e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the twelve weeks ended June 16, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File No. 0-785
NASH-FINCH COMPANY
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE
(State or other jurisdiction of
incorporation or organization)
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41-0431960
(IRS Employer
Identification No.) |
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7600 France Avenue South,
P.O. Box 355 |
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Minneapolis, Minnesota
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55440-0355 |
(Address of principal executive offices)
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(Zip Code) |
(952) 832-0534
(Registrants 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 þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. (See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act).
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of
July 13, 2007, 13,462,788 shares of Common Stock of the Registrant were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NASH FINCH COMPANY AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
(In thousands, except per share amounts)
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Twelve Weeks Ended |
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Twenty-Four Weeks Ended |
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June 16, |
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June 17, |
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June 16, |
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June 17, |
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2007 |
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2006 |
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2007 |
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2006 |
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Sales |
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$ |
1,063,974 |
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1,070,764 |
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$ |
2,096,217 |
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2,105,523 |
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Cost of sales |
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967,892 |
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974,249 |
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1,909,414 |
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1,916,589 |
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Gross profit |
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96,082 |
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96,515 |
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186,803 |
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188,934 |
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Other costs and expenses: |
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Selling, general and administrative |
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65,488 |
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73,045 |
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132,047 |
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143,381 |
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Special charges |
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(1,282 |
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(1,282 |
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Depreciation and amortization |
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8,901 |
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9,617 |
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17,983 |
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19,319 |
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Interest expense |
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5,671 |
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6,120 |
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11,266 |
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12,187 |
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Total other costs and expenses |
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78,778 |
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88,782 |
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160,014 |
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174,887 |
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Earnings before income taxes and cumulative effect
of
a change in accounting principle |
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17,304 |
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7,733 |
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26,789 |
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14,047 |
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Income tax expense |
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7,697 |
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3,603 |
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11,894 |
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6,230 |
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Net earnings before cumulative effect of a change in
accounting principle |
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9,607 |
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4,130 |
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14,895 |
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7,817 |
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Cumulative effect of a change in accounting principle, net
of income tax expense of $119 in 2006 |
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169 |
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Net earnings |
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$ |
9,607 |
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4,130 |
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$ |
14,895 |
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7,986 |
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Net earnings per share: |
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Basic: |
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Net earnings before cumulative effect of a change in
accounting principle |
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$ |
0.71 |
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0.31 |
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$ |
1.11 |
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0.59 |
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Cumulative effect of a change in accounting
principle,
net of income tax expense |
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0.01 |
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Net earnings per share |
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$ |
0.71 |
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0.31 |
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$ |
1.11 |
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0.60 |
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Diluted: |
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Net earnings before cumulative effect of a change in
accounting principle |
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$ |
0.70 |
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0.31 |
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$ |
1.10 |
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0.59 |
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Cumulative effect of a change in accounting
principle,
net of income tax expense |
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0.01 |
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Net earnings per share |
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$ |
0.70 |
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0.31 |
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$ |
1.10 |
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0.60 |
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Declared dividends per common share |
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$ |
0.180 |
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0.180 |
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$ |
0.360 |
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0.360 |
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Weighted average number of common shares
outstanding and common equivalent shares outstanding: |
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Basic |
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13,492 |
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13,366 |
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13,465 |
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13,357 |
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Diluted |
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13,630 |
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13,377 |
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13,563 |
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13,375 |
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See accompanying notes to consolidated financial statements.
2
NASH FINCH COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share amounts)
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June 16, |
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December 30, |
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2007 |
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2006 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,334 |
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958 |
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Accounts and notes receivable, net |
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179,327 |
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186,833 |
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Inventories |
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259,804 |
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241,875 |
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Prepaid expenses and other |
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13,291 |
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15,445 |
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Deferred tax asset, net |
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12,660 |
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11,942 |
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Total current assets |
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466,416 |
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457,053 |
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Notes receivable, net |
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11,325 |
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13,167 |
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Property, plant and equipment: |
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Property, plant and equipment |
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619,448 |
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620,555 |
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Less accumulated depreciation and amortization |
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(412,397 |
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(400,750 |
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Net property, plant and equipment |
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207,051 |
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219,805 |
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Goodwill |
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215,174 |
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215,174 |
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Customer contracts and relationships, net |
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30,400 |
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32,141 |
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Investment in direct financing leases |
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5,241 |
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6,143 |
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Deferred tax asset, net |
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8,601 |
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Other assets |
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10,514 |
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10,820 |
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Total assets |
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$ |
954,722 |
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954,303 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Current maturities of long-term debt and capitalized lease obligations |
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$ |
3,858 |
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3,776 |
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Accounts payable |
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204,527 |
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209,503 |
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Accrued expenses |
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67,337 |
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64,943 |
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Total current liabilities |
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275,722 |
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278,222 |
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Long-term debt |
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288,478 |
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313,985 |
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Capitalized lease obligations |
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32,224 |
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33,869 |
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Deferred tax liability, net |
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4,214 |
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Other liabilities |
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50,171 |
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29,633 |
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Stockholders equity: |
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Preferred stock no par value. Authorized 500 shares; none issued |
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Common stock $1.66 2/3 par value. Authorized 50,000 shares,
issued 13,480 and 13,409 shares, respectively |
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22,467 |
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22,348 |
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Additional paid-in capital |
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57,636 |
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53,697 |
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Common stock held in trust |
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(2,074 |
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(2,051 |
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Deferred compensation obligations |
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2,074 |
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2,051 |
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Accumulated other comprehensive income |
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(4,782 |
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(4,582 |
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Retained earnings |
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233,305 |
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223,416 |
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Common stock in treasury, 21 and 21 shares, respectively |
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(499 |
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(499 |
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Total stockholders equity |
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308,127 |
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294,380 |
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Total liabilities and stockholders equity |
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$ |
954,722 |
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954,303 |
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See accompanying notes to consolidated financial statements.
3
NASH FINCH COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
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Twenty-Four Weeks Ended |
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June 16, |
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June 17, |
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2007 |
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2006 |
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Operating activities: |
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Net earnings |
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$ |
14,895 |
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7,986 |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Special charges |
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(1,282 |
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Depreciation and amortization |
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17,983 |
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19,319 |
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Amortization of deferred financing costs |
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377 |
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380 |
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Amortization of rebatable loans |
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1,446 |
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1,006 |
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Provision for bad debts |
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873 |
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3,435 |
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Provision for lease reserves |
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(63 |
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1,295 |
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Deferred income tax expense |
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2,963 |
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1,140 |
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Gain on sale of real estate and other |
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(319 |
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(1,784 |
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LIFO charge |
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1,615 |
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923 |
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Asset impairments |
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1,141 |
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4,794 |
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Share-based compensation |
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2,540 |
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447 |
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Cumulative effect of a change in accounting principle |
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(288 |
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Deferred compensation |
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362 |
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(1,307 |
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Other |
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(60 |
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(532 |
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Changes in operating assets and liabilities: |
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Accounts and notes receivable |
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6,856 |
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7,809 |
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Inventories |
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(19,545 |
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21,611 |
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Prepaid expenses |
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2,630 |
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691 |
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Accounts payable |
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649 |
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5,739 |
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Accrued expenses |
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(1,179 |
) |
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(4,947 |
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Income taxes payable |
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8,468 |
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(2,152 |
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Other assets and liabilities |
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(283 |
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(736 |
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Net cash provided by operating activities |
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40,067 |
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64,829 |
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Investing activities: |
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Disposal of property, plant and equipment |
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2,259 |
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5,112 |
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Additions to property, plant and equipment |
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(5,804 |
) |
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(8,460 |
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Loans to customers |
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(433 |
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(5,524 |
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Payments from customers on loans |
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755 |
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1,021 |
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Purchase of marketable securities |
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(233 |
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Sale of marketable securities |
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2 |
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920 |
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Corporate owned life insurance, net |
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(123 |
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(208 |
) |
Other |
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(179 |
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Net cash used in investing activities |
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(3,344 |
) |
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(7,551 |
) |
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Financing activities: |
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Payments of revolving debt |
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(25,300 |
) |
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(35,600 |
) |
Dividends paid |
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(4,834 |
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(4,798 |
) |
Proceeds from exercise of stock options |
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1,638 |
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|
288 |
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Proceeds from employee stock purchase plan |
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255 |
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|
253 |
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Payments of long-term debt |
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(319 |
) |
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(653 |
) |
Payments of capitalized lease obligations |
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(1,451 |
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(1,361 |
) |
Decrease in book overdraft |
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(6,590 |
) |
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|
(6,556 |
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Tax benefit from exercise of stock options |
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|
254 |
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|
58 |
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Other |
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|
267 |
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Net cash used by financing activities |
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(36,347 |
) |
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(48,102 |
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Net increase in cash and cash equivalents |
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|
376 |
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|
9,176 |
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Cash and cash equivalents: |
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Beginning of year |
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|
958 |
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1,257 |
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End of period |
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$ |
1,334 |
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|
10,433 |
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|
See accompanying notes to consolidated financial statements.
4
Nash Finch Company and Subsidiaries
Notes to Consolidated Financial Statements
June 16, 2007
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information. Accordingly, they
do not include all of the information and footnotes required by generally accepted accounting
principles 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 30, 2006.
The accompanying 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) at June 16, 2007 and December 30, 2006, the results of operations for
the twelve and twenty-four weeks ended June 16, 2007 and June 17, 2006 and changes in cash flows
for the twenty-four weeks ended June 16, 2007 and June 17, 2006. 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 generally accepted accounting
principles 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.
Certain reclassifications have been reflected in the accompanying unaudited consolidated
financial statements for the second quarter and year-to-date periods ended June 16, 2007. These
reclassifications did not have an impact on operating earnings, earnings before income taxes, net
earnings, total cash flows or the financial position for any period presented.
