10-K 1 d651884d10k.htm 10-K 10-K
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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 28, 2013

Commission File number 001-35422

 

 

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.    x  Yes    ¨  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).    x  Yes    ¨  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.  ¨

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   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

The aggregate market value of all common stock held by non-affiliates of the registrant as of June 29, 2013 was $235,608,952 based on the closing price of $8.33 for one share of common stock, as reported for the New York Stock Exchange on June 28, 2013.

As of February 21, 2014, 49,676,077 shares of the registrants common stock, par value $0.01 per share, were issued and outstanding.

 

 

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 15, 2014 (hereinafter referred to as the Proxy Statement) are incorporated by reference into Part III of this report.

 

 

 


Table of Contents

Roundy’s, Inc.

FORM 10-K

For the Fiscal Year Ended December 28, 2013

Table of Contents

 

Part I   
Item 1.  

Business

     3   
Item 1A.  

Risk Factors

     8   
Item 1B.  

Unresolved Staff Comments

     24   
Item 2.  

Properties

     25   
Item 3.  

Legal Proceedings

     25   
Item 4.  

Mine Safety Disclosures

     25   
Part II   
Item 5.  

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

     26   
Item 6.  

Selected Financial Data

     29   
Item 7.  

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

     31   
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

     50   
Item 8.  

Financial Statements and Supplementary Data

     52   
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     88   
Item 9A.  

Controls and Procedures

     88   
Item 9B.  

Other Information

     88   
Part III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     89   
Item 11.  

Executive Compensation

     89   
Item 12.  

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

     89   
Item 13.  

Certain Relationships and Related Transactions, Director Independence

     89   
Item 14.  

Principal Accounting Fees and Services

     89   
Part IV   
Item 15.  

Exhibits, Financial Statement Schedules

     90   
 

Signatures

     91   
 

Index to Exhibits

     92   


Table of Contents

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 maintain or increase our operating margins;

 

   

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

 

   

the impact of the Patient Protection and Affordable Care Act;

 

   

our ability to implement our expansion into the Chicago market;

 

   

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

 

   

our ability to successfully integrate the stores acquired in the Chicago Stores Acquisition (as defined herein);

 

   

increases in commodity prices;

 

   

failure to allocate our capital efficiently;

 

   

changes to financial accounting standards regarding store leases;

 

   

our ability to comply with Section 404 of the Sarbanes-Oxley Act;

 

   

costs incurred and time spent by management as a result of operating as a public company;

 

   

our lack of public company operating experience;

 

   

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

 

   

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

 

   

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

 

   

variability in self-insurance liability estimates;

 

   

claims made against us resulting in litigation;

 

   

changes in law;

 

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

 

   

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

 

   

further impairment of our goodwill;

 

   

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;

 

   

our ability to protect or maintain our intellectual property;

 

   

other factors discussed under Item 1A—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 filings with the United States Securities and Exchange Commission (“SEC”) 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 subsidiaries as a combined entity.

We are a leading Midwest supermarket 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 28, 2013, our retail operations consisted of 163 grocery stores, with 121 stores in Wisconsin operating under the Pick ’n Save, Copps and Metro Market banners, 29 stores in Minneapolis/St. Paul operating under the Rainbow banner and 13 stores in Illinois operating under the Mariano’s banner. In addition, during the fourth quarter of 2013 the Company completed a transaction with Safeway, Inc. (“Safeway”) to acquire 11 Dominick’s stores in the Chicago area (the “Chicago Stores Acquisition”). These stores will be converted to the Mariano’s banner and will be opened in 2014.

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 retail banners. The following table represents our store network as of the end of each of our last five fiscal years:

 

     1/2/2010      1/1/2011      12/31/2011      12/29/2012      12/28/2013  

Pick ’n Save

     95         94         93         93         93   

Rainbow

     32         32         32         32         29   

Copps

     26         26         26         25         25   

Metro Market

     1         2         3         3         3   

Mariano’s

             1         4         8         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Company-owned stores

     154         155         158         161         163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our stores, which average approximately 62,000 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 101 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 and Oshkosh. We believe the Rainbow banner maintains the number three market share position in the Minneapolis/St. Paul metropolitan area.

Our Mariano’s 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. We entered the Chicago market in July 2010 through the opening of our first Mariano’s store in Arlington Heights, Illinois. As of December 28, 2013, we had opened 13 stores in the Chicago market and secured 13 leases for future stores in attractive locations. In addition, during the fourth quarter of 2013 the Company completed a transaction with Safeway to acquire 11 Dominick’s stores throughout the Chicago area. These stores will be converted to the Mariano’s banner and will be opened in 2014. Mariano’s brings an innovative format to the Chicago market, with its expanded variety of produce and other perishables, 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 2009     Fiscal 2010     Fiscal 2011     Fiscal 2012     Fiscal 2013  

Non-perishable food

     53.0     51.7     50.9     49.6     48.0

Perishable

     32.0     32.3     33.0     33.7     35.3

Non-food

     15.0     16.0     16.1     16.7     16.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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; general merchandise; alcohol; 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 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 600 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 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 offerings consists primarily of fresh cut USDA Choice graded beef, and we also sell all-natural pork, lamb, veal, Italian sausage and bratwurst, and chicken. Our fresh seafood includes, for example, salmon, whitefish and locally harvested rainbow trout. In addition, we offer popular ready-to-bake selections in our seafood department.

 

   

Bakery. Our bakery department offers a wide selection of breads, rolls, pies, donuts, muffins, cookies, pastries 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 provide our customers with a “neighborhood deli” experience by offering fresh foods from high quality suppliers at competitive prices. Our deli selections include fresh salads, sandwiches, 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, and sharp cheddars. We also offer many varieties of fresh soups that are sold hot on our soup bars. Our prepared foods include entrees such as meat loaf, chicken Milanese, rotisserie chickens, baby back ribs, chicken pot pies, empanada’s, various varieties of quiche, and hand-breaded, fresh fried chicken.

 

   

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 that facilitate one-stop shopping, we offer a wide variety of candy and seasonal merchandise, as well as an

 

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assortment of household cleaning and cooking products. We also offer a wide selection of baby products for our customers from diapers to baby food and formula and other baby accessories.

 

   

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 are full service pharmacies offering both clinical services as well as the more traditional dispensing functions. We accept a majority of commercial and Medicare Part-D plans in addition to State Medicaid and Medicare Part-B. All of our pharmacists are licensed as immunizers. We continue to work strategically with local healthcare systems to expand our offering and take advantage of the coming shift in healthcare.

