XNAS:NAFC Quarterly Report 10-Q Filing - 6/16/2012

Effective Date 6/16/2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

                                                                                                                                                (Mark One)

 

X

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

 

 

For the quarterly period (12 weeks) ended June 16, 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 July 10, 2012, 12,226,053 shares of Common Stock of the Registrant were outstanding.

 


 

 

 

Index

 

 

 

 

Page No.

 

 

Part I – FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Statements of Income

2

 

 

Consolidated 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  

15

 

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

24

 

 

Item 4.Controls and Procedures

24

 

 

Part II – OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

24

 

 

Item 1A. Risk Factors

24

 

 

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

24

 

 

Item 3.Defaults upon Senior Securities

24

 

 

Item 4.Mine Safety Disclosures

24

 

 

Item 5.Other Information

24

 

 

Item 6. Exhibits

25

 

 

SIGNATURES

26

 

 

 

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

 

 

24 Weeks Ended

 

 

 

June 16,

 

June 18,

 

 

June 16,

 

June 18,

 

 

2012

 

2011

 

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

Sales

$

1,092,798

 

1,099,575

 

 

2,151,432

 

2,199,384

Cost of sales

 

1,004,004

 

1,008,998

 

 

1,981,915

 

2,019,818

Gross profit

 

88,794

 

90,577

 

 

169,517

 

179,566

 

 

 

 

 

 

 

 

 

 

Other costs and expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

62,900

 

60,241

 

 

121,212

 

122,818

Gain on acquisition of a business

 

(6,639)

 

-

 

 

(6,639)

 

-

Goodwill impairment

 

131,991

 

-

 

 

131,991

 

-

Depreciation and amortization

 

8,382

 

8,367

 

 

16,586

 

16,950

Interest expense

 

5,460

 

5,355

 

 

10,598

 

10,814

Total other costs and expenses

 

202,094

 

73,963

 

 

273,748

 

150,582

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income taxes

 

(113,300)

 

16,614

 

 

(104,231)

 

28,984

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

(28,332)

 

6,563

 

 

(24,717)

 

11,452

Net earnings (loss)

$

(84,968)

 

10,051

 

 

(79,514)

 

17,532

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

$

(6.55)

 

0.79

 

 

(6.14)

 

1.38

Diluted

$

(6.55)

 

0.77

 

 

(6.14)

 

1.35

 

 

 

 

 

 

 

 

 

 

Declared dividends per common share

$

0.18

 

0.18

 

 

0.36

 

0.36

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

 

 

 

 

 

 

 

 

 

outstanding and common equivalent shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

12,966

 

12,744

 

 

12,958

 

12,731

Diluted

 

12,966

 

13,042

 

 

12,958

 

13,029

 

 

 

 

 

 

 

 

 

 

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

 

 

24 Weeks

Ended

 

 

(In thousands)

 

June 16,

2012

 

June 18,

2011

 

 

June 16,

2012

 

June 18,

2011

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

$

(84,968)

 

10,051

 

 

(79,514)

 

17,532

 

Change in fair value of derivatives, net of tax

 

-

 

75

(1)

 

-

 

151

(2)

Comprehensive income (loss)

$

(84,968)

 

10,126

 

 

(79,514)

 

17,683

 

 

 

 

 

 

 

 

 

 

 

 

(1) Net of tax of $48.

 

 

 

 

 

 

 

 

 

 

(2) Net of tax of $97.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

3

 


 
 

NASH-FINCH COMPANY AND SUBSIDIARIES

       

Consolidated Balance Sheets

       

(In thousands, except per share amounts)

       

 

June 16,

 

December 31,

 

 

2012

 

2011

(unaudited)

Assets

Current assets:

 

 

   

Cash

$

857

 

773

Accounts and notes receivable, net

 

253,820

 

243,763

Inventories

 

352,380

 

308,621

Prepaid expenses and other

 

15,434

 

17,329

Deferred tax asset, net

 

7,604

 

6,896

Total current assets

 

630,095

 

577,382

       

Notes receivable, net

 

22,645

 

23,221

Property, plant and equipment:

       

Property, plant and equipment

 

717,038

 

686,794

Less accumulated depreciation and amortization

 

(423,583)

 

(413,695)

Net property, plant and equipment

 

293,455

 

273,099

       

Goodwill

 

34,639

 

170,941

Customer contracts and relationships, net

 

14,357

 

15,399

Investment in direct financing leases

 

2,542

 

2,677

Other assets

 

11,637

 

11,049

Total assets

$

1,009,370

 

1,073,768

       

Liabilities and Stockholders' Equity

       

Current liabilities:

       

Current maturities of long-term debt and capital lease obligations

$

2,144

 

2,932

Accounts payable

 

237,992

 

234,722

Accrued expenses

 

54,904

 

61,459

Total current liabilities

 

295,040

 

299,113

       

Long-term debt

 

337,386

 

278,546

Capital lease obligations

 

14,868

 

15,905

Deferred tax liability, net

 

8,524

 

40,671

Other liabilities

 

32,651

 

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 13,765 and 13,727 shares, respectively

 

22,943

 

22,878

Additional paid-in capital

 

118,619

 

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

 

246,253

 

330,470

Common stock in treasury; 1,540 and 1,541 shares, respectively

 

(52,207)

 

(52,240)

Total stockholders' equity

 

320,901

 

404,623

Total liabilities and stockholders' equity

$

1,009,370

 

1,073,768

       

See accompanying notes to consolidated financial statements.