Note 2 Inventories
We use the LIFO method for valuation of a substantial portion of inventories. An actual
valuation of inventory under the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on
managements estimates of expected year-end inventory levels and costs. Because these estimates
are subject to many factors beyond managements 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 $52.9 million and $51.3 million higher at June 16, 2007 and December 30, 2006,
respectively. In the second quarter of 2007 we recorded LIFO charges of $0.8 million compared to
$0.5 million for second quarter 2006. Year-to-date LIFO charges recorded were $1.6 million and
$1.0 million, respectively, at June 16, 2007 and June 17, 2006.
Note 3 Share-Based Compensation
We account for share-based compensation awards in accordance with the provisions of Statement
of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment Revised, which
requires companies 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 in our Consolidated Statements of Income of $1.6 and $2.5 million, respectively, for the
twelve and twenty-four weeks ended June 16, 2007, versus expense of $0.6 and $0.4 million for the
twelve and twenty-four weeks ended June 17, 2006.
In addition, SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ materially from those
estimates. As such, during the first fiscal quarter of 2006, we recorded a cumulative effect for a
change in
accounting principle of $0.2 million in benefit, net of tax, as a result of estimating
forfeitures for our Long-Term Incentive Program (LTIP).
5
We have three stock incentive plans under which incentive stock options, non-qualified stock
options and other forms of stock-based compensation have been, or may be, granted primarily to key
employees and non-employee members of the Board of Directors. The 1995 Director Stock Option Plan
was terminated as of December 27, 2004 and participation in the 1997 Non-Employee Director Stock
Compensation Plan (1997 Director Plan) was frozen as of December 31, 2004.
Under the 2000 Stock Incentive Plan (2000 Plan), employees, non-employee directors,
consultants and independent contractors may be awarded incentive or non-qualified stock options,
shares of restricted stock, stock appreciation rights, performance units or stock bonuses. No
options have been granted since fiscal 2004. Option awards granted to employees prior to 2005 had
commonly been non-qualified stock options, each with an exercise price equal to the fair market
value of a share of our common stock on the date of grant and a term of 5 years, becoming
exercisable in 20% increments 6, 12, 24, 36 and 48 months after the date of the grant.
The following table summarizes information concerning outstanding and exercisable options
under the 1997 Director Plan and 2000 Plan as of June 16, 2007 (number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
Number |
|
Weighted |
|
Number of |
|
Weighted |
Range of |
|
of Options |
|
Average |
|
Options |
|
Average |
Exercise Prices |
|
Outstanding |
|
Exercise Price |
|
Exercisable |
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$17.35 17.95
|
|
|
24.8 |
|
|
|
|
|
|
|
18.8 |
|
|
|
|
|
24.55 35.36
|
|
|
31.5 |
|
|
|
|
|
|
|
16.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56.3 |
|
|
$ |
24.02 |
|
|
|
32.3 |
|
|
$ |
23.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since 2005, awards have taken the form of performance units (including share units
pursuant to our LTIP) and restricted stock units.
Performance units were granted during 2005, 2006 and 2007 under the 2000 Stock Incentive Plan
pursuant to our Long Term Incentive Plan. These units vest at the end of a three year performance
period. The payout, if any, for units granted in 2005 will be determined by comparing our growth in
Consolidated EBITDA (defined as in our senior secured credit agreement) and return on net assets
(defined as net income divided by the sum of net fixed assets plus the difference between current
assets and current liabilities) during the performance period to the growth in those measures over
the same period experienced by the companies in a peer group selected by us. The Long Term
Incentive Plan was amended in 2006, and the payout, if any, for units granted in 2006 will be
determined on the basis described above with return on net assets defined as the weighted average
of the return on net assets for the fiscal years during a Measurement Period, where the return on
net assets for each such fiscal year shall be the quotient of (i) net income for such fiscal year
divided by (ii) the average of the difference between total assets and current liabilities
(excluding current maturities of long-term debt and capital lease obligations) determined as of the
beginning and the end of such fiscal year. The Long Term Incentive Plan was further amended in
2007, and the payout, if any, for units granted in 2007 will be determined on the basis described
above with free cash flow (defined as cash provided from operations less capital expenditures for
property, plant and equipment) replacing the return on net assets. The performance units will pay
out in shares of our common stock or cash, or a combination of both, at the election of the
participant. Depending on our ranking among the companies in the peer group for the 2005 and 2006
awards, a participant could receive a number of shares (or the cash value thereof) ranging from
zero to 200% of the number of performance units granted. For the 2007 awards, a participant could
receive a number of shares (or the cash value thereof) ranging from zero to 200% of the number of
performance units granted depending on our ranking among the peer group for EBITDA and our free
cash flow (as a percent of net assets) versus targets approved by the Board of Directors. Because
these units can be settled in cash or stock, compensation expense is recorded over the three year
period and adjusted to market value each period.
Awards to non-employee directors under the 2000 Plan began in 2004 and have taken the form of
restricted stock units that are granted annually to
each non-employee director as part of his or her annual compensation for service as a director.
The number of such units awarded to each director in 2006 was determined by dividing $45,000 by the
fair market value of a share of our common stock on the date of grant. Each of these units vest
six months after issuance and will entitle a director to receive one share of our common
6
stock six months after the directors service on our Board ends. The awards are expensed over the
six month vesting period.
We also maintain the 1999 Employee Stock Purchase Plan under which our employees may purchase
shares of our common stock at the end of each six-month offering period at a price equal to 85% of
the lesser of the fair market value of a share of our common stock at the beginning or end of such
offering period.
During fiscal 2006 and the first two quarters of fiscal 2007, restricted stock units (RSUs)
were awarded to ten of our executives, including Alec C. Covington, our President and Chief
Executive Officer. 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.
On February 27, 2007, Mr. Covington was granted a total of 152,500 RSUs under the Companys
2000 Stock Incentive Plan. The new RSU grant replaces a previous grant of 100,000 performance
units awarded to Mr. Covington when he joined the Company last year. The previous 100,000 unit
grant has been cancelled. The new grant delivers additional equity in lieu of the cash tax gross
up payment included in the previous award; therefore no cash outlay will be required by the
Company. Vesting of the new RSU grant to Mr. Covington will occur over a four year period,
assuming Mr. Covingtons continued employment with Nash Finch. However, Mr. Covington will not
receive the stock until six months after the termination of his employment, whenever that may
occur.
On January 2, 2007, we granted Robert B. Dimond, Executive Vice President, Chief Financial
Officer and Treasurer a total of 75,000 performance units, 37,500 of which vest in one-third
increments on each of the first three anniversaries of the grant date and 37,500 of which vest on
the fifth anniversary of the date of grant.
The following table summarizes activity in our share-based compensation plans during the
year-to-date period ended June 16, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted |
|
Restricted |
|
Remaining |
|
|
|
|
|
|
Average |
|
Stock |
|
Restriction/ |
|
|
Stock |
|
Option |
|
Awards/ |
|
Vesting |
|
|
Option |
|
Price Per |
|
Performance |
|
Period |
(In thousands, except per share amounts) |
|
Shares |
|
Share |
|
Units |
|
(Years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 30, 2006 |
|
|
124.8 |
|
|
$ |
26.68 |
|
|
|
618.9 |
|
|
|
2.1 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
437.5 |
|
|
|
|
|
Exercised/restrictions
Lapsed |
|
|
(56.5 |
) |
|
|
|
|
|
|
|
* |
|
|
|
|
Forfeited/cancelled |
|
|
(12.0 |
) |
|
|
|
|
|
|
(127.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 16, 2007 |
|
|
56.3 |
|
|
$ |
24.02 |
|
|
|
928.6 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable/unrestricted at
December 30, 2006 |
|
|
97.0 |
|
|
$ |
27.33 |
|
|
|
171.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable/unrestricted at
June 16, 2007 |
|
|
35.3 |
|
|
$ |
23.72 |
|
|
|
191.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The exercised/restrictions lapsed amount above excludes 18,575 restricted stock units held by
Alec Covington that vested during the second fiscal quarter but were deferred until after his
employment with the Company ends. |
The weighted-average grant-date fair value of equity based restricted stock/performance units
granted was $30.03 during the twenty-four weeks ended June 16, 2007 versus $23.45 during the
comparable period ended June 17, 2006. Awards under our LTIP, which is a liability award
re-measured at each balance sheet date, are not included in these values.
7
Note 4 Other Comprehensive Income
Other comprehensive income consists of market value adjustments to reflect available-for-sale
securities and derivative instruments at fair value, pursuant to SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.
During the quarter and year-to-date periods ended June 17, 2006 all interest rate and
commodity swap agreements were designated as cash flow hedges and were reflected at fair value in
our Consolidated Balance Sheet with the related gains or losses on these contracts deferred in
stockholders equity as a component of other comprehensive income, and were accounted for
consistent to the prior year. During the quarter and year-to-date periods ended June 16, 2007 our
only outstanding commodity swap agreement did not qualify for hedge accounting in accordance with
SFAS No. 133, and the corresponding changes in fair value of the commodity swap agreement were
recognized in earnings. All investments in available-for-sale securities held by us are amounts
held in a rabbi trust in connection with the deferred compensation arrangement described below and
are included in other assets on the Consolidated Balance Sheet. The components of comprehensive
income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
Year-to-Date |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 16, |
|
|
June 17, |
|
|
June 16, |
|
|
June 17, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
9,607 |
|
|
|
4,130 |
|
|
|
14,895 |
|
|
|
7,986 |
|
Change in fair value of available-for-sale
securities, net of tax |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of tax |
|
|
(80 |
) |
|
|
188 |
|
|
|
(200 |
) |
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
9,527 |
|
|
|
4,321 |
|
|
|
14,695 |
|
|
|
8,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We offer deferred compensation arrangements, which allow certain employees, officers, and
directors to defer a portion of their earnings. The amounts deferred are held in a rabbi trust.