 

   

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 products from cosmetics to hair and skin care.

Own-Brand Strategy

We have been expanding the breadth of our own-brand offering over the last eight years. Our premium Roundy’s Select and Roundy’s Organics along with mid-tier Roundy’s and Roundy’s Fresh 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 6,600 as of December 28, 2013, with the percentage of sales from own-brand items representing 23.1% of our net sales for the year ended December 28, 2013.

Competitive Environment

For the disclosure related to the Company’s competitive environment, see Item 1A—Risk Factors under the heading “Risks Related to our Business.”

Marketing and Advertising

The support of our retail brands occurs through an integrated marketing approach in all markets. Printed circulars, distributed via local newspapers serve as a key medium for our value communication. These printed circulars are supplemented with bi-monthly coupon books. Weekly broad-based value messaging is supported through the use of local radio, television, web, digital and social media communication to varying degrees by market. We also distribute personalized offers to customers via email/ digital communication, in-store coupons and direct mail communications based on specific behaviors, measured through our loyalty card activity.

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 100 tractors and 381 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.

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

 

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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. Registered trademarks are generally renewable on a 10 year cycle. We also have several common law trademarks, including Copps and Mariano’s. 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 16 to our audited consolidated financial statements set forth in Item 8—Financial Statements and Supplementary Data below.

Employees

As of December 28, 2013, we had 21,160 employees, including 7,806 full-time employees and 13,354 part-time employees. Approximately 56% of our employees were subject to a collective bargaining agreement as of December 28, 2013. As of December 28, 2013, we had an aggregate of 44 collective bargaining agreements in effect, all of which are scheduled to expire between 2014 and 2016. As of December 28, 2013 there were no employees operating under an expired collective bargaining agreement and 282 employees that were previously non-union, but have recently elected to join a union and are currently operating without a collective bargaining agreement.

With respect to our unionized employees, as of February 21, 2014, there were no employees operating under an expired collective bargaining agreement and 342 employees that were previously non-union, but have recently elected to join a union and are currently operating without a collective bargaining agreement. As of February 21, 2014, 22% of our unionized employees were working under collective bargaining agreements that will expire prior to January 3, 2015.

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 our Proxy Statement under the caption “Directors and Executive Officers” 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.

 

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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, 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 retail food 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 New Albertson’s, Inc. (operating under the Jewel/Osco banner and SUPERVALU (operating under the Cub Foods banner); national supercenters such as Costco, Target and Wal-Mart; regional supercenters such as Woodman’s and Meijer’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, Wal-Mart, Trader Joe’s and Whole Foods 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: Jewel/Osco, Meijer’s, and Strack & Van Til.

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

 

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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. 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 28, 2013, we operated 121 stores in Wisconsin, making Wisconsin our largest market with 74% of our stores. Of our Wisconsin stores, 60, or approximately one-half, are located in the Milwaukee area. We also have 29 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.

 

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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.

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 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.

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 28, 2013, approximately 56% 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 28, 2013, we had an aggregate of 44 collective bargaining agreements in effect, all of which are scheduled to expire between 2014 and 2016. As of December 28, 2013 there were no employees operating under an expired collective bargaining agreement and 282 employees that were previously non-union, but have recently elected to join a union and are currently operating without a collective bargaining agreement.

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.

The Patient Protection and Affordable Care Act may materially increase our costs and/or make it harder for us to compete as an employer.

The Patient Protection and Affordable Care Act imposes new mandates on employers, including a requirement effective January 1, 2015 that employers with 50 or more full-time employees provide “credible” health insurance to employees or pay a financial penalty. Given our generally low-wage workforce and our current health plan design, and assuming the law is implemented without significant changes, these mandates could materially increase our costs. Moreover, if we choose to opt out of offering health insurance to our employees, we may become less attractive as an employer and it may be harder for us to compete for qualified employees.

 

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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 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 stores;

 

   

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

 

   

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

 

   

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

 

   

our ability to successfully integrate the stores acquired in the Chicago Stores Acquisition;

 

   

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

 

   

the negotiation of acceptable lease terms for store sites;

 

   

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

 

   

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 expansion 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.

We may not realize all of the expected benefits from the Chicago Stores Acquisition.

We believe that the Chicago Stores Acquisition will enable us to increase our market share in the Chicago area and continue to grow a unique brand in that market. We expect to spend approximately $45 million in capital expenditures over the next four years to fully remodel these stores to our specifications, with the typical total investment cost per store expected to be approximately $7 million (including the acquisition price but excluding inventory). We may choose to accelerate the time period in which we spend the allocated amount of capital expenditures. Actual capital expenditures may exceed our expected amounts due to unanticipated cost overruns, delays or changes in specifications. Any increase in spending could result in the Chicago Stores Acquisition negatively impacting EBITDA and net income during 2014 due to the timing and costs of their conversion to the Mariano’s format during that time. We do not expect the acquired stores to generate meaningful four-wall EBITDA during 2014 due to the timing and costs of their conversion to the Mariano’s format during that time. Once the total remodel is completed, we would anticipate that the new stores will have economics consistent with our other Mariano’s stores, but actual results may fail to meet our expectations. The Chicago Stores Acquisition will be the first expansion of Mariano’s through the purchase of existing store locations, and will also represent the largest simultaneous expansion of Mariano’s store locations to date. Our ability to realize the anticipated

 

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benefits of the Chicago Stores Acquisition will depend, to a large extent, on our ability to implement the Mariano’s store concept, support a larger number of stores with our existing supply chain operations and continue to provide a unique shopper experience. Our management will be required to devote significant attention and resources to these efforts, which may disrupt the operations at our existing stores and, if executed ineffectively, could preclude realization of the full benefits we expect. Failure to realize the anticipated benefits of this investment could cause an interruption of, or a loss of momentum in our operations. In addition, the efforts required to realize the benefits of this Chicago Stores Acquisition may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer relationships, and the diversion of management’s attention, and may have a material adverse effect on our operating results.

Increased commodity prices and availability of commodities 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 generally 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 or plan for 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 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 28, 2013, we had approximately $742.5 million in total debt and capital lease obligations. In addition, we had future minimum lease payment commitments of approximately $2.4 billion at December 28, 2013.

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 2012 and 2013, we had debt service repayments, of $56.2 million and $207.2 million, respectively. Fiscal 2012 debt service obligations included scheduled repayments of our senior credit facility, as discussed below. Fiscal 2013 debt service obligations included scheduled repayments on our senior credit facility, as well an optional prepayment on our senior credit facility of $148.0 million.