 

 

 

 

 
 

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Table of Contents

NASH-FINCH COMPANY AND SUBSIDIARIES

       

Consolidated Statements of Cash Flows (unaudited)

       

(In thousands)

       
 

24 Weeks Ended

 

June 16,

 

June 18,

 

2012

 

2011

Operating activities:

       

Net earnings (loss)

$

(79,514)

 

17,532

Adjustments to reconcile net earnings (loss) to net cash provided by (used in)

       

operating activities:

       

Gain on acquisition of a business

 

(6,639)

 

-

Depreciation and amortization

 

16,586

 

16,950

Amortization of deferred financing costs

 

576

 

845

Non-cash convertible debt interest

 

2,815

 

2,610

Rebateable loans

 

1,942

 

2,066

Provision for (recovery of) bad debts

 

(634)

 

779

Provision for (recovery of) lease reserves

 

(33)

 

607

Deferred income tax expense (benefit)

 

(33,657)

 

3,252

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

 

(387)

 

1,422

LIFO charge

 

602

 

2,632

Asset impairments

 

62

 

349

Impairments of goodwill

 

131,991

 

-

Share-based compensation

 

1,641

 

2,531

Deferred compensation

 

507

 

609

Other

 

(126)

 

(584)

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

       

Accounts and notes receivable

 

(3,396)

 

(5,548)

Inventories

 

(33,196)

 

21,279

Prepaid expenses

 

(1,284)

 

(446)

Accounts payable

 

(4,590)

 

(23,230)

Accrued expenses

 

(6,275)

 

(4,493)

Income taxes payable

 

2,688

 

929

Other assets and liabilities

 

(3,058)

 

(2,599)

Net cash provided by (used in) operating activities

 

(13,379)

 

37,492

       

Investing activities:

       

Proceeds from sale of assets

 

5,551

 

3,074

Additions to property, plant and equipment

 

(9,903)

 

(33,110)

Business acquired, net of cash

 

(29,700)

 

(1,587)

Loans to customers

 

(7,766)

 

(2,285)

Payments from customers on loans

 

506

 

672

Corporate-owned life insurance, net

 

(80)

 

(902)

Other

 

(151)

 

-

Net cash used in investing activities

 

(41,543)

 

(34,138)

Financing activities:

       

Proceeds from revolving debt

 

39,800

 

4,700

Dividends paid

 

(4,398)

 

(4,364)

Proceeds from long-term debt

 

16,890

 

-

Payments of long-term debt

 

(1,260)

 

(251)

Payments of capitalized lease obligations

 

(1,194)

 

(1,577)

Increase (decrease) in outstanding checks

 

5,949

 

(1,526)

Payments of deferred financing costs

 

(125)

 

-

Tax benefit from share-based compensation

 

66

 

-

Other

 

(722)

 

(507)

Net cash provided by (used in) financing activities

 

55,006

 

(3,525)

Net increase (decrease) in cash

 

84

 

(171)

Cash at beginning of year

 

773

 

830

Cash at end of period

$

857

 

659

       

See accompanying notes to consolidated financial statements.

 

 

 

 

 

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Table of Contents

Nash-Finch Company and Subsidiaries

Notes to Consolidated Financial Statements

June 16, 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 June 16, 2012, and December 31, 2011, the results of operations for the 12 and 24 weeks ended June 16, 2012 (“second quarter 2012”), and June 18, 2011 (“second quarter 2011”), and cash flows for the 24 weeks ended June 16, 2012 and June 18, 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 – Goodwill Impairment

 

During the second quarter we performed an impairment test of goodwill due to market conditions as of the end of our fifth fiscal period.  The Company’s market capitalization as calculated, using the share price multiplied by the shares outstanding, had declined in the second quarter and from fiscal year end 2011, resulting in a market value significantly lower than the fair value of the business segments.   We recorded a goodwill impairment charge of $132.0 million in the second quarter of fiscal 2012, of which $113.0 million related to our Food Distribution segment and $19.0 million related to our Retail segment.         

 

Note 3 – 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 which are located in Omaha and York, Nebraska (“Business”). The Company acquired the inventory, equipment and certain other assets of all locations and also acquired the real estate of six owned locations. The aggregate purchase price paid was $29.7 million in cash.

           

In accordance with the provisions of FASB Accounting Standards Codification (“ASC”) Topic 805, "Business Combinations" defines the acquirer in a business combination as the entity that obtains control of one or more businesses in a business combination and establishes the acquisition date as the date that the acquirer achieves control. ASC Topic 805 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. ASC Topic 805 also requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date

 

The following table summarizes the fair values of the assets acquired and liabilities of the Business assumed at the acquisition date:

 

 

(in thousands)

   
     

Inventories

$

11,165

Property, plant and equipment

 

25,570

Other assets

 

630

Total identifiable assets acquired

 

37,365

Accrued expenses

 

1,026

Total liabilities assumed

 

1,026

Net assets acquired

$

36,339

 

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          The fair value of the identifiable assets acquired and liabilities assumed of $36.3 million exceeded the purchase price of the Business of $29.7 million. Consequently, the Company reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a pre-tax gain of $6.6 million in the second quarter 2012 associated with the acquisition of the Business. The gain is included in the line item "Gain on acquisition of a business" in the Consolidated Statement of Income.

