our corporate support services.  The Company has strategic initiatives to improve working capital, manage debt, and increase shareholder value through capital expenditures with acceptable returns on investment.  Several important elements of the strategic plan include:

                 

·         Supply chain services focused on supporting our businesses with warehouse management, inbound and outbound transportation management and customized solutions for each business;

·         Growing the Military segment through acquisition and expansion of products and services, as well as creating warehousing and transportation cost efficiencies with a long-term distribution center strategic plan;

·         Providing our independent retail customers with a high level of order fulfillment, broad product selection  including leveraging the Our Family® brand, support services emphasizing best-in-class offerings in marketing, advertising, merchandising, store design and construction,  market research, retail store support, retail pricing and license agreement opportunities; and

·         Retail formats designed to appeal to the needs of today’s consumers.

 

                In addition to the strategic initiatives already in progress, our 2012 initiatives consist of the following:          

·        Continue implementation of our military distribution center network expansion;

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

·        Implement cost reduction and profit improvement initiatives; and

·        Identify acquisitions that support our strategic plan.

 

Our Military segment contracts with manufacturers to distribute a wide variety of food products to military commissaries and exchanges located in the United States and the District of Columbia, and in Europe, Puerto Rico, Cuba, the Azores, Egypt and Bahrain.  We have over 30 years of experience acting as a distributor to U.S. military commissaries and exchanges.  During the third quarter of fiscal 2010, we purchased a facility in Oklahoma City, Oklahoma for expansion of our Military business.  This facility became operational during the first quarter of fiscal 2012.

 

Our Food Distribution segment sells and distributes a wide variety of nationally branded and private label grocery products and perishable food products from 14 distribution centers to approximately 1,500 independent retail locations located in 29 states, primarily in the Midwest and Southeast regions of the United States. 

 

Our Retail segment operated 46 corporate-owned grocery stores primarily in the Upper Midwest as of March 24, 2012.  Primarily due to highly competitive conditions in which supercenters and other alternative formats compete for price conscious customers, we closed two and sold four retail stores during fiscal 2011.  We are implementing initiatives of varying scope and duration with a view toward improving our response to and performance under these highly competitive conditions.  These initiatives include designing and reformatting some of our retail stores into alternative formats to increase overall retail sales performance.  As we continue to assess the impact of performance improvement initiatives and the operating results of individual stores, we may need to recognize additional impairments of long-lived assets and goodwill associated with our Retail segment, and may incur restructuring or other charges in connection with closure or sales activities.  The Retail segment yields a higher gross profit percent of sales and higher selling, general and administrative (“SG&A”) expenses as a percent of sales compared to our Food Distribution and Military segments.  Thus, changes in sales of the Retail segment can have a disproportionate impact on consolidated gross profit and SG&A as compared to similar changes in sales in our Food Distribution and Military segments.

 


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Table of Contents

Results of Operations

Sales

 

The following table summarizes our sales activity for the 12 weeks ended March 24, 2012 (“first quarter 2012”) compared to the 12 weeks ended March 26, 2011 (“first quarter 2011”):

   

First quarter 2012

 

First quarter 2011

 

Increase/(Decrease)

(In thousands)

 

Sales

Percent

of

Sales

 

Sales

Percent of Sales

 

$

%

Segment Sales:

                 

Military

$

531,296

50.2%

 

537,440

48.9%

 

(6,144)

(1.1%)

Food Distribution

 

424,579

40.1%

 

450,307

40.9%

 

(25,728)

(5.7%)

Retail

 

102,759

9.7%

 

112,062

10.2%

 

(9,303)

(8.3%)

Total Sales

$

1,058,634

100.0%

 

1,099,809

100.0%

 

(41,175)

(3.7%)

 

 

Total Company sales declined 3.7% during the first quarter of 2012 as compared to the prior year period.  Excluding sales declines primarily attributable to the effect of the sale of four and closing of two corporate-owned retail stores, total Company comparable sales declined 3.1% during the first quarter of 2012.

 

Military segment sales decreased 1.1% during the first quarter of 2012 as compared to the prior year.  Domestic sales increased 0.9% while overseas sales decreased 11.0% as compared to the comparable prior year quarter. 

 

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

 

 

First Quarter

 

2012

 

2011

Domestic

84.5%

 

82.8%

Overseas

15.5%

 

17.2%

 

 

The decrease in Food Distribution sales for the first quarter of 2012 of 5.7% was primarily due to a reduction in sales to existing customers, and was partially due to prior year sales to lost customers exceeding new account gains reflected in current year sales.

