10-K 1 d319877d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

Commission file number 333-178311

 

 

Roundy’s, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   27-2337996
(State of incorporation)  

(I.R.S. Employer

Identification No.)

875 East Wisconsin Avenue

Milwaukee, Wisconsin

  53202
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (414) 231-5000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share   New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ¨  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ¨  Yes    x  No

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    x  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

 

Large accelerated filer    ¨    Accelerated filer    ¨
Non-accelerated filer    x    Smaller reporting company    ¨

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

As of June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, there was no established public trading market for the registrant’s common stock.

As of March 9, 2012, 45,642,999 shares of the registrants common stock, par value $0.01 per share, were issued and outstanding.

 

 

Documents Incorporated by Reference

None.

 

 

 


Table of Contents

Roundy’s, Inc.

FORM 10-K For the Fiscal Year Ended December 31, 2011

Table of Contents

 

Part I   

Item 1.

   Business      5   

Item 1A.

   Risk Factors      9   

Item 1B.

   Unresolved Staff Comments      26   

Item 2.

   Properties      27   

Item 3.

   Legal Proceedings      27   

Item 4.

   Mine Safety Disclosures      27   
Part II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     28   

Item 6.

   Selected Financial Data      30   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      51   

Item 8.

   Financial Statements and Supplementary Data      52   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      83   

Item 9A.

   Controls and Procedures      83   

Item 9B.

   Other Information      83   

Part III

  

Item 10.

   Directors, Executive Officers and Corporate Governances      84   

Item 11.

   Executive Compensation      89   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     106   

Item 13.

   Certain Relationships and Related Transactions, Director Independence      108   

Item 14.

   Principal Accounting Fees and Services      111   
Part IV   

Item 15.

   Exhibits, Financial Statement Schedules      113   
   Signatures      114   
   Index to Exhibits      115   

 

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Forward-Looking Statements

This Annual Report on Form 10-K for Roundy’s, Inc. and its subsidiaries contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect, ” “project,” “forecast,” “continue,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected store openings, costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including:

 

   

our ability to compete effectively with other retailers;

 

   

our ability to maintain price competitiveness;

 

   

ongoing economic uncertainty;

 

   

the geographic concentration of our stores;

 

   

our ability to achieve sustained sales and profitable operating margins at new stores;

 

   

our ability to maintain or increase our operating margins;

 

   

our ability to implement our expansion into the Chicago market on a timely basis or at all;

 

   

ordering errors or product supply disruptions in the delivery of perishable products;

 

   

increases in commodity prices;

 

   

our ability to protect or maintain our intellectual property;

 

   

severe weather, and other natural disasters in areas in which we have stores or distribution facilities;

 

   

the failure of our information technology or administrative systems to perform as anticipated;

 

   

data security breaches and the release of confidential customer information;

 

   

our ability to offset increasing energy costs with more efficient usage;

 

   

negative effects to our reputation from real or perceived quality or health issues with our food products;

 

   

our ability to retain and attract senior management and key employees;

 

   

our ability to renegotiate expiring collective bargaining agreements and new collective bargaining agreements;

 

   

our ability to satisfy our ongoing capital needs and unanticipated cash requirements;

 

   

the availability of financing to pursue our expansion into the Chicago market on satisfactory terms or at all;

 

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additional indebtedness incurred in the future;

 

   

our ability to retain and attract qualified store- and distribution-level employees;

 

   

rising costs of providing employee benefits, including increased pension contributions due to unfunded pension liabilities;

 

   

changes in law;

 

   

risks inherent in packaging and distributing pharmaceuticals and other healthcare products;

 

   

wartime activities, threats or acts of terror or a widespread regional, national or global health epidemic;

 

   

claims made against us resulting in litigation;

 

   

changes to financial accounting standards regarding store leases;

 

   

our high level of fixed lease obligations;

 

   

impairment of our goodwill; and

 

   

other factors discussed under “Risk Factors.”

We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other SEC filings and public communications. You should evaluate all forward-looking statements made in this Annual Report on Form 10-K in the context of these risks and uncertainties.

The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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PART I

ITEM 1—BUSINESS

Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our,” “Roundy’s,” “the Company,” “our business,” “our company” refer to Roundy’s, Inc. and its consolidated subsidiaries as a combined entity.

We are a leading Midwest supermarket chain with a 140-year operating history. We were founded in 1872 as a privately owned food wholesaling company. In 1952, we were sold to certain of our customers and until 2002 operated under the Roundy’s corporate name as a retailer owned cooperative, with food wholesaling operations largely focused in Wisconsin. We opened our first Pick ‘n Save store in 1975 and built a base of company-owned and operated retail stores throughout the 1980s and 1990s.

In June 2002, we were acquired by an investor group led by Willis Stein and our management team. At that time, we derived more than 50% of our sales from food wholesaling operations and the remainder from our company-operated retail stores. Following the acquisition, we accelerated our strategy of expanding our retail store base through selective acquisitions and organic growth, while divesting our wholesale operations. The substantial elimination of the wholesale business has helped to optimize our distribution network to better support our retail stores. As of December 31, 2011, our retail operations consisted of 158 grocery stores, with 122 stores in Wisconsin operating under the Pick ‘n Save, Copps and Metro Market banners, 32 stores in Minneapolis/St. Paul operating under the Rainbow banner and four stores in Illinois operating under the Mariano’s Fresh Market banner.

Our corporate headquarters are located at 875 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. Our telephone number is (414) 231-5000. Our website address is www.roundys.com.

Stores

We operate retail grocery stores under our Pick ‘n Save, Rainbow, Copps, Metro Market and Mariano’s Fresh Market retail banners. The following table represents our store network as of the end of each of our last five fiscal years:

 

     Fiscal Year Ended  
     12/27/2007      1/3/2009      1/2/2010      1/1/2011      12/31/2011  

Pick ’n Save

     94         94         95         94         93   

Rainbow

     31         31         32         32         32   

Copps

     27         26         26         26         26   

Metro Market

     1         1         1         2         3   

Mariano’s Fresh Market

     —           —           —           1         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Company-owned stores

     153         152         154         155         158   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our stores, which range in size from 26,000 to 130,000 square feet, offer all of the products and services found in a conventional supermarket, including nationally branded food products and own-brand products. In addition, our stores feature expansive meat, produce, deli and other perishable products and specialty and prepared foods departments, which represent higher growth and margin categories. We also offer a broad line of health and beauty care products and a large selection of seasonal merchandise to maximize the conveniences offered to our customers.

Our Pick ‘n Save, Rainbow and Copps retail banners are operated as high volume, value oriented supermarkets that seek to offer attractive prices and the best value among conventional food retailers in a given market. Our value price strategy is complemented by weekly promotions, a broad assortment of high quality fresh produce

 

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and other perishable products, as well as a focus on providing a high level of customer service and conveniences. Substantially all stores have full-service deli, meat, seafood and bakery departments, and 97 stores feature full-service pharmacies.

 

   

Pick ’n Save. We operate Pick ’n Save stores primarily in the Milwaukee area, as well as in certain other Wisconsin markets, including Racine, Oshkosh, Kenosha, and Fond du Lac. We also serve as the primary wholesaler for one additional Pick ’n Save bannered store that we do not operate.

 

   

Rainbow. We operate Rainbow stores in the Minneapolis/St. Paul area.

 

   

Copps. We operate Copps stores primarily in the Madison area as well as in certain northern Wisconsin markets, including Green Bay and Appleton.

We have focused on leveraging our strong brand names, high level of customer service, high quality perishables and strategically located stores, to increase market share. We believe the Pick ’n Save banner maintains the number one market share position in the Milwaukee metropolitan area. Additionally, through the Pick ’n Save and Copps banners, we believe we also maintain the number one market share position in several other large Wisconsin markets, including Madison, Racine, Fond du Lac, Oshkosh, West Bend and Kenosha. We believe the Rainbow banner maintains the number three market share position in the Minneapolis/St. Paul metropolitan area.

Our Mariano’s Fresh Market and Metro Market specialty food retail banners combine our value oriented conventional offering with an enhanced selection of full-service premium perishable and prepared food departments.

 

   

Mariano’s Fresh Market. We entered the Chicago market in July 2010 through the opening of our first Mariano’s Fresh Market store in Arlington Heights, Illinois. As of December 31, 2011, we had opened four stores in the Chicago market and secured nine leases for future stores in attractive locations. We subsequently opened another Chicago-area store in January 2012; Mariano’s Fresh Market brings an innovative format to the Chicago market, providing an expanded variety of produce and other perishables at competitive prices, unique specialty departments and superior customer service within an inviting ambiance.

 

   

Metro Market. We opened our first Metro Market store in August 2004 primarily to serve downtown Milwaukee apartment and condominium residents. The Metro Market store format features an expanded variety of produce, meat and prepared food offerings, coupled with exceptional customer service. We opened our second Metro Market store in March 2010 and our third in February 2011. Both of these additional locations are in suburbs of Milwaukee. All Metro Market stores operate in-store pharmacies.

Merchandising

We provide our customers with a compelling one-stop shopping experience featuring a high level of customer service in our attractive and convenient stores. Our product assortment includes high quality perishables and a broad selection of national brand and own-brand products at competitive prices. Many of our product categories include natural and organic options, catering to our customers’ focus on healthier eating choices.

Products

We offer our customers a wide variety of products, with a typical store stocking approximately 45,000 different items. Our stores sell most nationally advertised brands, as well as numerous products under our Roundy’s Select, Roundy’s and Clear Value own-brand labels, which maintain strong brand recognition throughout our markets. Our products can broadly be classified as non-perishable, perishable and non-food. Non-perishable food categories consist of grocery, frozen, and dairy products. Perishable categories include produce, meat, seafood, deli, bakery and floral. Non-food primarily includes general merchandise, health and beauty care, pharmacy, and alcohol.

 

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In recent years, we have enhanced the quality and selection of key perishable products to meet growing customer demand due to an increased focus on healthy eating. Perishable product sales also typically generate higher gross margins than non-perishable products. As a result, the percentage of our net sales generated from perishable products has increased in recent periods as illustrated by the table below:

 

     Fiscal 2007     Fiscal 2008     Fiscal 2009     Fiscal 2010     Fiscal 2011  

Non-perishable food

     53.2     53.2     53.0     51.7     50.9

Perishable

     31.6        31.8        32.0        32.3        33.0   

Non-food

     15.2        15.0        15.0        16.0        16.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We generally classify our products into the following primary categories: grocery, frozen & dairy; produce; meat & seafood; bakery; deli, cheese & prepared foods; floral; beer, wine & spirits; pharmacy; and health & beauty care. A brief description of the type of products we offer within each of these categories is set forth below.

 

   

Grocery, Frozen & Dairy. We offer a wide selection of grocery items at competitive prices, including both national brands and own brands. Our frozen department offers everyday staples such as vegetables, juice, microwaveable dinners, pizza and ice cream. In our dairy department, our milk, yogurt, sour cream, cheese, ice cream and eggs generally are produced locally in Wisconsin to ensure our customers are offered the freshest tasting products. We also provide a broad selection of natural and organic products.

 

   

Produce. We are committed to offering our customers the highest quality produce. We offer over 500 varieties of fresh fruit and vegetables sourced locally and from around the globe. Our stores offer an expansive assortment of USDA Certified organic produce. Our value-added produce offering includes fresh cut fruit, fresh squeezed orange juice and salad bars in many of our stores.

 

   

Meat & Seafood. We offer a distinctive selection of meat and fresh seafood, including natural and organic varieties, delivered with knowledgeable customer service. Our beef offering consists primarily of fresh cut Black Angus beef, and we also sell all-natural pork, lamb, veal, Italian sausage and bratwurst, and chicken. Our fresh seafood includes, for example, salmon, rainbow trout and locally harvested whitefish. In addition, we offer popular ready-to-bake selections in both our meat and seafood departments.

 

   

Bakery. Our bakery department offers a wide selection of breads, rolls, pies, donuts, muffins, cookies and other goods baked in-store daily. Our Roundy’s Select muffins are made with high quality ingredients, including Maine wild blueberries, Wisconsin cranberries, and spicy Korintje cinnamon. Roundy’s breads range from traditional French and Italian loaves to select artisanal varieties.

 

   

Deli, Cheese & Prepared Foods. We believe we provide our customers with a “neighborhood deli” experience by offering fresh foods from high quality suppliers at competitive prices. Our deli selections include salads, sandwiches, hot and ready-to-serve meals to go, and fresh sliced deli meats. We also offer an abundant selection of local, domestic, and imported artisanal cheeses, including creamy brie, gruyere, hard shaving cheeses, fresh mozzarella, Parmigiano Reggiano, Pecorino Romano and sharp cheddars. We also offer many varieties of fresh soups, both in bulk on the soup bar and packaged to go. Our prepared foods include entrees such as meat loaf, stuffed shells, rotisserie chickens and ribs.

 

   

Floral. We are committed to providing our customers with the freshest roses, bouquets, arrangements, green plants and attractive seasonal favorites. Our flower market offers a broad variety of cut flowers and allows customers to create their own bouquets.

 

   

General Merchandise. In order to maximize the conveniences offered to our customers, we offer a wide variety of candy and seasonal merchandise, as well as an assortment of household cleaning and cooking products.

 

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Alcohol. We offer a wide selection of competitively priced beer, wine and spirits. Our beer selection includes over 70 domestic and international brands in multiple styles, including local and regional craft beers. We also offer a wide assortment of wines from North America and around the world, and a broad variety of spirits.

 

   

Pharmacy. Our pharmacies offer helpful and knowledgeable pharmacists, quality products and value-added services for our customers. We accept over 4,000 different prescription plans, and all of our pharmacists are licensed as immunizers and trained in medication therapy management.

 

   

Health & Beauty Care. Our stores provide a convenient location for everyday health and beauty needs. We stock a wide variety of healthcare products, from thermometers and bandages to toothpaste and floss. We also offer a wide selection of beauty, baby and general merchandise products that facilitates one-stop shopping.

Own-Brand Strategy

We have been expanding the breadth of our own-brand offering over the last five years. Our premium Roundy’s Select and mid-tier Roundy’s own-brand lines feature quality levels that we believe equal or exceed national brands at competitive prices. Our Clear Value line offers entry-level own-brand products serving as our lowest price alternative to national brands. Our portfolio of own-brand items includes approximately 5,200 as of December 31, 2011, with the percentage of sales from own-brand items representing 19.7% of our net sales.

Competitive Environment

For the disclosure related to the Company’s competitive environment, see Item 1A under the heading “Competitive Environment.”

Marketing and Advertising

We use circulars distributed through direct delivery or inserted into local newspapers as our primary medium for advertising. These circulars include representative products from a store’s key departments, with special emphasis on up to 15 key items featured at competitive prices, and generally contain a themed promotion featuring approximately 15 additional items. We tailor our advertisements to specific local markets, which provide us with greater flexibility to target markets with different promotions and respond to local competitive activity. In addition, we advertise our promotional sales and promote our brand image through the use of local radio and television, as well as targeted direct mail in specific markets.

We seek to increase customer loyalty and enhance our value proposition through our Roundy’s Rewards and other loyalty cards. Our Roundy’s Rewards and other loyalty cards improve customer loyalty by offering instant electronic discounts, promotional offers at checkout, fuel discounts in selected markets and check cashing privileges. In addition, our loyalty card enables us to track customer purchasing trends, which we can use to further tailor our marketing initiatives.

Manufacturing and Distribution

We operate three distribution centers with an aggregate of approximately 1.8 million square feet of warehouse and administrative space. Our distribution network is supported by a modern fleet of 101 tractors and 379 trailers. In addition to the primary function of supplying our retail operations a broad product line that includes dry grocery, frozen foods, fresh produce, meat, dairy products, bakery goods and non-food products. Our three distribution centers in Wisconsin also supply the primary needs of one independent licensed Pick ’n Save location. We have a long-term license and supply contract in place with this independent customer. Under the terms of the licensing agreement, we allow the licensee to use the Pick ‘n Save banner free of charge in exchange for entering into a license and supply agreement in which the licensee generally agrees to purchase a majority of its product requirements from us.

 

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We operate a 116,000 square foot central commissary that manufactures a wide range of food products, including unique own-brand products. The commissary is a multi-purpose food production manufacturing plant and includes a complete food testing laboratory and an on-site product development department. The commissary currently produces a variety of perishable and non-perishable own-brand food items. We continually add to our capability to produce a wider variety of perishable and prepared foods. The commissary is an important element of the Company’s strategy to grow sales of own-brand products, perishables and prepared foods.

Intellectual Property

We maintain registered trademarks for our Pick ’n Save and Rainbow store banner trade names and our Roundy’s private label brand name. Trademarks are generally renewable on a 10 year cycle. We consider trademarks an important way to establish and protect our brands in a competitive environment.

Segments

The Company has determined that it has one reportable operating statement. See Note 15 to our audited consolidated financial statements set forth in Item 8 below.

Employees

As of December 31, 2011, we had 18,034 employees, including 7,630 full-time employees and 10,404 part-time employees. Approximately 49% of our employees were subject to a collective bargaining agreement as of December 31, 2011. With respect to our unionized employees, as of March 9, 2012, we have 15.9% of our unionized employees working under expired contracts and 1.8% of our unionized employees working under contracts that will expire prior to December 31, 2012.

We consider our employee relations to be good and do not anticipate any difficulties in re-negotiating these expired contracts. We have never experienced a strike or significant work stoppage.

Executive Officers of the Registrant

The disclosure regarding executive officers is set forth in Item 10 of Part III of this Form 10-K under the heading “Executive Officers of the Company” and is incorporated herein by reference.

Available Information

Our internet address is http://www.roundys.com. Through “Investor Relations”—“SEC Filings” on our home page, we make available free of charge our annual report on Form 10-K, our quarterly reports on Form 10-Q, our proxy statements, our current reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our reports filed with the SEC are also made available to read and copy at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the Public Reference Room by contacting the SEC at 1-800-SEC-0330. Reports filed with the SEC are also made available on its website at www.sec.gov.

Copies of the Charters of the Audit, Compensation and Nominating and Corporate Governance Committees of the Board of Directors, our Code of Business Conduct and Corporate Governance Guidelines can also be found on the Roundy’s website.

ITEM 1A—RISK FACTORS

There are risks and uncertainties that can affect our business, financial condition and results of operation, any one of which could cause our actual results to vary materially from recent results or from those indicated by forward looking statements included within this Annual Report on Form 10-K, and within other filings with the SEC,

 

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news releases, registration statements and other written communication. Any of these risks could materially and adversely affect our business, financial condition and results of operations, which in turn could materially and adversely affect the price of our common stock.

Risks Related to our Business

We operate in a highly competitive industry.

The food retail industry as a whole, and our marketing areas in Wisconsin, Minneapolis/St. Paul and Chicago, are highly competitive. We compete with various types of retailers, including national, regional and local conventional supermarkets, national and regional supercenters, membership warehouse clubs, and other alternative food retailers, such as natural foods stores, smaller specialty stores and farmers’ markets.

Our principal competitors include national conventional supermarkets such as SUPERVALU (operating under the Jewel/Osco and Cub Foods banners) and Safeway (operating under the Dominick’s banner); national supercenters such as Costco, Target and Wal-Mart; regional supercenters such as Woodman’s; regional supermarkets such as Festival Foods and Piggly Wiggly; alternative food retailers such as Aldi, Trader Joe’s and Whole Foods; and local supermarkets, natural foods stores, smaller specialty stores and farmers’ markets. In general, we compete with Aldi, Costco, Target and Wal-Mart across all of our geographic markets. Our remaining principal competitors within each of our geographic markets vary to a significant degree and include the following:

 

   

Wisconsin: Festival Foods, Piggly Wiggly and Woodman’s;

 

   

Minneapolis/St. Paul: Cub Foods and Lund’s/Byerly’s; and

 

   

Chicago: Dominick’s, Jewel/Osco, Strack & Van Til, Trader Joe’s and Whole Foods.

Some of these competitors have attempted to increase market share by expanding their footprints in our marketing areas. This competitor expansion creates a more difficult competitive environment for us. We also face limited competition from restaurants and fast-food chains. In addition, other established food retailers could enter our markets, increasing competition for market share.

We compete with other food retailers primarily on the basis of product selection and quality, price, customer service, store format and location or a combination of these factors. Pricing in particular is a significant driver of consumer choice in our industry and we regularly engage in price competition. To the extent that our competitors lower prices, our ability to maintain gross profit margins and sales levels may be negatively impacted. We expect competitors to continue to apply pricing and other competitive pressures. Some of our competitors have greater resources than we do and do not have unionized work forces, which may result in lower labor and benefit costs. These competitors could use these advantages to take measures, including reducing prices, which could materially adversely affect our competitive position, our financial condition and results of operations.

In addition to price competitiveness, our success depends on our ability to offer products that appeal to our customers’ preferences. Failure to offer such products, or to accurately forecast changing customer preferences, could lead to a decrease in the number of customer transactions at our stores and a decrease in the amount customers spend when they visit our stores. We also attempt to create a convenient and appealing shopping experience for our customers in terms of customer service, store format and location. If we do not succeed in offering attractively priced products that consumers want to buy or are unable to provide a convenient and appealing shopping experience, our sales, operating margins and market share may decrease, resulting in reduced profitability.

Economic conditions that impact consumer spending could materially affect our business.

Ongoing economic uncertainty continues to negatively affect consumer confidence and discretionary spending. Our results of operations may be materially affected by changes in economic conditions nationwide or in the regions in which we operate that impact consumer confidence and spending, including discretionary spending.