The assets of the rabbi trust include life insurance policies to fund our obligations under
deferred compensation arrangements for certain employees, officers and directors. The cash
surrender value of these policies is included in other assets on the Consolidated Balance Sheets.
The assets of the rabbi trust also include shares of Nash Finch common stock. These shares are
included in stockholders equity on the Consolidated Balance Sheets.
8
Note 5 Long-term Debt and Bank Credit Facilities
Total debt outstanding was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 16, |
|
|
December 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Senior secured credit facility: |
|
|
|
|
|
|
|
|
Revolving credit |
|
$ |
11,000 |
|
|
|
|
|
Term Loan B |
|
|
123,700 |
|
|
|
160,000 |
|
Senior subordinated convertible debt, 3.50% due in 2035 |
|
|
150,087 |
|
|
|
150,087 |
|
Industrial development bonds, 5.60% to 5.75% due in
various installments through 2014 |
|
|
3,615 |
|
|
|
3,790 |
|
Notes payable and mortgage notes, 7.95% to 8.00% due
in various installments through 2013 |
|
|
596 |
|
|
|
741 |
|
|
|
|
|
|
|
|
Total debt |
|
|
288,998 |
|
|
|
314,618 |
|
Less current maturities |
|
|
(520 |
) |
|
|
(633 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
288,478 |
|
|
|
313,985 |
|
|
|
|
|
|
|
|
Senior Secured Credit Facility
Our senior secured credit facility consists of $125.0 million in revolving credit, all of
which may be utilized for loans, and up to $40.0 million of which may be utilized for letters of
credit, and a $123.7 million Term Loan B. The Term Loan B portion of the facility was $160.0
million as of December 30, 2006 of which $20.0 million and $36.3 million was permanently paid down
during the second quarter 2007 and year-to-date 2007 periods, respectively. The facility is
secured by a security interest in substantially all of our assets that are not pledged under other
debt agreements. The revolving credit portion of the facility has a five year term and the Term
Loan B has a six year term. Borrowings under the facility bear interest at the Eurodollar rate or
the prime rate, plus, in either case, a margin increase that is dependent on our total leverage
ratio and a commitment commission on the unused portion of the revolver. The margin spread and the
commitment commission is reset quarterly based on movement of a leverage ratio defined by the
agreement. At June 16, 2007 the margin spreads for the revolver and Term Loan B maintained as
Eurodollar loans were 2.0% and 2.5%, respectively, and the unused commitment commission was 0.375%.
The margin spread for the revolver maintained at the prime rate was 1.0%. At June 16, 2007, $95.8
million was available under the revolving line of credit after giving effect to outstanding
borrowings and to $18.2 million of outstanding letters of credit primarily supporting workers
compensation obligations.
Senior Subordinated Convertible Debt
To finance a portion of the acquisition of 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 senior secured credit facility. See our Annual Report on Form 10-K for the fiscal year
ended December 30, 2006 for additional information.
Note 6 Special Charge
In fiscal 2004, we closed 18 retail stores and sought purchasers for our three Denver area
AVANZA stores. As a result of these actions, we recorded net charges of $34.9 million reflected in
a Special charges line within the Consolidated Statements of Income.
In fiscal 2005, we decided to continue to operate the three Denver area AVANZA stores and
therefore recorded a reversal of $1.5 million of the special charge related to the stores.
Partially offsetting this reversal was a $0.2 million change in estimate for one other property.
In fiscal 2006, we recorded additional charges, related to two properties included in the
special charge, of $5.5 million to write down capitalized leases and $0.9 million to reserve for
lease commitments as a result of
9
lower than originally estimated sublease income. Additionally, we reversed $0.2 million
of a previously recorded charge to change an estimate for another property.
In the second quarter of 2007, we reversed $1.6 million of previously established lease
reserves for one location after subleasing the property earlier than anticipated. We also recoded
an additional $0.3 million in charges due to revised lease commitment estimates for another
property in the second quarter of 2007.
Following is a summary of the activity in the 2004 reserve established for store dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write- Down of |
|
|
Write-Down |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Tangible Assets |
|
|
of Intangible Assets |
|
|
Lease Commitments |
|
|
Severance |
|
|
Other Exit Costs |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial net charge accrual |
|
$ |
21,485 |
|
|
|
1,072 |
|
|
|
11,636 |
|
|
|
86 |
|
|
|
588 |
|
|
|
34,867 |
|
Used in 2004 |
|
|
(21,485 |
) |
|
|
(1,072 |
) |
|
|
(2,162 |
) |
|
|
(86 |
) |
|
|
(361 |
) |
|
|
(25,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2005 |
|
|
|
|
|
|
|
|
|
|
9,474 |
|
|
|
|
|
|
|
227 |
|
|
|
9,701 |
|
Change in estimates |
|
|
(1,531 |
) |
|
|
|
|
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
(1,296 |
) |
Used in 2005 |
|
|
1,531 |
|
|
|
|
|
|
|
(2,026 |
) |
|
|
|
|
|
|
(55 |
) |
|
|
(550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
7,683 |
|
|
|
|
|
|
|
172 |
|
|
|
7,855 |
|
Change in estimates |
|
|
5,516 |
|
|
|
|
|
|
|
737 |
|
|
|
|
|
|
|
|
|
|
|
6,253 |
|
Used in 2006 |
|
|
(5,516 |
) |
|
|
|
|
|
|
(2,087 |
) |
|
|
|
|
|
|
(76 |
) |
|
|
(7,679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 30, 2006 |
|
|
|
|
|
|
|
|
|
|
6,333 |
|
|
|
|
|
|
|
96 |
|
|
|
6,429 |
|
Change in estimates |
|
|
|
|
|
|
|
|
|
|
(1,282 |
) |
|
|
|
|
|
|
|
|
|
|
(1,282 |
) |
Used in 2007 |
|
|
|
|
|
|
|
|
|
|
(462 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
(463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 16, 2007 |
|
$ |
|
|
|
|
|
|
|
|
4,589 |
|
|
|
|
|
|
|
95 |
|
|
|
4,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 16, 2007, we believe the remaining reserves are adequate.
Note 7 Guarantees
We have guaranteed the debt and lease obligations of certain of our food distribution
customers. In the event these retailers are unable to meet their debt service payments or
otherwise experience an event of default, we would be unconditionally liable for the outstanding
balance of their debt and lease obligations ($7.6 million as of June 16, 2007), which would be due
in accordance with the underlying agreements.
We entered into a new debt guarantee in first quarter 2007 with a food distribution customer
that is accounted for under Financial Accounting Standards Board (FASB) Interpretation No. 45,
Guarantors Accounting and Disclosures Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others,(FIN 45) which provides that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair value of the obligation it assumes
under that guarantee. The maximum undiscounted payments we would be required to make in the event
of default under the guarantee is $3.0 million, which is included in the $7.6 million total
referenced above. The maximum amount of the guarantee is reduced annually during the approximate
five-year term of the agreement, and is secured by a personal guarantee from the affiliated
customer. The initial liability was recorded at fair value, and is immaterial to the accompanying
consolidated financial statements. All of the other guarantees were issued prior to December 31,
2002 and therefore not subject to the recognition and measurement provisions of FIN 45.
We have also assigned various leases to other entities. If the assignees were to become
unable to continue making payments under the assigned leases, we estimate our maximum potential
obligation with respect to the assigned leases to be $12.3 million as of June 16, 2007.
10
Note 8 Income Taxes
The Company or one of its subsidiaries files 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 before 2003. The
Internal Revenue Service (IRS) has examined our U.S. income tax returns for 2004 and 2005.
During the next 12 months, the Company intends to file various reports to settle various tax
liabilities related to open tax years. The Company also expects various statutes of limitation to
expire during the year. Due to the uncertain response of the taxing authorities, a range of
outcomes cannot be reasonably estimated at this time.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, (FIN 48) on December 31, 2006. We did not recognize any adjustment in the
liability for unrecognized tax benefits, as a result of FIN 48, that impacted the December 31, 2006
balance of retained earnings. The total amount of unrecognized tax benefits was $21.8 million at
December 31, 2006 million. The total amount of tax benefits that if recognized would impact the
effective tax rate was $3.1 million at December 31, 2006. We recognize interest and penalties
accrued related to unrecognized tax benefits in income tax expense. We had approximately $3.7
million for the payment of interest and penalties accrued at December 31, 2006.
There have been no material changes to the amount of unrecognized tax benefits, the amount of
tax benefits that would impact the effective rate if recognized, or the amount of accrued interest
and penalties since the Company adopted the provisions of FIN 48 on December 31, 2006.
Note 9 Pension and Other Postretirement Benefits
The following tables present the components of our pension and postretirement net periodic
benefit cost:
Twelve Weeks Ended June 16, 2007 and June 17, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
585 |
|
|
|
567 |
|
|
|
14 |
|
|
|
15 |
|
Expected return on plan assets |
|
|
(578 |
) |
|
|
(586 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(161 |
) |
|
|
(161 |
) |
Recognized actuarial loss (gain) |
|
|
59 |
|
|
|
76 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
63 |
|
|
|
54 |
|
|
|
(149 |
) |
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Four Weeks Ended June 16, 2007 and June 17, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
|
$ |
1,170 |
|
|
|
1,133 |
|
|
|
28 |
|
|
|
40 |
|
Expected return on plan assets |
|
|
(1,154 |
) |
|
|
(1,172 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
(322 |
) |
|
|
(271 |
) |
Recognized actuarial loss (gain) |
|
|
118 |
|
|
|
153 |
|
|
|
(4 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
127 |
|
|
|
107 |
|
|
|
(298 |
) |
|
|
(233 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Weighted-average assumptions used to determine net periodic benefit cost for the second quarter and
year-to-date periods ended June 16, 2007 and June 17, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Weighted-average assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
5.50 |
% |
|
|
6.00 |
% |
|
|
5.50 |
% |
Expected return on plan assets |
|
|
7.00 |
% |
|
|
7.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
Rate of compensation increase |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Total contributions to our pension plan in 2007 are expected to be $1.6 million.
