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NAFC > SEC Filings for NAFC > Form 10-Q/A on 26-Apr-2013All Recent SEC Filings

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Form 10-Q/A for NASH FINCH CO


26-Apr-2013

Quarterly Report


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 traditional and alternative format 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 including a shift to non-traditional retail channels;

• 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, changes in funding levels, or the effects of mandated reductions in or sequestration of government expenditures;

• our ability to identify and execute plans to maintain 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 and ability to access capital to support capital spending and growth opportunities;

• 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 29, 2012. 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 SEC.


Table of Contents

Overview

In terms of revenue, we are the largest food distributor serving military commissaries and exchanges in the United States. Our core businesses include distributing food to military commissaries and independent grocery retailers and distributing to and operating our corporate-owned retail stores. Our business consists of three primary operating segments: Military Food Distribution ("Military"), Food Distribution and Retail.

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 business segments with warehouse management, inbound and outbound transportation management and customized solutions for each business segment;

† Growing the Military segment through acquisition and expansion of our distribution network, as well as creating warehousing and transportation cost efficiencies;

† Providing our independent retail customers with a high level of order fulfillment, broad product selection including leveraging the Our Family® and Nash Brothers Trading Company™ brands, 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.

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. During the third quarter of 2012, we transferred the operations of our Military distribution center in Jessup, Maryland to a larger facility in Landover, Maryland.

Our Food Distribution segment sells and distributes a wide variety of nationally branded and private label grocery products and perishable food products from 13 distribution centers to approximately 1,500 independent retail locations and corporate-owned retail stores located in 31 states, primarily in the Midwest, Great Lakes, and Southeast regions of the United States.

Our Retail segment operated 75 corporate-owned grocery stores primarily in the Upper Midwest as of March 23, 2013. During the second quarter of 2012, we acquired twelve Bag 'N Save® supermarkets located in Omaha and York, Nebraska. During the third quarter of 2012, we acquired eighteen No Frills® supermarkets located in Nebraska and western Iowa. This expansion of the Retail segment, including the addition of one store in the fourth quarter of 2012, was offset by the sale of two stores since the end of fiscal 2011. We are also implementing initiatives of varying scope and duration with a view toward improving our financial performance under the highly competitive conditions the Retail segment of our business faces. These initiatives include designing and reformatting some of our retail stores into alternative formats to increase overall retail sales performance. During the third quarter of 2012, we converted two of our existing retail stores to our Family Fresh Market® format. As we continue to assess the impact of performance improvement initiatives and the operating results of individual stores, we may need to recognize additional impairments of long-lived assets and goodwill associated with our Retail segment, and may incur restructuring or other charges in connection with closure or sales activities. The Retail segment yields a higher gross profit percent of sales and higher selling, general and administrative ("SG&A") expenses as a percent of sales compared to our Food Distribution and Military segments. Thus, changes in sales of the Retail segment can have a disproportionate impact on consolidated gross profit and SG&A as compared to similar changes in sales in our Food Distribution and Military segments.


Table of Contents

Results of Operations



Sales



The following table summarizes our sales activity for the 12 weeks ended March
23, 2013 ("first quarter 2013") compared to the 12 weeks ended March 24, 2012
("first quarter 2012"):



                                                                            Increase/
                              First quarter 2013    First quarter 2012      (Decrease)
                                         Percent              Percent
(In thousands)                   Sales   of Sales     Sales   of Sales      $        %
Segment Sales:
Military                     $   532,043    48.6%     534,328    49.9%    (2,285)  (0.4%)
Food Distribution                385,328    35.2%     432,758    40.5%   (47,430) (11.0%)
Retail                           176,870    16.2%     102,759     9.6%     74,111   72.1%
Total Sales                  $ 1,094,241   100.0%   1,069,845   100.0%     24,396    2.3%

Total Company sales increased 2.3% during the first quarter of 2013 as compared to the prior year quarter. The acquisition of eighteen No Frills® supermarkets during the third quarter of 2012 and the acquisition of twelve Bag 'N Save® supermarkets during the second quarter of 2012 resulted in a $77.3 million increase in Retail segment sales, partially offset by a $42.3 million decrease in Food Distribution segment sales due to the sales to those former Food Distribution customers now being reported in the Retail segment. The change in total Company sales was due to the items specifically outlined in our discussion of the sales of our reporting segments below, as well as market conditions impacting our industry, such as competition from supercenters and warehouse clubs, changes in consumer buying habits, and changes impacting sales to commissaries, including changes in purchasing patterns by the Defense Commissary Agency ("DeCA") for certain geographical regions, among other factors.

Military segment sales decreased 0.4% during the first quarter of 2013 as compared to the prior year quarter. During the first quarter of 2013, 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 $1.3 million in the first quarter of 2013. Including the impact of consignment sales, comparable Military sales decreased 0.2% in the first quarter of 2013 as compared to the prior year quarter. Domestic sales increased by 0.3%, while overseas sales decreased by 4.2% as compared to the prior year quarter. Domestic sales were positively impacted by new customers in 2013 compared to the prior year quarter. Overseas sales were impacted by troop reductions in Europe.

