Washington, DC 20549

 

FORM 10-Q

 

 

NASH-FINCH COMPANY

(Exact Name of Registrant as Specified in its Charter)

 

 

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.

 

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý   No  o

 

As of November 4, 2003, 12,101,212 shares of Common Stock of the Registrant were outstanding.

 

 

Index

 

 

Part I – FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements and Notes
	Consolidated Statements of Income
	Consolidated Balance Sheets
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
Part II – OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES

 

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PART 1 – FINANCIAL INFORMATION

 

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

 

NASH FINCH COMPANY AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
(In thousands, except per share amounts)

 

		Sixteen Weeks Ended						Forty Weeks Ended
		October 4, 2003			October 5, 2002			October 4, 2003			October 5, 2002
Sales		$	1,214,781		$	1,191,072		$	2,960,057		$	2,993,913
Cost and expenses:
Cost of sales		1,077,363			1,052,278			2,619,034			2,637,714
Selling, general and administrative		101,204			107,518			250,645			266,067
Special charge		—			(765		)	—			(765		)
Depreciation and amortization		13,098			12,298			32,180			30,770
Interest expense		9,011			9,235			26,837			22,533
Total costs and expenses		1,200,676			1,180,564			2,928,696			2,956,319
Earnings before income taxes and cumulative effect of change in accounting principle		14,105			10,508			31,361			37,594
Income tax expense		2,501			3,854			9,231			14,661
Earnings before cumulative effect of change in accounting principle		11,604			6,654			22,130			22,933
Cumulative effect of change in accounting principle, net of income tax benefits of $4,450		—			—			—			(6,960		)
Net earnings		$	11,604		$	6,654		$	22,130		$	15,973
Basic earnings per share:
Earnings before cumulative effect of change in accounting principle		$	0.96		$	0.56		$	1.84		$	1.95
Cumulative effect of change in accounting principle, net of income tax benefits		—			—			—			(0.59		)
Net earnings per share		$	0.96		$	0.56		$	1.84		$	1.36
Diluted earnings per share:
Earnings before cumulative effect of change in accounting principle		$	0.95		$	0.55		$	1.82		$	1.89
Cumulative effect of change in accounting principle, net of income tax benefits		—			—			—			(0.58		)
Net earnings per share		$	0.95		$	0.55		$	1.82		$	1.31
Cash dividends per common share:		$	0.09		$	0.09		$	0.27		$	0.27
Weighted average number of common shares outstanding and common equivalent shares outstanding:
Basic		12,098			11,831			12,046			11,784
Diluted		12,249			12,163			12,142			12,162

 

See accompanying notes to consolidated financial statements.

 

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NASH FINCH COMPANY AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except per share amounts)

 

		October 4, 2003			December 28, 2002			October 5, 2002
		(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	7,874		$	31,419		$	5,422
Accounts and notes receivable, net		149,003			165,527			165,678
Inventories		255,290			245,477			269,774
Prepaid expenses		13,264			12,335			12,550
Deferred tax assets		10,118			13,523			11,735
Total current assets		435,549			468,281			465,159
Investments in affiliates		20			556			556
Notes receivable, net		28,760			32,596			32,701
Property, plant and equipment:
Land		23,501			25,500			25,442
Buildings and improvements		154,578			155,865			156,258
Furniture, fixtures and equipment		324,927			323,201			318,654
Leasehold improvements		81,891			75,360			72,576
Construction in progress		4,409			7,169			12,364
Assets under capitalized leases		42,040			42,040			42,040
		631,346			629,135			627,334
Less accumulated depreciation and amortization		(377,780		)	(360,615		)	(360,537		)
Net property, plant and equipment		253,566			268,520			266,797
Goodwill, net		150,053			148,028			147,764
Investment in direct financing leases		13,696			14,463			14,707
Deferred tax asset, net		—			467			3,974
Other assets		14,365			15,011			15,597
Total assets		$	896,009		$	947,922		$	947,255
Liabilities and Stockholders’ Equity
Current liabilities:
Outstanding checks		$	10,795		$	27,076		$	14,895
Current maturities of long-term debt and capitalized lease obligations		6,848			7,497			6,701
Accounts payable		195,618			170,542			229,554
Accrued expenses		93,058			94,068			91,953
Income taxes payable		11,509			10,073			12,387
Total current liabilities		317,828			309,256			355,490
Long-term debt		276,832			357,592			313,687
Capitalized lease obligations		45,326			47,784			48,379
Other liabilities		14,032			11,811			10,212
Commitments and contingencies
Stockholders’ equity:
Preferred stock - no par value Authorized 500 shares;  none issued		—			—			—
Common stock of $1.66 2/3 par value Authorized 50,000 shares, issued 12,132, 12,012 and 12,012 shares, respectively		20,221			20,021			20,011
Additional paid-in capital		27,628			26,275			26,326
Restricted stock		(561		)	(894		)	(1,047		)
Accumulated other comprehensive income		(7,855		)	(7,507		)	(2,834		)
Retained earnings		203,544			184,645			178,072
		242,977			222,540			220,528
Less cost of 55, 70 and 68 shares of common stock in treasury, respectively		(986		)	(1,061		)	(1,041		)
Total stockholders’ equity		241,991			221,479			219,487
Total liabilities and stockholders’ equity		$	896,009		$	947,922		$	947,255

 

See accompanying notes to consolidated financial statements.