Note 10 Earnings Per Share
The following table reflects the calculation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
Year-to-Date |
|
|
|
Ended |
|
|
Ended |
|
(In thousands, except per share amounts) |
|
June 16, 2007 |
|
|
June 17, 2006 |
|
|
June 16, 2007 |
|
|
June 17, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
9,607 |
|
|
|
4,130 |
|
|
|
14,895 |
|
|
|
7,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share-basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
13,492 |
|
|
|
13,366 |
|
|
|
13,465 |
|
|
|
13,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share-basic |
|
$ |
0.71 |
|
|
|
0.31 |
|
|
|
1.11 |
|
|
|
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share-diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
13,492 |
|
|
|
13,366 |
|
|
|
13,465 |
|
|
|
13,357 |
|
Dilutive impact of options |
|
|
9 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
Shares contingently issuable |
|
|
129 |
|
|
|
11 |
|
|
|
93 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares and
potential dilutive
shares outstanding |
|
|
13,630 |
|
|
|
13,377 |
|
|
|
13,563 |
|
|
|
13,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share-diluted |
|
$ |
0.70 |
|
|
|
0.31 |
|
|
|
1.10 |
|
|
|
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive options excluded from
calculation (weighted-average amount
for period) |
|
|
30 |
|
|
|
71 |
|
|
|
46 |
|
|
|
71 |
|
Certain options 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 2035 will be convertible at the option of the
holder, only upon the occurrence of certain events, at an adjusted conversion rate of 9.4164 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 $49.50 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
Companys stock did not exceed the accreted value. Therefore, the notes are not dilutive to
earnings per share for any of the periods presented.
Performance units granted during 2005, 2006 and 2007 under the 2000 Plan for the LTIP will pay
out in shares of Nash Finch common stock or cash, or a combination of both, at the election of the
participant. Other performance and restricted stock units granted
during 2006 and 2007 pursuant to the 2000 Plan will pay out in
12
shares of Nash Finch common stock.
Unvested restricted units are not included in basic earnings per share until vested. All shares of
time-restricted stock are included in diluted earnings per share using the treasury stock method,
if dilutive. Performance units granted for the LTIP are only issuable if certain performance
criteria are met, making these shares contingently issuable under SFAS No. 128, Earnings per
Share. Therefore, the performance units are included in diluted earnings per share only if the
performance criteria are met as of the end of the respective reporting period and then accounted
for using the treasury stock method, if dilutive.
Note 11 Segment Reporting
We sell and distribute products that are typically found in supermarkets and operate three
reportable operating segments. Our food distribution segment consists of 16 distribution centers
that sell to independently operated retail food stores, our corporate owned stores and other
customers. The military segment consists primarily of two distribution centers that distribute
products exclusively to military commissaries and exchanges. The retail segment consists of
corporate-owned stores that sell directly to the consumer.
A summary of the major segments of the business is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended |
|
|
|
June 16, 2007 |
|
|
June 17, 2006 |
|
(In thousands) |
|
Sales from external customers |
|
|
Inter-segment sales |
|
|
Segment profit |
|
|
Sales from external customers |
|
|
Inter-segment sales |
|
|
Segment profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Distribution |
|
$ |
633,066 |
|
|
|
70,234 |
|
|
|
21,343 |
|
|
|
639,536 |
|
|
|
77,303 |
|
|
|
17,584 |
|
Military |
|
|
290,458 |
|
|
|
|
|
|
|
10,170 |
|
|
|
278,677 |
|
|
|
|
|
|
|
11,011 |
|
Retail |
|
|
140,450 |
|
|
|
|
|
|
|
6,818 |
|
|
|
152,551 |
|
|
|
|
|
|
|
6,600 |
|
Eliminations |
|
|
|
|
|
|
(70,234 |
) |
|
|
|
|
|
|
|
|
|
|
(77,303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,063,974 |
|
|
|
|
|
|
|
38,331 |
|
|
|
1,070,764 |
|
|
|
|
|
|
|
35,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-Date Ended |
|
|
|
June 16, 2007 |
|
|
June 17, 2006 |
|
(In thousands) |
|
Sales from external customers |
|
|
Inter-segment sales |
|
|
Segment profit |
|
|
Sales from external customers |
|
|
Inter-segment sales |
|
|
Segment profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Distribution |
|
$ |
1,247,852 |
|
|
|
137,153 |
|
|
|
39,523 |
|
|
|
1,260,012 |
|
|
|
154,911 |
|
|
|
35,425 |
|
Military |
|
|
572,265 |
|
|
|
|
|
|
|
19,642 |
|
|
|
541,522 |
|
|
|
|
|
|
|
19,758 |
|
Retail |
|
|
276,100 |
|
|
|
|
|
|
|
11,639 |
|
|
|
303,989 |
|
|
|
|
|
|
|
10,872 |
|
Eliminations |
|
|
|
|
|
|
(137,153 |
) |
|
|
|
|
|
|
|
|
|
|
(154,911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,096,217 |
|
|
|
|
|
|
|
70,804 |
|
|
|
2,105,523 |
|
|
|
|
|
|
|
66,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Reconciliation to Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
Year-To-Date |
|
|
|
Ended |
|
|
Ended |
|
(In thousands) |
|
June 16, 2007 |
|
|
June 17, 2006 |
|
|
June 16, 2007 |
|
|
June 17, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment profit |
|
$ |
38,331 |
|
|
|
35,195 |
|
|
|
70,804 |
|
|
|
66,055 |
|
Unallocated amounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment of inventory to LIFO |
|
|
(807 |
) |
|
|
(461 |
) |
|
|
(1,615 |
) |
|
|
(923 |
) |
Special charges |
|
|
1,282 |
|
|
|
|
|
|
|
1,282 |
|
|
|
|
|
Unallocated corporate overhead |
|
|
(21,502 |
) |
|
|
(27,001 |
) |
|
|
(43,682 |
) |
|
|
(51,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and
cumulative
effect of a change in accounting
principle |
|
$ |
17,304 |
|
|
|
7,733 |
|
|
|
26,789 |
|
|
|
14,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
ITEM 2. Managements 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 statements of historical
fact may be deemed forward-looking statements. 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 success or failure of strategic plans, new business ventures or initiatives; |
|
|
|
the effect of competition on our distribution, military and retail businesses; |
|
|
|
our ability to identify and execute plans to improve the competitive position of our retail operations; |
|
|
|
risks entailed by future acquisitions, including the ability to successfully integrate
acquired operations and retain the customers of those operations; |
|
|
|
technology failures which have a material adverse effect on our business; |
|
|
|
changes in credit risk from financial accommodations extended to new or existing customers; |
|
|
|
general sensitivity to economic conditions, including volatility in energy prices, food
commodities, and changes in market interest rates; |
|
|
|
our ability to identify and execute plans to expand our food distribution, military and
retail operations; |
|
|
|
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; |
|
|
|
possible changes in the military commissary system, including those stemming from the
redeployment of forces, congressional action and funding levels; |
|
|
|
Legal, governmental or administrative proceedings and/or disputes that result in adverse
outcomes, such as adverse determinations or developments with respect to the litigation or SEC
inquiry discussed in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year
ended December 30, 2006; |
|
|
|
changes in consumer spending or buying patterns; |
|
|
|
unanticipated problems with product procurement; |
|
|
|
severe weather and natural disasters adversely impacting our supply chain; |
|
|
|
changes in health care, pension and wage costs, and labor relations issues; and |
|
|
|
threats or potential threats to security or food safety. |
A
more detailed discussion of many of these factors, as well as other
factors, that could affect the Companys results, is contained
in Part II, Item 1A, Risk Factors of this Form 10-Q and in Part I, Item 1A, Risk
Factors, of our Annual Report on Form 10-K for the fiscal year ended December 30, 2006. 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).
Overview
We are the second largest publicly traded wholesale food distribution company in the United
States. Our business consists of three primary operating segments: food distribution, military and
food retailing.
15
In November 2006 we announced the launch of a new strategic plan, Operation Fresh Start,
designed to sharpen our focus and provide a strong platform to support growth initiatives. Built
upon extensive knowledge of current industry, consumer and market trends, and formulated to
differentiate the Company, the new strategy focuses activities on specific retail formats,
businesses and support services designed to delight consumers. The strategic plan encompasses
several important elements:
|
|
|
Emphasis on a suite of retail formats designed to appeal to todays consumers
including everyday value, multicultural, urban, extreme value and upscale formats,
as well as military commissaries and exchanges; |
|
|
|
|
Strong, passionate businesses in key areas including perishables, health and
wellness, center store, pharmacy and military supply, driven by the needs of each
format; |
|
|
|
|
Supply chain services focused on supporting our businesses with warehouse
management, inbound and outbound transportation management and customized solutions
for each business; |
|
|
|
|
Retail support services emphasizing best-in-class offerings in marketing,
advertising, merchandising, store design and construction, store brands, market
research, retail store support, retail pricing and license agreement opportunities; |
|
|
|
|
Store brand management dedicated to leveraging the strength of the Our Family
brand as a regional brand through exceptional product development coupled with
pricing and marketing support; and |
|
|
|
|
Integrated shared services company-wide including IT support and infrastructure,
accounting, finance, human resources and legal. |
In addition, we may from time to time identify and evaluate acquisition opportunities in our
food distribution and military segments, and to the extent we believe such opportunities present
strategic benefits to those segments and can be achieved in a cost-effective manner, complete such
acquisitions.