 

Retail sales declined 8.3% during the first quarter of 2012 as compared to the prior year period.  The decline in Retail sales is primarily attributable to the effect of the sale of four and closing of two corporate-owned stores since the beginning of the first fiscal quarter of 2011.  Same store sales were down 1.4% during the first quarter of 2012.  Same store sales compare retail sales for stores which were in operation for the same number of weeks in the comparative periods.

 

During the first quarter of 2012, our Retail segment consisted of 46 corporate-owned grocery stores, as compared to 52 stores during the first quarter of 2011.  There was no change in the corporate store count during the first quarter of either year.  The corporate store count excludes corporate-owned stand-alone pharmacies and convenience stores.

 

Consolidated Gross Profit

 

Consolidated gross profit was 7.6% of sales for the first quarter of 2012 as compared to 8.1% of sales for the first quarter of 2011.  Our overall gross profit margin was negatively affected by 0.1% of sales in the first quarter of 2012 due to a sales mix shift between our business segments between the years.  This was due to a higher percentage of 2012 sales occurring in the Military segment which has a lower gross profit margin than the Retail and Food Distribution segmentsIn addition to the impact of the sales mix shift, we experienced a lower gross margin in our Food Distribution segment, partially due to higher inflation in the previous year quarter resulting in a higher than normal prior year gross margin performance. In addition, declines in perishable commodity prices in the current year have also temporarily impacted gross margin performance.  The decrease in Food Distribution gross margin was primarily responsible for the overall decrease in Consolidated gross profit.

 

Consolidated Selling, General and Administrative Expenses

 

Consolidated SG&A was 5.5% of sales for the first quarter of 2012 as compared to 5.7% of sales for the first quarter of 2011.  Our SG&A was positively impacted in comparison to the prior year period due to a $2.0 million non-cash write-down of long-lived assets that occurred in the first quarter of 2011.

 

 

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Table of Contents

Depreciation and Amortization Expense

 

Depreciation and amortization expense was $8.2 million for the first quarter of 2012 as compared to $8.6 million for the first quarter of 2011.  Depreciation and amortization expense during the first quarter of 2012 for our Retail and Food Distribution segments decreased by $0.5 million and $0.4 million, respectively, as compared to the prior year.  This was offset by a $0.4 million increase for our Military segment, which is the result of our facility in Oklahoma City becoming operational in the first quarter of 2012..

 

Interest Expense

 

Interest expense was $5.1 million for the first quarter of 2012 as compared to $5.5 million for the first quarter of 2011.  Average borrowing levels declined to $318.3 million during the first quarter of 2012 from $362.7 million during the first quarter of 2011.  The effective interest rate was 4.2% for the first quarter of 2012 as compared to 4.1% for the first quarter of 2011.  Certain components of our interest expense are excluded from the calculation of our effective interest rate as the costs are not directly attributable to our long-term borrowing rates.   

 

The calculation of our effective interest rate excludes non-cash interest required to be recognized on our senior subordinated convertible notes.  Non-cash interest expense recognized was $1.4 million and $1.3 million for the first quarters of 2012 and 2011, respectively.  Additionally, the calculation of our average borrowing levels includes the unamortized equity component of our senior subordinated convertible notes that is required to be recognized.  The inclusion of the unamortized equity component brings the basis in our senior subordinated convertible notes to $150.1 million for purposes of calculating our average borrowing levels, or their aggregate issue price, on which we are required to pay semi-annual cash interest at a rate of 3.50% until March 15, 2013. 

 

Income Taxes

 

Income tax expense is provided on an interim basis using management’s estimate of the annual effective rate.  Our effective tax rate for the full fiscal year is subject to change and may be impacted by changes to nondeductible items and tax reserve requirements in relation to our forecasts of operations, sales mix by taxing jurisdictions, or changes in tax laws and regulations.  The effective income tax rate was 39.9% and 39.5% for the first quarters of 2012 and 2011, respectively.

 

During the first quarter of 2012, the Company did not file any claims with or receive refunds from any of the various tax authorities.  The effective rate for the first quarter differed from statutory rates due to the amount of permanent book tax differences relative to the Company’s pre-tax book income.  We estimate the full year effective tax rate for 2012 will be approximately 39.3% which excludes the potential impact of discrete events.