 

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This risk may be exacerbated if customers choose lower-cost alternatives to our product offerings in response to economic conditions. In particular, a decrease in discretionary spending could adversely impact sales of certain of our higher margin product offerings. Future economic conditions affecting disposable consumer income, such as employment levels, business conditions, changes in housing market conditions, the availability of credit, interest rates, tax rates and fuel and energy costs, could reduce overall consumer spending or cause consumers to shift their spending to lower-priced competitors. In addition, inflation or deflation can impact our business. Food deflation could reduce sales growth and earnings, while food inflation, combined with reduced consumer spending, could reduce gross profit margins. As a result, our results of operations could be materially adversely affected.

The geographic concentration of our stores creates an exposure to local economies and regional downturns that may materially adversely affect our financial condition and results of operations.

As of December 31, 2011, we operated 122 stores in Wisconsin, making Wisconsin our largest market with 77% of our stores. Of our Wisconsin stores, 60, or nearly half, are located in the Milwaukee area. We also have 32 stores located in the Minneapolis/St. Paul area. Our business is closely linked to local economic conditions in those areas and, as a result, we are vulnerable to economic downturns in those regions. In addition, any other factors that negatively affect these areas could materially adversely affect our revenues and profitability. These factors could include, among other things, changes in regional demographics, population and employer base. Any of these factors may disrupt our businesses and materially adversely affect our financial condition and results of operations.

We may be unable to maintain or improve levels of same-store sales, which could harm our business and cause our stock price to decline.

We may not be able to maintain or improve our current levels of same-store sales. Our same-store sales have fluctuated in the past and will likely fluctuate in the future. A variety of factors affect our same-store sales, including:

 

   

overall economic trends and conditions;

 

   

consumer preferences, buying trends and spending levels;

 

   

our competition, including competitor store openings or closings near our stores;

 

   

the pricing of our products, including the effects of inflation or deflation;

 

   

the number of customer transactions in our stores;

 

   

our ability to provide product offerings that generate new and repeat visits to our stores;

 

   

the level of customer service that we provide in our stores;

 

   

our in-store merchandising-related activities;

 

   

our ability to source products efficiently; and

 

   

the number of stores we open, remodel or relocate in any period.

Adverse changes in these factors may cause our same-store sales results to be materially lower than in recent periods, which would harm our business and could result in a decline in the price of our common stock.

We may be unable to maintain our operating margins, which could adversely affect the price of our common stock.

We intend to maintain our operating margins in an environment of increased competition through various initiatives, including expansion of our own-brand offerings, increased sales of perishables and prepared foods, improved ordering, and strategic remodels and relocations of our stores, as well as continued cost discipline focused on improving labor productivity and reducing shrink. If competitive pressures cause us to lower our

 

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prices, our operating margins may decrease. If customers do not adopt our increased own-brand, perishable or prepared food offerings, these higher margin items will not improve our operating margins. If we do not adequately refine and improve our various ordering, tracking and allocation systems, we may not be able to increase sales and reduce inventory shrink. Any failure to achieve gains in labor productivity may adversely impact our operating margins. As a result, our operating margins may stagnate or decline, which could adversely affect the price of our stock.

Prolonged labor disputes with unionized employees and increases in labor costs could adversely affect us.

Our largest operating costs are attributable to labor costs and, therefore, our financial performance is greatly influenced by increases in wage and benefit costs, including pension and health care costs. As a result, we are exposed to risks associated with a competitive labor market and, more specifically, to any disruption of our unionized work force.

As of December 31, 2011, approximately 49% of our employees were represented by unions and covered by collective bargaining or similar agreements that are subject to periodic renegotiation. Our renegotiation of expiring collective bargaining agreements and negotiation of new collective bargaining agreements may not prove successful, may result in a significant increase in labor costs, or may result in a disruption to our operations. We expect that we would incur additional costs and face increased competition if we lost customers during a work stoppage or labor disturbance.

As of December 31, 2011, we had an aggregate of 38 collective bargaining agreements in effect, all of which are scheduled to expire between 2012 and 2016. In addition, certain of our employees at our Rainbow stores are currently operating under a collective bargaining agreement, which expired by its terms on March 8, 2011 and has not yet been renewed.

In the renegotiation of our current contracts and the negotiation of our new contracts, rising health care and pension costs and the nature and structure of work rules will be important issues. The terms of the renegotiated collective bargaining agreements could create either a financial advantage or disadvantage for us as compared to our major competitors and could have a material adverse effect on our results of operations and financial condition. Our labor negotiations may not conclude successfully and work stoppages or labor disturbances could occur. A prolonged work stoppage affecting a substantial number of stores could have a material adverse effect on our financial condition, results of operations and cash flows. We also expect that in the event of a work stoppage or labor disturbance, we could incur additional costs and face increased competition for customers.

We may not be able to successfully implement our expansion into the Chicago market, which could limit our prospects for future growth.

Our ability to continue to expand into the Chicago market with a new format of stores under our Mariano’s Fresh Market banner is an important component of our business strategy. Successful execution of this expansion depends upon, among other things:

 

   

the levels of sales and profitability of Mariano’s Fresh Market stores;

 

   

the attractiveness of the Mariano’s Fresh Market store format and brand to local customers;

 

   

the incorporation of new Mariano’s Fresh Market stores into our existing distribution network;

 

   

the identification of suitable sites in the Chicago market for store locations;

 

   

the negotiation of acceptable lease terms for store sites;

 

   

the hiring, training and retention of skilled store personnel and management;

 

   

the effective management of inventory to meet the needs of our stores on a timely basis;

 

   

the availability of levels of cash flow or financing necessary to support our expansion; and

 

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our ability to successfully address competitive pricing, merchandising, distribution and other challenges encountered in connection with expansion into the Chicago market.

We, or our third-party vendors, may not be able to adapt our distribution, management information and other operating systems to adequately supply products to new stores at competitive prices so that we can operate the stores in a successful and profitable manner. Additionally, our expansion into the Chicago market will place increased demands on our operational, managerial and administrative resources. These increased demands could cause us to operate our existing business less effectively, which in turn could cause deterioration in the financial performance of our existing stores.

In addition, new stores build their sales volume and their customer base over time and, as a result, generally have lower gross margin rates and higher operating expenses, as a percentage of sales, than our more mature stores. If our Chicago market stores do not generate sufficient revenue or operate with acceptable margins, or if we experience an overall decline in performance, we may slow or discontinue our expansion plans, or we may decide to close stores in Chicago or elsewhere. We believe that the competitive dynamics in Chicago are currently favorable for our entrance into the market, but to the extent these conditions change, on account of competitors reacting to our entrance or otherwise, our growth may be inhibited. If we fail to successfully implement our expansion into Chicago, our growth prospects will be materially limited and could result in a decline in the price of our common stock.

Increased commodity prices and availability may impact our profitability.

Many of our products include ingredients such as wheat, corn, oils, milk, sugar, proteins, cocoa and other commodities. Commodity prices worldwide have been increasing. While commodity price inputs do not typically represent the substantial majority of our product costs, any increase in commodity prices may cause our vendors to seek price increases from us. Although we typically are able to mitigate vendor efforts to increase our costs, we may be unable to continue to do so, either in whole or in part. In the event we are unable to continue mitigating potential vendor price increases, we may in turn consider raising our prices, and our customers may be deterred by any such price increases. Our profitability may be impacted through increased costs to us which may impact gross margins, or through reduced revenue as a result of a decline in the number and average size of customer transactions.

Our plans to remodel or relocate certain of our existing stores and build new stores in the Chicago market require us to spend capital, which must be allocated among various projects. Failure to use our capital efficiently could have an adverse effect on our profitability.

We plan to remodel or relocate certain of our existing stores, and to open additional Mariano’s Fresh Market stores in the Chicago market. These initiatives will use cash generated by our operations. If this cash is not allocated efficiently among these various projects, or if any of these initiatives prove to be unsuccessful, we may experience reduced profitability and we could be required to delay, significantly curtail or eliminate planned store openings, remodels or relocations.

We have significant debt service and lease obligations and may incur additional indebtedness in the future which could adversely affect our financial health and our ability to react to changes to our business.

We have significant debt service and lease obligations, which could adversely affect our financial health. As of December 31, 2011, we had approximately $820 million in total debt and capital lease obligations. Subsequent to the refinancing of our debt in connection with our initial public offering, on February 13, 2012, we had approximately $702 million in total debt and capital lease obligations. In addition, we had future minimum lease payment commitments of $1.7 billion at December 31, 2011.

Our high level of debt and fixed lease obligations will require us to use a significant portion of cash generated by our operations to satisfy these obligations, and could adversely impact our ability to obtain future financing to support our capital expenditures or other operational investments or shareholder dividends. In fiscal 2010 and

 

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2011, we had debt service repayments, of $77.4 million and $133.2 million, respectively. Fiscal 2011 debt service obligations included a scheduled repayment of $54 million of our term loan principal amount.

If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any of such actions on a timely basis, on terms satisfactory to us or at all. Our level of indebtedness has important consequences. For example, our level of indebtedness may:

 

   

require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to us for working capital, capital expenditures and other general corporate purposes;

 

   

limit our ability to pay future dividends;

 

   

limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement our business strategy;

 

   

heighten our vulnerability to downturns in our business, the food retail industry or in the general economy and limit our flexibility in planning for, or reacting to, changes in our business and the food retail industry; or

 

   

prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our store base and product offerings.

We cannot assure you that our business will generate sufficient cash flow from operations or that future financing will be available to us in amounts sufficient to enable us to make payments on our indebtedness or to fund our operations. In addition, our failure to make payments under our operating leases could trigger defaults under other leases or under agreements governing our other indebtedness, which could cause the counterparties under those agreements to accelerate the obligations due thereunder.

We will require substantial cash flows from operations to make our payments under our operating leases. If we are not able to make the required payments under our debt and lease agreements, the lenders or owners of the stores we lease may, among other things, repossess those assets, which could adversely affect our ability to conduct our operations.

Proposed changes to financial accounting standards could require our store leases to be recognized on the balance sheet.

In addition to our significant level of indebtedness, we have significant obligations relating to our current operating leases. Proposed changes to financial accounting standards could require such leases to be recognized on the balance sheet. As of December 31, 2011, we had undiscounted operating lease commitments of approximately $1.73 billion, scheduled through 2032, related primarily to our stores. These leases are classified as operating leases and disclosed in Note 10 to our audited consolidated financial statements set forth in Item 8 below, but are not reflected as liabilities on our consolidated balance sheets. As of December 31, 2011, substantially all our stores were subject to leases, which have terms generally up to 20 years, and during fiscal 2011 our operating lease expense was approximately $105.7 million.

In August 2010, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) issued a joint discussion paper highlighting proposed changes to financial accounting standards for leases. Currently, Accounting Standards Codification 840 (“ASC 840”), Leases (formerly Statement of Financial Accounting Standards 13, Accounting for Leases) requires that operating leases are classified as an off-balance sheet transaction and only the current year operating lease expense is accounted for in the income statement. In order to determine the proper classification of our stores as either operating leases or capital leases, we must make certain estimates at the inception of the lease relating to the economic useful life

 

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and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. Substantially all of our store leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. Additionally, operating leases are not reflected in our consolidated balance sheets, which means that neither a leased asset nor an obligation for future lease payments is reflected in our consolidated balance sheets. The proposed changes to ASC 840 would require that substantially all operating leases be recognized as assets and liabilities on our balance sheet. The right to use the leased property would be capitalized as an asset and the present value of future lease payments would be accounted for as a liability. The proposed changes are currently being reviewed by FASB, IASB and others, and are expected to be finalized in 2012. The effective date, which has not been determined, could be as early as 2013 and may require retrospective adoption. While we have not quantified the impact this proposed standard would have on our financial statements, if our current operating leases are instead recognized on the balance sheet, it will result in a significant increase in the liabilities reflected on our balance sheet and in the interest expense and depreciation and amortization expense reflected in our income statement, while reducing the amount of rent expense. This could potentially decrease our net income.

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are not currently required to comply with the rules of the Securities and Exchange Commission (the “SEC”) implementing Section 404 of the Sarbanes-Oxley Act (“Sarbanes-Oxley”) and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Section 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal controls over financial reporting until the year following our second annual report required to be filed with the SEC. At such time, our independent registered public accounting firm may issue a report that is adverse, in the event it is not satisfied with the level at which our controls are documented, designed or operating. If we are unable to conclude that we have effective internal control over financial reporting, our independent registered public accounting firm is unable to provide us with an unqualified report as required by Section 404 or we are required to restate our financial statements, we may fail to meet our public reporting obligations and investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to divert attention from operational and other business matters to devote substantial time to public company requirements.

We have historically operated our business as a private company. In February 2012, we completed an initial public offering. As a result, we are required to incur additional legal, accounting, compliance and other expenses that we did not incur as a private company. We are obligated to file with the SEC quarterly and annual information and other reports that are specified in Section 13 and other sections of the securities Exchange Act of

 

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1934, as amended (the “Exchange Act”). In addition, we are also subject to other reporting and corporate governance requirements, including certain requirements of the New York Stock Exchange (“NYSE”), and certain provisions of Sarbanes-Oxley and other regulations promulgated thereunder, which impose significant compliance obligations upon us. We must be certain that we have the ability to institute and maintain a comprehensive compliance function; establish internal policies; ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis; design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with Sarbanes-Oxley; involve and retain outside counsel and accounting and financial staff with the appropriate experience in connection with the above activities and maintain an investor relations function. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

Sarbanes-Oxley, as well as rules subsequently implemented by the SEC and the NYSE, have imposed increased regulation and disclosure and have required enhanced corporate governance practices of public companies. Our efforts to comply with evolving laws, regulations and standards in this regard are likely to result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. These changes require a significant commitment of resources. We may not be successful in implementing or maintaining these requirements, any failure of which could materially adversely affect our business, results of operations and financial condition. In addition, if we fail to implement or maintain the requirements with respect to our internal accounting and audit functions, our ability to continue to report our operating results on a timely and accurate basis could be impaired. If we do not implement or maintain such requirements in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or NYSE. Any such actions could harm our reputation and the confidence of investors and customers in our company and could materially adversely affect our business and cause our share price to fall.

Our business may suffer as a result of our lack of public company operating experience. In addition, if securities or industry analysts do not publish research regularly or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

We have been a privately-held company since being acquired by Willis Stein and certain members of management in June 2002. Our recent lack of public company operating experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business strategy, either as a result of our inability to effectively manage our business in a public company environment or for any other reason, our business, prospects, financial condition and results of operations may be harmed.

In addition, as a new public company we may not be able to maintain regular research coverage by securities and industry analysts, which could negatively impact the trading price for our stock. If one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Failure to attract, train and retain qualified store-level and distribution-level employees could adversely affect our ability to carry out strategic initiatives and ultimately impact our financial performance.

The retail food industry is labor intensive. Our ability to meet our labor needs, including our needs for specialized workers, such as pharmacists, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force in the

 

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markets in which we are located, unemployment levels within those markets, unionization of the available work force, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation. Failure to do so could adversely affect our results of operations.

The loss of key employees could negatively affect our business.

A key component of our success is the experience of our key employees, including our Chairman, President and Chief Executive Officer, Robert Mariano, our Executive Vice President and Chief Financial Officer, Darren Karst and our Executive Vice President—Operations, Donald Rosanova. These employees have extensive experience in our industry and are familiar with our business, systems and processes. In addition, Messrs. Mariano, Karst and Rosanova are key to our strategy of expansion into the Chicago market, due to their experience with, and understanding of, food retailing in that region. The loss of services of one or more of our key employees could impair our ability to manage our business effectively. We do not maintain key person insurance on any employee.

The cost of providing employee benefits continues to increase and is subject to factors outside of our control.

We sponsor three defined benefit pension plans, two of which are frozen with respect to benefit accruals and the third of which is closed to new participants. Even though the vast majority of our employees are not accruing additional pension benefits under these plans, these pension plans are not fully funded. Our funding requirements vary based upon plan asset performance, interest rates and actuarial assumptions. Poorer than assumed asset performance and continuing low interest rates would likely cause our required funding contributions to increase in the future. As of December 31, 2011, the accumulated benefit obligation and fair value of plan assets for these three Company-sponsored defined benefit plans were $185.6 million and $143.5 million, respectively. As of January 2, 2010, the accumulated benefit obligation and fair value of plan assets for these three plans were $157.8 million and $139.5 million, respectively.

In addition, we participate in three underfunded multiemployer pension plans on behalf of our union-affiliated employees, and we are required to make contributions to these plans under our collective bargaining agreements. Each of these three multiemployer pension plans is currently underfunded in part due to increases in the costs of benefits provided or paid under these plans as well as lower returns on plan assets over the past several years. The unfunded liabilities of these three plans may result in increased future payments by us and other participating employers. In 2009, the largest multiemployer plan in which we participate was deemed by its plan actuary to be “critically underfunded,” prompting federally mandated increases in our contributions to it. Going forward, our required contributions to these multiemployer plans could increase as a result of many factors, including the outcome of collective bargaining with the unions, actions taken by trustees who manage the plans, government regulations, the actual return on assets held in the plans and the payment of a withdrawal liability if we choose to exit a plan. We expect meaningful increases in contribution expense as a result of required incremental plan contributions to reduce underfunding. Our risk of future increased payments may be greater if other participating employers withdraw from the plan and are not able to pay the total liability assessed as a result of such withdrawal, or if the pension plan adopts surcharges and/or increased pension contributions as part of rehabilitation plan. For example, in recent years our plan underfunding has increased due to the withdrawal of participating employers that, because of their financial distress, were unable to pay contributions or their portion of the unfunded pension liability.

Pursuant to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Pension Benefit Guaranty Corporation (the “PBGC”) has the right, subject to satisfaction of certain statutory requirements, to involuntarily terminate our defined benefit pension plans (thus accelerating funding obligations), or enter into an alternative arrangement with us to prevent such termination. In March 2010, we were contacted by the PBGC expressing concern regarding the impact that the payment of a $150 million shareholder dividend could have on our ability to meet our obligations to our largest defined benefit pension plan. We subsequently entered into an amendment to our existing agreement with the PBGC that required us to make additional contributions to our

 

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defined benefit pension plan, one of which we were required to make no later than April 29, 2010 and one on each of the first two anniversaries thereafter, and for us to increase and continue the credit support in the form of the existing letter of credit with respect to our obligations under such agreement. We cannot assure you that the PBGC will not seek to increase or accelerate our funding requirements under our defined benefit plans in the event our operating performance declines or we otherwise increase our indebtedness.

We also provide health benefits to substantially all of our full-time employees and to certain part-time employees depending on average hours worked. Even though employees generally pay a portion of the cost, our cost of providing these benefits has increased steadily over the last several years. We anticipate future increases in the cost of health benefits, partly, but not entirely, as a result of the implementation of federal health care reform legislation. If we are unable to control healthcare and pension costs, we may experience increased operating costs, which may adversely affect our financial condition and results of operations.

Variability in self-insurance liability estimates could significantly impact our results of operations.

We self-insure for workers’ compensation, general liability, automobile liability and employee health care benefits up to a set retention level, beyond which we maintain excess insurance coverage. Liabilities are determined using actuarial estimates of the aggregate liability for claims incurred and an estimate of incurred but not reported claims, on an undiscounted basis. Our accruals for insurance reserves reflect certain actuarial assumptions and management judgments, which are subject to a high degree of variability. The variability is caused by factors external to us such as: historical claims experience; medical inflation; legislative changes to benefit levels; trends relating to jury verdicts; and claim settlement patterns. Any significant variation in these factors could cause a material change to our reserves for self-insurance liabilities and may adversely affect our financial condition and results of operations.

Litigation may materially adversely affect our business, financial condition and results of operations.

Our operations are characterized by a high volume of customer traffic and by transactions involving a wide variety of product selections. These operations carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in many other industries. Consequently, we may be a party to individual personal injury, product liability and other legal actions in the ordinary course of our business, including litigation arising from food-related illness. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that may decrease consumer confidence in our businesses, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may materially adversely affect our businesses, financial condition, results of operations and cash flows.

Various aspects of our business are subject to federal, state and local laws and regulations. Our compliance with these regulations may require additional capital expenditures and could materially adversely affect our ability to conduct our business as planned.

We are subject to federal, state and local laws and regulations relating to zoning, land use, environmental protection, work place safety, public health, community right-to-know, alcoholic beverage sales, tobacco sales and pharmaceutical sales. In particular, the states of Wisconsin, Minnesota and Illinois and several local jurisdictions regulate the licensing of supermarkets, including alcoholic beverage license grants. In addition, certain local regulations may limit our ability to sell alcoholic beverages at certain times. A variety of state programs regulate the production and sale of milk, including the price of raw milk, through federal market orders and price support programs. We are also subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions, disabled access and work permit requirements. Compliance with new laws in these areas, or with new or stricter interpretations of existing requirements, could

 

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reduce the revenue and profitability of our stores and could otherwise materially adversely affect our business, financial condition or results of operations. Additionally, a number of federal, state and local laws impose requirements or restrictions on business owners with respect to access by disabled persons. Our compliance with these laws may result in modifications to our properties, or prevent us from performing certain further renovations.

Our pharmacy business is subject to, and influenced by, certain government laws and regulations, including those administered and enforced by Medicare, Medicaid, the Drug Enforcement Administration (the “DEA”), the Consumer Product Safety Commission, the U.S. Federal Trade Commission and the U.S. Food and Drug Administration. For example, the conversion of various prescription drugs to over-the-counter medications, a decrease in the rate at which new prescription drugs become available or the failed introduction of new prescription drugs into the market could materially adversely affect our pharmacy sales. The withdrawal of certain drugs from the market may also materially adversely affect our pharmacy business. Changes in third party reimbursement levels for prescription drugs, including changes in Medicare or state Medicaid programs, could also reduce our margins and have a material adverse effect on our business. In order to dispense controlled substances, we are required to register our pharmacies with the DEA and to comply with security, recordkeeping, inventory control and labeling standards.