Our food distribution segment sells and distributes a wide variety of nationally branded and
private label products to independent grocery stores and other customers primarily in the Midwest
and Southeast regions of the United States.
Our military segment contracts with manufacturers to distribute a wide variety of grocery
products to military commissaries and exchanges located primarily in the Mid-Atlantic region of the
United States, and in Europe, Cuba, Puerto Rico, Egypt and the Azores. We are the largest
distributor of grocery products to U.S. military commissaries and exchanges, with over 30 years of
experience acting as a distributor to U.S. military commissaries and exchanges.
Our retail segment operated 62 corporate-owned stores primarily in the Upper Midwest as of
June 16, 2007. Primarily due to intensely competitive conditions in which supercenters and other
alternative formats compete for price conscious customers, same store sales in our retail business
have declined since 2002, although the declines have moderated in more recent periods. As a
result, we closed or sold 25 retail stores in 2004, nine retail stores in 2005 and 16 retail stores
in 2006. There have been no stores sold or closed during 2007. We are taking and expect to take
further initiatives of varying scope and duration with a view toward improving our response to and
performance under these difficult competitive conditions. Our strategic initiatives are designed
to provide steps to create value within our organization. These steps include designing and
reformatting our base of retail stores into alternative formats to increase overall retail sales
performance. As we continue to assess the impact of performance improvement initiatives and the
operating results of individual stores, we may need to recognize additional impairments of
long-lived assets and additional goodwill impairment associated with our retail segment, and may
incur restructuring or other charges in connection with closure or sales activities.
16
Results of Operations
Sales
The following tables summarize our sales activity for the twelve weeks ended June 16, 2007
(Second quarter 2007) compared to the twelve weeks ended June 17, 2006 (Second quarter 2006) and
the twenty-four weeks ended June 16, 2007 (Year-to-date 2007) compared to the twenty-four weeks
ended June 17, 2006 (Year-to-date 2006):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter 2007 |
|
Second quarter 2006 |
|
Increase/(Decrease) |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
Percent of |
|
|
|
|
(In thousands) |
|
Sales |
|
Sales |
|
Sales |
|
Sales |
|
$ |
|
% |
|
Segment Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Distribution |
|
$ |
633,066 |
|
|
|
59.5 |
% |
|
|
639,536 |
|
|
|
59.7 |
% |
|
|
(6,470 |
) |
|
|
(1.0 |
%) |
Military |
|
|
290,458 |
|
|
|
27.3 |
% |
|
|
278,677 |
|
|
|
26.0 |
% |
|
|
11,781 |
|
|
|
4.2 |
% |
Retail |
|
|
140,450 |
|
|
|
13.2 |
% |
|
|
152,551 |
|
|
|
14.3 |
% |
|
|
(12,101 |
) |
|
|
(7.9 |
%) |
|
|
|
|
|
|
|
Total Sales |
|
$ |
1,063,974 |
|
|
|
100.0 |
% |
|
|
1,070,764 |
|
|
|
100.0 |
% |
|
|
(6,790 |
) |
|
|
(0.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date 2007 |
|
Year-to-date 2006 |
|
Increase/(Decrease) |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
Percent of |
|
|
|
|
(In thousands) |
|
Sales |
|
Sales |
|
Sales |
|
Sales |
|
$ |
|
% |
|
Segment Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food Distribution |
|
$ |
1,247,852 |
|
|
|
59.5 |
% |
|
|
1,260,012 |
|
|
|
59.9 |
% |
|
|
(12,160 |
) |
|
|
(1.0 |
%) |
Military |
|
|
572,265 |
|
|
|
27.3 |
% |
|
|
541,522 |
|
|
|
25.7 |
% |
|
|
30,743 |
|
|
|
5.7 |
% |
Retail |
|
|
276,100 |
|
|
|
13.2 |
% |
|
|
303,989 |
|
|
|
14.4 |
% |
|
|
(27,889 |
) |
|
|
(9.2 |
%) |
|
|
|
|
|
|
|
Total Sales |
|
$ |
2,096,217 |
|
|
|
100.0 |
% |
|
|
2,105,523 |
|
|
|
100.0 |
% |
|
|
(9,306 |
) |
|
|
(0.4 |
%) |
|
|
|
|
|
|
|
The decreases in food distribution sales for the second quarter and year-to-date periods
versus the comparable 2006 periods are primarily attributable to the annualized impact of lost
customer sales in 2006 that have not yet been fully offset by new account gains achieved. In
addition, sales in the second quarter and year-to-date periods to our existing customer base have
also declined relative to 2006.
Military segment sales were up 4.2% during the second quarter 2007 and 5.7% year-to-date 2007
compared to the same periods in 2006. The sales increases reflect stronger sales both domestically
and overseas. Export sales have benefited from troop redeployment delays, whereas the domestic
sales increase reflects increased product line offerings that have resulted in new sales volumes.
Domestic and overseas sales represented the following percentages of military segment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second quarter |
|
Year-to-date |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Domestic |
|
|
67.6 |
% |
|
|
67.5 |
% |
|
|
69.1 |
% |
|
|
69.4 |
% |
Overseas |
|
|
32.4 |
% |
|
|
32.5 |
% |
|
|
30.9 |
% |
|
|
30.6 |
% |
The decreases in retail sales in both the quarterly and year-to-date comparisons are
attributable to the closure of seven stores since the end of the second quarter of 2006. Same
store sales, which compare retail sales for stores which were in operation for the same number of
weeks in the comparative periods, increased 0.3% in the second quarter of 2007 and are essentially
flat year-to-date when compared to the same periods in 2006. The decline in same store sales has
continued to show improvement, marking the seventh consecutive quarter the year-to-date comparable
sales percentage has improved from the preceding quarter.
17
During the second quarters of fiscal 2007 and 2006, our corporate store count changed as
follows:
|
|
|
|
|
|
|
|
|
|
|
Second quarter |
|
Second quarter |
|
|
2007 |
|
2006 |
Number of stores at beginning of period |
|
|
62 |
|
|
|
71 |
|
Closed or sold stores |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
Number of stores at end of period |
|
|
62 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
During the year-to-date fiscal 2007 and 2006 periods ended June 16, 2007 and June 17, 2006,
respectively, our corporate store count changed as follows:
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
Year-to-date |
|
|
2007 |
|
2006 |
Number of stores at beginning of year |
|
|
62 |
|
|
|
78 |
|
Closed or sold stores |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
Number of stores at end of period |
|
|
62 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
During June 2007, we announced our intention to close our Fairfield, Iowa retail store
location by June 30, 2007. As of June 16, 2007, we sold the retail pharmacy operation located at
this facility. This location is still included as an open store in the above tables.
Gross Profit
Gross profit was 9.0% of sales for the second quarter 2007 and 8.9% year-to-date 2007 compared
to 9.0% of sales for both comparable prior year periods. Our overall gross profit margin was
negatively affected by 0.2% of sales in the 2007 period due to a sales mix shift between our
business segments between the years. This was due to a higher percentage of 2007 sales occurring
in the military segment and a lower percentage in the retail and food distribution segments which
have a higher gross profit margin, offsetting this shift was year over year impact from
implementing an enhanced forward buy strategy.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) for second quarter 2007 and year-to-date
2007 were 6.2% and 6.3% of sales, respectively, compared to 6.8% for both comparable periods last
year.
SG&A expenses for the 2006 periods included a second quarter 2006 charge of $5.5 million or
0.5% of sales related to a long-time food distribution customer whose business was discontinued
following actions taken by another creditor. The charge reflected the impairment of certain retail
properties leased to this customer and additional bad debt expense related to accounts and notes
receivable owed by this customer. SG&A expense in 2007 benefited by approximately 0.2% of sales
due to our retail segment which has a higher SG&A expenses than our military and food distribution
segments, and represented a smaller percentage of our total sales in 2007.
In
addition, in the second quarter and year-to-date period 2007, we
realized a gain net of impairments of $0.5 million primarily related
to the sale of a retail pharmacy customer database file. Gains on sale of real estate in fiscal 2006 of $1.2 million were
primarily related to the sale of unoccupied properties. The provision
for lease reserves increased $0.8 million for the second quarter
2007 and decreased $0.1 million year-to-date 2007 compared to an
increase of $0.8 million and an increase of $1.3 million
for both comparable periods last year.
Special Charges
In the second quarter of 2007, we reversed $1.6 million of previously established lease
reserves for one location after subleasing the property earlier than anticipated. We also recorded
an additional $0.3 million in charges due to revised lease commitment estimates for another
property in the second quarter of 2007. There were no special charges recognized during the second
quarter and year-to-date 2006 periods.
18
Depreciation and Amortization Expense
Depreciation and amortization expense of $8.9 million for second quarter 2007 decreased $0.7
million compared to the same period last year. Year-to-date depreciation expense decreased from
$19.3 million in 2006 to $18.0 million in 2007. The decreases for the quarter and year-to-date
periods were primarily due to decreased depreciation and amortization for fixtures and equipment,
capital leases, and vehicles.
Interest Expense
Interest expense was $5.7 million for the second quarter 2007 compared to $6.1 million for the
same period in 2006. Average borrowing levels decreased from $408.6 million during the second
quarter 2006 to $360.9 million during the second quarter 2007, primarily due to decreases in
revolving credit levels under our bank credit facility. The effective interest rate was 6.1% for
the second quarter of 2007, which was equal to the effective interest rate in the second quarter of
2006.