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

                                       First Quarter
                                       2013     2012
                             Domestic 85.1%     84.5%
                             Overseas 14.9%     15.5%

Food Distribution sales decreased 11.0% during the first quarter of 2013 as compared to the prior year quarter. This was primarily due to the effect of our retail store acquisitions from No Frills and Bag 'N Save, which resulted in a $42.3 million decrease in Food Distribution segment sales, since sales to those former Food Distribution customers are now reported in the Retail segment. Excluding the impact of these acquisitions, Food Distribution sales decreased 1.2% compared to the prior year quarter. This decrease was primarily attributable to prior year sales to lost customers exceeding new account gains reflected in current year sales.

Retail sales increased 72.1% during the first quarter of 2013 as compared to the prior year quarter. The increase in Retail sales is primarily attributable to our retail store acquisitions from No Frills and Bag 'N Save, which were responsible for a $77.3 million increase in sales as compared to the prior year quarter. Same store sales decreased 0.5% during the first quarter of 2013. Same store sales compare retail sales for stores which were in operation for the same number of weeks in the comparative periods. The decrease in our same store sales was primarily due to new competition from supercenters in one of our core markets.

During the first quarter of 2013, our Retail segment consisted of 75 corporate-owned grocery stores, as compared to 46 stores during the first quarter of 2012. There was no change in the corporate store count during the first quarter of either year. The corporate store count excludes corporate-owned stand-alone pharmacies and convenience stores.

Consolidated Gross Profit

Consolidated gross profit was 8.5% of sales for the first quarter of 2013 as compared to 7.5% of sales for the first quarter of 2012. Our gross margins were favorably impacted by 1.4% of sales in the first quarter due to a sales mix shift between our business segments between the years. This was primarily due to our retail store acquisitions in the second and third quarters of 2012, which were responsible for a significant increase in Retail segment sales during the first quarter of 2013. The Retail segment has a higher gross profit margin than the Food Distribution and Military segments. Our consolidated gross margin was negatively impacted by 0.4% of sales in comparison to the prior year quarter due to lower gross margins in our Military segment, primarily due to decreased drayage rates resulting from competitive bids, as well as the impact of lower food price inflation in the current period as compared to the prior year quarter.


Table of Contents

Consolidated Selling, General and Administrative Expenses

Consolidated SG&A was 6.9% of sales for the first quarter of 2013 as compared to 5.5% of sales for the first quarter of 2012. Our SG&A margin was negatively impacted by 1.3% 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 our retail store acquisitions in the second and third quarters of 2012, which were responsible for a significant increase in Retail segment sales during the first quarter of 2013. The Retail segment has higher SG&A expenses as a percent of sales compared to our other business segments.

Depreciation and Amortization Expense

Depreciation and amortization expense was $8.8 million for the first quarter of 2013 as compared to $8.2 million for the first quarter of 2012. Depreciation and amortization expense during the first quarter of 2013 for our Retail segment increased by $1.1 million as compared to the prior year quarter, which was primarily the result of our acquisitions of retail stores in the second and third quarters of 2012. Depreciation and amortization expense for our Military segment increased by $0.2 million during the first quarter of 2013 as compared to the prior year quarter, primarily due to the transfer of the operations of our Jessup, Maryland facility to a larger facility in Landover, Maryland during the third quarter of 2012. This was partially offset by a $0.7 million decrease for our Food Distribution segment as compared to the prior year quarter.

Interest Expense

Interest expense was $6.0 million for the first quarter of 2013 as compared to $5.1 million for the first quarter of 2012. Average borrowing levels increased to $398.2 million during the first quarter of 2013 from $318.3 million during the first quarter of 2012, primarily due to our acquisitions in the second and third quarters of 2012. The effective interest rate was 3.7% for the first quarter of 2013 as compared to 4.2% for the first quarter of 2012. 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 for both the first quarter of 2013 and the first quarter of 2012. 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 were 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 30.5% and 39.9% for the first quarters of 2013 and 2012, respectively.

During the first quarter of 2013, the Company made adjustments to reflect the impact of retroactive Federal legislation passed in 2013. Accordingly, the Company reported the effect of these discrete events in the first quarter of 2013. The effective tax rate for the first quarter 2013 is reflective of the results from these credits of ($0.3) million. The effective rate for the first quarter differed from statutory rates due to the amount of permanent book tax differences relative to the Company's pre-tax book income. We estimate the full year effective tax rate for 2013 will be approximately 38.8%, which excludes the potential impact of any additional discrete events. Additionally, in association with the redemption of notes related to the Senior Subordinated Convertible Debt in the first quarter 2013, the deferred income tax liability decreased and the income taxes payable increased by $26.9 million.


Table of Contents

Net Earnings

During the first quarter of 2013, we recorded net earnings of $2.1 million or $0.16 per diluted share as compared to net earnings of $5.5 million, or $0.42 per diluted share, during the first quarter of 2012. Net earnings in the periods presented in this report were affected by the items included in the discussion above.