 

          The Company recognized $0.4 million of acquisition related costs that were expensed during the first and second quarter 2012 related to the acquisition of Bag ‘N Save and an additional $0.5 million of costs related to our purchase of certain assets and liabilities from NF Foods, LLC on June 25, 2012. These costs are included in the Consolidated Statement of Income under selling, general and administrative expenses.

 

           Sales of the Business included in the Consolidated Statement of Income from the acquisition date to the second quarter ended June 16, 2012 were $29.1 million.  This was offset by a corresponding $16.1 million decrease in Food Distribution segment sales due to the sales to that former Food Distribution customer now being reported in the Retail segment.  Although the Company made reasonable efforts to do so, synergies achieved through the integration of the Business into the Company's Retail segment, unallocated interest expense and the allocation of shared overhead specific to the Business cannot be precisely determined. Accordingly, the Company has deemed it impracticable to calculate the precise impact the Business will have on the Company's net earnings during fiscal 2012. However, please refer to "Note 12-Segment Reporting" of this Form 10-Q for a comparison of the Retail segment sales and profit for the second quarters of fiscal 2012 and 2011.

Note 4 – 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 $87.9 million higher on June 16, 2012 and $87.3 million higher on December 31, 2011.  We recorded a LIFO charge of $0.4 million during the second quarter 2012 as compared to a LIFO charge of $2.1 million during the second quarter 2011.  During year-to-date 2012, we recorded a LIFO charge of $0.6 million as compared to a LIFO charge of $2.6 million during year-to-date 2011.

 

Note 5 – 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 $0.5 million during the second quarter 2012 versus $1.4 million during the second quarter 2011.  During year-to-date 2012, share-based compensation expense was $1.6 million as compared to $2.5 million during year-to-date 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.

 

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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 upon achievement of certain performance measures.  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 year-to-date 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 a blend of 1) absolute return on net assets and 2) compound annual growth rate for return on net assets as compared to 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.

 

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 267,345 SARs with a weighted average base/exercise price per SAR of $38.44 were outstanding and unvested.  No SARs were granted or exercised during fiscal 2012, however approximately 23,800 SARs were forfeited by a recipient due to termination of employment. The SARs did not vest because 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.  Therefore, the remaining 243,545 SARs never vested.  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 year-to-date 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

 

14.2

     

207.4

   

Forfeited/cancelled

 

-

     

(21.5)

   

Restrictions lapsed/ units settled

 

(69.5)

     

(1.4)

   

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

 

12.4

     

4.9

   

Outstanding at June 16, 2012

 

555.0

 

0.2

 

757.6

 

1.0

   

 

           

Exercisable/unrestricted at December 31, 2011

 

468.4

     

319.9

   

Exercisable/unrestricted at June 16, 2012

 

480.7

     

323.4

   

(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 year-to-date 2012 was $23.16 and $29.29, respectively. 

 

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Note 6 – 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 June 16, 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 June 16, 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 June 16, 2012, had a carrying value and fair value of $337.4 million and $336.8 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 second quarter of 2012, we recorded a goodwill impairment of $132.0 million as compared to $0.3 million in asset impairments during the second quarter of 2011.  For year-to-date 2012 and 2011, asset impairments were $132.1 million and $0.3 million, respectively.  We utilize a discounted cash flow model that incorporates unobservable level 3 inputs to test for long-lived asset impairment. 

 

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Note 7 – Long-term Debt and Bank Credit Facilities

 

Total debt outstanding was comprised of the following:

(In thousands)

 

June 16, 2012

 

December 31, 2011

         

Asset-backed credit agreement:

       

Revolving credit

$

175,200

 

135,400

Senior subordinated convertible debt, 3.50% due in 2035

 

145,296

 

142,481

Notes payable and mortgage notes, variable rate due in various installments through 2019

 

16,890

 

-

Industrial development bonds

 

-

 

1,260

Total debt

 

337,386

 

279,141

Less current maturities

 

-

 

(595)

Long-term debt

$

337,386

 

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.  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 June 16, 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 June 16, 2012, $231.2 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.

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Notes Payable and Mortgage Notes

 

                On May 18, 2012, the Company, as guarantor for U Save Foods, Inc., a Nebraska corporation and wholly-owned subsidiary of Nash Finch Company, entered into a seven year $16.9 million term loan facility (‘the Agreement”) with First National Bank of Omaha.  The Agreement is secured by seven corporate-owned retail locations in Nebraska.

Note 8 – 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 ($6.3 million as of June 16, 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 $6.3 million, which is 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 it is unlikely payments will be required or losses incurred under the guarantees.  A liability representing the fair value of the obligations assumed under the guarantees of $0.7 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 $9.4 million as of June 16, 2012 as compared to $11.4 million as of December 31, 2011.

 

Note 9 – Income Taxes

 

For the second quarter of 2012, our income tax benefit was $28.3 million as compared to income tax expense of $6.6 million for the second quarter of 2011.  For year-to-date 2012, our income tax benefit was $24.7 million as compared to income tax expense of $11.5 million for year-to-date 2011.