In addition, our pharmacy business is subject to local regulations in the states where our pharmacies are located, applicable Medicare and Medicaid regulations and state and federal prohibitions against certain payments intended to induce referrals of patients or other health care business. Failure to properly adhere to these and other applicable regulations could result in the imposition of civil, administrative and criminal penalties including suspension of payments from government programs; loss of required government certifications; loss of authorizations to participate in, or exclusion from, government reimbursement programs such as Medicare and Medicaid; loss of licenses; significant fines or monetary penalties for anti-kickback law violations, submission of false claims or other failures to meet reimbursement program requirements and could materially adversely affect the continued operation of our business. Our pharmacy business is also subject to the Health Insurance Portability and Accountability Act, including its obligations to protect the confidentiality of certain patient information and other obligations. Failure to properly adhere to these requirements could result in the imposition of civil as well as criminal penalties.

We may experience negative effects to our reputation from real or perceived quality or health issues with our food products, which could have an adverse effect on our operating results.

We believe that a reputation for providing our customers with fresh, high-quality food products is an important component of our customer value proposition. Concerns regarding the safety or quality of our food products or of our food supply chain could cause consumers to avoid purchasing certain products from us, or to seek alternative sources of food, even if the basis for the concern is outside of our control. Food products containing contaminants could be inadvertently distributed by us and, if processing at the consumer level does not eliminate them, these contaminants could result in illness or death. Adverse publicity about these concerns, whether or not ultimately based on fact, and whether or not involving products sold at our stores, could discourage consumers from buying our products and have an adverse effect on our operating results. Furthermore, the sale of food products entails an inherent risk of product liability claims, product recall and the resulting negative publicity. Any such claims, recalls or adverse publicity with respect to our own-brand products may have an even greater negative effect on our sales and operating results, in addition to generating adverse publicity for our own-brand products. Any lost confidence in us on the part of our customers would be difficult and costly to re-establish. Any such adverse effect could significantly reduce our brand value. Issues regarding the safety of any food items sold by us, regardless of the cause, could have a substantial and adverse effect on our sales and operating results.

 

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Certain risks are inherent in providing pharmacy services, and our insurance may not be adequate to cover any claims against us.

Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as risks of liability for products which cause harm to consumers. Although we maintain professional liability insurance and errors and omissions liability insurance, we cannot guarantee that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future, or at all. Our results of operations, financial condition or cash flows may be materially adversely affected if in the future our insurance coverage proves to be inadequate or unavailable, or there is an increase in the liability for which we self-insure, or we suffer harm to our reputation as a result of an error or omission.

If our goodwill becomes impaired, we may be required to record a significant charge to earnings.

We have a significant amount of goodwill. As of December 31, 2011, we had goodwill of approximately $726.9 million, which represented approximately 48.1% of our total assets as of such date. Goodwill is reviewed for impairment on an annual basis (as of the first day of the third quarter) or whenever events occur or circumstances change that would more likely than not reduce the fair value of our reporting unit below its carrying amount. Fair value is determined based on the discounted cash flows and comparable market values of our single reporting unit. If the fair value of the reporting unit is less than its carrying value, the fair value of the implied goodwill is calculated as the difference between the fair value of our reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An impairment charge is recorded for any excess of the carrying value over the implied fair value.

Determining market values using a discounted cash flow method requires that we make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate market rates. Our judgments are based on historical experience, current market trends and other information. In estimating future cash flows, we rely on internally generated forecasts for operating profits and cash flows, including capital expenditures. Based on our annual impairment test during fiscal 2009, 2010 and 2011, no goodwill impairment charge was required to be recorded. Changes in estimates of future cash flows caused by items such as unforeseen events or changes in market conditions could negatively affect our reporting unit’s fair value and result in an impairment charge. Factors that could cause us to change our estimates of future cash flows include a prolonged economic crisis, successful efforts by our competitors to gain market share in our core markets, our inability to compete effectively with other retailers or our inability to maintain price competitiveness. An impairment of a significant portion of our goodwill could materially adversely affect our financial condition and results of operations.

Severe weather, natural disasters and adverse climate changes may materially adversely affect our financial condition and results of operations.

Severe weather conditions and other natural disasters in areas where we have stores or distribution facilities or from which we obtain the products we sell may materially adversely affect our retail or distribution operations or our product offerings and, therefore, our results of operations. Such conditions may result in physical damage to, or temporary or permanent closure of, one or more of our stores or distribution facilities, an insufficient work force in our markets, and/or temporary disruption in the supply of products, including delays in the delivery of goods to our stores or a reduction in the availability of products in our stores. In addition, adverse climate conditions and adverse weather patterns, such as drought or flood, that impact growing conditions and the quantity and quality of crops may materially adversely affect the availability or cost of certain products within our supply chain. Any of these factors may disrupt our businesses and materially adversely affect our financial condition, results of operations and cash flows.

 

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Our business could be harmed by a failure of our information technology or administrative systems.

We rely on our information technology and administrative systems to effectively manage our business data, communications, supply chain, order entry and fulfillment and other business processes. The failure of our information technology or administrative systems to perform as we anticipate could disrupt our business and result in transaction errors, processing inefficiencies and the loss of sales and systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, systems failures, viruses and security breaches, including breaches of our transaction processing or other systems that could result in the compromise of confidential customer data. Any such damage or interruption could have a material adverse effect on our business, cause us to face significant fines, customer notice obligations or costly litigation, harm our reputation with our customers, require us to expend significant time and expense developing, maintaining or upgrading our information technology or administrative systems, or prevent us from paying our suppliers or employees, receiving payments from our customers or performing other information technology or administrative services on a timely basis.

If we experience a data security breach and confidential customer information is disclosed, we may be subject to penalties and experience negative publicity, which could affect our customer relationships and have a material adverse effect on our business.

We and our customers could suffer harm if customer information were accessed by third parties due to a security failure in our systems. The collection of data and processing of transactions require us to receive and store a large amount of personally identifiable data. This type of data is subject to legislation and regulation in various jurisdictions. Recently, data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislative proposals addressing data privacy and security. If some of the current proposals are adopted, we may be subject to more extensive requirements to protect the customer information that we process in connection with the purchases of our products. We may become exposed to potential liabilities with respect to the data that we collect, manage and process, and may incur legal costs if our information security policies and procedures are not effective or if we are required to defend our methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to our methods of handling personal data could adversely affect our business, results of operations, financial condition and cash flows due to the costs and negative market reaction relating to such developments.

Energy costs are a significant component of our operating expenses, and increasing energy costs, unless offset by more efficient usage or other operational responses, may impact our profitability

We utilize natural gas and electricity in our stores and distribution centers and gasoline and diesel fuel in the trucks that deliver products to our stores. Increases in energy costs, whether driven by increased demand, decreased or disrupted supply or an anticipation of any such events, will increase the costs of operating our stores and distribution network and may increase the costs of our products. We may not be able to recover these rising costs through increased prices charged to our customers, and any increased prices may exacerbate the risk of customers choosing lower-cost alternatives. In addition, if we are unsuccessful in protecting against these increases in energy costs through long-term energy contracts, improved energy procurement, improved efficiency and other operational improvements, the overall costs of operating our stores will increase which would impact our profitability.

We may be unable to protect or maintain our intellectual property, which could results in customer confusion and adversely affect our business.

We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. In particular, our trademarks, including our registered Roundy’s, Pick ’n Save and Rainbow trademarks are valuable assets that reinforce our customers’ favorable perception of our stores. From time to

 

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time, third parties have used names similar to ours, have applied to register trademarks similar to ours and, we believe, have infringed or misappropriated our intellectual property rights. We respond to these actions on a case-by-case basis. The outcomes of these actions have included both negotiated out-of-court settlements as well as litigation.

Risks Related to the Ownership of Our Common Stock

We are controlled by investment funds managed by affiliates of Willis Stein, whose interests in our business may be different from those of our other stockholders.

As of March 9, 2012, funds controlled by Willis Stein and Partners, LLC (“Willis Stein”) owned, or controlled through our Investor Rights Agreement (as defined within Item 13, “Certain Relationships and Related Transactions and Director Independence—Investor Rights Agreement”), 23,267,732 shares, or 51.0%, of our outstanding common stock. As such, affiliates of Willis Stein have significant influence over our reporting and corporate management and affairs, and, for so long as they control more than 50% of our outstanding shares of common stock, will be able to control virtually all matters requiring stockholder approval. Pursuant to the Investor Rights Agreement, for so long as Willis Stein controls more than 50% of our outstanding shares of common stock, they will have the ability to designate the majority of our board of directors for the first year following the IPO. During such time, we expect that representatives of Willis Stein will constitute a majority of each committee of our board of directors (other than the audit committee) and that the chairman of each of the committees (other than the audit committee) will be a representative of Willis Stein, and these arrangements could extend beyond the one-year period contemplated by the Investor Rights Agreement (although, at such time as we are not a “controlled company” under the corporate governance standards, our committee membership will comply with all applicable requirements of those standards).

Affiliates of Willis Stein will, for so long as they control more than 50% of our outstanding shares of common stock, effectively control actions to be taken by us and our board of directors, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. The directors designated by affiliates of Willis Stein have the authority, subject to the terms of our indebtedness and the rules and regulations of the New York Stock Exchange, to cause us to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. Our certificate of incorporation provides that the doctrine of “corporate opportunity” will not apply to Willis Stein, or any of our directors who are associates of, or affiliated with, Willis Stein, in a manner that would prohibit them from investing in competing businesses or doing business with our clients or guests. It is possible that the interests of Willis Stein and its affiliates may in some circumstances conflict with our interests and the interests of our other stockholders.

We are a “controlled company” within the meaning of the rules of the New York Stock Exchange and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements.

As of March 9, 2012 Willis Stein controls a majority of our voting common stock, and we are a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under the rules of the NYSE, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of our board consists of independent directors;

 

   

the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and corporate governance committee and compensation committee.

 

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We utilize the “controlled company” exemption from these corporate governance requirements. As a result, we neither have a majority of independent directors nor does our nominating and corporate governance committee and compensation committee consist entirely of independent directors. Further, we are not required to have an annual performance evaluation of the nominating and corporate governance committee and compensation committee. Accordingly, our stockholders do not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

Conflicts of interest may arise because some of our directors are representatives of our controlling stockholders.

Messrs. Larson, Stein and Willis, who are representatives of Willis Stein, serve on our board of directors. As discussed above, Willis Stein and entities controlled by them may hold equity interests in entities that directly or indirectly compete with us, and companies in which they currently invest may begin competing with us. As a result of these relationships, when conflicts between the interests of Willis Stein, on the one hand, and the interests of our other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors, or a committee consisting solely of disinterested directors, approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approves the transaction or (3) the transaction is otherwise fair to us. Under our amended and restated certificate of incorporation, representatives of Willis Stein are not required to offer to us any transaction opportunity of which they become aware and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacity as a director of ours.

An active, liquid trading market for our common stock may not develop, which could limit your ability to sell your shares of our common stock at an attractive price, or at all.

Prior to our initial public offering on February 8, 2012, there was no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market in our common stock or how liquid that market might become. An active public market for our common stock may not be sustained. If an active public market is not sustained, it may be difficult for stockholders to sell their shares of common stock at a price that is attractive to them, or at all.

Market volatility may affect our stock price and the value of your investment.

The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot predict or control, including:

 

   

announcements of new initiatives, commercial relationships, acquisitions or other events by us or our competitors;

 

   

failure of any of our initiatives to achieve commercial success;

 

   

fluctuations in stock market prices and trading volumes of securities of similar companies;

 

   

general market conditions and overall fluctuations in U.S. equity markets;

 

   

variations in our operating results, or the operating results of our competitors;

 

   

changes in our financial guidance to investors and analysts or our failure to achieve such expectations;

 

   

delays in, or our failure to provide, financial guidance;

 

   

changes in securities analysts’ estimates of our financial performance or our failure to achieve such estimates;

 

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sales of large blocks of our common stock, including sales by Willis Stein or by our executive officers or directors;

 

   

additions or departures of any of our key personnel;

 

   

changes in accounting principles or methodologies;

 

   

changing legal or regulatory developments in the U.S. and other countries; and

 

   

discussion of us or our stock price by the financial press and in online investor communities.

In addition, the stock market in general has experienced substantial price and volume volatility that is often seemingly unrelated to the operating performance of particular companies. These broad market fluctuations may cause the trading price of our common stock to decline. In the past, securities class action litigation has often been brought against a company after a period of volatility in the market price of its common stock. We may become involved in this type of litigation in the future. Any securities litigation claims brought against us could result in substantial expenses and the diversion of our management’s attention from our business.

We may not declare dividends or have the available cash to make dividend payments.

We intend to pay quarterly cash dividends in an amount equal to $0.23 per share. Whether we will do so, however, and the timing and amount of those dividends, will be subject to approval and declaration by our board of directors and will depend upon on a variety of factors, including the financial results, cash requirements and financial condition of the company, our ability to pay dividends under the credit agreement governing our new senior secured credit facilities and any other applicable contracts, and other factors deemed relevant by our board of directors.

Because Roundy’s, Inc. is a holding company with no material assets (other than the equity interests of its direct subsidiary), its cash flow and ability to pay dividends is dependent upon the financial results and cash flows of its operating subsidiaries and the distribution or other payment of cash to it in the form of dividends or otherwise. The direct and indirect subsidiaries of Roundy’s, Inc. are separate and distinct legal entities and have no obligation to make any funds available to it.

Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

As of March 9, 2012, there were 45,642,999 shares of our common stock outstanding. Of the total common shares outstanding, 23,052,995 remain subject to lock-up agreements for 180 days after the date of the initial public offering. A large portion of our shares are held by a small number of persons and investment funds. Sales by these stockholders of a substantial number of shares after our IPO could significantly reduce the market price of our common stock. Moreover, Willis Stein has rights, subject to some conditions, to require us to file registration statements covering the shares they currently hold, or to include these shares in registration statements that we may file for ourselves or other stockholders.

We also intend to register all common stock that we may issue under our 2012 Incentive Compensation Plan. An aggregate of 5,656,563 shares of our common stock has been reserved for future issuance under the 2012 Incentive Compensation Plan. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.

Our future operating results may fluctuate significantly and our current operating results may not be a good indication of our future performance. Fluctuations in our quarterly financial results could affect our stock price in the future.

Our revenues and operating results have historically varied from period-to-period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control. If our quarterly

 

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financial results or our predictions of future financial results fail to meet the expectations of securities analysts and investors, our stock price could be negatively affected. Any volatility in our quarterly financial results may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our stock. Our operating results for prior periods may not be effective predictors of our future performance.

Factors associated with our industry, the operation of our business and the markets for our products may cause our quarterly financial results to fluctuate, including:

 

   

our ability to compete effectively with other retailers;

 

   

our ability to maintain price competitiveness;

 

   

ongoing economic uncertainty;

 

   

the geographic concentration of our stores;

 

   

our ability to achieve sustained sales and profitable operating margins at new stores;

 

   

our ability to maintain or increase our operating margins;

 

   

our ability to implement our expansion into the Chicago market on a timely basis or at all;

 

   

ordering errors or product supply disruptions in the delivery of perishable products;

 

   

increases in commodity prices;

 

   

our ability to protect or maintain our intellectual property;

 

   

severe weather, and other natural disasters in areas in which we have stores or distribution facilities;

 

   

the failure of our information technology or administrative systems to perform as anticipated;

 

   

data security breaches and the release of confidential customer information;

 

   

our ability to offset increasing energy costs with more efficient usage;

 

   

negative effects to our reputation from real or perceived quality or health issues with our food products;

 

   

our ability to retain and attract senior management and key employees;

 

   

our ability to renegotiate expiring collective bargaining agreements and new collective bargaining agreements;

 

   

our ability to satisfy our ongoing capital needs and unanticipated cash requirements;

 

   

the availability of financing to pursue our expansion into the Chicago market on satisfactory terms or at all;

 

   

additional indebtedness incurred in the future;

 

   

our ability to retain and attract qualified store-and distribution-level employees;

 

   

rising costs of providing employee benefits, including increased pension contributions due to unfunded pension liabilities;

 

   

changes in law;

 

   

risks inherent in packaging and distributing pharmaceuticals and other healthcare products;

 

   

wartime activities, threats or acts of terror or a widespread regional, national or global health epidemic;

 

   

changes to financial accounting standards regarding store leases;

 

   

our high level of fixed lease obligations;

 

   

claims made against us resulting in litigation; and

 

   

impairment of our goodwill.

 

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Any one of the factors above or the cumulative effect of some of the factors referred to above may result in significant fluctuations in our quarterly financial and other operating results, including fluctuations in our key metrics. This variability and unpredictability could result in our failing to meet our internal operating plan or the expectations of securities analysts or investors for any period. If we fail to meet or exceed such expectations for these or any other reasons, the market price of our shares could fall substantially and we could face costly lawsuits, including securities class action suits. In addition, a significant percentage of our operating expenses are fixed in nature and based on forecasted revenue trends. Accordingly, in the event of revenue shortfalls, we are generally unable to mitigate the negative impact on margins in the short term.

Anti-takeover provisions in our charter documents and Delaware law might discourage or delay attempts to acquire us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors. These provisions include:

 

   

a classified board of directors so that not all members of our board of directors are elected at one time;

 

   

authorization of the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;

 

   

prohibition on stockholder action by written consent unless such action is recommended by either unanimous written consent of the board of directors or by unanimous vote of directors at a board meeting with a quorum, which requires that all stockholder actions not so approved be taken at a meeting of our stockholders;

 

   

special meetings of our stockholders may only be called by a resolution adopted by a majority of our directors then in office or by the chairman;

 

   

express authorization for our board of directors to make, alter, or repeal our amended and restated bylaws; and

 

   

advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”) which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions which they may desire.

ITEM 1B—UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2—PROPERTIES

We lease all of our properties from unaffiliated parties, except for two of our stores and our Stevens Point Distribution center, which we own. A typical store lease is for an initial 20-year term with four renewal options of five years each. The following table shows the number of stores operated by geographic market as of December 31, 2011:

 

     Wisconsin      Minnesota    Illinois  

Retail Stores:

        

Pick ’n Save

     93              

Metro Market

     3              

Copps

     26              

Rainbow

           32        

Mariano’s Fresh Market

                4   

Distribution Centers

     3              

Manufacturing

     1              

Our Oconomowoc distribution center operates under a long-term lease expiring in 2030 with five renewal options of five years each and our Mazomanie distribution center operates under a long-term lease expiring in 2022 with one ten year renewal option. Our commissary is located in Kenosha, Wisconsin and operates under a long-term lease expiring in 2020, with five renewal options of five years each. Our executive offices are located in a leased 115,000 square foot office facility in downtown Milwaukee, the lease for which expires in 2018, with three renewal options of five years each.

ITEM 3—LEGAL PROCEEDINGS

We are subject to various legal claims and proceedings which arise in the ordinary course of our business, including employment related claims, involving routine claims incidental to our business. Although the outcome of these routine claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these claims will have a material adverse effect on our results of operations, financial condition or cash flows.

ITEM 4—MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

ITEM 5—MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Shares of our common stock, traded under the symbol “RNDY”, have been publicly traded since February 8, 2012, when our common stock was listed and began trading on the New York Stock Exchange (“NYSE”). Accordingly, no market for our stock existed prior to February 8, 2012.

As of March 9, 2012, there were 64 holders of record of our common stock, and the closing price of our common stock was $10.68 per share as reported by the NYSE. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. For additional information related to ownership of our stock by certain beneficial owners and management, refer to Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Registered Sales of Equity Securities

On February 13, 2012, we completed our IPO of 22,059,091 shares of our common stock at a price of $8.50 per share, which included 14,705,883 new shares sold by Roundy’s and the sale of 7,353,208 shares from existing shareholders.

Roundy’s received approximately $125.0 million in gross proceeds from the IPO, or $111 million in net proceeds after deducting the underwriting discount and expenses related to our IPO. We used all of the net proceeds that we received from our IPO, together with borrowings under our new senior credit facility, to repay all of our outstanding borrowings under our existing first lien credit facility and second lien credit facility, including all accrued interest thereon and any related prepayment premiums. We did not receive any of the proceeds from the sale of shares by the selling stockholders.

Issuer Purchases of Equity Securities

The following table provides information as of December 31, 2011 with respect to shares of Common Stock purchased by the Company during the quarter then ended:

 

Period

   Total Number of
Shares
Purchased
(in thousands)
     Average
Price Paid
per Share
     Total Number of Shares
Purchased as Part of Publicly
Announced  Plans or Programs
     Maximum Dollar Value of
Shares that May Yet Be

Purchased Under the Plans or
Programs
 

Period 10—four weeks

           

October 2, 2011 to October 29, 2011

     0       $ 0.00         0       $ 0   

Period 11—four weeks

           

October 30, 2011 to November 26, 2011

     0       $ 0.00         0       $ 0   

Period 12—five weeks

           

November 27, 2011 to December 31, 2011

     273       $ 16.90         0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     273       $ 16.90         0       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Dividend Policy

We currently intend to declare quarterly dividends of approximately $0.23 per share on all outstanding shares of common stock. We currently expect the first quarterly dividend will be paid after completion of the first quarter of 2012. The declaration of this and any other dividends, and, if declared, the amount of any such dividend, will be subject to our actual future earnings and capital requirements and to the discretion of our board of directors. Our board of directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual, legal and regulatory restrictions and such other factors as our board of directors may deem relevant. For example, our ability to pay cash dividends on our common stock will be subject to our continued compliance with the terms of our outstanding indebtedness, including our new senior credit facility as further outlined below. We expect that our dividend payments for any particular quarter may represent a majority, but less than all, of our free cash flow for such period. We generally consider our free cash flow for any particular period to be our net earnings plus any non-cash charges and expenses incurred in such period after subtracting our capital expenditures and mandatory debt repayments for that period. Because any future payment of dividends will be at the discretion of our board of directors, we do not expect that any such dividend payments will have an adverse impact on our liquidity or otherwise limit our ability to fund capital expenditures or otherwise pursue our business strategy over the long-term. We intend to fund any future dividends out of our projected free cash flow and, as a result, we do not expect to incur any indebtedness to fund such payments.