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;

 

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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 retail food industry or in the general economy and limit our flexibility in planning for, or reacting to, changes in our business and the retail food 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.

While our existing debt instruments (including the Credit Agreement) and the indenture governing the senior secured second lien notes due 2020 (the “2020 Notes”), restrict us, and our subsidiaries from incurring additional debt, these restrictions include exceptions that will allow us and our subsidiaries to incur additional debt. If additional debt is issued, the risks described above could intensify.

The terms of our new credit facilities agreement and indenture governing the notes may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations.

The 2014 Credit Agreements and the indenture governing the 2020 Notes include a number of customary restrictive covenants. These covenants could impair our financing and operational flexibility and make it difficult for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. Specifically, such covenants may restrict our ability and, if applicable, the ability of our subsidiaries to, among other things:

 

   

incur additional debt;

 

   

make certain investments;

 

   

enter into certain types of transactions with affiliates;

 

   

limit dividends or other payments by our restricted subsidiaries to us;

 

   

use assets as security in other transactions;

 

   

pay dividends on our common stock or repurchase our equity interests;

 

   

sell certain assets or merge with or into other companies;

 

   

guarantee the debts of others;

 

   

enter into new lines of business;

 

   

make capital expenditures;

 

   

prepay, redeem or exchange or debt; and

 

   

form any joint ventures or subsidiary investments.

 

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Our failure to comply with the restrictive covenants described above as well as the terms of any future indebtedness we may incur from time to time could result in an event of default, which, if not cured or waived by lenders, could result in our being required to repay those borrowings before their due date. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected.

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 28, 2013, we had undiscounted operating lease commitments of approximately $2.4 billion, scheduled through 2035, 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—Financial Statements and Supplementary Data below, but are not reflected as liabilities on our consolidated balance sheets. As of December 28, 2013, substantially all our stores were subject to leases, which have terms generally up to 20 years, and during Fiscal 2013 our operating lease expense was approximately $123.0 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 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. All entities would need to classify leases to determine how to recognize lease-related revenue and expense. Classification would be based on the portion of the economic benefits of the underlying asset expected to be consumed by the lessee over the lease term, for which classification would be based on the nature of the asset being leased. 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 effective date has not been determined, 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 will likely impact our income statement in an amount which cannot be determined at this time.

Compliance with Section 404 of the Sarbanes-Oxley Act may negatively impact our results of operations and failure to comply may subject us to regulatory scrutiny and a loss of investors’ confidence in our internal control over financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires us and our independent registered accounting firm to perform an evaluation of our internal control over financial reporting and file management’s attestation with our Annual Report on Form 10-K each year. We have evaluated, tested and implemented internal controls over financial reporting to enable management to report on such internal controls under Section 404. However, we cannot assure you that the conclusions we reached as of December 28, 2013 will represent conclusions we or our independent

 

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registered public accounting firm reach in future periods. Failure on our part to comply with Section 404 may subject us to regulatory scrutiny and a loss of public confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control over financial reporting and hiring additional personnel. Any such actions could negatively affect our results of operations.

We will continue to 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.

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 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 the Sarbanes-Oxley Act (“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.

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.

Until February 2012, we were a privately-held company. Our 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.

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 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.

 

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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 life insurance on any employee.

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

We sponsor defined benefit pension plans, which are frozen with respect to benefit accruals and closed to new participants. Even though our employees are not accruing additional pension benefits under these plans, some of 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 28, 2013, the accumulated benefit obligation and fair value of plan assets for our Company-sponsored defined benefit plans were $179.0 million and $177.0 million, respectively. As of December 29, 2012, the accumulated benefit obligation and fair value of plan assets for these plans were $199.7 million and $163.7 million, respectively.

In addition, we participate in three underfunded multi-employer 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 multi-employer 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. Two of the multi-employer plans in which we participate were deemed by their plan actuaries to be in “critical status,” prompting federally mandated increases in our contributions to them. Going forward, our required contributions to these multi-employer 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. For example, in recent years our share of 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. During the fourth quarter of 2012, The Company recognized a charge of $1.0 million related to an expected liability for the withdrawal of approximately 3% of its employees who participate in the United Food and Commercial Workers Unions and Employers Pension Fund (“UFCW Fund”). These employees have resumed participation in the UFCW Fund and the Company therefore recognized a $1.0 million benefit during the third quarter of 2013 related to the reversal of the liability that was established in the fourth quarter of 2012.

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 one of our Company-sponsored defined benefit pension plans, one of which we were required to make no later than

 

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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 completed these steps in accordance with our agreement with the PBGC, and in December 2012 the PBGC agreed that we could reduce the amount of our letter of credit to the previous level. 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 reduce the revenue and profitability of our stores and could otherwise materially adversely affect our business,

 

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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.

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

 

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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 further impaired, we may be required to record significant charges to earnings in the future.

We have a significant amount of goodwill. As of December 28, 2013, we had goodwill of approximately $610.2 million, which represented approximately 41.8% 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. An impairment charge is recorded for any excess of the carrying value of goodwill over the implied fair value of the assets and liabilities.

Fair value is determined by using the income approach and market approach. Determining fair value using an income approach requires that we make significant estimates and assumptions, including management’s long-term projections of cash flows, market conditions and appropriate discount 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. The rates used to discount projected future cash flows reflect a weighted average cost of capital based on the Company’s industry, capital structure and risk premiums including those reflected in the current market capitalization. The market approach is based upon applying a multiple of earnings based upon publicly traded companies in our industry.

Based on our annual impairment testing completed at the beginning of the third quarter of Fiscal 2011, 2012 and 2013, no impairment of goodwill was indicated.

During the fourth quarter of Fiscal 2012, our market capitalization experienced a significant decline. As a result, management believed that there were circumstances evident which indicated that the fair value of our reporting unit could be below its carrying amount. Management therefore updated its annual review of goodwill for impairment that had been completed in the third quarter of 2012 and concluded that the carrying amount of goodwill exceeded its estimated fair value, resulting in a pre-tax, non-cash impairment charge of $120.8 million ($106.4 million, after taxes) during the fourth quarter of Fiscal 2012.

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 further impairment charges. Factors that could cause us to change our estimates of future cash flows include, among other things, a deterioration in general economic conditions, successful efforts by our competitors to gain market share in our core markets, an increased competitive environment, 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

 

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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.