Interest expense decreased to $11.3 million for year-to-date 2007 from $12.2 million in the
same period of 2006. Average borrowing levels decreased from $417.4 million during year-to-date
2006 to $361.3 million during the year-to-date 2007, primarily due to decreases in revolving credit
levels under our bank credit facility. The effective interest rate was 6.2% for year-to-date 2007
as compared to 6.0% for year-to-date 2006. The increase in the effective interest rate reflected
the impact of rising interest rates on variable rate debt partially offset by the impact of
interest rate swaps.
Income Taxes
Income tax expense is provided on an interim basis using managements estimate of the annual
effective rate. Our effective tax rate for the full fiscal year is subject to changes 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 to changes in tax laws and
regulations. The effective income tax rate was 44.5% and 46.6% for second quarter 2007 and 2006,
respectively, and 44.4% for both the year-to-date 2007 and 2006 periods.
Net Earnings
Net earnings in second quarter 2007 were $9.6 million, or $0.70 per diluted share, as compared
to $4.1 million, or $0.31 per diluted share, in the second quarter of 2006. Net earnings
year-to-date 2007 were $14.9 million, or $1.10 per diluted share, opposed to net earnings of $8.0
million, or $0.60 per diluted share, for the same period of the previous year. Year-to-date 2006
net earnings included the favorable impact of $0.2 million, or $0.01 per diluted share, for the
cumulative effect of an accounting change related to the adoption of SFAS No. 123(R), Share-Based
Payment Revised.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date Ended |
|
|
|
|
|
|
June 16, |
|
|
June 17, |
|
|
Increase/ |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
40,067 |
|
|
|
64,829 |
|
|
|
(24,762 |
) |
Net cash used in investing activities |
|
|
(3,344 |
) |
|
|
(7,551 |
) |
|
|
4,207 |
|
Net cash used by financing activities |
|
|
(36,347 |
) |
|
|
(48,102 |
) |
|
|
11,755 |
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
$ |
376 |
|
|
|
9,176 |
|
|
|
(8,880 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities decreased $24.8 million in year-to-date 2007 as compared
to year-to-date 2006. The primary factor for the decrease
was changes to inventory. During year-to-date 2007 increased inventory during the year
resulted in decreased cash from operations of $19.5 million, compared to year-to-date 2006 where
decreased inventory resulted in an increase in cash from operations of $21.6 million. The 2007
19
inventory increased, in part, to improve our fill rate and
opportunistic buying of products. The 2006 inventory reduction was due to the consolidation of two distribution centers.
Partially offsetting the changes in inventory was an increase in 2007 year-to-date net earnings of
$6.9 million and an increase in taxes payable of $10 million when compared to the same period in
2006.
Net cash used for investing activities decreased by $4.2 million for the year-to-date 2007
period as compared to the same period last year. The most significant factor for the
year-over-year variance was new loans to customers, with cash used of $0.4 million in year-to-date
2007 compared to $5.5 million in year-to-date 2006.
Cash used by financing activities decreased by $11.8 million in year-to-date 2007 compared to
year-to-date 2006. The decrease in cash used by financing activities included a $10.3 million net
decrease in revolving debt payments/proceeds, when comparing cash
flow activity from year-to-date 2007 to the comparable period in 2006. During year-to-date 2007 $36.3 million of the Term Loan B
portion of our existing credit facility was permanently paid down, which was partially offset by
increased borrowings under our revolving credit facility of $11.0 million. Year-to-date 2006
included the repayment of $35.6 million of our revolving debt.
During the remainder of fiscal 2007, we expect that cash flows from operations will be
sufficient to meet our working capital needs and enable us to further reduce our debt, with
temporary draws on our revolving credit line 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.
Senior Secured Credit Facility
Our senior secured credit facility consists of $125.0 million in revolving credit, all of
which may be utilized for loans, and up to $40.0 million of which may be utilized for letters of
credit, and a $123.7 million Term Loan B. The Term Loan B portion of the facility was $160.0
million as of December 30, 2006 of which $20.0 million and $36.3 million was permanently paid down
during the second quarter 2007 and year-to-date 2007 periods, respectively. Borrowings under the
facility bear interest at either the Eurodollar rate or the prime rate, plus in either case a
margin spread that is dependent on our total leverage ratio. We pay a commitment commission on the
unused portion of the revolver. The margin spreads and the commitment commission are reset
quarterly based on changes to our total leverage ratio defined by the applicable credit agreement.
At June 16, 2007 the margin spreads for the revolver and Term Loan B maintained as Eurodollar loans
were 2.0% and 2.5%, respectively, and the unused commitment commission was 0.375%. The margin
spread for the revolver maintained at the prime rate was 1.0%. The credit facility requires us to
hedge a certain portion of such borrowings through the use of interest rate swaps, as we have done
historically. At June 16, 2007, credit availability under the senior secured credit facility was
$95.8 million.
Our senior secured credit facility represents one of our primary sources of liquidity, both
short-term and long-term, and the continued availability of credit under that facility is of
material importance to our ability to fund our capital and working capital needs. The credit
agreement governing the credit facility contains various restrictive covenants, compliance with
which is essential to continued credit availability. Among the most significant of these
restrictive covenants are financial covenants which require us to maintain predetermined ratio
levels related to interest coverage and leverage. These ratios are based on EBITDA, on a rolling
four quarter basis, with some adjustments (Consolidated EBITDA). Consolidated EBITDA is a
non-GAAP financial measure that is defined in our bank credit agreement as earnings before
interest, income taxes, depreciation and amortization, adjusted to exclude extraordinary gains or
losses, gains or losses from sales of assets other than inventory in the ordinary course of
business, upfront fees and expenses incurred in connection with the execution and delivery of the
credit agreement, and non-cash charges (such as LIFO charges, closed store lease costs, asset
impairments and share-based compensation), less cash payments made during the current period on
certain non-cash charges recorded in prior periods. In addition, for purposes of determining
compliance with prescribed leverage ratios and adjustments in the credit facilitys margin spread
and commitment commission, Consolidated EBITDA is calculated on a pro forma basis that takes into
account all permitted acquisitions that have occurred since the beginning of the relevant four
quarter computation period. Consolidated EBITDA should not be considered an alternative measure of
our net income, operating performance, cash flow or liquidity. It is provided as
additional information relative to compliance with our debt covenants. In addition, the
credit agreement requires us to maintain predetermined ratio levels related to working capital
coverage (the ratio of the sum of net trade accounts receivable plus inventory to the sum of loans
and letters of credit outstanding under the new credit
20
agreement plus up to $60 million of
additional secured indebtedness permitted to be issued under the new credit agreement).
The financial covenants specified in the credit agreement, as amended, vary over the term of
the credit agreement and can be summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Fiscal |
|
|
|
|
|
Periods Ending |
|
|
|
Financial Covenants |
|
Closest to |
|
Required Ratio |
|
|
Interest Coverage Ratio |
|
12/31/04 through 9/30/07 |
|
|
3.50:1.00 |
|
|
(minimum) |
|
|
12/31/07 and thereafter |
|
|
4.00:1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Leverage Ratio |
|
12/31/04 through 9/30/06 |
|
|
3.50:1.00 |
|
|
(maximum) |
|
|
12/31/06 through 3/31/07 |
|
|
3.75:1.00 |
|
|
|
|
|
|
|
6/30/07 through 9/30/07 |
|
|
3.50:1.00 |
|
|
|
|
|
|
|
12/31/07 and thereafter |
|
|
3.00:1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Leverage Ratio |
|
12/31/04 through 9/30/06 |
|
|
2.75:1.00 |
|
|
(maximum) |
|
|
12/31/06 through 9/30/07 |
|
|
2.50:1.00 |
|
|
|
|
|
|
|
12/31/07 and thereafter |
|
|
2.25:1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital Ratio |
|
12/31/05 through 9/30/08 |
|
|
1.75:1.00 |
|
|
(minimum) |
|
|
Thereafter |
|
|
2.00:1.00 |
|
|
|
|
|
As of June 16, 2007, we were in compliance with all financial covenants as defined in our
credit agreement which are summarized as follows:
|
|
|
|
|
Financial Covenant |
|
Required Ratio |
|
Actual Ratio |
Interest Coverage Ratio (1) |
|
3.50:1.00 (minimum) |
|
4:38:1.00 |
|
Total Leverage Ratio (2) |
|
3.50:1.00 (maximum) |
|
2:95:1.00 |
Senior Secured Leverage Ratio (3) |
|
2.50:1.00 (maximum) |
|
1:23:1.00 |
Working Capital Ratio (4) |
|
1.75:1.00 (minimum) |
|
3:24:1.00 |
|
|
|
(1) |
|
Ratio of Consolidated EBITDA for the trailing four quarters to interest expense for
such period. |
|
(2) |
|
Total outstanding debt to Consolidated EBITDA for the trailing four quarters. |
|
(3) |
|
Total outstanding senior secured debt to Consolidated EBITDA for the trailing four
quarters. |
|
(4) |
|
Ratio of net trade accounts receivable plus inventory to the sum of loans and letters
of credit outstanding under the new credit agreement plus certain additional secured debt. |
Any failure to comply with any of these financial covenants would constitute an event of
default under the bank credit agreement, entitling a majority of the bank lenders to, among other
things, terminate future credit availability under the agreement and accelerate the maturity of
outstanding obligations under that agreement.