 

4

 

NASH FINCH COMPANY AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

		Forty Weeks Ended
		October 4, 2003			October 5, 2002
Operating activities:
Net earnings		$	22,130		$	15,973
Adjustments to reconcile net earnings to net cash provided by operating activities:
Special charges - non cash portion		—			(765		)
Depreciation and amortization		32,180			30,770
Amortization of deferred financing costs		868			873
Amortization of rebatable loans		1,235			1,193
Provision for bad debts		4,823			4,638
Cumulative effect of change in accounting principle		—			6,960
Deferred income tax expense		7,059			6,601
LIFO charge		841			1,223
Impairments		2,115			1,518
Gain on sale of property, plant & equipment		(608		)	(1,532		)
Other		(258		)	(37		)
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts and notes receivable		15,929			3,438
Inventories		(7,817		)	(3,042		)
Prepaid expenses		(656		)	2,460
Accounts payable		23,722			10,294
Accrued expenses		(2,275		)	(5,707		)
Income taxes payable		1,436			1,005
Other assets and liabilities		(1,216		)	(2,645		)
Net cash provided by operating activities		99,508			73,218
Investing activities:
Disposal of property, plant and equipment		8,409			3,591
Additions to property, plant and equipment		(25,559		)	(28,889		)
Business acquired, net of cash		(2,054		)	(3,356		)
Loans to customers		(4,463		)	(3,948		)
Payments from customers on loans		4,653			8,604
Other		577			2,473
Net cash used in investing activities		(18,437		)	(21,525		)
Financing activities:
Payment of revolving debt		(79,400		)	(7,000		)
Dividends paid		(3,231		)	(3,218		)
Payments of long-term debt		(4,583		)	(1,728		)
Payments of capitalized lease obligations		(1,770		)	(2,313		)
Decrease in outstanding checks		(16,281		)	(42,855		)
Other		649			376
Net cash used in financing activities		(104,616		)	(56,738		)
Net decrease in cash and cash equivalents		(23,545		)	(5,045		)
Cash and cash equivalents at beginning of the period		31,419			10,467
Cash and cash equivalents at end of the period		$	7,874		$	5,422
Supplemental disclosure of cash flow information:
Non cash investing and financing activities
Purchase of real estate under capital leases		$	—		$	3,789
Acquisition of minority interest		—			1,849

 

See accompanying notes to consolidated financial statements.

 

5

 

 

Nash Finch Company and Subsidiaries
Notes to Consolidated Financial Statements
October 4, 2003

 

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 the Company’s Annual Report on Form  10-K for the year ended December 28, 2002.

 

The accompanying financial statements include all adjustments which are, in the opinion of management, necessary to present fairly the financial position of the Company and its subsidiaries at October 4, 2003, December 28, 2002 and October 5, 2002, and the results of operations for the sixteen and forty weeks ended and changes in cash flows for the forty weeks ended October 4, 2003 and October 5, 2002.  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 made to the prior period financial statements.  These reclassifications had no impact on net income, earnings per share or stockholders’ equity.

 

Note 2 – Vendor Allowances and Credits

 

The Company participates with its vendors in a broad menu of promotions to increase sales of products.  These promotions fall into two main categories:  off-invoice allowances and performance- based allowances.  These promotional arrangements are often subject to negotiation with the Company’s vendors.

 

In the case of off-invoice allowances, discounts are typically offered by vendors with respect to certain merchandise purchased by the Company during a specified period of time.  The Company uses off-invoice allowances to support a variety of marketing programs such as reduced price offerings for specific time periods, food shows, pallet promotions and private label promotions.  The discounts are either reflected directly on the vendor invoice, as a reduction from the normal wholesale prices for merchandise to which the allowance applies, or the Company is allowed to deduct the allowance as an offset against the vendor’s invoice when it is paid.

 

In the case of performance-based allowances, the allowance or rebate is based on the Company’s completion of some specific activity, such as purchasing or selling product during a certain time period.  This basic performance requirement may be accompanied by an additional performance requirement such as providing advertising or special in-store promotion, tracking quantities of product

 

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sold, slotting (adding a new item to the system) and merchandising a new item, or achieving certain minimum purchase quantities.  The billing for these performance-based allowances is normally in the form of a “bill-back” in which case the Company is invoiced at the regular price with the understanding that the Company may bill back the vendor for the requisite allowance when the performance is satisfied.

 

Collectively with its vendors, the Company plans promotions and arrives at the amount the respective vendor plans to spend on promotions with the Company. The Company and the vendors then monitor, review and discuss the results of such promotions, and resolve issues relating to promotions and billings.  Each vendor has its own method for determining the amount of promotional funds budgeted to be spent with the Company during the period.  In most situations, the vendor allowances are based on units the Company purchased from the vendor.  In other situations, the allowances are based on its past or anticipated purchases and/or the anticipated performance of the planned promotions.