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.

 

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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 trademarks of Roundy’s, Pick ’n Save and Rainbow, and our common law trademarks of Copps and Mariano’s, are valuable assets that reinforce our customers’ favorable perception of our stores. From time to 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

Conflicts of interest may arise because some of our directors are representatives of Willis Stein.

Messrs. Larson, Stein and Willis, who are representatives of Willis Stein, serve on our board of directors. 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. 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.

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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future changes in our dividend policy;

 

   

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 do not expect to pay any cash dividends for the foreseeable future.

The continued expansion of the Mariano’s banner will require substantial funding. Accordingly, we do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. On December 2, 2013, we announced that our Board of Directors suspended the quarterly dividend in order to reallocate capital to execute our Mariano’s growth plan. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant. Because we are a holding company, our ability to pay cash dividends on our common stock is largely dependent upon the receipt of dividends or other distributions from our subsidiaries. In addition, we are currently limited in our ability to declare dividends or make distributions on account of our common stock (other than in the form of common stock) under the terms of the 2020 Notes and the Term Loan.

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 February 21, 2014, there were 49,676,077 shares of our common stock outstanding. 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 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.

An aggregate of 5,656,563 shares of our common stock has been registered and reserved for future issuance under the 2012 Incentive Compensation Plan. As of February 21, 2014 there were 3,752,312 remaining shares available for issuance. These shares can be freely sold in the public market upon issuance, subject to satisfaction of applicable vesting provisions. 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 financial results or our predictions of future financial results fail to meet the expectations of securities analysts

 

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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

 

   

further 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 28, 2013:

 

     Wisconsin      Minnesota      Illinois  

Retail Stores:

        

Pick ‘n Save

     93                   

Metro Market

     3                   

Copps

     25                   

Rainbow

             29           

Mariano’s

                     13   

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 2019 with two ten year renewal options. 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, 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 February 21, 2014, there were 74 holders of record of our common stock, and the closing price of our common stock was $6.81 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.

Common Stock Price

The following table shows the high and low sale prices per share of our common stock as reported on The New York Stock Exchange for each quarter during the fiscal year ended December 28, 2013.

 

     Common Stock Price Range  
     2012  

Fiscal

           High                      Low          

First Quarter

   $ 11.38       $ 8.25   

Second Quarter

   $ 12.50       $ 9.55   

Third Quarter

   $ 10.78       $ 6.00   

Fourth Quarter

   $ 6.60       $ 3.69   

Year

   $ 12.50       $ 3.69   

 

     2013  

Fiscal

           High                      Low          

First Quarter

   $ 6.99       $ 4.14   

Second Quarter

   $ 8.73       $ 6.32   

Third Quarter

   $ 9.87       $ 7.94   

Fourth Quarter

   $ 10.96       $ 8.05   

Year

   $ 10.96       $ 4.14   

 

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Stock Performance Graph

The following graph compares the cumulative total stockholder return on Roundy’s common stock between February 8, 2012 and December 28, 2013, based on the market price of the common shares and assumes reinvestment of dividends, with the cumulative total return of companies in the Russell 2000 Stock Index and a peer group composed of comparable companies in the grocery retail sector.

 

LOGO

 

      Base
Period
2/8/12
     INDEXED RETURNS  
         Quarter Ending  

Company / Index

      3/31/12      6/30/12      9/29/12      12/29/12      3/30/13      6/29/13      9/28/13      12/28/13  

Roundy’s Inc.

     100         118.89         115.86         70.76         53.36         80.41         103.62         114.51         127.07   

Russell 2000

     100         100.48         96.99         102.09         103.98         116.87         120.47         132.82         144.02   

Peer Group

     100         97.86         90.29         88.79         95.78         120.25         124.72         147.12         146.62   

 

  (1) Assumes $100 invested on February 8, 2012 in Roundy’s, Inc., Russell 2000 and the Peer Group, with reinvestment of dividends.
  (2) Peer Group consists of The Kroger Co., Safeway, Inc., Spartan Stores, Inc., SUPERVALU Inc., Weis Markets, Inc., Harris Teeter Supermarkets, Inc., Ingles Markets, Inc., Delhaize Group SA (ADR), Koninklijke Ahold NV (ADR).

Issuer Purchases of Equity Securities

During the year ended December 28, 2013 there were no issuer purchases of equity securities.

 

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Dividend Policy

We historically declared quarterly dividends of approximately $0.12 per share on all outstanding shares of common stock. Because the Company 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. Distributions from the Company’s subsidiaries are subject to applicable law and any restrictions contained in its subsidiaries’ current or future debt agreements.

In addition, we are currently limited in our ability to declare dividends or make distributions on account of our common stock (other than in the form of common stock) under the terms of the 2020 Notes, the 2014 Term Facility and 2014 Revolving Facility. In particular, the indenture governing the 2020 Notes generally provides that Roundy’s Supermarkets can pay dividends and make other distributions to its parent companies in an amount not to exceed (1) 50% of Roundy’s Supermarket’s consolidated net income for the period beginning September 29, 2013 and ending as of the end of the last fiscal quarter before the proposed payment for which financial statements are available, plus (2) 100% of the aggregate amount of cash and the fair market value of any assets or property received by Roundy’s Supermarkets after December 20, 2013 from the issuance and sale of equity interests of Roundy’s Supermarkets (subject to certain exceptions), plus (3) 100% of the aggregate amount of cash and the fair market value of any assets or property contributed to the capital of Roundy’s Supermarkets after December 20, 2013, plus (4) 100% of the aggregate amount received in cash and the fair market value of assets or property received after December 20, 2013 from the sale of certain investments or the sale of certain subsidiaries, provided that certain conditions are satisfied, including that Roundy’s Supermarkets has a consolidated interest coverage ratio for the most recent four fiscal quarters for which financial statements are available of at least 2.0 to 1.0. The restrictions on dividends and other distributions contained in the indenture are subject to certain exceptions, including (1) dividends and other distributions in an aggregate amount not to exceed $10.0 million in any calendar year, with unused amounts being carried forward to future periods and (2) other dividends and distributions in an aggregate amount not to exceed $20.0 million in the aggregate. Under our 2014 Term Facility, Roundy’s Supermarkets is only permitted to declare cash dividends on account of its capital stock for the purpose of funding the issuer’s expected dividend payments in an amount that does not exceed the sum of $30.0 million plus the available amount, which is calculated based on 50% of consolidated net income plus other amounts in a manner similar to the amount available for payment of dividends under the 2020 Notes, provided (a) no payment or insolvency event of default is continuing or would result therefrom and (b) the consolidated senior secured leverage ratio (on a pro forma basis) does not exceed 3.75 to 1.00. Under the 2014 Revolving Facility, Roundy’s Supermarket’s is permitted to make restricted payments, which would include the payment of dividends, provided (a) no default or event of default is continuing under the 2014 Revolving Facility and (b) either (i) the fixed charge coverage ratio is greater than 1.00 to 1.00 and excess availability plus cash and cash equivalents exceeds certain specified amounts (averaged over past 30 days and immediately after giving effect to the transaction); or (ii) excess availability plus cash and cash exceeds certain greater specified amounts (averaged over past 30 days and immediately after giving effect to the transaction).