21
The following is a summary of the calculation of Consolidated EBITDA for the trailing four
quarters ended June 16, 2007 and June 17, 2006 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2006 |
|
|
2007 |
|
|
2007 |
|
|
Trailing |
|
|
Qtr 3 |
|
|
Qtr 4 |
|
|
Qtr 1 |
|
|
Qtr 2 |
|
|
4 Qtrs |
|
|
Earnings (loss) from continuing
operations before income taxes |
|
$ |
(6,287 |
) |
|
|
(25,253 |
) |
|
|
9,485 |
|
|
|
17,304 |
|
|
|
(4,751 |
) |
Interest expense |
|
|
7,906 |
|
|
|
6,551 |
|
|
|
5,595 |
|
|
|
5,671 |
|
|
|
25,723 |
|
Depreciation and amortization |
|
|
12,685 |
|
|
|
9,447 |
|
|
|
9,082 |
|
|
|
8,901 |
|
|
|
40,115 |
|
LIFO charge |
|
|
1,590 |
|
|
|
117 |
|
|
|
808 |
|
|
|
807 |
|
|
|
3,322 |
|
Lease
reserves |
|
|
4,455 |
|
|
|
2,675 |
|
|
|
(888 |
) |
|
|
825 |
|
|
|
7,067 |
|
Goodwill impairment |
|
|
|
|
|
|
26,419 |
|
|
|
|
|
|
|
|
|
|
|
26,419 |
|
Asset impairments |
|
|
2,522 |
|
|
|
4,127 |
|
|
|
866 |
|
|
|
275 |
|
|
|
7,790 |
|
Losses (gains) on sale of real estate |
|
|
25 |
|
|
|
37 |
|
|
|
|
|
|
|
(147 |
) |
|
|
(85 |
) |
Share-based compensation |
|
|
233 |
|
|
|
486 |
|
|
|
956 |
|
|
|
1,584 |
|
|
|
3,259 |
|
Subsequent cash payments on non-cash
charges |
|
|
(1,862 |
) |
|
|
(686 |
) |
|
|
(700 |
) |
|
|
(663 |
) |
|
|
(3,911 |
) |
Special Charges |
|
|
6,253 |
|
|
|
|
|
|
|
|
|
|
|
(1,282 |
) |
|
|
4,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated EBITDA |
|
$ |
27,520 |
|
|
|
23,920 |
|
|
|
25,204 |
|
|
|
33,275 |
|
|
|
109,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2006 |
|
|
2006 |
|
|
Trailing |
|
Trailing four quarters ended June 17, 2006: |
|
Qtr 3 |
|
|
Qtr 4 |
|
|
Qtr 1 |
|
|
Qtr 2 |
|
|
4 Qtrs |
|
|
Earnings from continuing operations
before income taxes |
|
$ |
18,100 |
|
|
|
21,364 |
|
|
|
6,314 |
|
|
|
7,733 |
|
|
|
53,511 |
|
Interest expense |
|
|
7,919 |
|
|
|
6,048 |
|
|
|
6,067 |
|
|
|
6,120 |
|
|
|
26,154 |
|
Depreciation and amortization |
|
|
14,357 |
|
|
|
10,376 |
|
|
|
9,702 |
|
|
|
9,617 |
|
|
|
44,052 |
|
LIFO charge (benefit) |
|
|
(229 |
) |
|
|
(452 |
) |
|
|
462 |
|
|
|
461 |
|
|
|
242 |
|
Lease
reserves |
|
|
216 |
|
|
|
(191 |
) |
|
|
902 |
|
|
|
1,327 |
|
|
|
2,254 |
|
Asset impairments |
|
|
1,772 |
|
|
|
851 |
|
|
|
1,547 |
|
|
|
3,247 |
|
|
|
7,417 |
|
Losses (gains) on sale of real estate |
|
|
(556 |
) |
|
|
(2,600 |
) |
|
|
33 |
|
|
|
(1,225 |
) |
|
|
(4,348 |
) |
Share-based compensation |
|
|
488 |
|
|
|
14 |
|
|
|
(187 |
) |
|
|
634 |
|
|
|
949 |
|
Subsequent cash payments on non-cash
charges |
|
|
(752 |
) |
|
|
(2,690 |
) |
|
|
(808 |
) |
|
|
(656 |
) |
|
|
(4,906 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated EBITDA |
|
$ |
41,315 |
|
|
|
32,720 |
|
|
|
24,032 |
|
|
|
27,258 |
|
|
|
125,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The credit agreement also contains covenants that limit our ability to incur debt (including
guaranteeing the debt of others) and liens, acquire or dispose of assets, pay dividends on and
repurchase our stock, make capital expenditures and make loans or advances to others, including
customers.
Our contractual obligations and commercial commitments are discussed in Part II, Item 7 of our
Annual Report on Form 10-K for the fiscal year ended December 30, 2006, Managements Discussion
and Analysis of Financial Condition and Results of Operations under the caption Contractual
Obligations and Commercial Commitments. There have been no material changes to our contractual
obligations and commercial commitments during the second quarter ended June 16, 2007.
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 senior secured 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
for the fiscal year ended December 30, 2006 for additional information.
22
Derivative Instruments
We have market risk exposure to changing interest rates primarily as a result of our borrowing
activities and commodity price risk associated with anticipated purchases of diesel fuel. Our
objective in managing our exposure to changes in interest rates and commodity prices is to reduce
fluctuations in earnings and cash flows. To achieve these objectives, we use derivative
instruments, primarily interest rate and commodity swap agreements, to manage risk exposures when
appropriate, based on market conditions. We do not enter into derivative agreements for trading or
other speculative purposes, nor are we a party to any leveraged derivative instrument.
The interest rate swap agreements are designated as cash flow hedges and are reflected at fair
value in our Consolidated Balance Sheet and the related gains or losses on these contracts are
deferred in stockholders equity as a component of other comprehensive income. Deferred gains and
losses are amortized as an adjustment to expense over the same period in which the related items
being hedged are recognized in income. However, to the extent that any of these contracts are not
considered to be effective in accordance with SFAS No. 133 in offsetting the change in the value of
the items being hedged, any changes in fair value relating to the ineffective portion of these
contracts are immediately recognized in income.
Interest rate swap agreements are entered into for periods consistent with related underlying
exposures and do not constitute positions independent of those exposures. At June 16, 2007, we had
four outstanding interest rate swap agreements with notional amounts totaling $90.0 million, which
commence and expire as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
Notional |
|
Effective Date |
|
Termination Date |
|
Fixed Rate |
|
$20,000
|
|
12/13/2005
|
|
12/13/2007
|
|
|
4.737 |
% |
30,000
|
|
12/13/2006
|
|
12/13/2007
|
|
|
4.100 |
% |
20,000
|
|
12/13/2006
|
|
12/13/2007
|
|
|
4.095 |
% |
20,000
|
|
12/13/2006
|
|
12/13/2007
|
|
|
4.751 |
% |
At June 17, 2006 we had seven outstanding interest rate swap agreements with notional amounts
totaling $185.0 million. Three of those agreements with notional amounts totaling $95.0 million
expired on December 13, 2006.
We use commodity swap agreements to reduce price risk associated with anticipated purchases of
diesel fuel. The agreements call for an exchange of payments with us making payments based on
fixed price per gallon and receiving payments based on floating prices, without an exchange of the
underlying commodity amount upon which the payments are made. At June 16, 2007, our one
outstanding commodity swap agreement did not qualify for hedge accounting in accordance with SFAS
No. 133. Resulting gains and losses on the fair market value of the commodity swap agreement are
immediately recognized as income or expense. Pre-tax gains of $0.2 million and $0.5 million on the
commodity swap agreement were recorded as a reduction to cost of sales during the second quarter
2007 and year-to-date 2007 periods, respectively. The commodity swap agreement will commence and
expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
Effective Date |
|
Termination Date |
|
Fixed Rate |
|
145,000 |
|
|
2/1/2007 |
|
|
|
2/29/2008 |
|
|
$1.65/gallon |
gallons/month |
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the previously discussed interest rate and commodity swap agreements, we
entered into a fixed price fuel supply agreement in the first quarter of 2007 to support our food
distribution segment. The agreement requires us to purchase a total of 168,000 gallons per month
at prices ranging from $2.28 to $2.49 per gallon. The term of the agreement began on February 1,
2007 and will end on December 31, 2007. The fixed price fuel agreement qualifies for the normal
purchase exception under SFAS No. 133, therefore the fuel purchases under this contract are
expensed as incurred as an increase to cost of sales.
23
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.
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 30, 2006, Managements 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 twenty-four weeks ended June 16, 2007, other than the adoption of FIN 48 discussed
below.
Recently Adopted and Proposed Accounting Standards
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN
48). This interpretation prescribes a minimum recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. This interpretation also provides guidance on recognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
On December 31, 2006 we adopted the recognition and disclosure provisions of FIN 48. Please refer
to Note 8 Income Taxes in the accompanying financial statements for additional information
regarding the impact of our adoption of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value instruments. FASB 157 does not require any
new fair value measurements, but applies under other accounting pronouncements that require or
permit fair value measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 (our fiscal 2008). We believe that implementation of FASB
157 will have little or no impact on our Consolidated Financial Statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB
Statement No. 115, (SFAS 159). This standard allows a company to irrevocably elect fair value as
the initial and subsequent measurement attribute for certain financial assets and financial
liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings. The
provisions of this standard are effective as of the beginning of our fiscal year 2008. We are
currently evaluating what effect the adoption of SFAS 159 will have on our consolidated financial
statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Our exposure in the financial markets consists of changes in interest rates relative to our
investment in notes receivable, the balance of our debt obligations outstanding and derivatives
employed from time to time to manage our exposure to changes in interest rates and diesel fuel
prices. (See Part II, Item 7 of our December 30, 2006 Form 10-K and Part I, Item 2 of this report
under the caption Liquidity and Capital Resources).