 

Net Earnings

 

Net earnings were $5.5 million, or $0.42 per diluted share, during the first quarter of 2012 as compared to net earnings of $7.5 million, or $0.57 per diluted share, during the first quarter of 2011.  Net earnings in the periods presented in this report were affected by the events included in the discussion above.   

 

Liquidity and Capital Resources

 

The following table summarizes our cash flow activity and should be read in conjunction with the Consolidated Statements of Cash Flows:

 

   

12 Weeks Ended

 

(In thousands)

 

March 24, 2012

 

March 26, 2011

 

Increase/ (Decrease)

Net cash provided by (used in) operating activities

 

$ (18,967)

 

5,614

 

(24,581)

Net cash used in investing activities

 

(5,066)

 

(28,979)

 

23,913

Net cash provided by financing activities

 

23,960

 

23,287

 

673

Net change in cash

 

$       (73)

 

(78)

 

5

 

Cash provided by operating activities decreased by $24.6 million during the first quarter of 2012 as compared to the prior year.  Inventories increased $13.9 million during the first quarter of 2012, as compared to a decrease in inventory of $5.1 million in the prior year period, which contributed $19.0 million to the year-over-year decrease in cash provided by operating activities.  Also contributing to this decrease was a $7.8 million year-over-year decrease in net cash earnings.

 

 

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Table of Contents

Net cash used in investing activities decreased by $23.9 million during the first quarter of 2012 as compared to the prior year.  Net cash used in investing activities during the first quarter of 2012 consisted primarily of additions to property, plant and equipment of $4.1 million.  The additions to property, plant and equipment during the prior year period consisted primarily of the purchase of the real estate associated with our military distribution facility in Norfolk, Virginia, which was previously a leased location, for $27.6 million.

 

Cash provided by financing activities increased by $0.7 million during the first quarter of 2012 as compared to the prior year.  During the first quarter of 2012, cash provided by financing activities consisted primarily of proceeds of revolving debt of $18.6 million and increased outstanding checks of $9.4 million partially offset by dividend payments of $2.2 million.  Cash provided by financing activities during the first quarter of 2011 included proceeds of revolving debt of $22.6 million and an increase in outstanding checks of $3.5 million partially offset by dividend payments of $2.2 million.

 

During the remainder of fiscal 2012, we expect that cash flows from operations will be sufficient to meet our working capital needs and enable us to reduce our debt, with temporary draws on our credit facility during the year to build inventories for certain holidays.  Longer term, we believe that cash flows from operations, short-term bank borrowing, various types of long-term debt and lease and equity financing will be adequate to meet our working capital needs, planned capital expenditures and debt service obligations.  There can be no assurance, however, that we will continue to generate cash flows at current levels as our business is sensitive to trends in consumer spending at our customer locations and our owned retail food stores, as well as certain factors outside of our control, including, but not limited to, the current and future state of the U.S. and global economy, competition, recent and potential future disruptions to the credit and financial markets in the U.S. and worldwide and continued volatility in food and energy commodities.  Please see Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2011, for a more detailed discussion of potential factors that may have an impact on our liquidity and capital resources.  

 

Asset-backed Credit Agreement 

 

                Our credit agreement is an asset-backed loan consisting of a $520.0 million revolving credit facility, which includes a $50.0 million Swing Line sub-facility and a $75.0 million letter of credit sub-facility (the “Revolving Credit Facility”).  We are required by the Credit Agreement to maintain a reserve of $100.0 million with respect to the Senior Subordinated Convertible Debt, which reserve shall increase to $150.0 million on December 15, 2012.  Provided no default is existing or would arise, we may from time-to-time, request that the Revolving Credit Facility be increased by an aggregate amount (for all such requests) not to exceed $250.0 million. 

 

                The Revolving Credit Facility has a 5-year term and will be due and payable in full on December 21, 2016. We can elect, at the time of borrowing, for loans to bear interest at a rate equal to the base rate, as defined in the credit agreement, or LIBOR plus a margin. The LIBOR interest rate margin was 1.75% as of March 24, 2012, and can vary quarterly in 0.25% increments between three pricing levels ranging from 1.50% to 2.00% based on the excess availability, which is defined in the credit agreement as (a) the lesser of (i) the borrowing base; or (ii) the aggregate commitments; minus (b) the aggregate of the outstanding credit extensions.