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. We paid dividends of $26.0 million and $21.7 million on account of our common stock during Fiscal 2012 and 2013, respectively.

On December 2, 2013, we announced that our Board of Directors had suspended the quarterly dividend to reallocate capital to execute our Mariano’s growth plan. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant.

 

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ITEM 6—SELECTED FINANCIAL DATA

The following table presents selected historical consolidated statement of income, balance sheet, cash flow and operating 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 (in thousands, except for per share data and amounts relating to square feet).

 

     Fiscal Year  
      2009     2010     2011     2012     2013  
Statement of Income Data:           

Net Sales

   $ 3,745,774      $ 3,766,988      $ 3,841,984      $ 3,890,537      $ 3,949,906   

Costs and Expenses:

          

Cost of sales

     2,726,672        2,748,919        2,804,709        2,855,385        2,898,785   

Operating and administrative

     876,510        868,972        886,862        908,300        947,651   

Goodwill impairment charge

                          120,800          

Interest expense, current and long-term debt, net

     32,281        64,037        68,855        48,825        47,875   

Interest expense, dividends on preferred stock

     14,799        2,716                        

Amortization of deferred financing costs

     1,816        2,906        3,469        2,413        4,354   

Loss on debt extinguishment (1) (2)

     5,879                      13,304          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     3,657,957        3,687,550        3,763,895        3,949,027        3,898,665   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     87,817        79,438        78,089        (58,490     51,241   

Provision for income taxes

     40,638        33,244        30,041        10,759        16,703   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 47,179      $ 46,194      $ 48,048      $ (69,249   $ 34,538   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) per common share (3):

          

Basic

   $      $ 1.01      $ 1.58      $ (1.61   $ 0.77   

Diluted

   $      $ 1.01      $ 1.58      $ (1.61   $ 0.76   

Weighted average number of common shares outstanding:

          

Basic

     27,587        27,384        27,324        43,047        44,949   

Diluted

     30,648        30,434        30,374        43,047        45,299   

Dividends declared per common share

   $      $ 2.90      $      $ 0.58      $ 0.48   

Cash Flow Financial Data:

          

Cash provided by (used in):

          

Operating activities

   $ 175,362      $ 40,633      $ 182,017      $ 105,734      $ 104,039   

Investing activities

     (93,689     (57,754     (65,868     (61,554     (102,578

Financing activities

     (99,200     (21,365     (65,516     (58,359     7,828   

Depreciation and amortization

     81,091        75,237        72,949        68,549        69,337   

Capital expenditures

     76,436        62,932        66,497        62,004        67,109   

Balance Sheet Data (at end of period):

          

Working capital

   $ 30,030      $ 28,215      $ 79,755      $ 79,909      $ 106,121   

Total assets

     1,481,877        1,446,931        1,512,682        1,380,085        1,460,938   

Total debt and capital lease obligations (4)

     747,286        884,008        820,141        696,562        742,463   

Preferred stock subject to mandatory redemption

     69,156                               

Shareholders’ equity

     186,165        152,564        177,175        193,266        226,427   

Operating Data:

          

Number of stores at end of fiscal year

     154        155        158        161        163   

Average weekly net sales per store (5)

   $ 468      $ 469      $ 471      $ 467      $ 470   

Net sales per average selling square foot per period

   $ 596      $ 592      $ 588      $ 578      $ 575   

Average store size:

          

Average total square feet

     60,363        60,792        61,109        61,422        61,923   

Average selling square feet

     40,852        41,201        41,784        42,086        42,521   

Change in same-store sales (6)

     (1.2 %)      (0.8 %)      (0.2 %)      (2.8 %)      (2.7 %) 

 

(1) On October 30, 2009, Roundy’s Supermarkets Inc. amended its 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.

 

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(2) In connection with the completion of our initial public offering on February 13, 2012, Roundy’s Supermarkets, Inc. entered into a new senior credit facility. As a result of this refinancing, we recognized a loss on debt extinguishment of $13.3 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, $2,147, $8,806 and $11,769 at January 1, 2011, December 31, 2011, December 29, 2012 and December 28, 2013, 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) 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 included in Item 6—Selected Financial Data and our consolidated financial statements and the notes to those statements included in Item 8—Financial Statements and Supplementary Data 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 Item 1A—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 founded in 1872. 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 2012, based on comparative data that we obtained from Metro Market Studies, Grocery Distribution Analysis and Guide, 2012. As of December 28, 2013, we operated 163 grocery stores in Wisconsin, Minnesota and Illinois under the Pick ’n Save, Rainbow, Copps, Metro Market and Mariano’s retail banners, which are served by our three strategically located distribution centers and our food processing and preparation commissary.

Our net sales have remained relatively stable over our last three completed fiscal years, despite 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 2012. As of December 28, 2013, we continue to serve as the primary wholesaler for one independent Pick ’n Save retail store. In recent periods, our net sales have increased as compared to prior comparable periods due primarily to sales generated from stores opened or replaced during Fiscal 2012 and 2013.

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 continue our expansion into the Chicago market with plans to open four to five new stores per year in the Chicago market over the next five years. In addition, we plan to accelerate our presence in Chicago and, as such, on December 20, 2013, we acquired 11 Dominick’s stores. We intend to convert these stores to the Mariano’s format, all of which will be opened in 2014.

As of December 28, 2013, we had thirteen stores open in the Chicago market. 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.

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 if we are able to successfully pass those higher prices on to our customers. 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 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. In Fiscal 2012, we again experienced deflationary trends, some of which were related to pricing and promotional activity, in several key product categories that negatively affected our same-store sales and margins. In 2013, we experienced low to moderate inflation which we do not believe materially affected our same-store sales.