Because Roundy’s, Inc. is a holding company, its cash flow and ability to pay dividends are dependent upon the financial results and cash flows of its operating subsidiaries and the distribution or other payment of cash to it in the form of dividends or otherwise. We expect to cause the operating subsidiaries of Roundy’s, Inc. to pay distributions to it to fund its expected dividend payments, subject to applicable law and any restrictions contained in its subsidiaries’ current or future debt agreements.

Roundy’s, Inc.’s principal operating subsidiary, Roundy’s Supermarkets, Inc. (“RSI”), as the borrower under our new senior credit facility, is permitted to declare cash dividends on account of its capital stock for the purpose of funding our expected dividend payments in an amount that does not exceed the sum of (i) 70% of RSI’s excess cash flow calculated on a quarterly basis and (ii) $25.0 million plus an amount equal to its retained portion of adjusted excess cash flow measured cumulatively, in each case, subject to pro forma compliance with the financial covenants contained in, and no default or event of default being continuing under, the new senior credit facility. Excess cash flow is equal to Adjusted EBITDA minus capital expenditures, cash payments of interest, cash payments of taxes, mandatory loan repayments and amortization of capital leases for that period, and adjusted excess cash flow will be an amount equal to excess cash flow minus cash dividends paid and changes in net working capital. Under the new senior credit facility, RSI is required to comply with certain financial covenants, including (a) a maximum total leverage ratio and (b) a minimum cash interest coverage ratio to be determined. All of RSI’s existing subsidiaries are guarantors under the new senior credit facility and are otherwise restricted in their ability to transfer assets to the issuer in the form of loans, advances or cash dividends other than described above. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—New Senior Credit Facility.”

The ability of our subsidiaries to comply with the foregoing limitations and restrictions is, to a significant degree, subject to their respective operating results, which are dependent on a number of factors outside of our control. As a result, we cannot assure you that we will be able to declare dividends as contemplated herein. See Item 1A “Risk Factors—Risks Related to the Ownership of our Common Stock—We may not declare dividends or have the available cash to make dividend payments.”

We paid cash dividends to holders of our equity securities in an aggregate amount of $150.0 million in fiscal 2010, including approximately $79.2 million on account of our common stock. We did not pay any dividends on account of our common stock during fiscal 2011.

 

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ITEM 6—SELECTED FINANCIAL DATA

The following table presents selected historical consolidated statement of income, balance sheet, and cash flow financial data for the periods presented and should only be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the related notes thereto (dollars in thousands, except for per share data and amounts relating to square feet).

 

    Fiscal Year  
     2007     2008     2009     2010     2011  

Statement of Income Data:

         

Net Sales

  $ 3,798,864      $ 3,867,146      $ 3,745,774      $ 3,766,988      $ 3,841,984   

Costs and Expenses:

         

Cost of sales

    2,774,960        2,820,828        2,726,672        2,748,919        2,804,709   

Operating and administrative

    879,865        891,028        876,510        868,972        886,862   

Interest expense, current and long-term debt, net

    73,139        50,435        32,281        64,037        68,855   

Interest expense, dividends on preferred stock

    12,773        14,376        14,799        2,716        —     

Amortization of deferred financing costs

    1,768        1,797        1,816        2,906        3,469   

Facility closure and asset impariment costs (adjustment) (1)

    (1,453     —          —          —          —     

Loss on debt extinguishment (2)

    —          —          5,879        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,741,052        3,778,464        3,657,957        3,687,550        3,763,895   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    57,812        88,682        87,817        79,438        78,089   

Provision for income taxes

    26,639        39,244        40,638        33,244        30,041   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 31,173      $ 49,438      $ 47,179      $ 46,194      $ 48,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per common share (3):

         

Basic and Diluted

  $ —        $ —        $ —        $ 1.01      $ 1.58   

Weighted average number of common shares outstanding:

         

Basic

    27,930        27,853        27,587        27,384        27,324   

Diluted

    30,994        30,917        30,648        30,434        30,374   

Dividends declared per common share

  $ —        $ —        $ —        $ 2.90      $ —     

Cash Flow Financial Data:

         

Cash provided by (used in):

         

Operating activities

  $ 117,969      $ 169,993      $ 175,362      $ 40,633      $ 182,017   

Investing activities

    (80,583     (70,710     (93,689     (57,754     (65,868

Financing activities

    9,595        (90,817     (99,200     (21,365     (65,516

Depreciation and amortization

    82,802        81,074        81,091        75,237        72,949   

Capital expenditures

    69,378        76,467        76,436        62,932        66,497   

Balance Sheet Data (at end of period):

         

Working capital

  $ 60,179      $ 55,518      $ 30,030      $ 28,215      $ 79,755   

Total assets

    1,533,221        1,488,706        1,481,877        1,446,931        1,512,682   

Total debt and capital lease obligations (4)

    845,065        757,625        747,286        884,008        820,141   

Preferred stock subject to mandatory redemption

    115,592        129,968        69,156        —          —     

Shareholders’ equity

    118,254        133,673        186,165        152,564        177,175   

Operating Data:

         

Number of stores at end of fiscal year

    153        152        154        155        158   

Average weekly net sales per store (5)

  $ 467      $ 473      $ 468      $ 469      $ 471   

Net sales per average selling square foot per period (6)

  $ 597      $ 605      $ 596      $ 592      $ 588   

Average store size:

         

Average total square feet

    60,081        60,082        60,363        60,792        61,109   

Average selling square feet

    40,697        40,667        40,852        41,201        41,784   

Change in same-store sales (7)

    0.0     0.6     (1.2 %)      (0.8 %)      (0.2 %) 

 

(1)

On August 30, 2006, we closed three retail stores in the Minneapolis area. We recorded asset impairment costs of $5.9 million and facility closure costs of $12.7 million. Facility closure costs consist primarily of the present value

 

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  of remaining future lease liabilities, net of expected sublease income. In 2007, we adjusted estimates for remaining future lease liabilities, which reduced the facility closure costs by approximately $1.5 million.
(2) On October 30, 2009, we amended our first lien credit facility, which extended a portion of our Term Loan and modified our interest rate structure. As a result of the Amendment, we recognized a loss on debt extinguishment of $5.9 million.
(3) Prior to the April 29, 2010 payment of the liquidation value and unpaid dividends on our preferred stock, common shareholders did not share in net income unless earnings exceeded the remaining unpaid dividends and liquidation value. Accordingly, the common stock earnings per share prior to April 29, 2010 was zero, as the unpaid dividends and liquidation value exceeded net income. For additional information as to how we calculated net earnings per common share, see Note 14 to our audited consolidated financial statements.
(4) Amounts shown are net of unamortized discounts of $2,647 and $2,147 at January 1, 2011 and December 31, 2011, respectively.
(5) We calculated average weekly net sales per store by dividing net sales by the average number of stores open during the applicable weeks.
(6) The amount for fiscal 2008 has been decreased to reflect a 52-week year so as to be comparable to other years presented.
(7) Represents the percentage change in our same-store sales as compared to the prior comparable period. Our practice is to include sales from a store in same-store sales beginning on the first day of the fifty-third week following the store’s opening. When a store that is included in same-store sales is remodeled or relocated, we continue to consider sales from that store to be same-store sales. This practice may differ from the methods that other food retailers use to calculate same-store or “comparable” sales. As a result, data in this Form 10-K regarding our same-store sales may not be comparable to similar data made available by other food retailers.

 

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ITEM 7—MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with the information set forth under “Selected Financial Data” and our consolidated financial statements and the notes to those statements included within Item 8 of this Annual Report on Form 10-K. The statements in this discussion regarding our expectations of future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and “Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Overview

We are a leading Midwest supermarket chain with a 140-year operating history. We have achieved leading market positions in our core markets and are the largest grocery retailer in the state of Wisconsin by net sales for fiscal 2010, based on comparative data that we obtained from the Metro Market Study. As of December 31, 2011, we operated 158 grocery stores in Wisconsin, Minnesota and Illinois under the Pick ’n Save, Rainbow, Copps, Metro Market and Mariano’s Fresh Market retail banners, which are served by our three strategically located distribution centers and our food processing and preparation commissary.

Our net sales have remained stable over our last three completed fiscal years, despite recent economic challenges. During this period, we have pursued pricing and merchandising improvement initiatives, as well as our Chicago expansion strategy. We also completed our exit from third party wholesale distribution, begun in 2002, with wholesale distribution sales decreasing from $63 million in fiscal 2008 to $15 million in fiscal 2011. As of December 31, 2011, we continue to serve as the primary wholesaler for one independent Pick ’n Save store. Beginning in fiscal 2009, our net sales reflect the impact of our acquisition, completed on December 11, 2009, of substantially all of the assets related to 20 pharmacies located in our stores that were previously owned by a third party for approximately $16.6 million. In more recent periods, our net sales have improved as compared to prior comparable periods due primarily to sales generated from stores opened or replaced during fiscal 2010 and 2011.

Since fiscal 2009, we have been able to maintain attractive and consistent operating margins and cash flows generated as a result of our value positioning, efficient operating structure and distinctive merchandising strategies, especially those involving own brand and perishable goods. In addition, we implemented several cost reduction measures during this period to help support our operating margins and cash flow, including initiatives to reduce shrink and improve labor productivity throughout our operations. These initiatives, together with our efficient cost structure, have enabled us to continue to make targeted investments to lower our everyday retail prices in an effort to improve our competitive position within our markets.

Going forward, we plan to continue to maintain our market leadership and focus on growing same-store sales, opening new stores and increasing our cash flow. We intend to pursue same-store sales growth by continuing to focus on price competitiveness, improving our marketing efforts, selectively remodeling and relocating existing stores and enhancing and expanding our own brand, perishable and prepared food offerings. In addition, we intend to opportunistically open new stores in our core markets, and intend to continue our expansion into the Chicago market with plans to open four to five stores per year in the Chicago market over the next five years. As of December 31, 2011, we had four stores open in the Chicago market, and we opened another store in January 2012. Given its favorable competitive dynamics and attractive demographics, including a large population and above average household income, we believe the Chicago market provides us with a compelling expansion opportunity. We also plan to continue to support our operating margins and cash flow generation by implementing cost reduction measures, including initiatives to reduce shrink and improve labor productivity throughout our operations and by focusing on higher margin products.

 

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Factors Affecting Our Operating Results

Various factors affect our operating results during each period, including:

General Economic Conditions and Changes in Consumer Behavior

The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our stores, while economic weakness results in a reduction of customer spending. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs.

Although economic weakness caused by the recent economic recession has decreased overall consumer spending, we believe, based on information from the Food Marketing Institute, that many consumers are spending less of their overall food budget on meals away from home and more at food retailers. As a result, we believe that the impact of the current economic slowdown on our recent operating results has at least been partially mitigated by increased consumer preferences for meals at home. The recent economic environment has also led consumers to become more price sensitive and, as a result, consumers are increasingly purchasing own brand products that offer a better value than national brands. Because own brand items have a lower price point than national brands, as our own brand sales mix increases, our overall net sales are reduced but our gross profit and gross margin improve.

Our core markets also feature relatively stable local economies with diversified employer bases and stable to modestly growing populations. Although our markets have been impacted by the economic downturn, unemployment rates in Wisconsin and Minneapolis are lower than the national average.

Inflation and Deflation Trends

Inflation and deflation can impact our financial performance. During inflationary periods, our financial results can be positively impacted in the short term as we sell lower-priced inventory in a higher price environment. Over the longer term, the impact of inflation is largely dependent on our ability to pass through inventory price increases to our customers, which is subject to competitive market conditions. In recent inflationary periods, we have generally been able to pass through most cost increases. For example, our operating results in fiscal 2008 were positively impacted by the inflationary environment, largely driven by higher commodity prices. Conversely, during deflationary periods our operating results are generally adversely affected. In fiscal 2009, for example, the food retail sector began experiencing deflation, as input costs declined and price competition among retailers intensified, pressuring sales across the industry. In fiscal 2010, food deflation moderated and, beginning in early fiscal 2011, we began to experience inflation in some commodity driven categories, which has had a slight negative impact on our gross margins as price competition has partially limited our ability to immediately pass through higher prices on certain products.

Cost Management Initiatives

Our recent operating results reflect the impact of our ongoing initiatives to lower our operating costs to support our margins. For example, we have improved our labor productivity, as measured by items sold per labor hour, over our last three completed fiscal years, and expect to continue to implement initiatives to lower future labor costs. In particular, we expect we will achieve additional labor savings by reducing unproductive labor hours through continued implementation of lean initiatives, including a focus on improving organizational efficiency, work processes and store layouts.

We have also undertaken a number of initiatives to control and reduce product shrink (e.g., spoiled, damaged, stolen or out-of-date inventory). For example, we have begun to implement the Periscope software system, a data

 

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collection, production planning and product ordering tool that we expect to generate improvements in shrink in most of our perishable departments. This system provides store management with the necessary tools to forecast daily product requirements based on historical customer purchasing data, allowing managers to optimize inventory ordering and production planning relative to customer demand.

Targeted Investments in Everyday Low Prices

Our recent operating results have been impacted by our price cutback initiative that we began to implement in fiscal 2007 in order to improve our pricing compared to conventional supermarket and supercenter competitors. Through this initiative we have lowered our everyday prices on approximately 5,500 to 6,000 key value items in highly competitive and price sensitive markets. A substantial portion of our existing store network has absorbed the impact of the price cutback initiative, but we expect to expand it to other stores depending on local competitive conditions. In addition, we expect to continue to implement local advertising campaigns to highlight price cutbacks. These promotional activities may pressure operating margins during the periods when they are implemented, but can have a significant impact in driving net sales growth.

Store Openings and Store Closings

Our operating results in any particular period are impacted by the timing of new store openings and store closings. For example, we typically incur higher than normal employee costs at the time of a new store opening associated with set-up and other opening costs. During the first several weeks following a new store opening, operating margins are also affected by promotional discounts and other marketing costs and strategies associated with new store openings, as well as higher shrink and costs related to hiring and training new employees. A new store in our core markets can take a year or more to achieve a level of operating profitability comparable to our company-wide average for existing stores, with a somewhat longer time horizon anticipated with respect to our new Chicago stores.

In addition, many of our new store openings in existing markets have had a near term negative impact on our same-store sales as a result of cannibalization from existing stores in close proximity. Over the longer term, we believe that any such cannibalization will be more than offset by future net sales growth and expanded market share. When we close underperforming stores, we expense the present value of any remaining future lease liabilities, net of expected sublease income, which negatively impacts our operating results during the period of the closure.

We also look for opportunities to relocate existing stores to improve location, lease terms or store layout. Relocated stores typically achieve a level of operating profitability comparable to our company-wide average for existing stores more quickly than new stores.

Changes in our store base during the periods presented are summarized below:

 

     Fiscal Year Ended  
     1/2/2010     1/1/2011     12/31/2011  

Stores at beginning of period

     152        154        155   

New stores opened

     3        1        3   

Relocated stores opened

     4        5        4   

Stores closed but relocated

     (4     (5     (4

Stores acquired

     1        —          —     

Stores sold

     (2     —          —     
  

 

 

   

 

 

   

 

 

 

Stores at end of period

     154        155        158   
  

 

 

   

 

 

   

 

 

 

 

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Expanded Own Brand Offering

Delivering high quality own-brand products is a key component of our pricing and merchandising strategy, as we believe it builds and deepens customer loyalty, enhances our value proposition, generates higher gross margins relative to national brands and improves the breadth and selection of our product offering. A strong own-brand offering has become an increasingly important competitive advantage in the food retail industry, given consumers’ growing focus on value and greater willingness to purchase own brand products over national brands.

Our portfolio of own-brand items has increased from approximately 1,600 items at the end of fiscal 2005 to approximately 5,200 as of December 31, 2011, with the percentage of sales from own-brand items increasing from 8.4% to 19.7% during this same period. Because own brand items have a lower price point than national brands, as our own brand sales mix increases, our overall net sales are reduced but our gross profit and gross margin improve.

Developments in Competitive Landscape

The U.S. food retail industry is highly competitive. Our competitors include national, regional and local conventional supermarkets, national and regional supercenters, membership warehouse clubs, and alternative food retailers, such as natural foods stores, smaller specialty stores and farmers’ markets. In any particular financial period, our results of operations may be impacted by changes to the competitive landscape in one or more of our markets, including as a result of existing competitors expanding their presence or new competitors entering our markets. For example, in recent years we have faced increased competition from the continued expansion of supercenters, such as Walmart throughout our Wisconsin markets and SuperTarget in the Minneapolis/St. Paul area. In certain cases, the impact of these competitive supercenter openings has caused our net sales to decline in the near term. However, the longer term impact of supercenter openings on our overall net sales and market share is more difficult to predict and is dependent on a number of factors in a particular market, including strength of competition, the competitive response by us and other food retailers, and consumer shopping preferences. At times, smaller regional and independent grocers are displaced by supercenter openings, creating an opportunity for us to gain market share.

Our competitors will often implement significant promotional activities in an effort to gain market share, in particular in connection with new store openings. In order to remain competitive and maintain our market share, we sometimes elect to implement competing promotional activities, which may result in near term pressure on our operating margins unless we are able to implement corresponding cost saving initiatives. Changes in the competitive landscape in our markets may also impact our level of capital expenditures in the event we decide to remodel or relocate an existing store to improve our competitive position.

Interest Expense and Loss on Debt Extinguishment

Our interest expense in any particular period is impacted by our overall level of indebtedness during that period and changes in the interest rates payable on such indebtedness. As a result of certain financing activities, the average interest rate we pay on our indebtedness has increased over the last three fiscal years. In October 2009, we entered into an amendment of our first lien credit facility, which extended a portion of our first lien term loans and modified our interest rate structure. As a result of the October 2009 credit facility amendment, we recognized a loss on debt extinguishment of $5.9 million. In April 2010, we borrowed $150 million under a second lien credit facility in order to pay a $150 million dividend to our shareholders, and entered into an additional amendment to our first lien credit facility that further modified our interest rate structure. We used all of the net proceeds we received from our IPO to reduce our outstanding indebtedness and, as a result, expect that after the completion of our IPO our interest expense will be lower than in recent periods.

 

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Transaction-Related Charges

We used all of the net proceeds that we received from our IPO, together with our indebtedness from new senior credit facility, to repay all of our outstanding borrowings and other amounts owing under our existing credit facilities. In connection with such repayment, we will record a charge of approximately $10.2 million, net of tax, to write off all of our unamortized deferred financing costs and the unamortized original issue discount as well as prepayment penalties associated with such indebtedness and to reflect the related prepayment premiums. Going forward, our interest expense will include the amortization of the financing costs associated with our new debt financing arrangements.

In connection with the completion of our IPO, we granted an aggregate of 819,286 shares of restricted stock to certain of our directors, executive officers and non-executive officers. The restricted stock for executive officers and non-executive officers will vest over five years and the restricted stock for our directors will vest over one year. We estimate that we will record compensation expense associated with these grants, resulting in a reduction in net earnings, of approximately $0.9 million for fiscal 2012, approximately $0.8 million for each of fiscal 2013 through fiscal 2016, and approximately $0.1 million for fiscal 2017, in each case net of tax, and based on the initial public offering price of $8.50 per share.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales and same-store sales, gross profit, operating and administrative expenses and Adjusted EBITDA.

Net Sales and Same-Store Sales

We evaluate net sales because it helps us measure the impact of economic trends and inflation or deflation, the effectiveness of our marketing, promotional and merchandising activities, the impact of new store openings and store closings, and the effect of competition over a given period. Net sales represent product sales less returns and allowances and sales promotions. We derive our net sales primarily from the operation of retail grocery stores and to a much lesser extent from the independent distribution of food and non-food products to an independently-owned store. We recognize retail sales at the point of sale. We do not record sales taxes as a component of retail revenues as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.

We also consider same-store sales to be a key indicator in evaluating our performance. Same-store sales controls for the effects of new store openings, making it a useful measure for period-to-period comparisons. Our practice is to include sales from a store in same-store sales beginning 53 weeks following the store’s opening. When a store that is included in same-store sales is remodeled or relocated, we continue to include sales from that store in same-store sales. This practice may differ from the methods that our competitors use to calculate same-store or “comparable” sales. As a result, data in this Annual Report on Form 10-K regarding our same-store sales may not be comparable to similar data made available by our competitors.

Various factors may affect our net sales and same-store sales, including:

 

   

overall economic trends and conditions;

 

   

consumer preferences and buying trends;

 

   

our competition, including competitor store openings or closings near our stores;

 

   

the pricing of our products, including the effects of inflation or deflation;

 

   

the number of customer transactions in our stores;

 

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our ability to provide product offerings that generate new and repeat visits to our stores;

 

   

the level of customer service that we provide in our stores;

 

   

our in-store merchandising-related activities;

 

   

our ability to source products efficiently; and

 

   

the number of stores we open, remodel or relocate in any period.