 

                The Credit Agreement contains no financial covenants unless (i) an event of default occurs under the Credit Agreement, or (ii) the failure of the Company to maintain excess availability equal to or greater than 10% of the borrowing base at any time, in which event, the Company must comply with a trailing 12-month basis consolidated fixed charge covenant ratio of 1.0 : 1.0, which ratio shall continue to be tested each period thereafter until excess availability exceeds 10% of the borrowing base for three consecutive fiscal periods.

 

                The Credit Agreement contains usual and customary covenants for a facility of this type requiring the Company and its subsidiaries, among other things, to maintain collateral, comply with applicable laws, keep proper books and records, preserve corporate existence, maintain insurance and pay taxes in a timely manner. Events of default under the Credit Agreement are usual and customary for transactions of this type, subject to, in specific instances, materiality and cure periods including, among other things: (a) any failure to pay principal thereunder when due or to pay interest or fees on the due date; (b) material misrepresentations; (c) default under other agreements governing material indebtedness of the Company; (d) default in the performance or observation of any covenants; (e) any event of insolvency or bankruptcy; (f) any final judgments or orders to pay more than $15.0 million that remain unsecured or unpaid; (g) change of control, as defined in the Credit Agreement; and (h) any failure of a collateral document, after delivery thereof, to create a valid mortgage or first-priority lien.

 

                As of March 24, 2012, $252.4 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $13.6 million of outstanding letters of credit primarily supporting workers’ compensation obligations.  We are currently in compliance with all covenants contained within the Credit Agreement.

 

 

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                Our Revolving Credit Facility represents one of our primary sources of liquidity, both short-term and long-term, and the continued availability of credit under that agreement is of material importance to our ability to fund our capital and working capital needs.

 

Senior Subordinated Convertible Debt

 

We also have outstanding $150.1 million in aggregate issue price (or $322.0 million in aggregate principal amount at maturity) of senior subordinated convertible notes due in 2035. The notes are unsecured senior subordinated obligations and rank junior to our existing and future senior indebtedness, including borrowings under our Revolving Credit Facility.  Cash interest at the rate of 3.50% per year is payable semi-annually on the issue price of the notes until March 15, 2013.  After that date, cash interest will not be payable, unless contingent cash interest becomes payable, and original issue discount for non-tax purposes will accrue on the notes daily at a rate of 3.50% per year until the maturity date of the notes.  See our Annual Report on Form 10-K filed with the SEC for the fiscal year ended December 31, 2011, for additional information.

 

Consolidated EBITDA (Non-GAAP Measurement)

 

 The following is a reconciliation of EBITDA and Consolidated EBITDA to net earnings for the first quarters of 2012 and 2011 (amounts in thousands):

 

 

First quarter

 

First quarter

 

2012

 

2011

Net earnings

$ 5,454

 

7,481

Income tax expense

3,615

 

4,889

Interest expense

5,138

 

5,459

Depreciation and amortization

8,204

 

8,583

EBITDA

22,411

 

26,412

LIFO charge

181

 

501

Provision for lease reserves

-

 

448

Asset impairments

62

 

-

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

(476)

 

1,796

Share-based compensation

1,094

 

1,159

Subsequent cash payments on non-cash charges

(442)

 

(504)

Consolidated EBITDA

$ 22,830

 

29,812

 

 

EBITDA and Consolidated EBITDA are measures used by management to measure operating performance.  EBITDA is defined as net earnings before interest, taxes, depreciation, and amortization.  Consolidated EBITDA excludes certain non-cash charges and other items that management does not utilize in assessing operating performance and is a metric used to determine payout of performance units pursuant to our Short-Term and Long-Term Incentive Plans.  The above table reconciles net earnings to EBITDA and Consolidated EBITDA.  Not all companies utilize identical calculations; therefore, the presentation of EBITDA and Consolidated EBITDA may not be comparable to other identically titled measures of other companies.  Neither EBITDA or Consolidated EBITDA are recognized terms under GAAP and do not purport to be an alternative to net earnings as an indicator of operating performance or any other GAAP measure.  In addition, EBITDA and Consolidated EBITDA are not intended to be measures of free cash flow for management’s discretionary use since they do not consider certain cash requirements, such as interest payments, tax payments and capital expenditures.