Targeted Investments in Everyday Low Prices

In order to support our goal of offering a superior assortment of center store, fresh and organics, supported by everyday fair pricing and a great customer experience, we adjust our pricing in certain markets for select key product categories to better compete against supercenter pricing. In those markets and categories, we are going to market with a lower everyday price and fewer deep promotional offers. This is more efficient and we believe ultimately helps our overall price image.

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

 

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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  
     12/31/2011     12/29/2012     12/28/2013  

Stores at beginning of period

     155        158        161   

New stores opened

     3        4        5   

Relocated stores opened

     4        2        0   

Stores closed but relocated

     (4     (3     0   

Stores closed

     0        0        (3
  

 

 

   

 

 

   

 

 

 

Stores at end of period

     158        161        163   
  

 

 

   

 

 

   

 

 

 

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 retail food 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 6,600 as of December 28, 2013, with the percentage of sales from own-brand items increasing from 8.4% for Fiscal 2005 to 23.1% for Fiscal 2013. 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 Wal-Mart throughout our Wisconsin markets and SuperTarget in the

 

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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. In some cases, 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. In February 2012, we used all of the net proceeds that we received from our initial public offering (“IPO”), together with our indebtedness from our new senior credit facility, to repay all of our outstanding borrowings and other amounts owed under our old credit facilities. In connection with such repayment, we recorded a charge of approximately $8.0 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. In 2013, we issued $200 million of Senior Secured Second Lien Notes (the “2020 Notes”) and used the proceeds to prepay approximately $148.0 million of our Term Loan and to fund the Chicago Stores Acquisition. In connection with the prepayment on our Term Loan, we recorded charge of approximately $2.1 million, net of tax, to write off a portion of our unamortized deferred financing costs and a portion of the unamortized original issue discount on the Term Loan. Going forward, our interest expense will include the amortization of the original issue discounts associated with our debt financing arrangements, including our senior credit facility and the 2020 Notes.

Stock Compensation

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. During Fiscal 2012, we cancelled 62,348 shares of restricted stock that were granted to executives that are no longer with the Company, and granted an additional 73,110 shares to new directors and executive officers. The 2012 restricted stock grants for executive officers and non-executive officers associated with these grants will vest over five years and the restricted stock for our directors will vest over one year. In 2013, we granted 770,366 shares of restricted stock that will vest upon certain market performance metrics (the “Market Awards”) and 460,717 shares of time-based restricted stock (the “Time-Based Awards”) to certain employees under the Plan. The Time-Based restricted stock vests over three years for employees and one year for non-employee directors. The Market Awards will vest after three years if certain specified market conditions are met. The market-based condition is a comparison of the total shareholder return (“TSR”) of the Company’s stock with the TSR of its peer group over the corresponding three year period as determined by the Compensation Committee of the Company’s Board of Directors. These Market Awards also include a modifier based on the performance of the Company’s operating income as compared to its peer group. The number of shares ultimately vested will be determined based on the TSR metric and operating income results at the conclusion of the third year. We recorded total stock-based compensation expense of $0.8 million and $1.7 million, both net of tax, in Fiscal 2012 and Fiscal 2013 respectively. We estimate that we will record compensation expense associated with the 2012 and 2013 grants of approximately $1.8 million for Fiscal 2014, $1.6 million for Fiscal 2015, $1.0 million for Fiscal 2016, and approximately $0.1 million for Fiscal 2017, in each case net of tax, and based upon the fair market value of each grant on the day of the grant.

 

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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;

 

   

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;

 

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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. Our operating and administrative expenses have increased due to additional legal, accounting, insurance and other expenses incurred 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 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, provision for income taxes, depreciation and amortization, LIFO charges, amortization of deferred financing costs, non-cash compensation expenses arising from the issuance of stock, costs incurred in connection with our IPO (or subsequent offerings of Roundy’s common stock), loss on debt extinguishment, certain non-recurring or unusual employee and pension related costs, costs related to acquisitions, costs related to debt financing activities and goodwill impairment charges. 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 believe 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 December 31, 2011, December 29, 2012 and December 28,

 

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2013. 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 2013” refers to our fiscal year ended December 28, 2013. 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  
     12/31/2011      12/29/2012      12/28/2013  

Pick ’n Save

     93         93         93   

Rainbow

     32         32         29   

Copps

     26         25         25   

Metro Market

     3         3         3   

Mariano’s

     4         8         13   
  

 

 

    

 

 

    

 

 

 

Total Company-owned stores

     158         161         163   
  

 

 

    

 

 

    

 

 

 

Number of same-stores

     155         156         158   

The following table sets forth various components of our consolidated statements of income for Fiscal 2011, 2012 and 2013 from the audited consolidated financial statements included in Item 8—Financial Statements and Supplementary Data in this Annual Report on Form 10-K, expressed both in dollars and as a percentage of net sales for the period indicated.

 

    Fiscal Year  
    2011     2012     2013  

Net Sales

  $ 3,841,984        100.0   $ 3,890,537        100.0   $ 3,949,906        100.0

Costs and Expenses:

           

Cost of sales

    2,804,709        73.0        2,855,385        73.4        2,898,785        73.4   

Operating and administrative

    886,862        23.1        908,300        23.3        947,651        24.0   

Goodwill impairment charge

                  120,800        3.1                 

Interest expense, current and long-term debt, net

    68,855        1.8        48,825        1.3        47,875        1.2   

Amortization of deferred financing costs

    3,469        0.1        2,413        0.1        4,354        0.1   

Loss on debt extinguishment

                  13,304        0.3                 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,763,895        98.0     3,949,027        101.5     3,898,665        98.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before Income Taxes

    78,089        2.0        (58,490     (1.5     51,241        1.3   

Provision for Income Taxes

    30,041        0.8        10,759        0.3        16,703        0.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

  $ 48,048        1.3   $ (69,249     (1.8 %)    $ 34,538        0.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal 2013 Compared With Fiscal 2012

Net Sales. Net sales were $3.95 billion for 2013, an increase of $59.4 million, or 1.5% from $3.89 billion for 2012. The increase primarily reflects the impact of new stores, partially offset by a 2.7% decrease in same-store sales and the effect of three store closures during 2013. The decline in same-store sales was due to a 4.7% decrease in the number of customer transactions, partially offset by a 2.2% increase in the average transaction size. The Company’s same-store sales were negatively impacted by the effect of competitive store openings, the mix shift to greater generic pharmacy sales and the weak economic environment in the Company’s core markets.