The provision for income taxes reflects the Company’s estimate of the effective rate expected to be applicable for the full fiscal year, adjusted for any discrete events, which are reported in the period that they occur.  This estimate is re-evaluated each quarter based on the Company’s estimated tax expense for the full fiscal year.  During the second quarter 2012, the Company filed reports with various taxing authorities which resulted in the refunds of tax payments.  The effect of these discrete events in the second quarter was ($0.1) million.  The effective tax rate for fiscal 2012 was also impacted by $14.4 million related to the goodwill impairment and the related non-deductible portion thereof.  For the second quarter of 2012, our effective tax rate was 25.0% as compared to 39.5% for the second quarter of 2011.  For year-to-date 2012, our effective tax rate was 23.7% as compared to 39.5% for year-to-date 2011.

 

The total amount of unrecognized tax benefits as of the end of the second quarter of 2012 was $2.2 million.  There was no net change in unrecognized tax benefits since March 24, 2012.  The total amount of tax benefits that if recognized would impact the effective tax rate was $0.5 million at the end of the second quarter of 2012.  We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.  At the end of the second 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. 

 

 

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Note 10 – Pension and Other Postretirement Benefits

               

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

 

12 Weeks Ended June 16, 2012 and June 18, 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

 

-

                 

24 Weeks Ended June 16, 2012, and June 18, 2011:

           
                 
   

Pension Benefits

 

Other Benefits

(In thousands)

 

2012

 

2011

 

2012

 

2011

                 

Interest cost

$

943

 

979

 

13

 

16

Expected return on plan assets

 

(930)

 

(866)

 

-

 

-

Amortization of prior service cost

 

-

 

-

 

-

 

(10)

Recognized actuarial loss (gain)

 

393

 

727

 

(10)

 

(7)

Net periodic benefit cost

$

406

 

840

 

3

 

(1)

 

                Weighted-average assumptions used to determine net periodic benefit cost for the second quarter and year-to-date periods 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.

 

Note 11 – Earnings (Loss) Per Share

 

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

 

   

Second Quarter

 

Year-to-Date

Ended

Ended

(In thousands, except per share amounts)

 

June 16, 2012

 

June 18, 2011

 

June 16, 2012

 

June 18, 2011

                 

Net earnings (loss)

$

(84,968)

 

10,051

 

(79,514)

 

17,532

                 

Net earnings (loss) per share-basic:

               

Weighted-average shares outstanding

 

12,966

 

12,744

 

12,958

 

12,731

                 

Net earnings (loss) per share-basic

$

(6.55)

 

0.79

 

(6.14)

 

1.38

                 

Net earnings (loss) per share-diluted:

               

Weighted-average shares outstanding

 

12,966

 

12,744

 

12,958

 

12,731

Shares contingently issuable

 

-

 

298

 

-

 

298

Weighted-average shares and potential dilutive shares outstanding

 

12,966

 

13,042

 

12,958

 

13,029

                 

Net earnings (loss) per share-diluted

$

(6.55)

 

0.77

 

(6.14)

 

1.35

 

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                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. 

 

Due to the net loss for both the second quarter and year-to-date periods of 2012, the calculation of diluted earnings per share is the same as the calculation of basic earnings per share.  When a separate calculation of diluted earnings per share is made, as it was for the second quarter and year-to-date periods of 2011, 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 were included in diluted earnings per share for the second quarter and year-to-date periods of 2011 at the payout percentage based on performance criteria results as of the end of the respective reporting period and then accounted for using the treasury stock method, if dilutive.  For the second quarter of 2011, approximately 60,000 shares related to the LTIP and 238,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS.  For year-to-date 2011, approximately 54,000 shares related to the LTIP and 244,000 shares related to RSUs were included under “shares contingently issuable” in the calculation of diluted EPS.

 

Note 12 – Segment Reporting

 

We sell and distribute products that are typically found in supermarkets and operate three reportable operating segments.  The Military segment consists of 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 June 16, 2012, the Retail segment consists of 56 corporate-owned stores that sell directly to the consumer. 

  

 

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

   

Second Quarter Ended

   

June 16, 2012

 

June 18, 2011

(In thousands)

 

Sales from external customers

 

Inter-segment sales

 

Segment profit1

 

Sales from external customers

 

Inter-segment sales

 

Segment profit

                         

Military

$

523,212

 

-

 

8,570

 

529,141

 

-

 

11,285

Food Distribution

 

433,133

 

71,793

 

5,517

 

459,465

 

55,313

 

7,709

Retail

 

136,453

 

-

 

2,390

 

110,969

 

-

 

2,128

Eliminations

 

-

 

(71,793)

 

-

 

-

 

(55,313)

 

-

Total

$

1,092,798

 

-

 

16,477

 

1,099,575

 

-

 

21,122

                         
                         
   

Year-to-Date Ended

   

June 16, 2012

 

June 18, 2011

(In thousands)

 

Sales from external customers

 

Inter-segment sales

 

Segment profit1

 

Sales from external customers

 

Inter-segment sales

 

Segment profit

                         

Military

$

1,054,508

 

-

 

19,044

 

1,066,581

 

-

 

23,432

Food Distribution

 

857,712

 

123,663

 

7,855

 

909,772

 

110,235

 

13,554

Retail

 

239,212

 

-

 

3,051

 

223,031

 

-

 

1,144

Eliminations

 

-

 

(123,663)

 

-

 

-

 

(110,235)

 

-

Total

$

2,151,432

 

-

 

29,950

 

2,199,384

 

-

 

38,130

 

Reconciliation to Consolidated Statements of Income:

           
                 
   

Second Quarter Ended

 

Year-to-Date Ended

   