 

The Company jointly negotiates with its vendors the promotional calendar that governs all promotions. Forecasting promotional expenditures is a critical part of the Company’s twice yearly planning sessions with its vendors.  Most vendors work with the Company to project not just overall spending, but also spending on a category and regional basis.  As individual promotions are completed and the associated billing is processed, the vendors track the Company’s promotional program execution and spend rate.  The vendors discuss the tracking, performance and spend rate with the Company on a regular basis throughout the year.  Depending upon the vendor arrangements, such discussions can occur on a weekly, monthly, quarterly or annual basis.  These communications include future promotions, product cost, targeted retails and price points, anticipated volume, promotion expenditures, vendor maintenance, billing issues and procedures, new items/discontinued items, and trade spend levels relative to budget per event and per year, as well as the resolution of any issues that arise between the vendor and the Company. In the future, the nature and menu of promotional programs and the allocation of dollars among them may change as a result of ongoing negotiations and commercial relationships between vendors and the Company.

 

Note 3 - Inventories

 

The Company uses 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 must necessarily be based on management’s estimates of expected year-end inventory levels and costs.  Because these are subject to many factors beyond management’s control, interim results are subject to the final year-end LIFO inventory valuation. If the FIFO method had been used, inventories would have been approximately $46.4 million, $45.5 million and $49.0 million higher at October 4, 2003, December 28, 2002 and October 5, 2002, respectively.  For the sixteen weeks ending October 4, 2003, the Company recorded a LIFO charge of $0.04 million.  No LIFO charge was recorded in the sixteen weeks ended October 5, 2002.  For the forty weeks ending October 4, 2003 and October 5, 2002, the Company recorded LIFO charges of $0.8 million and $1.2 million, respectively.

 

Note 4 – Stock Option Plans

 

As permitted by the provisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation”, the Company has chosen to continue to apply Accounting Principles Board Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees” and related interpretations in accounting for its stock-based compensation.  As a result, the Company

 

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does not recognize compensation costs if the option price equals or exceeds the market price at the date of grant. The following table illustrates the effect on net income and earnings per share for the sixteen and forty weeks ended October 4, 2003 and October 5, 2002 if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation (in thousands, except per share amounts):

 

		Sixteen Weeks Ended						Forty Weeks Ended
		October 4, 2003			October 5, 2002			October 4, 2003			October 5, 2002
Reported net earnings		$	11,604		$	6,654		$	22,130		$	15,973
Total stock-based employee compensation expense determined under fair value based method for all option awards, net of tax		$	(351	)	$	(395	)	$	(909	)	$	(896	)
Adjusted net earnings		$	11,253		$	6,259		$	21,221		$	15,077
Reported basic earnings per share		$	0.96		$	0.56		$	1.84		$	1.36
Adjusted basic earnings per share		$	0.93		$	0.53		$	1.76		$	1.28
Reported diluted earnings per share		$	0.95		$	0.55		$	1.82		$	1.31
Adjusted diluted earnings per share		$	0.92		$	0.51		$	1.75		$	1.24

 

Note 5 – Other Comprehensive Income

 

Comprehensive income is as follows (in thousands):

 

		Sixteen Weeks Ended						Forty Weeks Ended
		October 4, 2003			October 5, 2002			October 4, 2003			October 5, 2002
Net earnings:		$	11,604		$	6,654		$	22,130		$	15,973
Unrealized gain, net of tax		(132		)	(217		)	(212		)	(193		)
Comprehensive income		$	11,472		$	6,437		$	21,918		$	15,780

 

During 2003 and 2002, other comprehensive income consisted of market value adjustments to reflect derivative instruments designated as cash flow hedges at fair value, pursuant to SFAS No. 133.

 

Note 6 – Recently Adopted and Issued Accounting Standards

 

Emerging Issues Task Force (EITF) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor,” addresses how a reseller of a vendor’s products should account for cash consideration received from a vendor and how to measure that consideration in its income statement.

 

In January 2003, the EITF concluded that new vendor arrangements, including modifications of existing arrangements entered into after December 31, 2002, should apply the provisions outlined in EITF No. 02-16.  In March 2003, the EITF concluded that entities may elect to early adopt the provisions of EITF No. 02-16 as a cumulative effect of a change in accounting principle.  The Company elected to early adopt the provisions of EITF No. 02-16 in the fourth quarter of 2002, retroactive to the beginning of fiscal 2002 and recognized a charge of $7.0 million, net of income taxes of $4.4 million, which represented the cumulative effect of a change in accounting principle as of the

 

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beginning of fiscal 2002.  This adoption also resulted in the reclassification of net cooperative advertising income in fiscal 2002 from selling, general, and administrative expense to cost of sales retroactively as of the beginning of fiscal 2002.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51” (FIN No. 46).  In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.  A variable interest entity often holds financial assets, including loans or receivables, real estate or other property.  A variable interest entity may be essentially passive or it may engage in activities on behalf of another company.  Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests.  FIN No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both.  FIN No. 46’s consolidation requirements apply immediately to variable entities created or acquired after January 31, 2003.  The consolidation requirements related to entities created before February 1, 2003 have been recently delayed to the first interim period ending after December 15, 2003, which for the Company is the fourth quarter of fiscal 2003.  The Company is currently evaluating whether financial support or accommodations provided or to be provided to customers of its food distribution segment could result in the consolidation of such a customer in the Company’s consolidated financial statements upon the adoption of FIN No. 46.