 

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As of December 28, 2013, we operated 163 retail grocery stores including 93 Pick ’n Save stores, 29 Rainbow stores, 25 Copps stores, 13 Mariano’s stores and 3 Metro Market stores.

Gross Profit. Gross profit was $1.05 billion for 2013 and $1.04 billion for 2012. Gross profit, as a percentage of net sales, was 26.6% for 2013 and 2012, respectively.

Operating and Administrative Expenses. Operating and administrative expenses were $947.7 million for 2013, an increase of $39.4 million, or 4.3%, from $908.3 million for 2012. Operating and administrative expenses, as a percentage of net sales, was 24.0% and 23.3% for 2013 and 2012, respectively. The increase was primarily due to increased occupancy and labor costs related to new stores as well as reduced fixed cost leverage in the Company’s core business resulting from lower sales.

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 $52.2 million for 2013, an increase of $1.0 million, from $51.2 million for 2012. The increase was primarily due to $3.5 million of unamortized loan costs, including $2.0 million of previously capitalized deferred financing costs and $1.5 million of the unamortized original issue discount on the Term Loan, both of which related to the prepayment on the Company’s Term Loan that occurred during the fourth quarter of 2013, offset by reduced interest rates on the Company’s Term Loan and decreased levels of indebtedness from the Company’s debt refinancing in the first quarter of 2012.

Income Taxes. Provision for income taxes was $16.7 million for 2013, an increase of $5.9 million, from $10.8 million for 2012. The effective income tax rates for 2013 and 2012 were 32.6% and (18.4%), respectively. The effective tax rate for 2013 reflects the settlement of certain state income tax matters. The provision for income taxes and effective tax rate for 2012 reflects the impact of the goodwill impairment charge recorded during the fourth quarter of 2012, the majority of which is non-deductible for tax purposes.

Fiscal 2012 Compared With Fiscal 2011

Net Sales. Net sales were $3.89 billion for 2012, an increase of $48.6 million, or 1.3% from $3.84 billion for 2011. The increase primarily reflects the impact of new stores, partially offset by a 2.8% decrease in same-store sales. The decline in same-store sales was due to a 2.6% decrease in the number of customer transactions and 0.1% decrease in the average transaction size. The Company’s same-store sales were negatively impacted by the effect of competitive store openings during the last twelve months, as well as the continued challenging economic and promotional environment. Same-store sales were also affected by the calendar shift of both the 2011 New Year’s holiday, which is traditionally a slow sales day and fell in the first quarter of 2012 and the 2012 New Year’s Eve holiday as more of these holiday related sales were shifted into the first quarter of 2013. Adjusted for the effect of both New Year’s holiday calendar shifts, same-store sales declined 2.5%.

As of December 29, 2012, we operated 161 retail grocery stores including 93 Pick ’n Save stores, 32 Rainbow stores, 25 Copps stores, 8 Mariano’s stores and 3 Metro Market stores.

Gross Profit. Gross profit was $1.04 billion for Fiscal 2012 and Fiscal 2011. Gross profit, as a percentage of net sales, was 26.6% and 27.0% for Fiscal 2012 and Fiscal 2011, respectively. The decrease in gross profit as a percentage of net sales primarily reflects price and promotional investments in certain of our markets and increased shrink, offset somewhat by lower costs in our supply chain operations.

Operating and Administrative Expenses. Operating and administrative expenses were $908.3 million for 2012, an increase of $21.4 million, or 2.4%, from $886.9 million for Fiscal 2011. Operating and administrative expenses, as a percentage of net sales, was 23.3% and 23.1% for 2012 and 2011, respectively. The increase was primarily due to increased occupancy costs related to new and replacement stores, incremental costs related to being a public company and reduced fixed cost leverage in our core business resulting from lower same-store sales.

 

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Goodwill Impairment Charge. During the fourth quarter of Fiscal 2012, the Company’s market capitalization experienced a significant decline. As a result, management believed that there were circumstances evident which indicated that the fair value of our reporting unit could be below its carrying amount. Management therefore updated its annual review of goodwill for impairment that had been completed in the third quarter, and concluded that the carrying amount of goodwill exceeded its estimated fair value, resulting in a pre-tax, non-cash goodwill impairment charge of $120.8 million ($106.4 million after-tax) during the fourth quarter 2012.

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 $51.2 million for 2012, a decrease of $21.1 million, from $72.3 million for 2011. The decrease was primarily due to decreased levels of indebtedness and reduced interest rates resulting from our debt refinancing in the first quarter 2012.

Loss on Debt Extinguishment. In connection with our debt refinancing in February 2012, we recognized a loss on debt extinguishment of $13.3 million.

Income Taxes. Provision for income taxes was $10.8 million for 2012, a decrease of $19.2 million, from $30.0 million for 2011. The effective income tax rates for 2012 and 2011 were (18.4%) and 38.5%, respectively. The provision for income taxes and effective tax rate for 2012 reflects the impact of the goodwill impairment charge recorded during the fourth quarter of 2012, the majority of which is non-deductible for tax purposes.

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 $106.1 million at December 28, 2013, compared to $79.9 million at December 29, 2012. The increase in working capital was due to increased inventories and deferred income tax assets, as well as decreased current maturities of long term debt due to the prepayment of $148 million on our Term Loan.

At December 28, 2013, we had $82.2 million of cash and cash equivalents and $95.4 million of availability under our revolving credit facility. We also had an aggregate of $518.1 million of outstanding indebtedness under our Term Loan (excluding unamortized discount of $5.8 million) and other long-term debt, notes payable of $200.0 million (excluding unamortized discount of $6.0 million), $36.1 million of capital lease obligations, no outstanding borrowings under our revolving credit facility and outstanding letters of credit of $29.6 million.

We historically declared quarterly dividends of approximately $0.12 per share on all outstanding shares of common stock. Because the Company 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. Distributions from the Company’s subsidiaries are subject to applicable law and any restrictions contained in its subsidiaries’ current or future debt agreements.

On December 2, 2013, we announced that our Board of Directors had suspended the quarterly dividend to reallocate capital to execute our Mariano’s growth plan. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant. In addition, we are currently limited in our ability to declare dividends or make distributions on account of our common stock (other than in the form of common stock) under the terms of the 2020 Notes and the Term Loan.

 

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Initial Public Offering

On February 7, 2012, we priced the initial public offering of our common stock which began trading on the New York Stock Exchange on February 8, 2012. 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 shares sold by Roundy’s and 7,353,208 shares sold by existing shareholders. Roundy’s received approximately $125.0 million in gross proceeds from the IPO, or approximately $111.8 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 RSI’s existing debt.