June 16,

 

June 18,

 

June 16,

 

June 18,

(In thousands)

 

2012

 

2011

 

2012

 

2011

                 

Total segment profit1

$

16,477

 

21,122

 

29,950

 

38,130

Unallocated amounts:

               

Gain on acquisition of a business

 

6,639

 

-

 

6,639

 

-

Goodwill impairment

 

(131,991)

 

-

 

(131,991)

 

-

Interest

 

(4,425)

 

(4,508)

 

(8,829)

 

(9,146)

Earnings before income taxes

$

(113,300)

 

16,614

 

(104,231)

 

28,984

 

 Segment profit excludes goodwill impairment and gain on acquisition of a business

 

Note 13 – Legal Proceedings

 

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

 

Note 14 – Subsequent Event – Acquisition

 

                On June 25, 2012, U Save Foods, Inc., a Nash Finch wholly-owned subsidiary, completed an asset purchase of NF Foods, LLC (DBA No Frills Supermarkets or “No Frills”). The Company acquired certain assets and liabilities relating to eighteen retail supermarkets, fourteen of which are located in Nebraska, primarily in the Greater Omaha market; and the other four are located in western Iowa.  No Frills was a long time customer of Nash Finch.

 

The aggregate purchase price paid was approximately $47.5 million, and is subject to customary post-closing adjustments based upon changes in the working capital of the purchased businesses.  A final purchase price will be determined within ninety days after the closing date.

  

The eighteen retail grocery stores represented approximately $230 million in annual retail sales for the NF Foods, LLC fiscal year ended December 31, 2011.  

  

The acquisition was funded by the Company’s existing asset-backed credit agreement.

 

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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”).

 

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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 corporate-owned retail locations and approximately 1,500 independent retail locations located in 29 states, primarily in the Midwest, Great Lakes, and Southeast regions of the United States. 

 

Our Retail segment operated 56 corporate-owned grocery stores primarily in the Upper Midwest as of June 16, 2012.  During the second quarter of 2012, we acquired twelve Bag ‘N Save supermarkets located in Omaha and York, Nebraska.  This expansion of the Retail segment was offset by the sale of six stores and the closure of two stores since the end of the first quarter of 2011.  We are implementing initiatives of varying scope and duration with a view toward improving our financial performance.  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 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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Results of Operations

 

Sales

 

The following tables summarize our sales activity for the 12 weeks ended June 16, 2012 (“second quarter 2012”) compared to the 12 weeks ended June 18, 2011 (“second quarter 2011”) and the 24 weeks ended June 16, 2012 (“year-to-date 2012”) compared to the 24 weeks ended June 18, 2011 (“year-to-date 2011”):

 

   

Second quarter 2012

 

Second quarter 2011

 

Increase/

(Decrease)

(In thousands)

 

Sales

Percent of Sales

 

Sales

Percent of Sales

 

$

%

Segment Sales:

                 

Military

$

523,212

47.9%

 

529,141

48.1%

 

(5,929)

(1.1%)

Food Distribution

 

433,133

39.6%

 

459,465

41.8%

 

(26,332)

(5.7%)

Retail

 

136,453

12.5%

 

110,969

10.1%

 

25,484

23.0%

Total Sales

$

1,092,798

100.0%

 

1,099,575

100.0%

 

(6,777)

(0.6%)

                   
                   
   

Year-to-date 2012

 

Year-to-date 2011

 

Increase/(Decrease)

(In thousands)

 

Sales

Percent of Sales

 

Sales

Percent of Sales

 

$

%

Segment Sales:

                 

Military

$

1,054,508

49.0%

 

1,066,581

48.5%

 

(12,073)

(1.1%)

Food Distribution

 

857,712

39.9%

 

909,772

41.4%

 

(52,060)

(5.7%)

Retail

 

239,212

11.1%

 

223,031

10.1%

 

16,181

7.3%

Total Sales

$

2,151,432

100.0%

 

2,199,384

100.0%

 

(47,952)

(2.2%)

 

Total Company sales declined 0.6% during the second quarter of 2012 as compared to the prior year quarter.  The acquisition of twelve Bag ‘N Save stores during the second quarter of 2012 resulted in a $29.1 million increase in Retail segment sales, partially offset by a $16.1 million decrease in Food Distribution segment sales due to the sales to that former Food Distribution customer now being reported in the Retail segment.  After adjusting for the effect of this acquisition and the sale and closing of retail stores, total Company comparable sales declined 1.5% during the second quarter of 2012.

 

Total Company sales declined 2.2% during year-to-date 2012 as compared to the prior year period.  Adjusted for the effect of the Bag ‘N Save acquisition and the sale and closing of retail stores, total Company comparable sales declined 2.3% during year-to-date 2012.

 

Military segment sales decreased 1.1% during the second quarter of 2012 as compared to the prior year quarter.  During the second quarter of 2012, a larger portion of Military sales were made on a consignment basis, which are included in our reported sales on a net basis.  The year-over-year increase in consignment sales was $3.4 million in the second quarter of 2012.  Including the impact of consignment sales, comparable Military sales decreased 0.5% in the second quarter of 2012 as compared to the prior year quarter.  Overseas sales decreased by 0.6% while domestic sales decreased by 1.2% as compared to the prior year quarter.