Gross Profit

We use gross profit to measure the effectiveness of our pricing and procurement strategies as well as initiatives to increase sales of higher margin items and to reduce shrink. We calculate gross profit as net sales less cost of sales. Cost of sales includes product costs, inbound freight, warehousing costs, receiving and inspection costs, distribution costs, and depreciation and amortization expenses associated with our supply chain operations. The components of our cost of sales may not be identical to those of our competitors. As a result, data in this Annual Report on Form 10-K regarding our gross profit may not be comparable to similar data made available by our competitors.

Our cost of sales is directly correlated with our overall level of sales. Gross profit as a percentage of net sales is affected by:

 

   

relative mix of products sold;

 

   

shrink resulting from product waste, damage, theft or obsolescence;

 

   

promotional activity; and

 

   

inflationary and deflationary trends.

Operating and Administrative Expenses

We evaluate our operating and administrative expenses in order to identify areas where we can create savings, such as labor process improvements. Operating and administrative expenses consist primarily of personnel costs, sales and marketing expenses, depreciation and amortization expenses as well as other expenses associated with facilities unrelated to our supply chain network, internal management expenses and expenses for accounting, information systems, legal, business development, human resources, purchasing and other administrative departments.

Store-level labor costs are generally the largest component of our operating and administrative expenses. Store-level expenses, including labor, rent, utilities and maintenance, generally decrease as a percentage of net sales as our net sales increase. Accordingly, higher sales volumes allow us to leverage our store-level fixed costs to improve our operating margin.

The components of our operating and administrative expenses may not be identical to those of our competitors. As a result, data in this Annual Report on Form 10-K regarding our operating and administrative expenses may not be comparable to similar data made available by our competitors. We expect that our operating and administrative expenses will increase in future periods due to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company.

Adjusted EBITDA

We believe that Adjusted EBITDA is a useful performance measure and we use it to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business. We also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual

 

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basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including our senior executives.

We define Adjusted EBITDA as earnings before interest expense, interest expense associated with preferred stock, provision for income taxes, depreciation and amortization, LIFO charges, amortization of deferred financing costs, non-cash compensation expenses arising from the issuance of stock, options to purchase stock and stock appreciation rights, costs incurred in connection with our IPO (or subsequent offerings of Roundy’s common stock) and loss on debt extinguishment. All of the omitted items are either (i) non-cash items or (ii) items that we do not consider in assessing our on-going operating performance. Because it omits non-cash items, we feel that Adjusted EBITDA is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect our operating performance. Because it omits the other items, we believe Adjusted EBITDA is also more reflective of our on-going operating performance.

We determine the amount of the LIFO charges that we exclude in calculating Adjusted EBITDA by determining the base year values of beginning and ending inventories that we account for on a LIFO basis using cumulative price indexes as published by the Bureau of Labor Statistics and subtracting the current year difference between inventories calculated on a LIFO basis and the current cost of inventories valued on a FIFO basis.

Basis of Presentation

Our fiscal year is the 52 or 53 week period ending on the Saturday nearest to December 31. For the last three completed calendar years, our fiscal year ended on January 2, 2010, January 1, 2011 and December 31, 2011. For ease of reference, we identify our fiscal years in this Annual Report on Form 10-K by reference to the calendar year ending nearest to such date. For example, “fiscal 2011” refers to our fiscal year ended December 31, 2011. Our fiscal years include 12 reporting periods, with an additional week in the eleventh reporting period for 53 week fiscal years. All fiscal years presented included 52 weeks.

Results of Operations

Our results of operations in any particular period are affected by the number of stores we have in operation during that period. The following table summarizes our store network as of the end of each of our last three fiscal years.

 

     Fiscal Year Ended  
     1/2/2010      1/1/2011      12/31/2011  

Pick ’n Save

     95         94         93   

Rainbow

     32         32         32   

Copps

     26         26         26   

Metro Market

     1         2         3   

Mariano’s Fresh Market

     —           1         4   
  

 

 

    

 

 

    

 

 

 

Total Company-owned stores

     154         155         158   
  

 

 

    

 

 

    

 

 

 

Number of same-stores

     150         154         155   

 

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The following table sets forth a summary of our consolidated statements of income for fiscal 2009, 2010 and 2011 from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

    Fiscal Year  
    2009     2010     2011  
    $     % of
Sales
    $     % of
Sales
    $     % of
Sales
 

Net Sales

  $ 3,745,774        100.0   $ 3,766,988        100.0   $ 3,841,984        100.0

Costs and Expenses:

           

Cost of sales

    2,726,672        72.8        2,748,919        73.0        2,804,709        73.0   

Operating and administrative

    876,510        23.4        868,972        23.1        886,862        23.1   

Interest expense, current and long-term debt, net

    32,281        0.9        64,037        1.7        68,855        1.8   

Interest expense, dividends on preferred stock

    14,799        0.4        2,716        0.1        —          —     

Amortization of deferred financing costs

    1,816        0.0        2,906        0.1        3,469        0.1   

Loss on debt extinguishment

    5,879        0.2        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,657,957        97.7     3,687,550        97.9     3,763,895        98.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    87,817        2.3        79,438        2.1        78,089        2.0   

Provision for income taxes

    40,638        1.1        33,244        0.9        30,041        0.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 47,179        1.3   $ 46,194        1.2   $ 48,048        1.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2011 Compared With Fiscal 2010

Net Sales. Net sales were $3.84 billion for 2011, an increase of $75.0 million, or 2.0% from $3.77 billion for 2010. The increase primarily reflects the impact of new stores, offset by decreased same-store sales, which were 0.2% lower than 2010. The same-store sales decrease was due to a 2.6% decrease in the number of customer transactions offset by a 2.5% increase in the average transaction size, and was impacted by new competitive store openings in certain markets in the last 12 months offset by the increase in sales at store relocations opened in 2011.

As of December 31, 2011, we operated 158 retail grocery stores including 93 Pick ’n Save stores, 32 Rainbow stores, 26 Copps stores, 4 Mariano’s Fresh Market stores and 3 Metro Market stores.

Gross Profit. Gross profit was $1.04 billion for fiscal 2011, an increase of $19.2 million, or 1.9%, from $1.02 billion for fiscal 2010. Gross profit, as a percentage of net sales, was 27.0% for 2011 and 2010.

Operating and Administrative Expenses. Operating and administrative expenses were $886.9 million for 2011, an increase of $17.9 million, or 2.1%, from $869.0 million for 2010. The increase in operating and administrative expenses was due to higher store occupancy costs related to new stores and increased rent on relocated stores. Operating and administrative expenses, as a percentage of net sales, was 23.1% for 2011 and 2010. Increases in occupancy costs and rent expense were offset by reduced labor and benefit costs, resulting from labor productivity improvements and tight cost controls at our stores.

Interest Expense. Interest expense includes interest on our outstanding indebtedness and amortization of deferred financing costs and original issue discount and is net of interest income earned on our invested cash.

Interest expense was $72.3 million for 2011, an increase of $5.4 million, from $66.9 million for 2010. The increase was primarily due to increased interest rates and increased overall levels of indebtedness as a result of the second lien credit facility we entered into on April 29, 2010.

 

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Interest Expense Associated with Preferred Stock. Interest expense associated with preferred stock includes dividends accrued on preferred stock subject to mandatory payment.

There was no interest expense on account of dividends on preferred stock for fiscal 2011, as compared to $2.7 million for fiscal 2010. The preferred stock ceased to accrue dividends on April 29, 2010.

Income Taxes. Provision for income taxes was $30.0 million for 2011, a decrease of $3.2 million, from $33.2 million for 2010. The effective income tax rates for 2011 and 2010 were 38.5% and 41.8%, respectively. The decrease in the effective income tax rate is primarily due to different state income tax rates in states where we operate and the mix of our earnings in those states as well as to the effect of the preferred stock ceasing to accrue dividends, which were non-deductible for tax purposes, on April 29, 2010.

Fiscal 2010 Compared With Fiscal 2009

Net Sales. Net sales were $3.77 billion for fiscal 2010, an increase of $21.2 million, or 0.6%, from $3.75 billion for fiscal 2009. This increase was primarily due to sales attributable to four new stores opened and one store acquired during fiscal 2009 and 2010. This increase was somewhat offset by the sale of one store, a decrease in wholesale sales and a 0.8% decrease in our same-store sales. The same-store sales decrease was due to a 1.6% decrease in the number of customer transactions offset by a 0.8% increase in the average transaction size, and was impacted by the cannibalization of sales at certain of our existing stores resulting from opening new stores in close proximity to existing stores. In addition, our same-store sales were positively impacted by the acquisition of 20 pharmacies.

As of January 1, 2011, we operated 155 retail grocery stores including 94 Pick ’n Save stores, 26 Copps stores, 32 Rainbow stores, 2 Metro Market stores and 1 Mariano’s Fresh Market store.

Gross Profit. Gross profit was $1.02 billion for fiscal 2010, a slight decrease of $1.0 million, or 0.1%, from $1.02 billion for fiscal 2009. Gross profit, as a percentage of net sales, was 27.0% for fiscal 2010, compared to 27.2% for fiscal 2009. The decrease in gross profit as a percentage of net sales was due primarily to price reductions related to our continued investment in lower everyday retail prices and increased expense related to promotional activity in certain of our markets, partially offset by reduced shrink.

Operating and Administrative Expenses. Operating and administrative expenses were $869.0 million for fiscal 2010, a decrease of $7.5 million, or 0.9%, from $876.5 million for fiscal 2009. Operating and administrative expenses, as a percentage of net sales, decreased to 23.1% for fiscal 2010, compared with 23.4% for fiscal 2009. The decrease was primarily due to labor and benefit cost improvements partially offset by an increase in occupancy costs, primarily due to new store openings and increased lease expense on store relocations.

Interest Expense. Interest expense, including the amortization of deferred financing costs and original issue discount, was $66.9 million for fiscal 2010, an increase of $32.8 million, from $34.1 million for fiscal 2009. The increase was primarily due to higher interest rates on our existing first lien credit facilities and increased indebtedness related to our second lien loan.

Interest Expense Associated with Preferred Stock. Interest expense on account of dividends on preferred stock was $2.7 million for fiscal 2010, a decrease of $12.1 million, from $14.8 million for fiscal 2009. The preferred stock ceased to accrue dividends on April 29, 2010, when the liquidation value and accrued dividends were fully paid.

Income Taxes. Provision for income taxes was $33.2 million for fiscal 2010, a decrease of $7.4 million, from $40.6 million for fiscal 2009. The effective income tax rate was 41.8% for fiscal 2010 and 46.3% for fiscal 2009. The decrease in the effective income tax rate was primarily due to different state income tax rates in the states where we operate and the mix of our earnings in those states as well as to the effect of the preferred stock ceasing to accrue dividends, which were non-deductible for tax purposes, on April 29, 2010.

 

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Liquidity and Capital Resources

Overview

Our principal sources of liquidity are cash flow generated from operations and borrowings under our revolving credit facility. Our principal uses of cash are to provide for working capital, finance capital expenditures, meet debt service requirements and pay stockholder dividends. The most significant components of our working capital are cash, inventories and accounts payable. Our working capital was $79.8 million at December 31, 2011, compared to $28.2 million at January 1, 2011. The increase in working capital was due to increased cash and inventories and decreased current maturities of long term debt due to the payment of $53.5 million for a portion of our term loan which matured in November 2011. These increases were partially offset by an increase in accounts payable due to the timing of payments at the end of fiscal 2010.

At December 31, 2011, we had $87.1 million of cash and cash equivalents and $67.1 million of availability under our revolving credit facility. We also had an aggregate of $785.8 million of outstanding indebtedness under our term loans (excluding unamortized discount on our second lien loan of $2.6 million) and other long-term debt, no outstanding borrowings under our revolving credit facility and outstanding letters of credit of $27.9 million.

We currently intend to declare quarterly dividends of approximately $0.23 per share on all outstanding shares of common stock. We expect to fund these dividend payments using our free cash flow, which we generally consider to be for any particular period our net earnings plus any non-cash charges and expenses incurred in such period after subtracting our capital expenditures and mandatory debt repayments for that period. The declaration of dividends, and, if declared, the amount of any such dividend, will be subject to our actual future earnings and capital requirements and to the discretion of our board of directors. Our board of directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual, legal and regulatory restrictions and such other factors as our board of directors may deem relevant. For example, our ability to pay cash dividends on our common stock will be subject to our continued compliance with the terms of any indebtedness, including our New Senior Credit Facility, as further defined below. We currently expect that our dividend payments for any particular quarter may represent a majority, but less than all, of our free cash flow for such period. Because any future payment of dividends will be at the discretion of our board of directors, we do not expect that any such dividend payments will have an adverse impact on our liquidity or otherwise limit our ability to fund capital expenditures or otherwise pursue our business strategy over the long-term. We do not expect to incur any indebtedness to fund any future dividend payments.

Initial Public Offering

On February 8, 2012, we announced an initial public offering (“IPO”) of our common stock which began trading on the New York Stock Exchange. On February 13, 2012, we completed our offering of 22,059,091 shares of our common stock at a price of $8.50 per share, which included 14,705,883 new shares sold by Roundy’s and the sale of 7,353,208 shares from existing shareholders. Roundy’s received approximately $125.0 million in gross proceeds from the IPO, or approximately $111 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds of our IPO were used to pay down and refinance our existing debt.

New Senior Credit Facility

In connection with the completion of our IPO, Roundy’s Supermarkets, Inc. (“RSI”) entered into a new senior credit facility (the “Refinancing”), consisting of a $675 million term loan (the “Term Facility”) and a $125 million revolving credit facility (the “Revolving Facility” and together with the Term Facility, the “New Credit Facilities”) with the Term Facility maturing in February 2019 and the Revolving Facility maturing in February 2017. We used all of the net proceeds from the IPO, together with borrowings under the New Credit Facilities, to repay all of our outstanding borrowings under the first lien term loan and second lien loan, including all accrued interest thereon and any related prepayment premiums.

 

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Borrowings under the Term Facility bear interest, at our option, at (i) adjusted LIBOR (subject to a 1.25% floor) plus 4.5% or (ii) an alternate base rate plus 3.5%. Borrowings under the Revolving Facility bear interest, at our option, at (i) adjusted LIBOR (subject to a 1.25% floor) plus 4.5%% or (ii) an alternate base rate plus 3.5%. In addition, there is a fee payable quarterly in an amount equal to 0.5% per annum of the undrawn portion of the Revolving Facility, calculated based on a 360-day year.

All of RSI’s obligations under the New Credit Facilities are unconditionally guaranteed (the “Guarantees”) by each of the direct and indirect subsidiaries of the Company party thereto (other than any future unrestricted subsidiaries as we may designate, at our discretion, from time to time) (the “Guarantors”).

Additionally, the New Credit Facilities and the Guarantees are secured by a first-priority perfected security interest in substantially all present and future assets of RSI and each Guarantor, including accounts receivable, equipment, inventory, general intangibles, intellectual property, investment property and intercompany notes among Guarantors; except that the security interest granted by Roundy’s Acquisition Corp. (the direct parent of RSI) is limited to its right, title and interest in and to the stock and promissory notes of RSI and general intangibles and investment property related thereto, and all proceeds, supporting obligations and products related thereto and all collateral security and guarantees given by any person with respect thereto.

Mandatory prepayments under the New Credit Facilities are required with (i) 50% of adjusted excess cash flow (which percentage shall be reduced to 25% upon achievement and maintenance of leverage ratio of less than 2.5:1.0, and to 0% upon achievement and maintenance of leverage ratio of less than 2.0:1.0) (subject to annual adjustment to account for variations in quarterly cash flow); (ii) 100% of the net cash proceeds of assets sales or other dispositions of property by RSI and its restricted subsidiaries (subject to certain exceptions and reinvestment provisions); and (iii) 100% of the net cash proceeds of issuances, offerings or placements of debt obligations of RSI or its restricted subsidiaries (subject to certain exceptions).

The New Credit Facilities contain customary affirmative covenants, including (i) maintenance of legal existence and compliance with laws and regulations; (ii) delivery of consolidated financial statements and other information; (iii) maintenance of properties in good working order; (iv) payment of taxes; (v) delivery of notices of defaults, litigation, ERISA events and material adverse changes; (vi) maintenance of adequate insurance; and (vii) inspection of books and records.

The New Credit Facilities also contain customary negative covenants, including restrictions on (i) dividends on, and redemptions of, equity interest and other restricted payments (with permitted basket for cash dividends on common stock in the sum of (a) 70% of excess cash flow calculated on a quarterly basis and (b) $25,000,000, plus a builder basket based on the Borrower’s retained portion of adjusted excess cash flow measured cumulatively, in each case, subject to pro forma compliance with the Borrower’s financial covenants and no default or event of default being continuing, provided that the aggregate amount of dividends that may be made during the fiscal quarter ended June 30, 2012 shall be $10,550,000); (ii) liens and sale-leaseback transactions; (iii) loans and investments; (iv) guarantees and hedging agreements; (v) the sale, transfer or disposition of assets and businesses; (vi) transactions with affiliates; (vii) changes in business conducted by the Borrower and its subsidiaries; (viii) payment or amendment of subordinated debt and organizational documents; and (ix) maximum capital expenditures. Excess cash flow is an amount equal to Adjusted EBITDA minus capital expenditures, cash payments of interest, cash payments of taxes, mandatory loan repayments and amortization of capital leases for that period. RSI is also required to comply with the following financial covenants: (i) a maximum total leverage ratio and (ii) a minimum cash interest coverage ratio.

In connection with the Refinancing, we expect to recognize a loss on debt extinguishment of approximately $17.0 million, which includes $7.0 million of previously capitalized costs, the remaining unamortized discount on the second lien loan of $2.1 million and prepayment premiums on the first lien term loan and second lien loan. In addition, we expect to incur approximately $0.8 million of other one-time costs associated with the IPO and Refinancing.

 

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Old Credit Facilities

As of December 31, 2011, there were no outstanding borrowings under our revolving credit facility, other than outstanding letters of credit of $27.9 million which reduced amounts available under the revolving credit facility.

On October 30, 2009 we amended our first lien credit agreement. Under the terms of this amendment, the maturities of approximately $649 million of the then outstanding term loans of $704 million, and $95 million of the then $125 million revolving credit facility were extended for two years from the original maturity dates (the extended portions referred to as the “Extended Term Loan” and the “Extended Revolving Credit Facility,” respectively). Accordingly, the first lien loan was repayable (i) in quarterly installments of approximately $1.8 million through September 2011, (ii) with a one-time payment of approximately $54 million in November 2011, (iii) in quarterly installments of approximately $1.7 million from December 2011 to September 2013, and (iv) with a one-time payment of the remaining balance in November 2013. The Extended Revolving Credit Facility was to have matured November 2012. To permit us to enter into a second lien credit facility (the “Second Lien Credit Agreement”), our first lien credit agreement was amended on April 16, 2010 (the “April 2010 Amendment”), which included, among other things, an increase in interest rate margins of 0.75%. Financing costs related to the April 2010 Amendment were $2.0 million.

On April 16, 2010, the Company borrowed $150 million under the Second Lien Credit Agreement for purposes of paying a $150 million dividend to our shareholders. This loan (“Second Lien Loan”) was issued at a 2% discount, and was to have matured in April 2016. Financing costs related to the Second Lien Loan were approximately $5.8 million.

At December 31, 2011, we were in compliance with our financial covenants for all of our indebtedness.

Cash Flows

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities (in thousands):

 

     2009     2010     2011  

Net cash provided by operating activities

   $ 175,362      $ 40,633      $ 182,017   

Net cash used in investing activities

     (93,689     (57,754     (65,868

Net cash used in financing activities

     (99,200     (21,365     (65,516
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (17,527   $ (38,486   $ 50,633   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 74,921      $ 36,435      $ 87,068   
  

 

 

   

 

 

   

 

 

 

Net Cash Provided by Operating Activities. Net cash provided by operating activities was $40.6 million in fiscal 2010 compared to $175.4 million for fiscal 2009. The decrease in net cash provided by operating activities in 2010 was due primarily to a decrease in accounts payable resulting from vendor payments that were made in late 2010, rather than early 2011 as well as an increase in interest payments.

Net cash provided by operating activities in fiscal 2011 was $182.0 million, compared to $40.6 million in fiscal 2010. The increase in net cash provided by operating activities in fiscal 2011 was due primarily to vendor payments that were made in late 2010, rather than early 2011. Net cash provided by operating activities was also impacted by a decrease in income taxes paid, offset by an increase in inventories and an increase in interest payments.

Net Cash Used in Investing Activities. Net cash used in investing activities consists primarily of capital expenditures for opening new stores and relocating and remodeling existing stores, as well as investments in information technology, store maintenance and our supply chain.

 

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Net cash used in investing activities was $93.7 million during fiscal 2009. Net cash used during the period related primarily to capital expenditures of $76.4 million and the acquisition of substantially all of the assets related to 20 pharmacies located in our stores for approximately $16.6 million.

Net cash used in investing activities was $57.8 million during fiscal 2010. Net cash used during the period related primarily to capital expenditures of $62.9 million partially offset by $5.9 million of proceeds from asset sales.

Net cash used in investing activities was $65.9 million during fiscal 2011. Net cash used during the period related primarily to capital expenditures of $66.5 million, partially offset by $0.6 million of proceeds from asset sales.

Net Cash Used in Financing Activities. Net cash used in financing activities consists primarily of payments on our debt and capital lease obligations, proceeds from debt borrowing, and payment of dividends to our shareholders.

Net cash used in financing activities was $99.2 million during fiscal 2009. Net cash used in financing activities in 2009 was due primarily to the payment of $75.0 million in dividends to equity holders and payment of liquidation value on preferred stock, $10.3 million of repayments on our long-term debt and capital lease obligations and $9.7 million in financing costs incurred with the October 2009 amendment of our first lien credit agreement.