ITEM 4. Controls and Procedures
Management of Nash Finch, with the participation and under the supervision of the Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period
covered by this quarterly report. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are effective as of
the end of the period covered by this quarterly report to provide reasonable assurance that
material information required to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time
24
periods specified by the Securities and Exchange Commissions rules and forms. A
controls system, no matter how well designed and operated, cannot provide absolute assurance that
the objectives of the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a company have been
detected.
There was no change in our internal control over financial reporting that occurred during our
most recently completed fiscal quarter that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
On December 19, 2005 and January 4, 2006, two purported class action lawsuits were filed
against us and certain of our executive officers in the United States District Court for the
District of Minnesota on behalf of purchasers of Nash Finch common stock during the period from
February 24, 2005, the date we announced an agreement to acquire two distribution divisions from
Roundys, through October 20, 2005, the date we announced a downward revision to our earnings
outlook for fiscal 2005. One of the complaints was voluntarily dismissed on March 3, 2006 and a
consolidated complaint was filed on June 30, 2006. The consolidated complaint alleges that the
defendants violated the Securities Exchange Act of 1934 by issuing false statements regarding,
among other things, the integration of the distribution divisions acquired from Roundys, the
performance of our core businesses, our internal controls and our financial projections, so as to
artificially inflate the price of our common stock. The defendants filed a joint motion to dismiss
the consolidated complaint, which the Court denied on May 1, 2007. We intend to vigorously defend
against the consolidated complaint. No damages have been specified. We are unable to evaluate the
likelihood of prevailing in this case at this early stage of the proceedings, but do not believe
the eventual outcome will have a material impact on our financial position or results of
operations.
There have been no material changes to the legal proceedings described in Part I, Item 3,
Legal Proceedings, of our Annual Report on Form 10-K for the fiscal year ended December 30, 2006,
other than the Courts denial of the joint motion to dismiss described above. We are also 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
In addition to the risk factors contained in Part I, Item 1A, Risk Factors, of our Annual
Report on Form 10-K for the fiscal year ended December 30, 2006, we have identified the following
modification to our risk factor disclosure:
Legal,
governmental or administrative proceedings and/or disputes that result in adverse outcome or
unfavorable changes in government regulations or accounting standards may affect our businesses and
operating results.
Adverse
outcomes in litigation, governmental or administrative proceedings
and/or other disputes
may result in significant liability to the Company and affect our profitability or impose
restrictions on the manner in which we conduct our business. Our
businesses are also subject
to various federal, state and local laws and regulations with which we must comply. Our ability to
comply with governmental regulations to timely obtain permits, invest in capital expenditures
required to maintain compliance in expanding our existing facilities or new store openings could
adversely affect our business operations. Changes in applicable laws and regulations that impose
additional requirements or restrictions on the manner in which we operate our businesses could
increase our
operating costs. In addition, changes in accounting standards could impact our reported
revenue and profitability as reported in our financial statements.
Severe weather and natural disasters can adversely impact our operations, our suppliers, or the
availability and cost of products we purchase.
25
Severe weather conditions and natural disasters could damage our properties and adversely
impact the geographic areas where we conduct our business or the suppliers from whom we procure
products or otherwise cause disruptions to our food distribution, military or retail operations or
affect our supply chain efficiencies. In addition, unseasonably adverse climatic conditions that
impact growing conditions and the crops of food producers may adversely affect the availability or
cost of certain products.
Increase in employee benefit costs and other labor relations issues may lead to labor disputes and
disruption of our businesses.
Some of our employees are participants in collective bargaining agreements, and associates at
some of our locations participate in multi-employer health and pension plans. The costs of
providing benefits through such plans have increased in
recent years. A reduction in the number of employers contributing
to the plans we participate in could result in a significant increase in the amount of future
contributions we will be required to provide to the plans. Contributions to these plans may
continue to increase and the benefit levels and other issues may continue to create collective
bargaining challenges, which could increase our costs and materially affect our financial condition
and results of operations. In addition, potential labor disputes may affect sales at our ability
to distribute our products.
If we are unable to control health care, pension and wage costs, or gain operational flexibility
under our collective bargaining agreements, we may experience increased operating costs and an
adverse impact on future results of operations. There can be no assurance that the Company will be
able to negotiate the terms of any expiring or expired agreement in a manner that is favorable to
the Company. Therefore, potential work disruptions from labor disputes could result, which may
affect future revenues and profitability.
Threats or potential threats to security or food safety may adversely affect our business.
Threats or acts of terror, data theft, information espionage, or other criminal activity
directed at the food industry, the transportation industry, or computer or communications systems,
including security measures implemented in recognition of actual or potential threats, could
increase security costs, adversely affect our operations. Other events that give rise to actual or potential food contamination, drug
contamination, or food-borne illness could have an adverse effect on our operating results.
Changes in consumer spending or buying patterns.
Significant changes in consumer buying patterns due to shifts in shopping preferences, adverse
local economic conditions, or entry of new stores providing similar products in the geographic
areas where we operate could have an adverse effect on our future revenues and profitability.
Unanticipated problems with product procurement.
Significant changes in our ability to obtain adequate product supplies due to weather, food
contamination, regulatory actions, labor supply, or product vendor defaults or disputes that limit
our ability to procure products for sale to customers could have an adverse effect on our operating
results
26
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes purchases of Nash Finch common stock by the trustee of the
Nash-Finch Company Deferred Compensation Plan Trust during the second quarter 2007. All such
purchases reflect the reinvestment by the trustee of dividends paid during the first and second
quarters of 2007 on shares of Nash Finch common stock held in the Trust in accordance with the
regulations of the trust agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
(d) |
|
|
(a) |
|
|
|
|
|
Total number of shares |
|
Maximum number (or |
|
|
Total number |
|
(b) |
|
purchased as part of |
|
approximate dollar value) of |
|
|
of shares |
|
Average price |
|
publicly announced |
|
shares that may yet be purchased |
Period |
|
purchased |
|
paid per share |
|
plans or programs |
|
under plans or programs |
|
Period 4
(March 25 to April 21,
2007) |
|
|
661 |
|
|
|
35.76 |
|
|
|
|
|
|
|
|
|
Period 5
(April 22 to May 19, 2007) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period 6
(May 20 to June 16, 2007) |
|
|
475 |
|
|
|
49.92 |
|
|
|
(* |
) |
|
|
(* |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,136 |
|
|
|
41.66 |
|
|
|
(* |
) |
|
|
(* |
) |
|
|
|
(*) |
|
The Nash-Finch Company Deferred Compensation Plans Trust Agreement requires that
dividends paid on Nash Finch common stock held in the Trust be reinvested in additional shares of
such common stock. |
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) |
|
The Company held its Annual Meeting of Stockholders on May 15, 2007. |
|
(c) |
|
Election of Directors |
|
|
|
Two individuals were nominated by the Board to serve as Class A directors for three-year
terms expiring at the 2010 annual meeting of stockholders. Both nominees were elected, with
the results of votes of stockholders as follows: |
|
|
|
|
|
|
|
|
|
Class A Director Nominees |
|
Votes For |
|
Votes Withheld |
Alec C. Covington |
|
|
11,939,766 |
|
|
|
297,502 |
|
Mickey P. Foret |
|
|
11,638,474 |
|
|
|
598,794 |
|
ITEM 5. Other Information
Restricted
Stock Unit Awards. On August 7, 2006, the Company granted RSUs to each
of Jeffrey E. Poore, Executive Vice President, Supply Chain
Management, Calvin S. Sihilling, Executive Vice President, Chief
Information Officer and Kathleen M. Mahoney, Senior Vice President,
General Counsel and Secretary. In addition, on November 6, 2006, the
Company granted RSUs to Christopher A. Brown, in connection with his
acceptance of an offer to serve as the Companys Executive Vice
President, Food Distribution. The grants of the RSUs were previously
reported by the Company on a Form 8-K filed on August 11, 2006
with respect to the RSUs granted to Messrs. Poore and Sihilling
and Ms. Mahoney and a Form 8-K filed on October 25, 2006 with
respect to RSUs granted to Mr. Brown. Each of Messrs. Poore,
Sihilling and Brown and Ms. Mahoney entered into a Restricted Stock
Unit Award Agreement in connection with the grant of their respective
RSUs.
On
July 18, 2007, each Restricted Stock Unit Award Agreement entered
into by Messrs. Poore, Sihilling and Brown and Ms. Mahoney was
amended to clarify that all of their respective RSUs will immediately
vest in full upon a change in control of the Company. The Amended and
Restated form of Restricted Stock Unit Award Agreement entered into
by Messrs. Poore, Sihilling and Brown and Ms. Mahoney is
filed herewith as Exhibit 10.1.
27
ITEM 6. Exhibits
Exhibits filed or furnished with this Form 10-Q:
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.1
|
|
Form of Amended and Restated
Restricted Stock Unit Award Agreement |
|
|
|
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 (furnished herewith). |
28
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, 2007 |
by |
/s/ Alec C. Covington
|
|
|
|
Alec C. Covington |
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
Date: July 19, 2007 |
by |
/s/ Robert B. Dimond
|
|
|
|
Robert B. Dimond |
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
29
NASH FINCH COMPANY
EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q
For the Quarter Ended June 16, 2007
|
|
|
|
|
Exhibit |
|
|
|
Method of |
No. |
|
Item |
|
Filing |
|
|
|
|
|
10.1
|
|
Form of Amended and Restated
Restricted Stock Unit Award Agreement.
|
|
Filed herewith |
|
|
|
|
|
12.1
|
|
Calculation of Ratio of Earnings to Fixed Charges
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Filed herewith |
|
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31.1
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Rule 13a-14(a) Certification of the Chief Executive Officer.
|
|
Filed herewith |
|
|
|
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31.2
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Rule 13a-14(a) Certification of the Chief Financial Officer
|
|
Filed herewith |
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32.1
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Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
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Filed herewith |
30