 

Military segment sales decreased 1.1% during year-to-date 2012 as compared to the prior year period.  During year-to-date 2012, a larger portion of Military sales were made on a consignment basis, which are included in our reported sales on a net basis.  The year-over-year increase in consignment sales was $2.6 million during year-to-date 2012.  Including the impact of consignment sales, comparable Military sales decreased 0.8% during year-to-date 2012 as compared to the prior year period.  Domestic sales decreased by 0.2% while overseas sales decreased by 5.7% as compared to the prior year period.

 

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

 

Second Quarter

 

Year-to-date

 

2012

 

2011

 

2012

 

2011

Domestic

82.1%

 

82.2%

 

83.3%

 

82.5%

Overseas

17.9%

 

17.8%

 

16.7%

 

17.5%

 

Food Distribution sales decreased 5.7% during the second quarter of 2012 as compared to the prior year quarter.  This was partially due to the effect of the Bag ‘N Save acquisition, which resulted in a $16.1 million decrease in Food Distribution segment sales, since sales to that former Food Distribution customer are now reported in the Retail segment sales.  Excluding the impact of the Bag ‘N Save acquisition, Food Distribution sales decreased 2.2% compared to the prior year quarter.  This decrease was attributable to prior year sales to lost customers exceeding new account gains reflected in current year sales, as well as a reduction in sales to existing customers.

 

Food Distribution sales decreased 5.7% during year-to-date 2012 as compared to the prior year period.  The Bag ‘N Save acquisition was responsible for $16.1 million of the year-over-year decrease in sales.  Excluding the impact of the Bag ‘N Save acquisition, Food Distribution sales decreased 4.0% compared to the prior year period.  This decrease was attributable to prior year sales to lost customers exceeding new account gains reflected in current year sales, as well as a reduction in sales to existing customers.

 

Retail sales increased 23.0% during the second quarter of 2012 as compared to the prior year quarter.  The increase in Retail sales is primarily attributable to the Bag ‘N Save acquisition, which was responsible for a $29.1 million increase in sales as compared to the prior year quarter.  This was partially offset by the effect of the sale and closing of retail stores since the beginning of the second quarter of 2011.  Same store sales decreased 0.3% during the second 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.

 

                Retail sales increased 7.3% during year-to-date 2012 as compared to the prior year period.  The increase in Retail sales is primarily attributable to the Bag ‘N Save acquisition, which was responsible for a $29.1 million increase in sales as compared to the prior year period.  This was partially offset by the effect of the sale and closing of retail stores since the beginning of the first fiscal quarter of 2011.  Same store sales decreased 0.8% during year-to-date 2012.

 

During the second quarters of 2012 and 2011, our corporate store count changed as follows: 

 

   

Second quarter 2012

 

Second quarter 2011

Number of stores at beginning of period

 

46

 

52

Acquired stores

 

12

 

-

Sold stores

 

(2)

 

(4)

Closed stores

 

-

 

(2)

Number of stores at end of period

 

56

 

46

 

During year-to-date 2012 and 2011, our corporate store count changed as follows:

 

   

Year-to-date 2012

 

Year-to-date 2011

Number of stores at beginning of period

 

46

 

52

Acquired stores

 

12

 

-

Sold stores

 

(2)

 

(4)

Closed stores

 

-

 

(2)

Number of stores at end of period

 

56

 

46

 

Consolidated Gross Profit

 

Consolidated gross profit was 8.1% of sales for the second quarter of 2012 as compared to 8.2% of sales for the second quarter of 2011.  Our gross margins were negatively impacted in the second quarter partially due to higher inflation in the prior year quarter resulting in a higher than normal prior year gross margin performance. Partially offsetting this was a favorable impact of 0.5% of sales in the second quarter of 2012 due to a sales mix shift between our business segments between the years.  This was primarily due to the Bag ‘N Save acquisition, which was responsible for a significant increase in Retail segment sales during the second quarter of 2012.  The Retail segment has a higher gross profit margin than the Food Distribution and Military segments.

 

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Consolidated gross profit was 7.9% of sales for year-to-date 2012 as compared to 8.2% of sales for year-to-date 2011.  Our gross margins were negatively impacted during year-to-date 2012 partially due to higher inflation in the prior year period 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.  Partially offsetting this was a favorable impact of 0.2% of sales in the second quarter of 2012 due to a sales mix shift between our business segments between the years.  This was primarily due to the Bag ‘N Save acquisition, which was responsible for a significant increase in Retail segment sales during year-to-date 2012.

 

Gain on Acquisition of a Business

 

                      A pre-tax gain on the acquisition of a business of $6.6 million was recognized during the second quarter 2012 related to the Bag ’N Save acquisition. The fair value of the identifiable assets acquired net of liabilities assumed of $36.3 million exceeded the purchase price paid for the business of $29.7 million. Consequently, we reassessed the recognition and measurement of identifiable assets acquired and liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate  As a result, the Company recognized a pre-tax gain of $6.6 million in the second quarter 2012 associated with the acquisition of the Business.  The gain is included in the line item “Gain on acquisition of a business” in the Consolidated Statement of Income.

 

Goodwill Impairment

 

During the second quarter we performed an impairment test of goodwill due to market conditions as of the end of our fifth fiscal period.  The Company’s market capitalization as calculated, using the share price multiplied by the shares outstanding, had declined in the second quarter and from fiscal year end 2011 resulting in a market value significantly lower than the fair value of the business segments.   We recorded a goodwill impairment charge of $132.0 million in the second quarter of fiscal 2012, of which $113.0 million related to our Food Distribution segment and $19.0 million related to our Retail segment.         