Net cash used in financing activities was $21.4 million during fiscal 2010. Net cash used in financing activities in 2010 was due primarily to repayments of $10.6 million on our long-term debt and capital lease obligations and $7.9 million in financing costs. In addition, during 2010, we received net proceeds of $147.0 million from our second lien credit facility, which was used to fund $150.0 million in dividends to equity holders and to pay the liquidation value of our preferred stock.

Net cash used in financing activities was $65.5 million during fiscal 2011. Net cash used in financing activities in 2011 was due primarily to scheduled payments of debt and capital lease obligations, which included a payment of $53.5 million for a portion of our term loan which matured in November 2011.

Capital Expenditures

Total capital expenditures for fiscal 2012, excluding any acquisitions, are estimated to be approximately $65 to $70 million.

Non-GAAP Measures

We present Adjusted EBITDA, a non-GAAP measure, to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure and is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under U.S. generally accepted accounting principles (“GAAP”) can provide alone. Our board of directors and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for employees, including our senior executives.

We define Adjusted EBITDA as earnings before interest expense, interest expense associated with preferred stock, provision for income taxes, depreciation and amortization, LIFO charges, amortization of deferred financing costs, non-cash compensation expenses arising from the issuance of stock, options to purchase stock and stock appreciation rights, costs incurred in connection with our IPO (or subsequent offerings our Roundy’s common stock) and loss on debt extinguishment. Omitting interest, taxes and the other items provides a financial

 

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measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness, tax structures, and methodologies in calculating LIFO expense that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of owned property, and because in our experience, whether a store is new or one that is fully or mostly depreciated does not necessarily correlate to the contribution that such store makes to operating performance. We believe that investors, analysts and other interested parties consider Adjusted EBITDA an important measure of our operating performance. Adjusted EBITDA should not be considered as an alternative to net income as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

To properly and prudently evaluate our business, we encourage you to review our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K and the reconciliation to Adjusted EBITDA from net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the table below. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.

The following is a summary of the calculation of Adjusted EBITDA for Fiscal 2009, 2010 and 2011 (in thousands):

 

     2009      2010      2011  

Net income

   $ 47,179       $ 46,194       $ 48,048   

Interest expense, current and long-term debt, net

     32,281         64,037         68,855   

Interest expense, dividends on preferred stock

     14,799         2,716         —     

Amortization of deferred financing costs

     1,816         2,906         3,469   

Provision for income taxes

     40,638         33,244         30,041   

Depreciation and amortization expense

     79,275         72,331         69,480   

LIFO charges

     31         1,665         4,262   

Loss on debt extinguishment

     5,879         —           —     
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 221,898       $ 223,093       $ 224,155   
  

 

 

    

 

 

    

 

 

 

Our principal sources of liquidity are cash flows generated from operations and borrowings under our revolving credit facility. Our principal uses of cash are to meet debt service requirements, finance capital expenditures, make acquisitions and provide for working capital. We expect that current excess cash, cash available from operations and funds available under our revolving credit facility will be sufficient to fund our operations, debt service requirements and capital expenditures for at least the next 12 months.

 

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Our ability to make payments on and to refinance our debt, and to fund planned capital expenditures depends on our ability to generate sufficient cash in the future. This, to some extent, is subject to general economic, financial, competitive and other factors that are beyond our control. We believe that, based upon current levels of operations, we will be able to meet our debt service obligations when due. Significant assumptions underlie this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. If our future cash flow from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of our debt, on or before maturity. There can be no assurance that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all. In addition, the terms of our existing and future indebtedness may limit our ability to pursue any of these alternatives.

Contractual Obligations

The following table of material debt and lease commitments at December 31, 2011 summarizes the effect these obligations are expected to have on our cash flow in the future periods as set forth in the table below (in thousands):

 

    2012     2013     2014     2015     2016     Thereafter     Total  

Long-term debt (1)

  $ 10,789      $ 632,110      $ 5,056      $ 5,496      $ 155,704      $ 13,133      $ 822,288   

Interest (1)

    62,221        61,397        17,248        16,813        5,751        1,809        165,239   

Operating leases

    112,469        115,777        119,329        116,975        112,295        1,147,760        1,724,605   

Sublease income

    (4,761     (4,023     (2,877     (2,004     (1,384     (5,741     (20,790
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commitments

  $ 180,718      $ 805,261      $ 138,756      $ 137,280      $ 272,366      $ 1,156,961      $ 2,691,342   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Includes principal and interest payments for our outstanding indebtedness and capital lease obligations (See Note 7 to the consolidated financial statements included within Item 8). Interest payments have been estimated based on the coupon rate for fixed rate obligations or the rate in effect at December 31, 2011 for variable rate obligations. Interest obligations exclude amounts which have been accrued through December 31, 2011.

The following table represents our material debt and lease commitments as of February 13, 2012 after giving effect for the Refinancing (in thousands):

 

    2012     2013     2014     2015     2016     Thereafter     Total  

Long-term debt (1)

  $ 10,863      $ 11,319      $ 11,806      $ 12,246      $ 12,454      $ 654,383      $ 713,071   

Interest (1)

    43,779        40,923        40,139        39,316        38,457        79,236        281,850   

Operating leases

    112,469        115,777        119,329        116,975        112,295        1,147,760        1,724,605   

Sublease income

    (4,761     (4,023     (2,877     (2,004     (1,384     (5,741     (20,790
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commitments

  $ 162,350      $ 163,996      $ 168,397      $ 166,533      $ 161,822      $ 1,875,638      $ 2,698,736   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Includes principal and interest payments for our new Senior Credit Facility and capital lease obligations (See Note 7 to the consolidated financial statements included within Item 8), and interest payments for our Existing Credit Facility (through the date of the Refinancing). Interest payments have been estimated based on the coupon rate for fixed rate obligations or the rate in effect at December 31, 2011 for variable rate obligations related to the Existing Credit Facility, and the rate in effect for the New Senior Credit Facility on the date of the Refinancing. Interest obligations exclude amounts which have been accrued through December 31, 2011.

 

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As of December 31, 2011, we have $12.2 million of unrecognized tax benefits. The Company believes it is reasonably possible that tax audit resolutions could reduce its unrecognized tax benefits by $6.5 million in the next 12 months. These amounts have been excluded from the contractual obligations table because a reasonably reliable estimate of the period of cash settlement with the respective taxing authorities cannot be determined due to uncertainty regarding the timing of future cash outflows associated with these liabilities.

Our purchase obligations are cancelable and therefore not included in the above table.

We have outstanding letters of credit that total approximately $27.9 million at December 31, 2011.

We are required to make contributions to our defined benefit plans. These contributions are required under the minimum funding requirements of Employee Retirement Pension Plan Income Security Act. Our estimated 2012 minimum required contributions to our defined benefit plans are approximately $9.1 million. Due to uncertainties regarding significant assumptions involved in estimating future required contributions to our defined benefit plans, such as interest rate levels, the amount and timing of asset returns and the impact of proposed legislation, we are not able to reasonably estimate our future required contributions beyond 2011.

Off-Balance Sheet Items

General

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. With the exception of operating lease and pension obligations, we do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into or disclosed in our financial statements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. In addition, we do not engage in trading activities involving non-exchange traded contracts.

Multiemployer Plans

We are a party to three underfunded multiemployer pension plans on behalf of our union-affiliated employees. This underfunding has increased in part due to increases in the costs of benefits provided or paid under these plans as well as lower returns on plan assets. The unfunded liabilities of these plans may result in increased future payments by us and other participating employers. Going forward, our required contributions to these multiemployer plans could increase as a result of many factors, including the outcome of collective bargaining with the unions, actions taken by trustees who manage the plans, government regulations, the actual return on assets held in the plans and the payment of a withdrawal liability if we choose to exit a plan. We expect meaningful increases in contribution expense as a result of required incremental plan contributions to reduce underfunding. Our risk of future increased payments may be greater if other participating employers withdraw from the plan and are not able to pay the total liability assessed as a result of such withdrawal, or if the pension plan adopts surcharges and/or increased pension contributions as part of a rehabilitation plan.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with U.S. GAAP require us to make estimates, assumptions and judgments that affect amounts of assets and liabilities reported in the consolidated financial statements, the disclosure of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the year. We believe our estimates and assumptions are reasonable; however, future results could differ from those estimates.

 

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Critical accounting policies reflect material judgment and uncertainty and may result in materially different results using different assumptions or conditions. We identified the following critical accounting policies and estimates: inventories, income taxes, discounts and vendor allowances, allowance for losses on receivables, closed facility commitments, reserves for self-insurance, employee benefit plans, goodwill and impairment of long-lived assets. For a detailed discussion of accounting policies, please refer to the notes to the consolidated financial statements.

Senior management of the Company has discussed the development and selection of the following critical accounting policies with the audit committee of our board of directors.

Inventories

Inventories are recorded at the lower of cost or market. Substantially all of our inventories consist of finished goods. Cost is calculated on a FIFO and a LIFO basis for approximately 62% and 38%, and 63% and 37%, of our inventories at January 1, 2011 and December 31, 2011, respectively. We use the link chain method for computing dollar value LIFO, whereby the base year values of beginning and ending inventories are determined using price indexes published by the Bureau of Labor Statistics. We use a combination of the retail inventory method (“RIM”) and weighted average cost method to determine the current cost of inventory before any LIFO reserve is applied. Under RIM, the current cost of inventories and gross margins are calculated by applying a cost-to-retail ratio to the current retail value of inventories. The weighted average cost method is used for our supply chain and perishable store inventories and the RIM method is used for all other inventories. If the FIFO method had been used to determine cost of inventories for which the LIFO method is used, our inventories would have been higher by approximately $17.9 million and $22.1 million as of January 1, 2011 and December 31, 2011, respectively.

Income Taxes

We pay income taxes based on tax statutes, regulations and case law of the various jurisdictions in which we operate. At any one time, multiple tax years are subject to audit by the various taxing authorities. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize an income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The income tax benefit recognized in our financial statements from such a position is measured based on the largest estimated benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Discounts and Vendor Allowances

Purchases of product at discounted costs are recorded in inventory at the discounted cost until sold. Volume and other program allowances are accrued as a receivable when it is reasonably assured they will be earned and reduce the cost of the related inventory for product on hand or cost of sales for product already sold. Vendor allowances received to fund advertising and certain other expenses are recorded as a reduction of our expense for such related advertising or other expense, if such vendor allowances reimburse us for specific, identifiable and incremental costs incurred by us in selling the vendor’s product. Any excess reimbursement over our cost is classified as a reduction to cost of sales.

 

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Allowances for Losses on Receivables

Management makes estimates of the uncollectibility of its accounts and notes receivable portfolios. In determining the adequacy of the allowances, management analyzes its accounts based on historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially impacted by different judgments as to collectability based on the information considered and further deterioration of accounts.

Closed Facility Commitments

In prior years, we leased store sites which we have subleased to qualified independent retailers at rates that are generally equal to the rent paid by us. We also lease store sites for our retail operations. Under the terms of the original lease agreements, we remain primarily liable for any properties that are subleased as well as our own retail stores. Should a retailer be unable to perform under the sublease or should we close underperforming stores, we would record a charge to earnings for the discounted cost of the remaining term of the lease and related costs, less any anticipated sublease income. Should the number of defaults by sublessees or store closures increase, or the actual sublease income be less than estimated, the remaining lease commitments we must record could have a material adverse effect on our operating results and cash flows. Early settlements of lease obligations with the landlord and the discount rate used to calculate the estimated liability will also impact recorded balances or future results.

Reserves for Self-Insurance

We are primarily self-insured for potential liabilities for workers’ compensation, general liability and employee health care benefits. It is our policy to record the liability based on claims filed and a consideration of historical claims experience, demographic factors and other actuarial assumptions for those claims incurred but not yet reported. Any projection of losses concerning these claims is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.

Employee Benefit Plans

Certain of our employees are covered by noncontributory defined benefit pension plans. U.S. GAAP requires that we recognize in our consolidated balance sheet a liability for pension plans which are underfunded or unfunded, or an asset for defined benefit plans which are overfunded. U.S. GAAP also requires that we measure the benefit obligations and fair value of plan assets that determine our defined benefit plans’ funded status as of our fiscal year end date. We currently use a December 31 measurement date. We record, as a component of accumulated other comprehensive income/(loss), actuarial gains or losses that have not yet been recognized.

The determination of our obligation and expense for Company-sponsored pension plans is dependent upon assumptions we select for use by actuaries in calculating those amounts. Those assumptions are described in Note 8 to our consolidated financial statements and include the discount rate, the expected long-term rate of return on plan assets and the rate of future compensation increases. Actual returns on plan assets and changes in the interest rates used to determine the discount rate are accumulated and amortized over future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions, including the discount rate used and expected return on plan assets, may significantly impact pension expense and cash contributions in the future.

The objective of our discount rate assumptions was intended to reflect the rates at which the pension benefits could be effectively settled. Our methodology for selecting the discount rates as of year-end 2011 was to match the plan’s cash flows to that of a yield curve that provides the equivalent yields on high-quality fixed income securities for each maturity. Benefit cash flows due in a particular year can theoretically be “settled” by

 

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“investing” them in high quality income securities that mature in the same year. The discount rates are the single rates that produce the same present value of cash flows. The selection of the 4.30% discount rates as of December 31, 2011 represents the equivalent rate constructed under a broad-market yield curve. We utilized a discount rate of 5.50% as of January 1, 2011. A 100 basis point increase in the discount rate would decrease the projected pension benefit obligation as of December 31, 2011, by approximately $14 million.

To determine the expected rate of return on pension plan assets, we consider current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. For 2010 and 2011, we assumed a pension plan investment return rate of 8.5%.

Goodwill

Our goodwill totaled $726.9 million at December 31, 2011. Goodwill is reviewed for impairment on an annual basis (as of the first day of the third quarter) or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Fair value is determined based on the discounted cash flows and comparable market values of our single reporting unit. If the fair value of the reporting unit is less than its carrying value, the fair value of the implied goodwill is calculated as the difference between the fair value of our reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An impairment charge is recorded for any excess of the carrying value over the implied fair value. The fair market value of our reporting unit is substantially in excess of carrying value for each of the reporting periods.

Determining market values using a discounted cash flow method requires that we make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate market rates. Our judgments are based on historical experience, current market trends and other information. In estimating future cash flows, we rely on internally generated forecasts for operating profits and cash flows, including capital expenditures. Based on our annual impairment test during Fiscal 2009, 2010 and 2011, no goodwill impairment charge was required to be recorded. Changes in estimates of future cash flows caused by items such as unforeseen events or changes in market conditions could negatively affect our reporting unit’s fair value and result in an impairment charge. Factors that could cause us to change our estimates of future cash flows include a prolonged economic crisis, successful efforts by our competitors to gain market share in our core markets, our inability to compete effectively with other retailers or our inability to maintain price competitiveness.

Impairment of Long-Lived Assets Other Than Goodwill

Long-lived assets are reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying value of such assets to the undiscounted future cash flows expected to be generated by such assets. If the carrying value of an asset exceeds its estimated undiscounted future cash flows, an impairment provision is recognized to the extent that the carrying amount of the asset exceeds its fair value. We consider factors such as historic or forecasted operating results, trends and future prospects, current market value, significant industry trends and other economic and regulatory factors in performing these analyses. Using different assumptions and definitions could result in a change in our estimates of cash flows and those differences could produce materially different results.

Recent Accounting Pronouncements

In June 2011, FASB amended its rules regarding the presentation of comprehensive income. The objective of this amendment is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Specifically, this amendment requires that all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new rules became effective during interim and annual

 

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periods beginning after December 15, 2011. Because the standard only affects the presentation of comprehensive income and does not affect what is included in comprehensive income, the standard will not have a material effect on our consolidated financial statements.

In September 2011, FASB amended its standards regarding disclosure requirements for employers participating in multiemployer pension and other postretirement benefit plans (“multiemployer plans”) to improve transparency and increase awareness of the commitments and risks involved with participation in multiemployer plans. The amended disclosures require employers participating in multiemployer plans to provide additional quantitative and qualitative disclosures to provide users with more detailed information regarding an employer’s involvement in multiemployer plans. The new rules became effective for our fiscal year ended December 31, 2011 and resulted in enhanced disclosures, but did not otherwise have an impact on our consolidated financial statements.

Item 7A—Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to financial market risks associated with interest rate and commodity prices.

Interest Rate Risk

We have a market risk exposure to changes in interest rates. We manage interest rate risk through the use of fixed- and variable-interest rate debt. The New Credit Facilities provide a floor in the rates under which we are charged interest expense. Currently, the LIBOR rate is below the interest rate floor included in the credit agreement. Should the LIBOR rate exceed the floor provided in the Credit Agreement, we would be required to make higher interest payments than planned. A one percentage point increase in LIBOR above the 1.25% minimum floor would cause an increase to the interest expense on our borrowings under the Term Facility of approximately $6.8 million. We historically have not engaged in interest rate hedging activities related to our interest rate risk.

Commodity Risk

We are subject to volatility in food costs as a result of market risk associated with commodity prices. Although we typically are able to mitigate these cost increases, our ability to continue to do so, either in whole or in part, and may be limited by the competitive environment we operate in. We manage our exposure to this risk primarily through pricing agreements with our vendors.

 

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Item 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

     Page
Reference
 

Consolidated Financial Statements

  

Report of Independent Registered Public Accounting Firm

     53   

Consolidated Statements of Income for the fiscal years ended January 2, 2010, January  1, 2011, and December 31, 2011

     54   

Consolidated Balance Sheets as of January 1, 2011 and December 31, 2011

     55   

Consolidated Statements of Cash Flows for the fiscal years ended January 2, 2010, January  1, 2011, and December 31, 2011

     56   

Consolidated Statements of Shareholders’ Equity for the fiscal years ended January 2, 2010,  January 1, 2011, and December 31, 2011

     57   

Notes to Consolidated Financial Statements

     58   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Roundy’s, Inc.;

We have audited the accompanying consolidated balance sheets of Roundy’s, Inc. as of January 1, 2011 and December 31, 2011, and the related consolidated statements of income, cash flows, and shareholders’ equity for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Roundy’s, Inc. at January 1, 2011 and December 31, 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements as a whole, presents fairly in all material aspects the information set forth herein.

/s/ ERNST & YOUNG LLP

Milwaukee, Wisconsin

March 28, 2012

 

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CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

     Year Ended  
     January 2,
2010
     January 1,
2011
     December 31,
2011
 

Net Sales

   $ 3,745,774       $ 3,766,988       $ 3,841,984   

Costs and Expenses:

        

Cost of sales

     2,726,672         2,748,919         2,804,709   

Operating and administrative

     876,510         868,972         886,862   

Interest:

        

Interest expense, current and long-term debt, net

     32,281         64,037         68,855   

Interest expense, dividends on preferred stock

     14,799         2,716         —     

Amortization of deferred financing costs

     1,816         2,906         3,469   

Loss on debt extinguishment

     5,879         —           —     
  

 

 

    

 

 

    

 

 

 
     3,657,957         3,687,550         3,763,895   
  

 

 

    

 

 

    

 

 

 

Income before Income Taxes

     87,817         79,438         78,089   

Provision for Income Taxes

     40,638         33,244         30,041   
  

 

 

    

 

 

    

 

 

 

Net Income

   $ 47,179       $ 46,194       $ 48,048   
  

 

 

    

 

 

    

 

 

 

Net earnings per common share:

        

Basic and Diluted

   $ —         $ 1.01       $ 1.58   

Weighted average number of common shares oustanding:

        

Basic

     27,587         27,384         27,324   

Diluted

     30,648         30,434         30,374   

Dividends per common share

   $ —         $ 2.90       $ —     

See notes to consolidated financial statements.