 

Note 7 – Segment Reporting

 

A summary of the major segments of the business is as follows:
(In thousands)

 

Sixteen weeks ended October 4, 2003

 

		Food Distribution			Retail			Military			Totals
Revenue from external customers		$	604,544		$	291,246		$	318,991		$	1,214,781
Inter-segment revenue		150,911			—			—			150,911
Segment profit		19,623			10,056			9,267			38,946

 

Sixteen weeks ended October 5, 2002

 

		Food Distribution			Retail			Military			Totals
Revenue from external customers		$	555,511		$	321,633		$	313,928		$	1,191,072
Inter-segment revenue		175,259			—			—			175,259
Segment profit		16,802			5,942			9,380			32,124

 

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Forty weeks ended October 4, 2003

 

		Food Distribution			Retail			Military			Totals
Revenue from external customers		$	1,413,732		$	732,722		$	813,603		$	2,960,057
Inter-segment revenue		382,407			—			—			382,407
Segment profit		44,411			27,248			22,638			94,297

 

Forty weeks ended October 5, 2002

 

		Food Distribution			Retail			Military			Totals
Revenue from external customers		$	1,409,353		$	804,536		$	780,024		$	2,993,913
Inter-segment revenue		434,593			—			—			434,593
Segment profit		46,392			24,846			24,031			95,269

 

Reconciliation to statements of operations:
(In thousands)

 

Sixteen weeks ended October 4, 2003 and October 5, 2002

 

		2003			2002
Profit and loss
Total profit for segments		$	38,946		$	32,124
Unallocated amounts:
Adjustment of inventory to LIFO		(41		)	—
Unallocated corporate overhead		(24,800		)	(22,381		)
Special charges		—			765
Earnings before income taxes and cumulative effect of change in accounting principle		$	14,105		$	10,508

 

Forty weeks ended October 4, 2003 and October 5, 2002

 

		2003			2002
Profit and loss
Total profit for segments		$	94,297		$	95,269
Unallocated amounts:
Adjustment of inventory to LIFO		(841		)	(1,223		)
Unallocated corporate overhead		(62,095		)	(57,217		)
Special charges		—			765
Earnings before income taxes and cumulative effect of change in accounting principle		$	31,361		$	37,594

 

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Note 8 – Guarantees

 

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (FIN 45).  FIN 45 elaborates on the existing disclosure requirements for most guarantees, including residual value guarantees issued in conjunction with operating lease agreements.  It also clarifies 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 and must disclose that information in its interim and annual financial statements.  The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002.

 

In the normal course of business, the Company may guarantee lease and debt obligations of retailers.  In the event these retailers are unable to meet their debt service payments or otherwise experience an event of default, the Company would be unconditionally liable for the outstanding balance of their debt and lease obligations, which would be due in accordance with the underlying agreements.  As of October 4, 2003, the Company has guaranteed outstanding debt and lease obligations of retailers in the amount of $20.5 million.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

 

Sales

 

Sales by the Company (also referred to as “we” or “us”) for the sixteen weeks ended October 4, 2003 were $1,214.8 million compared to $1,191.1 million for the same period last year, reflecting an increase of $23.7 million or 2.0%.  For the forty weeks ended October 4, 2003, sales were $2,960.1 million compared to $2,993.9 million for the same period last year, reflecting a decrease of $33.8 million or 1.1%.  The distribution of sales by segment is as follows (dollars in millions):

 

		Sixteen Weeks Ended						Forty Weeks Ended
		October 4, 2003			October 5, 2002			October 4, 2003			October 5, 2002
Food distribution		$	604.5		$	555.5		$	1,413.8		$	1,409.4
Retail		291.3			321.7			732.7			804.5
Military		319.0			313.9			813.6			780.0
		$	1,214.8		$	1,191.1		$	2,960.1		$	2,993.9

 

Food distribution sales for the sixteen weeks ended October 4, 2003 increased $49.0 million or 8.8% compared to the prior year period and sales for the forty weeks ended October 4, 2003 increased $4.4 million or 0.3% compared to the prior year period.  The increase in both periods is due to new business primarily with former Fleming accounts and an increase in sales of private label products, partially offset by difficult economic conditions and soft sales/store closings experienced by independent retailers because of increased competition in certain markets.

 

Retail segment sales for the sixteen weeks ended October 4, 2003 decreased $30.4 million or 9.4% compared to the prior year period. Sales for the forty weeks ended October 4, 2003 decreased $71.8 million or 8.9% compared to the prior year period.  Same store sales, which compares retail sales for stores which were in operation for the same number of weeks in the comparative periods, declined by 11.3% and 11.5% for the sixteen and forty weeks ended October 4, 2003, respectively, as compared to the prior year periods.  The decline in both periods is attributed to the intense level of competition throughout our retail marketing areas, largely reflecting the growth of supercenter competition, and retail customers trading down and/or purchasing less in conventional supermarket channels.   We anticipate that same store sales comparisons will begin to improve in the fourth quarter of fiscal 2003 when we will have cycled the new competition added during the first three quarters of 2002.  During the sixteen and forty weeks ended October 4, 2003, our corporate store count changed as follows:

 

		Sixteen Weeks		Forty Weeks
Number of stores at beginning of period		108		109
New stores		2		3
Acquired stores		—		6
Closed or sold stores		(1	)	(9	)
Number of stores at end of period		109		109

 

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In January of 2003, we opened our third AVANZA^TM store in Denver, Colorado.  This format is designed to service the Hispanic market, which we believe is under-served by conventional grocery stores.  We opened a fourth AVANZA store in Pueblo, Colorado in June 2003 and opened a fifth store in Chicago, Illinois in August 2003.  Our sixth AVANZA store was opened in Chicago in October of 2003.  In addition, we closed two underperforming Buy n SaveÒ stores in January and February of 2003 and closed a third store in July of 2003, reducing to five the total number of these stores serving low income, value conscious consumers as of October 4, 2003.