 

Consolidated Selling, General and Administrative Expenses

 

Consolidated SG&A was 5.8% of sales for the second quarter of 2012 as compared to 5.5% of sales for the second quarter of 2011.  Our SG&A margin was negatively impacted by 0.4% of sales in comparison to the prior year quarter due to a sales mix shift between our business segments between the years.  This was primarily due to the Bag ‘N Save acquisition, which was responsible for a significant increase in Retail segment sales during the second quarter of 2012.  The Retail segment has higher SG&A expenses as a percent of sales compared to our other business segments.

 

Consolidated SG&A was 5.6% of sales for both year-to-date 2012 and year-to-date 2011.  Our SG&A margin was negatively impacted by 0.2% of sales in comparison to the prior year period due to a sales mix shift between our business segments between the years.  This was primarily due to the Bag ‘N Save acquisition, which was responsible for a significant increase in Retail segment sales during year-to-date 2012.  Partially offsetting this, our SG&A margin 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.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense was $8.4 million for both the second quarter of 2012 and the second quarter of 2011.  Depreciation and amortization expense during the second quarter of 2012 for our Food Distribution segment decreased by $0.6 million as compared to the prior year.  This was offset by a $0.6 million increase for our Military segment, which is primarily the result of our facility in Oklahoma City becoming operational in the first quarter of 2012.

 

Depreciation and amortization expense was $16.6 million for year-to-date 2012 as compared to $17.0 million for year-to-date 2011.  Depreciation and amortization expense during year-to-date 2012 for our Food Distribution and Retail segments decreased by $1.0 million and $0.4 million, respectively, as compared to the prior year.  This was partially offset by a $1.0 million increase for our Military segment, which is primarily the result of our facility in Oklahoma City becoming operational in the first quarter of 2012.

 

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Interest Expense

 

Interest expense was $5.5 million for the second quarter of 2012 as compared to $5.4 million for the second quarter of 2011.  Average borrowing levels increased to $367.4 million during the second quarter of 2012 from $350.5 million during the second quarter of 2011.  The effective interest rate was 3.7% for the second quarter of 2012 as compared to 4.1% for the second quarter of 2011.

 

Interest expense was $10.6 million for year-to-date 2012 as compared to $10.8 million for year-to-date 2011.  Average borrowing levels decreased to $342.8 million during year-to-date 2012 from $356.6 million during year-to-date 2011.  The effective interest rate was 4.0% for year-to-date 2012 as compared to 4.1% for year-to-date 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 second quarters of 2012 and 2011, respectively.  Non-cash interest expense recognized was $2.8 million and $2.6 million for the year-to-date periods 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 25.0% and 39.5% for the second quarters of 2012 and 2011, respectively.  The effective income tax rate was 23.7% and 39.5% for year-to-date 2012 and 2011, respectively.

 

During the second quarter of 2012, the Company filed claims with and received refunds from various tax authorities.  Accordingly, the Company reported the effect of these discrete events in the second quarter of 2012.  The effective tax rate for the second quarter 2012 is reflective of the results from these refunds of ($0.1) million and $14.4 million related to the goodwill impairment charges and the non-deductible portion thereof.  The effective rate for the second quarter differed from statutory rates due to the amount of permanent book tax differences relative to the Company’s pre-tax book income.  We estimate the full year effective tax rate for 2012 will be approximately 15.3%, which excludes the potential impact of any additional discrete events.

 

Net Earnings (Loss)

 

During the second quarter of 2012, we recorded a net loss of $85.0 million or $6.55 per diluted share as compared to net earnings of $10.1 million, or $0.77 per diluted share, during the second quarter of 2011.  During year-to-date 2012, we recorded a net loss of $79.5 million or $6.14 per diluted share as compared to net earnings of $17.5 million, or $1.35 per diluted share, during year-to-date 2011.  Net earnings in the periods presented in this report were affected by the events included in the discussion above.   

 

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Liquidity and Capital Resources

 

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

 

   

24 Weeks Ended

   
   

June 16,

 

June 18,

 

Increase/

(In thousands)

 

2012

 

2011

 

(Decrease)

             

Net cash provided by (used in) operating activities

$

(13,379)

$

37,492

 

(50,871)

Net cash used in investing activities

 

(41,543)

 

(34,138)

 

(7,405)

Net cash provided by (used in) financing activities

 

55,006

 

(3,525)

 

59,531

Net change in cash

$

84

$

(171)

 

255

 

Cash provided by operating activities decreased by $50.9 million during year-to-date 2012 as compared to the prior year.  Inventories increased $33.2 million during year-to-date 2012, as compared to a decrease in inventory of $21.3 million in the prior year period, which contributed $54.5 million to the year-over-year decrease in cash provided by operating activities.  Also contributing to this decrease was a $15.9 million year-over-year decrease in net cash earnings.  This was partially offset by a $18.6 million year-over-year reduction in cash used related to our accounts payable.

 

Net cash used in investing activities increased by $7.4 million during year-to-date 2012 as compared to the prior year.  Net cash used in investing activities during year-to-date 2012 consisted primarily of $29.7 million to purchase the twelve Bag ‘N Save supermarkets and $9.9 million in other additions to property, plant and equipment.  Net cash used in investing activities during year-to-date 2011 consisted primarily of $33.1 million in additions to property, plant and equipment, of which $27.6 million was related to the purchase of the real estate associated with our military distribution facility in Norfolk, Virginia, which was previously a leased location.