Liquidity and Capital Resources

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

                                                        12 Weeks Ended
                                                March 23,   March 24,   Increase/
   (In thousands)                                  2013       2012      (Decrease)
   Net cash used in operating activities      $  (12,406)    (18,967)        6,561
   Net cash used in investing activities         (12,260)     (5,066)      (7,194)
   Net cash provided by financing activities       24,571      23,960          611
   Net change in cash                         $      (95)        (73)         (22)

Cash used in operating activities decreased by $6.6 million during the first quarter of 2013 as compared to the prior year. Inventories decreased by $1.8 million in the first quarter of 2013 as compared to an increase in inventories of $13.9 million in the prior year period, which contributed $15.7 million to the year-over-year decrease in cash used in operating activities. In addition, accrued expenses increased by $3.7 million in the first quarter of 2013 as compared to a decrease of $11.2 million in the prior year period, which contributed $14.9 million to the year-over-year decrease in cash used in operating activities. Partially offsetting this, accounts and notes receivable increased by $19.3 million in the first quarter of 2013 as compared to an increase of $2.6 million in the prior year period, which was responsible for a $16.7 million increase in cash used in operating activities. The other significant factor impacting our operating cash flows for the quarter was a $3.4 million year-over-year decrease in net earnings.

Net cash used in investing activities increased by $7.2 million during the first quarter of 2013 as compared to the prior year. During the first quarter of 2013, we had a year-over-year increase of $9.0 million in loans made to customers. This was partially offset by a year-over-year decrease of $1.3 million in capital expenditures and a year-over-year increase of $1.0 million in payments received from customers on loans.

Cash provided by financing activities increased by $0.6 million during the first quarter of 2013 as compared to the prior year. During the first quarter of 2013, proceeds from the revolving credit facility, net of amounts used to retire long-term debt, primarily our Senior Subordinated Convertible Debt, were $23.3 million, as compared to a net amount of $17.8 million during the first quarter of 2012. This was responsible for a $5.5 million year-over-year increase in cash provided by financing activities. This was offset by a $5.4 million year-over-year decrease in cash provided by financing activities related to increases in outstanding checks of $4.0 million and $9.4 million in the first quarters of 2013 and 2012, respectively.

During the remainder of fiscal 2013, 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 29, 2012, for a more detailed discussion of potential factors that may have an impact on our liquidity and capital resources.


Table of Contents

Asset-backed Credit Agreement

On December 21, 2011, the Company and its subsidiaries entered into a credit agreement and related security and other agreements with Wells Fargo and the Lenders party thereto (the "Credit Agreement"), providing for a $520.0 million revolving asset-backed credit facility, which included a $50.0 million Swing Line sub-facility and a $75.0 million letter of credit sub-facility (the "Revolving Credit Facility"). At the inception of the agreement, we were required to maintain a reserve of $100.0 million with respect to the Senior Subordinated Convertible Debt, which reserve increased to $150.0 million commencing on December 15, 2012, and was eliminated upon redemption of the Senior Subordinated Convertible Debt on March 15, 2013. Provided no event of default is then existing or would arise, the Company may from time-to-time, request that the Revolving Credit Facility be increased by an aggregate amount (for all such requests) not to exceed $250.0 million.

On November 27, 2012, the Company and its subsidiaries entered into Amendment No. 1 (the "Amendment") to the Credit Agreement.

Among other things, the Amendment (i) increased the commitments under the Credit Agreement by $70.0 million to $590.0 million, including within the increase a first-in last-out tranche ("FILO Tranche Loans") of $30.0 million which amortizes by $2.5 million on the first day of each fiscal quarter beginning March 24, 2013, (ii) extended the maturity of the Credit Agreement by one year to December 21, 2017, and (iii) provided for increases to advance rates of certain components of the borrowing base as well as permitting the inclusion of asset classes in the borrowing base that were previously excluded.

The principal amount outstanding under the amended Revolving Credit Facility, plus accrued and unpaid interest thereon, will be due and payable in full at maturity on December 21, 2017. The Company can elect, at the time of borrowing, for loans to bear interest at a rate equal to either the base rate or LIBOR plus a margin. The LIBOR interest rate margin can vary quarterly in 0.25% increments between three pricing levels ranging from 1.50% to 2.00%, except for FILO Tranche Loans which bear interest at a rate equal to LIBOR plus 2.75%. The pricing levels for the non-FILO Tranche Loans are based on the Excess Availability, which is defined in the Credit Agreement as (a) the lesser of (i) the borrowing base; or (ii) the aggregate commitments; minus (b) the aggregate of the outstanding credit extensions. The LIBOR interest rate margin was 1.75% as of March 23, 2013.

At March 23, 2013, $212.9 million was available under the Revolving Credit Facility after giving effect to outstanding borrowings and to $14.4 million of outstanding letters of credit primarily supporting workers' compensation obligations.

The Credit Agreement contains no financial covenants unless and until . . .

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