 

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CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     January 1,
2011
    December 31,
2011
 
Assets    

Current Assets:

   

Cash and cash equivalents

  $ 36,435      $ 87,068   

Notes and accounts receivable, less allowance for losses of $894 and $770, respectively

    37,076        32,467   

Merchandise inventories

    258,234        286,537   

Prepaid expenses

    16,819        18,880   

Deferred income taxes

    10,128        6,038   
 

 

 

   

 

 

 

Total current assets

    358,692        430,990   
 

 

 

   

 

 

 

Property and Equipment, net

    310,183        309,575   

Other Assets:

   

Other assets—net

    50,991        45,238   

Goodwill

    727,065        726,879   
 

 

 

   

 

 

 

Total other assets

    778,056        772,117   
 

 

 

   

 

 

 

Total assets

  $ 1,446,931      $ 1,512,682   
 

 

 

   

 

 

 
Liabilities and Shareholders’ Equity    

Current Liabilities:

   

Accounts payable

  $ 165,472      $ 245,216   

Accrued wages and benefits

    52,217        48,876   

Other accrued expenses

    45,989        42,089   

Current maturities of long-term debt and capital lease obligations

    64,367        10,789   

Income taxes payable

    2,432        4,265   
 

 

 

   

 

 

 

Total current liabilities

    330,477        351,235   
 

 

 

   

 

 

 

Long-term Debt and Capital Lease Obligations

    819,641        809,352   

Deferred Income Taxes

    62,227        66,438   

Other Liabilities

    82,022        108,482   
 

 

 

   

 

 

 

Total liabilities

    1,294,367        1,335,507   
 

 

 

   

 

 

 

Commitments and Contingencies

   

Shareholders’ Equity:

   

Preferred stock (20 shares authorized, $0.01 par value, 10 shares at 1/1/11 and 12/31/11, respectively, issued and outstanding)

    1,044        1,044   

Common stock (150,000 shares authorized, $0.01 par value, 27,345 shares and 27,072 shares at 1/1/11 and 12/31/11, respectively, issued and outstanding)

    273        271   

Additional paid-in capital

    3,565        —     

Retained earnings

    174,392        221,365   

Shareholder notes receivable

    (4,091     —     

Accumulated other comprehensive loss

    (22,619     (45,505
 

 

 

   

 

 

 

Total shareholders’ equity

    152,564        177,175   
 

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 1,446,931      $ 1,512,682   
 

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

    Year Ended  
    January 2,
2010
    January 1,
2011
    December 31,
2011
 

Cash Flows From Operating Activities:

     

Net income

  $ 47,179      $ 46,194      $ 48,048   

Adjustments to reconcile net income to net cash flows provided by operating activities:

     

Depreciation and amortization, including deferred financing costs

    81,091        75,237        72,949   

Gain on sale of property and equipment and other assets

    (617     (415     (542

LIFO charges

    31        1,665        4,262   

Deferred income taxes

    28,130        12,301        18,030   

Interest earned on shareholder notes receivable

    (256     (218     (187

Deferred dividends on preferred stock

    14,799        2,716        —     

Loss on debt extinguishment

    5,879        —          —     

Amortization of debt discount

    —          353        500   

Forgiveness of shareholder notes receivable

    —          —          75   

Changes in operating assets and liabilities, net of the effect of business acquisitions:

     

Notes and accounts receivable

    (4,742     (5,102     4,609   

Merchandise inventories

    4,336        (9,828     (32,565

Prepaid expenses

    211        (573     (2,061

Other assets

    (2,666     195        532   

Accounts payable

    16,712        (74,236     79,744   

Accrued expenses and other liabilities

    (1,752     (11,185     (19,725

Income taxes

    (12,973     3,529        8,348   
 

 

 

   

 

 

   

 

 

 

Net cash flows provided by operating activities

    175,362        40,633        182,017   
 

 

 

   

 

 

   

 

 

 

Cash Flows From Investing Activities:

     

Capital expenditures

    (76,436     (62,932     (66,497

Proceeds from sale of property and equipment and other assets

    875        5,899        629   

Payment for business acquisitions, net of cash acquired

    (18,254     (721     —     

Decrease in notes receivable, net

    126        —          —     
 

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities

    (93,689     (57,754     (65,868
 

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities:

     

Dividends and liquidation value of preferred stock paid to preferred shareholders

    (75,000     (70,828     —     

Dividends paid to common shareholders

    —          (77,006     —     

Proceeds from long-term borrowings

    —          147,000        —     

Payments of debt and capital lease obligations

    (10,339     (10,631     (64,367

Purchase of common stock

    (3,563     (2,156     (439

Issuance of common stock

    —          65        —     

Purchase of preferred stock

    (611     —          —     

Repayment of shareholder notes receivable

    —          72        —     

Payment of equity issuance costs in advance of stock issuance

    —          —          (710

Credit agreement amendment fees and expenses

    (9,687     (7,881     —     
 

 

 

   

 

 

   

 

 

 

Net cash flows used in financing activities

    (99,200     (21,365     (65,516
 

 

 

   

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

    (17,527     (38,486     50,633   

Cash and Cash Equivalents, Beginning of Year

    92,448        74,921        36,435   
 

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, End of Year

  $ 74,921      $ 36,435      $ 87,068   
 

 

 

   

 

 

   

 

 

 

Supplemental Cash Flow Information:

     

Cash paid for interest

  $ 29,348      $ 60,817      $ 71,122   

Cash paid for income taxes

    25,482        15,131        3,663   

Shareholder notes cancelled in exchange for common stock

    —          —          4,203   

Notes receivable issued for shareholders’ purchase of common stock

    509        —          —     

Dividends utilized for repayment of shareholder notes receivable

    —          2,165        —     

See notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

 

    Preferred Stock     Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Shareholder
Notes
Receivable
    Accumulated
Other
Comprehensive
(Loss)
Income
    Total
Shareholders’
Equity
    Comprehensive
Income
 
    Shares     Amount     Shares     Amount              

Balance, January 3, 2009

    —        $ —          27,626      $ 276      $ 8,707      $ 160,190      $ (5,345   $ (30,155   $ 133,673     

Net income

    —          —          —          —          —          47,179        —          —          47,179      $ 47,179   

Purchase of common stock

    —          —          (160     (1     (3,562     —          —          —          (3,563     —     

Issuance of common stock

    —          —          25        —          509        —          (509     —          —          —     

Interest on shareholder notes receivable

    —          —          —          —          —          —          (256     —          (256     —     

Employee benefit plans, net of $6,088 tax

    —          —          —          —          —          —          —          9,132        9,132        9,132   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 2, 2010

    —        $ —          27,491      $ 275      $ 5,654      $ 207,369      $ (6,110   $ (21,023   $ 186,165      $ 56,311   
                   

 

 

 

Net income

    —          —          —          —          —          46,194        —          —          46,194      $ 46,194   

Reclassification of preferred stock

    10        1,044        —          —          —          —          —          —          1,044        —     

Common stock dividends

    —          —          —          —          —          (79,171     —          —          (79,171     —     

Purchase of common stock

    —          —          (150     (2     (2,154     —          72        —          (2,084     —     

Issuance of common stock

    —          —          4        —          65        —          —          —          65        —     

Repayment of shareholder notes receivable and interest

    —          —          —          —          —          —          2,165        —          2,165        —     

Interest on shareholder notes receivable

    —          —          —          —          —          —          (218     —          (218     —     

Employee benefit plans, net of ($1,064) tax

    —          —          —          —          —          —          —          (1,596     (1,596     (1,596
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2011

    10      $ 1,044        27,345      $ 273      $ 3,565      $ 174,392      $ (4,091   $ (22,619   $ 152,564      $ 44,598   
                   

 

 

 

Net income

    —          —          —          —          —          48,048        —          —          48,048      $ 48,048   

Purchase of common stock

    —          —          (26     —          —          (439     —          —          (439     —     

Interest on shareholder notes receivable

    —          —          —          —          —          —          (187     —          (187     —     

Cancellation of shareholder notes receivable and accrued interest in exchange for common stock

    —          —          (247     (2     (3,565     (636     4,278        —          75        —     

Employee benefit plans, net of ($15,262) tax

    —          —          —          —          —          —          —          (22,886     (22,886     (22,886
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

    10      $ 1,044        27,072      $ 271      $ —        $ 221,365      $ —        $ (45,505   $ 177,175      $ 25,162   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ROUNDY’S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JANUARY 2, 2010, JANUARY 1, 2011, AND DECEMBER 31, 2011

1. ORGANIZATION

Roundy’s, Inc. (“Roundy’s” or the “Company”), formerly known as Roundy’s Parent Company, Inc. (“RPI”) is a corporation formed in 2010 for the purpose of owning and operating Roundy’s Acquisition Corp. (“RAC”), and its 100% owned subsidiary, Roundy’s Supermarkets, Inc. (“RSI”).

Roundy’s is a leading food retailer in the state of Wisconsin. As of December 31, 2011, Roundy’s owned and operated 158 retail grocery stores, of which 122 are located in Wisconsin, 32 are located in Minnesota and 4 are located in Illinois. Roundy’s also distributes a full line of food and non-food products from three wholesale distribution centers and provides services to one independent licensee retail location in Wisconsin.

Initial Public Offering—On February 8, 2012, we announced an initial public offering (“IPO”) of our common stock which began trading on the New York Stock Exchange. On February 13, 2012, we completed our offering of 22,059,091 shares of our common stock at a price of $8.50 per share, which included 14,705,883 new shares sold by Roundy’s and the sale of 7,353,208 shares from existing shareholders. Roundy’s received approximately $125.0 million in gross proceeds from the IPO, or approximately $111 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds of our IPO were used to pay down our existing debt (see Subsequent Events below).

A summary of our capitalization upon closing of the IPO is as follows (in thousands):

 

Common stock issued and outstanding at December 31, 2011

     27,072   

Conversion of preferred stock into common stock prior to IPO (see Note 3)

     3,050   

Rounding of partial shares held prior to stock split

     (4

Sale of common stock through IPO

     14,706   
  

 

 

 

Common stock issued and outstanding after IPO

     44,824   
  

 

 

 

In connection with the completion of our IPO, we granted an aggregate of 819,286 shares of restricted stock to certain of our directors, executive officers and non-executive officers. The restricted stock for executive officers and non-executive officers will vest over five years and the restricted stock for our directors will vest over one year.

2. Roundy’s/RAC Merger

On April 15, 2010, Roundy’s and RAC were parties to a merger accomplished pursuant to Section 251(g) of the Delaware General Corporation Law (the “Holding Company Merger”) whereby each outstanding share of capital stock of RAC was converted into one share of Roundy’s stock, having the same rights, preferences and privileges as the shares of RAC from which they were converted. This transaction was a reorganization and there was no change in control as a result of these actions. Accordingly, all periods are presented as if Roundy’s was in existence as of the first period presented.

3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The accompanying consolidated financial statements include the accounts of Roundy’s and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless otherwise indicated, all references in these consolidated financial statements to “the Company”, “we,” “us” or “our” or similar words are to Roundy’s, Inc. and its subsidiaries.

 

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Fiscal Year—Our fiscal year is the 52 or 53 week period ending on the Saturday nearest to December 31. The years ended January 2, 2010 (“Fiscal 2009”), January 1, 2011 (“Fiscal 2010”) and December 31, 2011 (“Fiscal 2011”) included 52 weeks.

Use of Estimates—The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to allowances for doubtful accounts and notes receivable, valuation of inventories, self-insurance reserves, closed facilities reserves, purchase accounting estimates, useful lives for depreciation and amortization of property and equipment, and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.

Revenue Recognition—Retail revenues are recognized at the point of sale. Discounts provided to customers by the Company at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction of sales as the products are sold. Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons. The Company records a receivable from the vendor for the difference in sales price and payment received from the customer. Sales taxes are not recorded as a component of retail revenues as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.

We record deferred revenue when we sell Roundy’s gift cards. A sale is then recognized when the gift card is redeemed to purchase our product. Gift card breakage is recognized when redemption is deemed remote. The amount of breakage has not been material in Fiscal 2009, Fiscal 2010, or Fiscal 2011.

Independent distribution revenues are recognized, net of any estimated returns and allowances, when product is shipped, collectability is reasonably assured, and title has passed.

Costs and Expenses—Cost of sales includes product costs, inbound freight, warehousing costs, receiving and inspection costs, distribution costs, and depreciation and amortization expenses associated with our supply chain operations. Operating and administrative expenses consist primarily of personnel costs, sales and marketing expenses, depreciation and amortization expenses and other expenses associated with facilities unrelated to our supply chain operations, internal management expenses and expenses for finance, legal, business development, human resources, purchasing and other administrative departments. Interest expense includes interest on our outstanding indebtedness and dividends on our preferred stock and is net of interest income earned on invested cash and shareholder notes receivable.

Discounts and Vendor Allowances—Purchases of product at discounted costs are recorded in inventory at the discounted cost until sold. Volume and other program allowances are accrued as a receivable when it is reasonably assured they will be earned and reduce the cost of the related inventory for product on hand or cost of sales for product already sold. Vendor allowances received to fund advertising and certain other expenses are recorded as a reduction of our expense for such related advertising or other expense if such vendor allowances reimburse us for specific, identifiable and incremental costs we incur in selling the vendor’s product. Any excess reimbursement over our cost is classified as a reduction to cost of sales.

Vendor allowances for volume and other program allowances and allowances to fund advertising related expenses totaled $106.0 million, $129.7 million and $127.7 million for Fiscal 2009, Fiscal 2010 and Fiscal 2011, respectively.

Advertising Expense—We expense advertising costs as incurred. Advertising expenses totaled $39.3 million, $32.2 million and $31.2 million, for Fiscal 2009, Fiscal 2010 and Fiscal 2011, respectively.

 

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Pre-Opening Costs—The costs associated with opening new and remodeled stores are expensed as incurred.

Income Taxes—The provision for federal income tax is computed based upon our consolidated tax return. The provision for state income tax is computed based upon the tax returns we file in the appropriate tax jurisdictions. We provide for income taxes in accordance with Accounting Standards Codification (“ASC”) 740 “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We periodically review tax positions taken or expected to be taken, and income tax benefits are recognized for those positions for which it is more likely than not will be upheld upon examination by taxing authorities. We recognize the settlement of certain tax positions based upon criteria under which a position may be determined to be effectively settled.

Comprehensive Income (Loss)—Comprehensive income refers to revenues, expenses, gains and losses that are not included in net income but rather are recorded directly in shareholders’ equity in the consolidated statements of shareholders’ equity. The Company’s other comprehensive income (loss) is comprised solely of the adjustments for pension liabilities.

Cash Equivalents—We consider all highly liquid investments with maturities of three months or less when acquired to be cash equivalents. Accounts payable includes $21.3 million and $48.1 million at January 1, 2011 and December 31, 2011, respectively, of checks written in excess of related bank balances but not yet presented to our bank for collection.

Fair Value of Financial Instruments—ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) defines fair value, establishes a framework for measuring fair value and requires additional disclosures about fair value measurements. ASC 820 prioritizes the inputs to valuation techniques used to measure fair value into the following hierarchy:

 

   

Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.

 

   

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

   

Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.

Financial instruments consist of cash and cash equivalents, accounts and notes receivable, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, accounts and notes receivable, and accounts payable approximate fair value at January 1, 2011 and December 31, 2011 because of the short-term nature of these financial instruments. Based on the borrowing rates currently available to us for long-term debt with similar terms and maturities, the fair value of long-term debt, including current maturities, is approximately $885.2 million and $817.0 million as of January 1, 2011 and December 31, 2011, respectively. We consider the fair value of the debt to be Level 2.

Accounts Receivable—We are exposed to credit risk with respect to accounts receivable. We continually monitor our receivables with vendors and customers by evaluating the collectability of accounts receivable based on a combination of factors, namely aging and historical trends. An allowance for doubtful accounts is recorded based on the likelihood of collection based on management’s review of the facts. Accounts receivable are written off after all collection efforts have been exhausted.

Inventories—Inventories are recorded at the lower of cost or market. Substantially all of our inventories consist of finished goods. Cost is calculated on a first-in-first-out (“FIFO”) and last-in-first-out (“LIFO”) basis for

 

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approximately 62% and 38%, and 63% and 37%, of our inventories at January 1, 2011 and December 31, 2011, respectively. If the FIFO method was used to calculate the cost for our entire inventory, inventories would have been approximately $17.9 million and $22.1 million greater at January 1, 2011 and December 31, 2011, respectively.

Additionally, cost of sales would have been approximately $0.2 million, $0.1 million, and $0.1 million greater during Fiscal 2009, Fiscal 2010, and Fiscal 2011, respectively, had the Company not experienced a reduction in inventory quantities that are valued under the LIFO method.

Cost is determined using the retail inventory method for all retail inventories, which totals approximately 67% of total inventories at January 1, 2011 and December 31, 2011. Cost for our supply chain inventory is determined based on the weighted average costing method and such inventory totals 33% of total inventories at January 1, 2011 and December 31, 2011.

We record an inventory shrink adjustment based on a physical count and also provide an estimated inventory shrink adjustment for the period between the last physical inventory count and each balance sheet date. We perform physical counts of perishable store inventories approximately every month and nonperishable store inventories approximately every quarter. The adjustments resulting from the physical inventory counts have been consistent with the inventory shrink estimates provided for in the consolidated financial statements.

Property and Equipment—Property and equipment are stated at cost and are depreciated by the straight-line method for financial reporting purposes and by use of accelerated methods for income tax purposes. Depreciation and amortization of property and equipment are expensed over their estimated useful lives, which are generally 39 years for buildings and three to ten years for equipment. Leasehold improvements and property under capital leases are amortized over the lesser of the useful life of the asset or the term of the lease. Terms of leases used in the determination of estimated useful lives may include renewal periods at our discretion when penalty for a failure to renew is so significant that exercise of the option is determined to be reasonably assured at the inception of the lease.

Leases—We categorize leases at inception as either operating leases or capital leases. We record rent liabilities for contingent percentage of sales lease provisions when we determine that it is probable that the specified levels will be reached as defined by the lease. Lease expense for operating leases with increasing rate rents is recognized on a straight-line basis over the term of the lease.

Long-Lived Assets—Long-lived assets are reviewed for potential impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying value of such assets to the undiscounted future cash flows expected to be generated by the assets. If the carrying value of an asset exceeds its estimated undiscounted future cash flows, an impairment provision is recognized to the extent that the carrying amount of the asset exceeds its fair value. We consider factors such as current results, trends and future prospects, current market value, and other economic and regulatory factors in performing these analyses. The Company determined that no long-lived assets were impaired as of Fiscal 2009, Fiscal 2010 and Fiscal 2011.

Deferred Financing Costs—Deferred financing costs are amortized over the life of the related debt using the effective interest rate method.

Customer Lists—Customer lists, which represent prescription files from acquired pharmacies, are amortized over the estimated payback period on acquisition of the files and subject to review for potential impairment when events or changes in circumstances indicate the carrying amount may not be recoverable.

Goodwill—Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. The carrying value of goodwill is evaluated for impairment annually on the first day of the third quarter or whenever events or circumstances indicate that it is likely that the fair value of our reporting unit is below its carrying amount. We have determined that the Company has one financial reporting unit.

 

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We have determined that a single financial reporting unit is appropriate for goodwill impairment testing purposes because while our stores are operated in varying geographies and under different banners, they offer the same general mix of products, have similar pricing strategies and promotional programs resulting in similar economic characteristics. Stores are managed centrally through a consolidated buying, merchandising, operational and financial management organization.

The fair value of our financial reporting unit is determined based on the discounted cash flows and comparable market values of the reporting unit. Projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. If the fair value of the reporting unit is less than its carrying value, the fair value of the implied goodwill is calculated as the difference between the fair value of the reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An impairment charge is recorded for any excess of the carrying value over the implied fair value.

We completed our annual impairment reviews for Fiscal 2009, Fiscal 2010 and Fiscal 2011 and concluded there was no impairment of goodwill.

The change in the net carrying amount of goodwill consisted of the following (in thousands):

 

     Year Ended  
     January 1,
2011
    December 31,
2011
 

Balance at beginning of year

   $ 728,338      $ 727,065   

Adjustment to acquisition liabilities, net of tax

     (1,273     (186
  

 

 

   

 

 

 

Balance at end of year

   $ 727,065      $ 726,879   
  

 

 

   

 

 

 

The adjustment to acquisition liabilities relates to closed facility reserves that were established during purchase accounting from prior acquisitions. This adjustment represents the reduction in reserve from our original estimate at the time the facilities were acquired. As these reserves were recognized in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, any subsequent adjustments are recognized as an adjustment to goodwill.

Trademarks—Trademarks, which have indefinite lives, are not amortized but are evaluated annually for impairment. There was no impairment in Fiscal 2009, Fiscal 2010, or Fiscal 2011.

Self-Insurance—We are primarily self-insured for potential liabilities for workers’ compensation, general liability and employee health care benefits. It is our policy to record the liability based on claims filed and a consideration of historical claims experience, demographic factors and other actuarial assumptions for those claims incurred but not yet reported. Any projection of losses concerning these claims is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. A summary of the changes in our self-insurance liability is as follows (in thousands):

 

     Year Ended  
     January 2,
2010
    January 1,
2011
    December 31,
2011
 

Balance at beginning of year

   $ 30,203      $ 32,900      $ 32,143   

Claim payments

     (83,033     (77,192     (79,738

Reserve accruals

     85,730        76,435        77,929   
  

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 32,900      $ 32,143      $ 30,334   
  

 

 

   

 

 

   

 

 

 

 

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Closed Facilities Reserve—When a facility is closed, the remaining net book value of the property, net of expected salvage value, is charged to operations. For properties under lease agreements, the present value of any remaining future liability under the lease, net of estimated sublease income, is expensed at the time the use of the property is discontinued and is classified as operating and administrative expense. The liabilities for leases of closed facilities are paid over the remaining lease term. Adjustments to closed facility reserves primarily relate to changes in subtenant income or actual costs differing from original estimates, and are recognized in the period in which the adjustments become known.

The following table provides the activity in the liability for closed stores (in thousands):

 

     Year Ended  
     January 1,
2011
    December 31,
2011
 

Balance at beginning of year

   $ 21,460      $ 15,336   

Charges for closed stores

     2,168        4,607   

Payments

     (6,156     (4,724

Adjustments

     (2,136     (310
  

 

 

   

 

 

 

Balance at end of year

   $ 15,336      $ 14,909   
  

 

 

   

 

 

 

Concentrations of Risk—Certain of our employees are covered by collective bargaining agreements. We currently participate in 44 union contracts covering approximately 49% of our employees. Of these contracts, five contracts were expired as of December 31, 2011 of which four have been subsequently ratified and six expire in 2012 of which one has been subsequently ratified. In the aggregate, these contracts cover approximately 21% of our employees. The remaining 33 contracts expire in 2013 through 2016. We believe that our relationships with our employees are good; therefore, we do not anticipate significant difficulty in renegotiating these contracts.

Subsequent Events—We have evaluated our financial statements for subsequent events through the date the financial statements were issued. Other than as described below, we are not aware of any subsequent events which require recognition or disclosure in the financial statements.

On January 24, 2012, the Board of Directors approved an amendment to the articles of incorporation to increase the number of shares we are authorized to issue to 150,000,000 shares of common stock and 5,000,000 shares of preferred stock, and to convert all of our outstanding preferred stock into shares of common stock on a one-for-one basis. Subsequent to the preferred stock conversion, the Board of Directors approved a 292.2-for-one stock split on all common shares outstanding as of that date. In accordance with applicable accounting rules, we have restated all of the historical common share and per share amounts for the periods presented to give retroactive effect to this 292.2-for-one common stock split but have not given retroactive effect to the conversion of preferred stock into common stock. Therefore, the 10,439 shares of outstanding preferred stock that have been converted and then subsequently split in January 2012 are not reflected in common share and per share amounts in the accompanying financial statements.