 

Military segment sales for the sixteen weeks ended October 4, 2003 increased $5.1 million or 1.6% over the prior year period.   Sales for the forty weeks ended October 4, 2003 increased by $33.6 million or 4.3% over the prior year period.  The increase in sales for the forty weeks ended October 4, 2003 is primarily attributed to the positive impact of the military deployment in the Middle East.  As a result of the end of the war, the military segment sales trend slowed to its pre-war rate during the sixteen weeks ended October 4, 2003.

 

Gross Profit

 

Gross profit for the sixteen weeks ended October 4, 2003 was 11.3% of sales compared to 11.7% for the same period last year.  Gross profit for the forty weeks ended October 4, 2003 was 11.5% of sales compared to 11.9% for the same period last year.  The decrease in both periods is primarily attributed to an increase in the percentage of our overall sales that is derived from our food distribution and military segments, both of which operate at lower gross profit margins than our retail segment.  The impact of this change in revenue mix was partially offset by gross margin improvement in the retail segment reflecting improved operational execution and control relative to the same quarter a year ago in which actions we had taken reduced the retail segment’s gross margin by approximately 2% in response to competitive pressures.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses for the sixteen weeks ended October 4, 2003 were 8.3% of sales compared to 9.0% for the same period last year.  Selling, general and administrative expenses for the forty weeks ended October 4, 2003 were 8.5% of sales compared to 8.9% for the same period last year.  The decrease in both periods is primarily attributed to the increase in the percentage of our overall sales that is derived from our food distribution and military segments, both of which incur lower selling, general and administrative expenses as a percentage of sales as compared to our retail segment.  Selling, general and administrative expenses also included transition costs of $0.8 million and $2.7 million for the sixteen and forty weeks ended October 4, 2003 for the consolidation of two military warehouses into one located in Norfolk, Virginia, and start-up costs related to our AVANZA format of approximately $2.0 million and $3.0 million for the sixteen and forty weeks ended October 4, 2003.  In addition, for the sixteen weeks ended October 4, 2003, we recorded a $1.7 million charge for retail store impairments and $0.6 million in closed store lease costs compared to $1.5 million and $0.4 million, respectively, for the same period a year ago.  For the forty weeks ended October 4, 2003 we recorded a $2.1 million charge for retail store impairments and $1.0 million in closed store lease costs compared to $1.5 million and $0.4 million, respectively, for the same period a year ago.  The retail impairment charges relate to stores which were determined to be impaired as a result of increased competition within our market area.  The estimated undiscounted cash flows related to these facilities indicated that the carrying value of the assets may not be recoverable based on current expectations, causing these assets to be written down in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  The closed store lease costs were recorded for non-cancelable

 

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lease costs related to closed corporate-owned retail and independent customer stores where we were obligated to assume the liability.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense for the sixteen weeks ended October 4, 2003 was $13.1 million compared to $12.3 million for the same period last year, reflecting an increase of $0.8 million, or 6.5%.  Depreciation and amortization expense for the forty weeks ended October 4, 2003 was $32.2 million compared to $30.8 million for the same period last year, reflecting an increase of $1.4 million, or 4.5%.  The increase in both periods primarily represents the addition of information technology software in 2003.

 

Interest Expense

 

Interest expense for the sixteen weeks ended October 4, 2003 was $9.0 million compared to $9.2 million for the same period last year, reflecting a decrease of $0.2 million, or 2.2%.   A decrease in the average borrowing level under our bank credit facility in the 2003 quarter, was offset by an increase in our average borrowing rate (including the impact of our interest rate swaps) from 4.5% in the 2002 quarter to 5.4% in the 2003 quarter.  Interest expense for the forty weeks ended October 4, 2003 was $26.8 million compared to $22.5 million for the same period last year, reflecting an increase of $4.3 million, or 19.1%.   The increase in interest expense for the 2003 year-to-date period is primarily attributed to $2.5 million paid to our bondholders and $1.3 million paid to our bank lenders during the first quarter of 2003 as consideration for waivers to extend the deadlines for filing our third quarter Form 10-Q for fiscal 2002, our Form 10-K for fiscal 2002 and our first quarter Form 10-Q for fiscal 2003.  Also contributing to the increase in interest expense was an increase in our average borrowing rate from 4.4% in the 2002 year-to-date period to 5.0% in the comparable 2003 period, the impact of which was partially offset by a decrease in our average borrowing level.