 

Off-Balance Sheet Arrangements

 

                As of the date of this report, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, often referred to as structured finance or special purpose entities, which are generally established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 

 

Recoverability of Goodwill

 

Our most recent annual impairment test of goodwill was completed during the fourth quarter of fiscal 2011 based on conditions as of the end of our third quarter of fiscal 2011 which resulted in no indication of goodwill impairment for any of our reporting units.  The fair value of the Military segment was approximately 30% higher than its carrying value, while the Food Distribution segment fair value exceeded its carrying value by approximately 13% and the Retail segment fair value was approximately 16% higher than its carrying value.

 

 

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The fair value for each reporting unit is determined based on an income approach which incorporates a discounted cash flow analysis which uses significant unobservable inputs, or level 3 inputs, as defined by the fair value hierarchy, and a market approach that utilizes current earnings multiples of comparable publicly-traded companies.  The Company has weighted the valuation of its reporting units at 70% based on the income approach and 30% based on the market approach. The Company believes that this weighting is appropriate since it is often difficult to find other comparable publicly-traded companies that are similar to our reporting units and it is our view that future discounted cash flows are more reflective of the value of the reporting units. 

 

Critical Accounting Policies and Estimates

 

                Our critical accounting policies are discussed in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Critical Accounting Policies.”  There have been no material changes to these policies or the estimates used in connection therewith during the 12 weeks ended March 24, 2012.

 

Recently Adopted and Proposed Accounting Standards

 

There have been no recently adopted accounting standards that have resulted in a material impact to the Company’s financial statements.

 

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

 

                Our exposure in the financial markets consists of changes in interest rates relative to our investment in notes receivable, the balance of our debt obligations outstanding and derivatives employed from time-to-time to manage our exposure to changes in interest rates.  (See Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and Part I, Item 2 of this report under the caption “Liquidity and Capital Resources”).

 

ITEM 4.  Controls and Procedures

                 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

There were no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report that materially affected our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1.  Legal Proceedings

                 

                We are engaged from time-to-time in routine legal proceedings incidental to our business.  We do not believe that these routine legal proceedings, taken as a whole, will have a material impact on our business or financial condition.

 

ITEM 1A.  Risk Factors

 

There have been no material changes to our risk factors contained in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

 

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

 

20
 


 
 

Table of Contents

ITEM 6.  Exhibits

 

Exhibits filed or furnished with this Form 10-Q:

 

Exhibit No.

 

Description

 

 

12.1

Calculation of Ratio of Earnings to Fixed Charges

 

 

31.1

Rule 13a-14(a) Certification of the Chief Executive Officer

 

 

31.2

Rule 13a-14(a) Certification of the Chief Financial Officer

 

 

32.1

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

101.CAL

XBRL Taxonomy Extension calculation

 

 

101.DEF

XBRL Extension Definitions

 

 

101.LAB

XBRL Taxonomy Extension Labels

 

 

101.PRE

XBRL Taxonomy Extension Presentation

 


21


 


 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

NASH-FINCH COMPANY

 

Registrant

   

Date: April 27, 2012

by /s/ Alec C. Covington

 

Alec C. Covington

 

President and Chief Executive Officer

   

Date: April 27, 2012

by /s/ Robert B. Dimond

 

Robert B. Dimond

 

Executive Vice President and Chief Financial Officer

 
 

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Table of Contents

 

NASH FINCH COMPANY

EXHIBIT INDEX TO QUARTERLY REPORT

ON FORM 10-Q

For the Quarter Ended March 24, 2012

 

Exhibit No.

Item

Method of Filing

 

 

 

12.1

Calculation of Ratio of Earnings to Fixed Charges

Filed herewith

 

 

 

31.1

Rule 13a-14(a) Certification of the Chief Executive Officer

Filed herewith

 

 

 

31.2

Rule 13a-14(a) Certification of the Chief Financial Officer

Filed herewith

 

 

 

32.1

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

Filed herewith

101.INS

XBRL Instance Document

Filed herewith

101.SCH

XBRL Taxonomy Extension Schema

Filed herewith

101.CAL

XBRL Taxonomy Extension calculation

Filed herewith

101.DEF

XBRL Extension Definitions

Filed herewith

101.LAB

XBRL Taxonomy Extension Labels

Filed herewith

101.PRE

XBRL Taxonomy Extension Presentation

Filed herewith

 

23


 


 

 

XNAS:NAFC Quarterly Report 10-Q Filling

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