On February 13, 2012, concurrent with the completion of our IPO, we refinanced our First and Second Lien Loans (see Note 7) with the proceeds of our IPO and a new senior credit facility. The new senior credit facility consists of a $675 million term loan and a $125 million revolving credit facility, which will expire in February 2019 and February 2017, respectively.

4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (“FASB”) amended its rules regarding the presentation of comprehensive income. The objective of this amendment is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. Specifically, this amendment requires that all non-owner changes in shareholders’ equity be presented

 

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either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new rules became effective during interim and annual periods beginning after December 15, 2011. Because the standard only affects the presentation of comprehensive income and does not affect what is included in comprehensive income, the standard will not have a material effect on the Company’s consolidated financial statements.

In September 2011, the FASB amended its standards regarding disclosure requirements for employers participating in multiemployer pension and other postretirement benefit plans (“multiemployer plans”) to improve transparency and increase awareness of the commitments and risks involved with participation in multiemployer plans. The amended disclosures require employers participating in multiemployer plans to provide additional quantitative and qualitative disclosures to provide users with more detailed information regarding an employer’s involvement in multiemployer plans. The new rules became effective for our fiscal year ended December 31, 2011 and resulted in enhanced disclosures as disclosed in Note 8, but otherwise had no impact on the Company’s consolidated financial statements.

5. ACQUISITIONS

In December 2009, we acquired substantially all of the assets related to 20 pharmacies from Aurora Pharmacy, Inc. that were located within certain of our existing supermarkets throughout Wisconsin. The purchase price was $16.6 million, including $4.8 million for the related pharmacy inventories. As a result of the acquisition, we recorded a customer list intangible asset of $11.0 million, which is being amortized over the estimated life of the customer list. The operating results of these pharmacies are included within the consolidated statements of income after the acquisition date.

6. PROPERTY AND EQUIPMENT AND OTHER ASSETS

Property and equipment, which are recorded at cost, consisted of the following (in thousands):

 

     January 1,
2011
     December 31,
2011
 

Land

   $ 7,375       $ 7,392   

Buildings

     23,738         23,920   

Equipment

     542,267         582,125   

Property under capital leases

     47,041         47,041   

Leasehold improvements

     159,343         165,896   
  

 

 

    

 

 

 
     779,764         826,374   

Less accumulated depreciation and amortization

     469,581         516,799   
  

 

 

    

 

 

 

Property and equipment, net

   $ 310,183       $ 309,575   
  

 

 

    

 

 

 

Depreciation expense for property and equipment, including amortization of property under capital leases, was $78.3 million, $69.6 million and $67.0 million, for Fiscal 2009, Fiscal 2010 and Fiscal 2011, respectively.

Other assets, which are recorded at cost, consisted of the following (in thousands):

 

     January 1, 2011      December 31, 2011  
     Gross      Accumulated
Amortization
    Net      Gross      Accumulated
Amortization
    Net  

Trademarks

   $ 23,400       $ —        $ 23,400       $ 23,400       $ —        $ 23,400   

Deferred financing costs

     17,319         (5,768     11,551         16,682         (8,601     8,081   

Customer lists

     12,070         (2,505     9,565         12,053         (4,497     7,556   

Favorable lease rights

     5,000         (2,749     2,251         5,000         (3,101     1,899   

Other assets

     4,485         (809     3,676         4,523         (689     3,834   

Assets held for sale

     548         —          548         468         —          468   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other assets

   $ 62,822       $ (11,831   $ 50,991       $ 62,126       $ (16,888   $ 45,238   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Amortization expense (including the amortization of deferred financing costs) was $2.8 million, $5.6 million, and $5.9 million for Fiscal 2009, Fiscal 2010 and Fiscal 2011, respectively.

Amortization of other assets (including the amortization of deferred financing costs), excluding trademarks which have indefinite lives, will be approximately $5.6 million in 2012, $4.9 million in 2013, $3.3 million in 2014, $3.1 million in 2015 and $0.7 million in 2016.

7. LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

 

     January 1,
2011
     December 31,
2011
 

First Lien Loan

   $ 694,841       $ 634,217   

Second Lien Loan

     150,000         150,000   

Capital lease obligations, 7.6% to 10.0%, due 2012 to 2021

     39,972         36,426   

Other long-term debt

     1,842         1,645   
  

 

 

    

 

 

 
     886,655         822,288   

Less: Unamortized discount on Second Lien Loan

     2,647         2,147   

Less: Current maturities

     64,367         10,789   
  

 

 

    

 

 

 

Total long-term debt, net of current maturities

   $ 819,641       $ 809,352   
  

 

 

    

 

 

 

As of each balance sheet date presented, we had a first lien senior credit facility comprised of a term loan (the “First Lien Loan”) and a $95 million revolving credit facility (together, the “First Lien Credit Agreement”). As of December 31, 2011, there were no outstanding borrowings under the revolving credit facility. Outstanding letters of credit, totaling $27.9 million at December 31, 2011, reduce availability under the revolving credit facility. As of December 31, 2011 we had $67.1 million available under the revolving credit facility.

On October 30, 2009 we amended our First Lien Credit Agreement (“October 2009 Amendment”). Under the terms of the October 2009 Amendment, the maturities of portions of the outstanding term loans and the revolving credit facility were extended from the previous maturity dates (the extended portions referred to as the “Extended Term Loan” and the “Extended Revolving Credit Facility,” respectively). The First Lien Loan was repayable (i) in quarterly installments of approximately $1.8 million through September 2011, (ii) with a one-time payment of $54 million in November 2011, (iii) in quarterly installments of approximately $1.7 million from December 2011 to September 2013, and (iv) with a one-time payment of the remaining balance in November 2013. The Extended Revolving Credit Facility was to have matured November 2012. Financing costs paid related to the October 2009 Amendment were approximately $9.7 million, of which we capitalized $6.2 million. In connection with the October 2009 Amendment, we recognized a loss on debt extinguishment of $5.9 million, which included $3.5 million of previously capitalized costs, as the Extended Term Loan was significantly modified.

The Extended Term Loan and the Extended Revolving Credit Facility bear interest based upon LIBOR or base rate options. Under the LIBOR option for the Extended Term Loan and Extended Revolving Credit Facility, the applicable rate was LIBOR plus 5.00%, subject to a minimum floor of 2.0% for purposes of determining LIBOR. Under the base rate option for the Extended Term Loan and Extended Revolving Credit Facility, the applicable rate of interest was the base rate plus 4.00%. The Non-Extended Term Loan bears interest based upon LIBOR or base rate options. Under the LIBOR option for the Non-Extended Term Loan, the applicable rate of interest was LIBOR plus 3.50%. Under the Base Rate option for the Non-Extended Term Loan, the applicable interest rate was the base rate plus 2.50%. Commitment fees of 0.6% accrued on the unutilized portion of the Extended Revolving Credit Facility.

To permit us to enter into a second lien credit facility (the “Second Lien Credit Agreement”), our First Lien Credit Agreement was amended on April 16, 2010 (the “April 2010 Amendment”), which included, among other

 

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things, an increase in interest rate margins of 0.75%, which is reflected in the interest rate margins in the previous paragraph. Financing costs related to the April 2010 Amendment were $2.0 million, which were capitalized and were being amortized over the remaining term of the debt, as the debt was not significantly modified.

On April 16, 2010, the Company borrowed $150 million under the Second Lien Credit Agreement for purposes of paying dividends to our preferred and common shareholders. This loan (the “Second Lien Loan”) was issued at a 2% discount, and was to have matured in April 2016. The Second Lien Loan bears interest based upon LIBOR or base rate options. Under the LIBOR option for the Second Lien Loan, the applicable rate was LIBOR plus 8.0%, subject to a minimum floor of 2% for purposes of determining LIBOR. Under the base rate option for the Second Lien Loan, the applicable rate was the base rate plus 7.0%. Financing costs related to the Second Lien Loan were approximately $5.8 million, which were capitalized and were being amortized over the remaining term of the debt using the effective interest method.

Optional prepayments of principal outstanding under the credit agreements were permitted at any time, upon proper notice as defined. Under certain circumstances prepayment fees were required. In addition, we were required to prepay amounts outstanding under the credit agreement in the event of certain issuances of equity, issuance of additional indebtedness, asset dispositions or in the event of excess levels of cash flow, all as defined in the credit agreements.

The credit agreements were secured by substantially all of our tangible and intangible assets as well as a pledge of our stock and that of all of our domestic subsidiaries.

The credit agreements contain various restrictive covenants which: (i) prohibited us from prepaying other indebtedness, (ii) required us to maintain specified financial ratios, such as (a) a minimum fixed charge coverage ratio, (b) a maximum ratio of senior debt to Adjusted EBITDA, and (c) a maximum ratio of total debt to Adjusted EBITDA; and (iii) limit our capital expenditures. In addition, the credit agreements limited our ability to declare or pay dividends. At December 31, 2011, we were in compliance with our financial covenants for all of our indebtedness.

On December 31, 2011, prior to our Refinancing discussed below, repayment of principal on long-term debt outstanding was as follows (in thousands):

 

2012

   $ 10,789   

2013

     632,110   

2014

     5,056   

2015

     5,496   

2016

     155,704   

Thereafter

     13,133   
  

 

 

 

Total debt

   $ 822,288   
  

 

 

 

In connection with our IPO on February 13, 2012, RSI entered into a new senior credit facility (the “Refinancing”), consisting of a $675 million term loan (the “Term Facility”) and a $125 million revolving credit facility (the “Revolving Facility” and together with the Term Facility, the “New Credit Facilities”) with the Term Facility maturing in February 2019 and the Revolving Facility maturing in February 2017. We used all of the net proceeds from the IPO, together with borrowings under the New Credit Facilities, to repay all of our outstanding borrowings under the First Lien Loan and Second Lien Loan, including all accrued interest thereon and any related prepayment premiums. Borrowings under the New Credit Facilities will bear interest, at our option, at (i) adjusted LIBOR (subject to a 1.25% floor) plus 4.5% or (ii) an alternate base rate plus 3.5%. In addition, there is a fee payable quarterly in an amount equal to 0.5% per annum of the undrawn portion of the Revolving Facility. The terms of the New Credit Facilities contain customary provisions regarding prepayments and restrictive covenants that are similar to our existing credit facilities, and are also secured by substantially all of our tangible and intangible assets.

 

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In connection with the Refinancing, we expect to recognize a loss on debt extinguishment of approximately $17.0 million, which consists primarily of $7.0 million of previously capitalized costs, the remaining unamortized discount on the Second Lien Loan of $2.1 million and prepayment premiums on the First Lien Loan and Second Lien Loan.

8. EMPLOYEE BENEFIT PLANS

Company-Sponsored Plans

Certain non-union employees are covered by defined benefit pension plans. Prior to January 1, 2005, benefits were based on either years of service and the employee’s highest compensation during five of the most recent ten years of employment or on stated amounts for each year of service. On May 31, 2006, we amended our primary pension plan. As a result of this amendment, no new participants will be added to the plan and current participants will no longer accrue benefits. Employees are still required to meet the vesting requirements of the plan in order to receive benefits.

On April 28, 2010, we amended our agreement with the Pension Benefit Guaranty Corporation (“PBGC”) dated November 3, 2005, whereby, among other things, we agreed to contribute $7.5 million in April 2010, $5 million in April 2011 and $2.5 million in April 2012 to our primary pension plan. In addition, we increased the amount of the letter of credit we have posted in favor of the PBGC to $12.5 million from $10 million, for the benefit of the pension plan, which will be in place until certain conditions are satisfied.

The benefit obligation and related assets under all plans have been measured as of the end of Fiscal 2010 and Fiscal 2011, the plans’ measurement dates. The following tables set forth pension obligations and plan assets information (in thousands):

 

     Year Ended  
     January 1, 2011     December 31, 2011  

Change in projected benefit obligations:

    

Projected benefit obligation-beginning of year

   $ 146,673      $ 157,808   

Service cost

     435        411   

Interest cost

     8,608        8,515   

Actuarial loss

     9,824        26,898   

Benefits paid

     (7,732     (8,027
  

 

 

   

 

 

 

Projected benefit obligation-end of year

   $ 157,808      $ 185,605   
  

 

 

   

 

 

 

Change in plan assets:

    

Fair value-beginning of year

   $ 122,820      $ 139,461   

Actual return on plan assets

     16,136        (911

Company contributions

     8,237        13,007   

Benefits paid

     (7,732     (8,027
  

 

 

   

 

 

 

Fair value-end of year

   $ 139,461      $ 143,530   
  

 

 

   

 

 

 

Funded status

   $ (18,347   $ (42,075
  

 

 

   

 

 

 

Components of net amount recognized in balance sheet:

    

Accrued pension costs (accrued expenses)

   $ (180   $ (185

Accrued pension costs (other liabilities)

     (18,167     (41,890
  

 

 

   

 

 

 

Net amount recognized in balance sheet

   $ (18,347   $ (42,075
  

 

 

   

 

 

 

 

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As of January 1, 2011 and December 31, 2011, all plans were underfunded. As of January 1, 2011, the accumulated benefit obligation and fair value of plan assets for all plans was $157.8 million and $139.5 million, respectively. As of December 31, 2011, the accumulated benefit obligation and fair value of plan assets for all plans was $185.6 million and $143.5 million, respectively.

Amounts recognized in accumulated other comprehensive loss consist of (in thousands):

 

     January 1, 2011     December 31, 2011  

Net actuarial loss

   $ (37,637   $ (75,785

Deferred taxes

     15,018        30,280   
  

 

 

   

 

 

 

Net amount recognized in accumulated other comprehensive loss

   $ (22,619   $ (45,505
  

 

 

   

 

 

 

We expect to amortize $4.5 million of the actuarial loss as a component of net pension cost in 2012.

Net pension expense (income) consists of (in thousands):

 

     Year Ended  
     January 2, 2010     January 1, 2011     December 31, 2011  

Service cost

   $ 420      $ 435      $ 411   

Interest cost on projected benefit obligation

     8,582        8,608        8,515   

Expected return on plan assets

     (8,090     (10,471     (12,092

Amortization of unrecognized net loss

     2,848        1,498        1,758   
  

 

 

   

 

 

   

 

 

 

Net pension expense (income)

   $ 3,760      $ 70      $ (1,408
  

 

 

   

 

 

   

 

 

 

The weighted-average assumptions to determine net periodic benefit costs were as follows:

 

     Year Ended  
     January 2, 2010     January 1, 2011     December 31, 2011  

Discount rate

     6.25     6.00     5.50

Rate of increase in compensation levels

     4.00     4.00     n/a   

Expected long-term rate of return on plan assets

     8.50     8.50     8.50

For future periods, the expected long-term rate of return on plan assets is 8.5%. The expected return on plan assets is based on the Company’s expectation of long-term average rate of return of capital markets in which the plans invest. The return on plan assets reflects the weighted-average of the expected long-term rates of return for the broad categories of investments held in the plans. The expected long-term rate of return is adjusted when there are fundamental changes in expected returns on the plans’ investments. In fiscal 2009 and 2010, one of our plans had several active participants whose benefits were dependent upon compensation levels. In fiscal 2010, the remaining participants in this plan retired, and as such, compensations levels do not impact participant benefits.

The weighted-average assumptions used to determine the benefit obligation at year-end were as follows:

 

     January 1, 2011     December 31, 2011  

Discount rate

     5.50     4.30

Rate of increase in compensation levels

     4.00     n/a   

We have an administrative committee that oversees the investment of the assets of the plans and has created a target allocation investment policy. The Company’s investment policies employ an approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent

 

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level of risk. The investment portfolio primarily contains a diversified blend of equity and fixed-income investments. The Company’s planned allocation range at December 31, 2011 as a percentage of total market value was approximately 65% equity and 35% fixed-income. Equity investments are diversified across domestic and non-domestic stocks, as well as growth, value, and small to large capitalizations. Fixed income investments include corporate and government securities with short-, mid- and long-term maturities with investment grade ratings at the time of purchase. Investment and market risks are measured and monitored on an ongoing basis through regular investment portfolio reviews, annual liability measurement and periodic asset/liability studies. Investment strategies for plan assets measured at fair value include:

 

   

Fixed Income—Invest primarily in fixed income securities of U.S. and foreign affiliates, including securities issued or guaranteed by the U.S. and non-U.S. governments.

 

   

Cash Equivalents—Invest primarily in high quality debt instruments, including commercial paper and corporate obligations, securities issued or guaranteed by the U.S. government or its agencies, certificates of deposit, and bankers’ acceptances.

 

   

Large/Mid/Small Cap Equity—Invest primarily in common stocks and other equity securities of U.S. companies.

 

   

International Equity—Invest primarily in foreign equity securities, located in Europe, Latin America, and Asia.

 

   

Real Estate—Invest primarily in common stocks and other equity securities of real estate companies, including real estate investment trusts, and real estate operating companies.

 

   

Emerging Markets Equity—Invest primarily in common stocks of issuers in emerging and developing markets throughout the world, and may include up to 100% of total assets in foreign securities, primarily of companies with high growth potential.

The plans’ assets are held in pooled separate accounts. The fair value of the plans’ assets is primarily based on quoted market prices for the underlying securities or investments. The method by which fair value is determined can impact the valuation of the plans’ assets and therefore our net pension expense (income). The fair values are classified as Level 2 in the fair value hierarchy since the net asset value per share of the pooled separate account itself is not publicly quoted and the values are not dependent on the input of significant judgment or assumptions by management.

 

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The fair value of the Company’s pension plan assets as of January 1, 2011 and December 31, 2011 are as follows (in thousands):

 

     Balance as of
January 1,
2011
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Fixed Income and Cash Equivalents

   $ 51,581       $ —         $ 51,581       $ —     

Large Cap Equity

     42,858         —           42,858         —     

International Equity

     16,923         —           16,923         —     

Mid Cap Equity

     9,076         —           9,076         —     

Small Cap Equity

     9,066         —           9,066         —     

Real Estate

     7,103         —           7,103         —     

Emerging markets Equity

     2,854         —           2,854         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 139,461       $ —         $ 139,461       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Balance as of
December 31,
2011
     Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Fixed Income and Cash Equivalents

   $ 54,292       $ —         $ 54,292       $ —     

Large Cap Equity

     43,470         —           43,470         —     

International Equity

     16,743         —           16,743         —     

Small Cap Equity

     9,150         —           9,150         —     

Mid Cap Equity

     9,053         —           9,053         —     

Real Estate

     8,056         —           8,056         —     

Emerging markets Equity

     2,766         —           2,766         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 143,530       $ —         $ 143,530       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following benefit payments, which reflect expected future costs, are expected to be paid by the plans during the following fiscal years (in thousands):

 

     Estimated future
benefit payments
 

2012

   $ 8,175   

2013

     8,430   

2014

     8,802   

2015

     9,057   

2016

     9,222   

2017-2021

     48,306   
  

 

 

 
   $ 91,992   
  

 

 

 

We estimate 2012 minimum required contributions to our defined benefit pension plans will be approximately $9.1 million, which includes the mandatory PBGC payment of $2.5 million previously discussed. Due to uncertainties regarding significant assumptions involved in estimating future required contributions to our defined benefit pension plans, such as interest rate levels, the amount and timing of asset returns and the impact of proposed legislation, we are not able to reasonably estimate our future required contributions beyond 2012.

 

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Multi-Employer Plans

The Company contributes to a number of multi-employer pension plans based on obligations arising from our collective bargaining agreements covering supply chain and certain store union employees. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed by employers and unions. The trustees are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plan.

The risks of participating in multi-employer pension plans are different from the risks of participating in single-employer pension plans in the following respects:

 

  a. Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.

 

  b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan allocable to such withdrawing employer may be borne by the remaining participating employers.

 

  c. If the company stops participating in some of its multi-employer pension plans, the Company may be required to pay those plans an amount based on its allocable share of the underfunded status of the plan, referred to as a withdrawal liability.

We contribute to the following multi-employer pension plans:

 

Plan Name

   EIN    Expiration Date of
Contracts with
Covered Employees

Central States, Southeast and Southwest Areas Pension Fund (a)

   36-6044243    March 2011 to
September 2013

United Food and Commercial Workers Unions and Employers Pension Plan (b)

   39-6069053/001    March 2011 to
February 2013

United Food and Commercial Workers International Union-Industry Pension Fund

   51-6055922/001    March 2011

Minneapolis Retail Meat Cutters and Food Handlers Pension Plan

   41-0905139/001    March 2013

 

(a) The Company is party to two collective bargaining agreements (“CBA”) requiring contributions to this fund, one of which expires in September 2013, and the other that had expired in March 2011. The contract that had expired in March 2011 was ratified after year-end and now expires in March 2016.
(b) The Company is party to two CBAs that require contributions to this fund, one of which expired in March 2011 and the other in February 2012.

The Central States, Southeast and Southwest Areas Pension Fund, United Food and Commercial Workers Unions and Employers Pension Plan and Minneapolis Retail Meat Cutters and Food Handlers Pension Plans are underfunded as of December 31, 2011.

 

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The following table represents the zone status (as currently defined by the Pension Protection Act of 2006) as of each plan’s most recent fiscal year-end nearest January 1, 2011 and December 31, 2011:

 

      As of January 1, 2011    As of December 31, 2011

Plan Name

   Plan
Year-End Date
   Zone
Status
   Plan
Year-End Date
   Zone
Status

Central States, Southeast & Southwest Areas Pension Fund

   December 31, 2009    Red    December 31, 2010    Red

United Food and Commercial Workers Unions and Employers Pension Plan

   November 1, 2010    Red    November 1, 2011 &n