 

Income Taxes

 

Income tax expense is provided on an interim basis using management’s estimate of the annual effective rate.  The effective income tax rate was 29.4% for the forty weeks ended October 4, 2003 compared to 39% for the same period last year.  During the third quarter of 2003, the Company recognized a reduction in income tax expense of $3.0 million or $0.25 per diluted share, as a result of the resolution of various outstanding state and federal tax issues.

 

Cumulative Effect of Change in Accounting Principle

 

We adopted the provisions of EITF Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Considerations Received From a Vendor” as of the beginning of fiscal 2002.  The cumulative effect at the beginning of fiscal 2002 was a charge of $7.0 million, net of income taxes of $4.4 million.  The cumulative effect of a change in accounting principle has been presented in our consolidated statement of income for the forty weeks ended October 5, 2002.

 

Net Earnings

 

Net earnings for the sixteen weeks ended October 4, 2003 were $11.6 million, or $0.95 per diluted share, compared to $6.7 million, or $0.55 per diluted share, for the sixteen weeks ended October 5, 2002.  Net earnings for the forty weeks ended October 4, 2003 were $22.1 million, or $1.82 per diluted share, compared to $16.0 million or $1.31 per diluted share for the same period last year.

 

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Excluding the reduction of tax expense for the sixteen and forty weeks ended October 4, 2003, the waiver fees paid to our bondholders and our bank lenders during the forty weeks ended October 4, 2003, income from the reversal of special charges recognized for the sixteen and forty weeks ended October 5, 2002 and the cumulative effect of a change in accounting principle due to the adoption of EITF No. 02-16 for the forty weeks ended October 5, 2002, adjusted earnings and adjusted diluted earnings per share (which are non-GAAP financial measures) are as follows (dollars in thousands, except per share data):

 

		Sixteen Weeks Ended						Forty Weeks Ended
		October 4, 2003			October 5, 2002			October 4, 2003			October 5, 2002
Reported net earnings:		$	11,604		$	6,654		$	22,130		$	15,973
Debt waiver fees, net of income taxes of  $1,496		—			—			2,339			—
Cumulative effect of change in accounting principle, net of income taxes of $4,450		—			—			—			6,960
Special charges, net of income taxes of $298		—			(467		)	—			(467		)
Income tax expense		(3,000		)	—			(3,000		)	—
Adjusted earnings		$	8,604		$	6,187		$	21,469		$	22,466
Diluted earnings per share:
Reported earnings per share		$	0.95		$	0.55		$	1.82		$	1.31
Debt waiver fees, net of income taxes		—			—			0.20			—
Cumulative effect of change in accounting principle, net of income taxes		—			—			—			0.58
Special charges, net of income taxes		—			(0.04		)	—			(0.04		)
Income tax expense		(0.25		)	—			(0.25		)	—
Adjusted earnings per share		$	0.70		$	0.51		$	1.77		$	1.85

 

We believe that the presentation of adjusted earnings and adjusted earnings per diluted share provides useful information to investors in that it enhances a comparison of the Company’s underlying profitability between the 2003 and 2002 periods by eliminating the impact of events that do not affect both years.  The charges and gains excluded in computing adjusted earnings and adjusted earnings per share have not otherwise occurred within the past two years and are not expected to occur within the next two years.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in applying certain critical accounting policies.  Critical accounting policies are those that require the most subjective and complex judgments.

 

On an on-going basis, the Company evaluates its estimates utilizing historic experience, consultation with experts and other methods the Company considers reasonable.  In any case, actual results may differ significantly from the Company’s estimates.  Any effects on the Company’s

 

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business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known (See Part II, Item 7 under the caption “Critical Accounting Policies” of our Form 10-K for the year ended December 28, 2002 for additional discussion).

 

LIQUIDITY AND CAPITAL RESOURCES

 

Historically, we have financed our capital needs through a combination of internal and external sources.  These sources include cash flow from operations, short-term bank borrowings, various types of long-term debt and lease financing.

 

Operating cash flows were $99.5 million for the forty weeks ended October 4, 2003 compared to $73.2 million for the same period last year.  The change in cash flows from operating activities is primarily due to changes in operating assets and liabilities.  For the forty weeks ended October 4, 2003, the most significant of these cash flow changes was an increase in accounts payable of $23.7 million, as compared to an increase in accounts payable of $10.3 million in the 2002 period.  Also contributing to the change in operating cash flows was a decrease in accounts receivable of $16.0 million in the 2003 period, compared to a decrease of $3.4 million in the 2002 period.  The cash flow impacts of these changes were partially offset by an increase in inventory of $7.8 million in the 2003 period.

 

Cash used in investing activities was $18.4 million for the forty weeks ended October 4, 2003 compared to $21.5 million for the same period last year.  Investing activities for the forty weeks ended October 4, 2003 consisted primarily of $25.6 million in capital expenditures and $2.1 million in acquisition costs, partially offset by $8.4 million in disposal of property, plant & equipment.   We expect our capital expenditures to be approximately $40 million for fiscal 2003.  The majority of these expenditures are within our retail segment for continued expansion of our AVANZA store format and the remodeling of several of our existing conventional retail stores.   Investing activity in the comparable forty week period in the prior year consisted primarily of $28.9 million in capital expenditures, $3.4 million in acquisition costs and $4.7 million of net loan payments received from customers

 

Cash used in financing activities was $104.6 million for the forty weeks ended October 4, 2003 compared to $56.7 million for the same period last year.  Cash used in the 2003 period primarily reflects payments of $79.4 million made on the credit facility and a decrease in the outstanding checks balance of $16.3 million.  In the 2002 period, cash used for financing activities primarily reflected a decrease of $42.9 million in the outstanding checks balance.