 

Cash provided by financing activities increased by $58.5 million during year-to-date 2012 as compared to the prior year.  During year-to-date 2012, cash provided by financing activities consisted primarily of proceeds of revolving debt of $39.8 million, proceeds of $16.9 million from mortgage financing related to the Bag ‘N Save acquisition, and increased outstanding checks of $5.9 million partially offset by dividend payments of $4.4 million.  Cash used in financing activities during year-to-date 2011 included dividend payments of $4.4 million and a decrease in outstanding checks of $1.5 million partially offset by proceeds of revolving debt of $4.7 million.

 

During the remainder of fiscal 2012, we expect that cash flows from operations will be sufficient to meet our working capital needs, 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 June 16, 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.

 

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                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 June 16, 2012, $231.2 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.

 

                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.

 

Notes Payable and Mortgage Notes

                On May 18, 2012, the Company, as guarantor for U Save Foods, Inc., a Nebraska corporation and wholly-owned subsidiary of Nash Finch Company, entered into a seven year $16.9 million term loan facility (‘the Agreement”) with First National Bank of Omaha.  The Agreement is secured by seven corporate-owned retail locations in Nebraska.

Consolidated EBITDA (Non-GAAP Measurement)

 

 The following is a reconciliation of EBITDA and Consolidated EBITDA to net earnings for the second quarters and year-to-date periods of 2012 and 2011 (amounts in thousands):

 

 

2012

 

2011

 

2012

 

2011

 

Second quarter

 

Second quarter

 

Year-to-Date

 

Year-to-Date

Net earnings (loss)

$ (84,968)

 

10,051

 

$ (79,514)

 

17,532

Income tax expense (benefit)

(28,332)

 

6,563

 

(24,717)

 

11,452

Interest expense

5,460

 

5,355

 

10,598

 

10,814

Depreciation and amortization

8,382

 

8,367

 

16,586

 

16,950

EBITDA

(99,458)

 

30,336

 

(77,047)

 

56,748

LIFO charge

420

 

2,131

 

602

 

2,632

Gain on acquisition of a business

(6,639)

 

-

 

(6,639)

 

-

Goodwill impairment

131,991

 

-

 

131,991

 

-

Provision for (recovery of) lease reserves

(33)

 

159

 

(33)

 

607

Asset impairments

-

 

349

 

62

 

349

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

89

 

(391)

 

(387)

 

1,405

Share-based compensation

546

 

1,372

 

1,640

 

2,531

Subsequent cash payments on non-cash charges

(729)

 

(572)

 

(1,172)

 

(1,076)

Consolidated EBITDA

$ 26,187

 

33,384

 

$ 49,017

 

63,196

 

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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

 

During the second quarter we performed an impairment test of  goodwill due to market conditions as of the end of our fifth fiscal period.  The Company’s market capitalization as calculated using the share price multiplied by the shares outstanding had declined in the second quarter and from fiscal year end 2011, resulting in a market value significantly lower than the fair value of the business segments.  We recorded a goodwill impairment charge of $132.0 million in the second quarter of fiscal 2012, of which $113.0 million related to our Food Distribution segment and $19.0 million related to our Retail segment.  The fair value of the Military segment was higher than its carrying value and did not require any impairment.

 

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 75% based on the income approach and 25% 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. 

 

We performed the step two impairment test to calculate the implied fair value of goodwill of the food distribution and retail segments by deducting the fair value of all tangible and intangible net assets (including unrecognized intangible assets) from the fair values calculated in step one. The fair value of net assets were significantly higher than the fair values in step one which resulted in the impairment of goodwill.

 

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 24 weeks ended June 16, 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.

 

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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.

 

Except as set forth below, there was no change in our internal control over financial reporting that occurred during the period covered by this quarterly report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

On April 3, 2012, U Save Foods, Inc., a Nash Finch wholly-owned subsidiary, completed the purchase from Bag ‘N Save Inc. of the inventory and equipment assets related to twelve stores which are located in Nebraska, primarily in the Greater Omaha market (“Business”).  The acquisition of the Business represents a material change in the Company’s internal control over financial reporting since management’s last assessment.  We are currently integrating policies, processes, people, technology and operations in relation to the Business.  Management will continue to evaluate our internal control over financial reporting as we execute integration activities and anticipates that it will complete an evaluation as to whether or not to include the Business as a part of management’s next assessment of the Company’s 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  

None

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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

 

25

 


 

Table of Contents

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: July 19, 2012

 

by /s/ Alec C. Covington

 

 

Alec C. Covington

 

 

President and Chief Executive Officer

 

Date: July 19, 2012

 

by /s/ Robert B. Dimond

 

 

Robert B. Dimond

 

 

Executive Vice President and Chief Financial Officer

 

26

 


 

 

NASH FINCH COMPANY

EXHIBIT INDEX TO QUARTERLY REPORT

ON FORM 10-Q

For the Quarter Ended June 16, 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


 

27

 

XNAS:NAFC Quarterly Report 10-Q Filling

XNAS:NAFC Stock - Get Quarterly Report SEC Filing of XNAS:NAFC stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:NAFC Quarterly Report 10-Q Filing - 6/16/2012
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