 

At October 4, 2003 total debt, including capitalized leases, was $329.0 million compared to $412.9 million at December 28, 2002 and $368.8 million as of October 5, 2002.  Amounts outstanding under the revolving credit facility were none at October 4, 2003, $79.4 million at December 28, 2002 and $33.0 million at October 5, 2002.

 

Our revolving credit facility contains various restrictive covenants, compliance with which is a condition to continued credit availability under the facility.  The agreement contains financial covenants which, among other matters, require us to maintain predetermined ratio levels related to interest coverage, fixed charge coverage and leverage.  These ratios are based on EBITDA with some adjustments (Adjusted EBITDA).  Adjusted EBITDA is a non-GAAP financial measure that is defined by the revolving credit facility as earnings before interest, income taxes, depreciation and amortization, adjusted to exclude extraordinary gains or losses, gains or losses from sales of real estate, and non-cash LIFO and other charges (such as closed store lease costs and retail impairments).  Adjusted EBITDA should not be

 

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considered an alternative measure of our net income, operating performance, cash flow or liquidity.  It is provided as additional information relative to our debt covenants.

 

As of October 4, 2003, we were in compliance with all Adjusted EBITDA-based debt covenants as defined in our credit agreement which are summarized as follows:

 

Financial Covenant		Required Ratio		Actual Ratio
Interest Coverage Ratio (1)		3.00:1.00 (minimum)		3.63:1.00
Fixed Charge Coverage Ratio(2)		1.05:1.00 (minimum)		1.36:1.00
Leverage Ratio (3)		3.75:1.00 (maximum)		2.67:1.00

 

(1)           Ratio of Adjusted EBITDA for the trailing four quarters to interest expense for such period.  The required minimum ratio per the credit agreement will be adjusted upward to 3.25:1.00 for the fourth quarter of fiscal 2003.

 

(2)           Ratio of Adjusted EBITDA plus rent expense for the trailing four quarters to the sum of interest expense, rent expense and capital expenditures for such period.  The required minimum ratio per the credit agreement will be adjusted upward to 1.10:1.00 for the first quarter of fiscal 2004.

 

(3)           Total outstanding debt and capitalized leases to Adjusted EBITDA for the trailing four quarters.  The maximum permitted ratio per the credit agreement will be adjusted downward to 3.50:1:00 for the fourth quarter of fiscal 2003.

 

The following is a summary of the calculation of Adjusted EBITDA (in thousands) for the sixteen and forty week periods ended October 4, 2003 and October 5, 2002:

 

		Sixteen Weeks Ended						Forty Weeks Ended
		October 4, 2003			October 5, 2002			October 4 2003			October 5, 2002
Earnings before income taxes and cumulative effect of change in accounting principle		$	14,105		$	10,508		$	31,361		$	37,594
Add (Deduct):
LIFO		41			—			841			1,223
Depreciation and amortization		13,098			12,298			32,180			30,770
Interest expense		9,011			9,235			26,837			22,533
Special charges		—			(765		)	—			(765		)
Impairments		1,725			1,518			2,115			1,518
Closed store lease costs		583			353			969			353
Gains on sale of real estate		(218		)	(1,386		)	(410		)	(1,398		)
Total Adjusted EBITDA		$	38,345		$	31,761		$	93,893		$	91,828

 

Borrowings under the credit facility are collateralized by a security interest in substantially all assets of the Company and its wholly-owned subsidiaries that are not pledged under other debt agreements.  The credit agreement also contains covenants that specify a minimum working capital ratio, limit our ability to incur debt (including guaranteeing the debt of others) and liens, acquire or

 

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dispose of assets, pay dividends on and repurchase our stock, make capital expenditures and make loans or advances to others, including customers.

 

We have market risk exposure to changing interest rates primarily as a result of our borrowing activities. Our objective in managing our exposure to changes in interest rates is to reduce fluctuations in earnings and cash flows. To achieve these objectives, we use derivative instruments, primarily interest rate 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 perfectly effective 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 October 4, 2003 we had three outstanding interest rate swap agreements which commenced on July 26, 2002, December 6, 2002 and June 6, 2003 to manage interest rates on a portion of our long-term debt.  The agreements expire on September 25, 2004, October 6, 2004 and October 6, 2004 with notional amounts of $50 million, $35 million and $35 million, respectively.  The agreements call for an exchange of interest payments with us making payments based on fixed rates of 2.75%, 3.5% and 3.97% for the respective time intervals and receiving payments based on floating rates, without an exchange of the notional amount upon which the payments are based.

 

We believe that borrowing under the revolving credit facility, cash flows from operating activities and lease financing will be adequate to meet our working capital needs, planned capital expenditures and debt service obligations for the foreseeable future.

 

FORWARD LOOKING INFORMATION

 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  The statements regarding the Company contained in this report that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements based on current expectations 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 material differences include the following:

 

•                  the effect of competition on the Company’s distribution and retail businesses;

•                  general economic conditions;

•                  credit risk from financial accommodations extended to customers;

•                  risks entailed by expansion, affiliations and acquisitions;

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

•                  changes in vendor promotions or allowances;

 

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•                  changes in consumer spending and buying patterns;

•                  the ability to execute plans to improve retail operations and to enhance wholesale operations;

•                  adverse determinations or developments with respect to litigation, other legal proceedings or the SEC investigation; and

•                  the success or failure of new business ventures or initiatives.

 

These factors are discussed more fully in Part I, Item 3 and Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 28, 2002, under the caption “Cautionary Factors.”  You should carefully consider each cautionary factor and all of the other information in this report.  We undertake no obligation to revise or update publicly any forward-looking statements.  You are advised, however to consult any future disclosures we make on related subjects in future reports to the SEC.

 

NEW ACCOUNTING STANDARDS

 

Emerging Issues Task Force (EITF) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor,” addresses how a reseller of a vendor’s products should account for cash consideration received from a vendor and how to measure that consideration in its income statement.

 

In January 2003, the EITF concluded that new vendor arrangements, including modifications of existing arrangements entered into after December 31, 2002, should apply the provisions outlined in EITF No. 02-16.  In March 2003, the EITF concluded that entities may elect to early adopt the provisions of EITF No. 02-16 as a cumulative effect of a change in accounting principle.  We elected to early adopt the provisions of EITF No. 02-16 in the fourth quarter of 2002, retroactive to the beginning of fiscal 2002 and recognized a charge of $7.0 million, net of income taxes of $4.4 million, which represented the cumulative effect of a change in accounting principle as of the beginning of fiscal 2002.  This adoption also resulted in the reclassification of our net cooperative advertising income in fiscal 2002 from selling, general, and administrative expense to cost of sales retroactively as of the beginning of fiscal 2002.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51” (FIN No. 46).  In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.  A variable interest entity often holds financial assets, including loans or receivables, real estate or other property.  A variable interest entity may be essentially passive or it may engage in activities on behalf of another company.  Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests.  FIN No. 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both.  FIN No. 46’s consolidation requirements apply immediately to variable entities created or acquired after January 31, 2003.  The consolidation requirements related to entities created before February 1, 2003 have been recently delayed to the first interim period ending after December 15, 2003, which is our fourth quarter of fiscal 2003.  We are currently evaluating whether financial support or accommodations provided or to be provided to customers of our food distribution segment could result in the consolidation of such a customer in our consolidated financial statements upon the adoption of FIN No. 46.

 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have market risk exposure to changing interest rates primarily as a result of our borrowing activities.  We use interest rate swap agreements to manage our risk exposure (See Part II, Item 7 of our December 28, 2002 Form 10-K and Part I, Item 2 of this report under the caption “Liquidity and Capital Resources”).

 

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ITEM 4.  CONTROLS AND PROCEDURES

 

Management of the Company, with the participation and under the supervision of the Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of October 4, 2003.  Based on this evaluation the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms.  There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that materially affected, or is reasonably like to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

(a)                                  The Company held its Annual Meeting of Stockholders on July 8, 2003

 

(b)                                 Two incumbent directors were nominated by the Board to serve as directors of the Company for three-year terms expiring at the 2006 Annual Meeting of Stockholders.  Both nominees were elected, with the results of votes of security holders as follows:

 

(1) Election of Directors		Votes For		Votes Withheld
Jerry L. Ford		10,293,211		367,063
John E. Stokely		10,250,581		409,693

 

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K.

 

(a)                                  Exhibits filed or furnished with this Form 10-Q:

 

10.1                           Second Amendment, dated as of September 16, 2003, to the Credit Agreement dated as of December 19, 2000 among the Company, Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company) as administrative agent, and various lenders.

 

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).

 

(b)                                 Reports on Form 8-K:

 

On July 10, 2003, the Company furnished a Form 8-K reporting in accordance with “Item 12 – Results of Operations and Financial Condition” the issuance of a press release announcing its results for the second quarter of its fiscal year 2003.

 

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SIGNATURES

 

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

 

 

	NASH-FINCH COMPANY
	Registrant
Date:  November 5, 2003	By   /s/ Ron Marshall
	Ron Marshall
	Chief Executive Officer
Date: November 5, 2003	By   /s/ Robert B. Dimond
	Robert B. Dimond
	Executive Vice President and Chief Financial Officer

 

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NASH FINCH COMPANY

 

EXHIBIT INDEX TO QUARTERLY REPORT
ON FORM 10-Q

 

For the Sixteen Weeks Ended October 4, 2003

 

Item No.		Item		Method of Filing
10.1		Second Amendment, dated as of September 16, 2003, to the Credit Agreement dated as of December 19, 2000 among the Company, Deutsche Bank Trust Company Americas (formerly known as Bankers Trust Company) as administrative agent, and various lenders		Filed herewith
31.1		Rule 13a-14(a) Certification of the Chief Executive Officer		Filed herewith
31.2		Rule 13a-14(a) Certification of the Chief Financial Officer		Filed herewith
32.1		Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer		Furnished herewith

 

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