Subsequent to year end, the Company completed a public offering of 10,170,989 shares of its common stock at a price of $7.00 per share, which included 2,948,113 shares sold by Roundy’s and 7,222,876 shares sold by existing shareholders. The Company received approximately $20.6 million in gross proceeds from the offering, or approximately $19.1million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds will be used for general corporate purposes, which the Company expects to include funding working capital and operating expenses as well as capital expenditures to build out the Chicago stores acquired from Safeway.

Senior Credit Facility

In connection with the completion of our IPO, our principal operating subsidiary Roundy’s Supermarkets, Inc. (“RSI”) entered into a new senior credit facility (the “2012 Refinancing”), consisting of a $675 million term loan (the “Term Loan”) and a $125 million revolving credit facility (the “Revolving Facility” and together with the Term Loan, the “Credit Facilities”) with the Term Loan maturing in February 2019 and the Revolving Facility maturing in February 2017. We used the net proceeds from the IPO, together with borrowings under the Credit Facilities, to refinance our existing indebtedness and to pay accrued interest and related prepayment premiums.

Borrowings under the Term Loan and 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.

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

Additionally, the 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.

On December 9, 2013, RSI amended its credit agreement governing the Credit Facilities (“as amended, the “Credit Agreement”) to, among other things, permit the issuance of the 2020 Notes and related obligations and to revise certain financial maintenance and other covenants.

The Credit Facilities contain a number of customary affirmative covenants. The Credit Facilities also contain customary negative covenants, including restrictions on (i) dividends on, and redemptions of, equity interest and other restricted payments (with a permitted basket for cash dividends on common stock in the sum of $25,000,000, plus a builder basket based on the Company’s retained portion of adjusted excess cash flow measured cumulatively, in each case, subject to pro forma compliance with financial covenants and no default or event of default being continuing; (ii) liens and sale-leaseback transactions; (iii) loans and investments;

 

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(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.

At December 28, 2013, we were in compliance with our financial covenants for all of our indebtedness.

Subsequent to year-end, the Company announced that RSI had refinanced its Credit Facilities with a $460 million new term loan (“2014 Term Facility”) and an asset-based revolving credit facility (“2014 Revolving Facility”) of $220 million (the “2014 Refinancing”). In connection with the 2014 Refinancing, the Company expects to recognize a loss on debt extinguishment, which will include the write-off of deferred financing costs and the original issue discount on the Term Loan. The amount of the transaction expenses that will be expensed rather than capitalized, as well as the portion of the deferred financing costs and original issue discount that will be written off, cannot be determined at this time.

Notes

On December 20, 2013, RSI completed the private sale of $200 million notes that mature on December 15, 2020. The Company will pay interest at a rate of 10.25% on the 2020 Notes semiannually, commencing on June 15, 2014. The 2020 Notes were issued with a 3.01% discount, which will be amortized over the seven year term of the 2020 Notes. The Company capitalized $4.6 million of financing costs related to the issuance of the 2020 Notes which will be also amortized over the seven year term of the 2020 Notes.

The Company used the net proceeds from the issuance of the 2020 Notes to prepay approximately $148 million in principal amount of the Company’s outstanding term loan and to fund the Chicago Stores Acquisition. The Company capitalized $0.6 million related to an amendment fee paid to lenders of the Credit Facilities. In addition, the Company expensed $3.5 of unamortized loan costs, including $2.0 million of previously capitalized financing costs and $1.5 million of the unamortized discount on the Term Loan.

The 2020 Notes are unconditionally guaranteed, jointly and severally, on a senior basis, by (i) RSI’s indirect parent company Roundy’s, Inc., (ii) RSI’s direct parent company Roundy’s Acquisition Corp. and (iii) each of RSI’s domestic restricted subsidiaries owned on the date of original issuance of the notes, and will be secured by a second priority security interest in substantially all of our and the Guarantors’ assets, which security interests will rank junior to the security interests in such assets that secure our existing credit facility. The 2020 Notes and the guarantees thereof are secured by a second priority lien on substantially all the assets owned by RSI and the guarantors on the issue date of the 2020 Notes or thereafter acquired, subject to permitted liens and certain exceptions. These liens are junior in priority to the first-priority liens on the same collateral securing our existing Credit Facility (as well as certain hedging and cash management obligations owed to lenders thereunder or their affiliates) and to certain other permitted liens under the indenture.

The indenture governing the 2020 Notes generally provides that RSI can pay dividends and make other distributions to its parent companies in an amount not to exceed (i) 50% of RSI’s consolidated net income for the period beginning September 29, 2013 and ending as of the end of the last fiscal quarter before the proposed payment for which financial statements are available, plus (ii) 100% of the aggregate amount of cash and the fair market value of any assets or property received by RSI after December 20, 2013 from the issuance and sale of equity interests of RSI (subject to certain exceptions), plus (iii) 100% of the aggregate amount of cash and the fair market value of any assets or property contributed to the capital of RSI after December 20, 2013, plus (iv) 100% of the aggregate amount received in cash and the fair market value of assets or property received after December 20, 2013 from the sale of certain investments or the sale of certain subsidiaries, provided that certain conditions are satisfied, including that RSI has a consolidated interest coverage ratio of greater than 2.0 to 1.0.

 

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The restrictions on dividends and other distributions contained in the indenture are subject to certain exceptions, including (i) the payment of dividends to permit any of its parent companies to pay taxes, general corporate and operating expenses, customary compensation of officers and employees of such parent companies and costs related to an offering of such parent company’s equity and (ii) dividends and other distributions in an aggregate amount not to exceed $10.0 million in any calendar year, with unused amounts being carried forward to future periods.

2014 Term Facility and 2014 Revolving Facility

On March 3, 2014, RSI entered into two new senior credit facilities: (i) a $460 million term loan and (ii) a $220 million asset-based revolving credit facility and together with the Term Facility, the “2014 Facilities”). The Company used the proceeds to repay the outstanding borrowings under the Borrower’s existing Credit Facilities, including all accrued interest thereon and related costs, fees and expenses. Borrowings under the 2014 Term Facility bear interest, at our option, at (i) adjusted LIBOR (subject to a 1.00% floor) plus 4.75% or (ii) an alternate base rate plus 3.75%. The 2014 Term Facility will mature on March 3, 2021; provided however, the maturity date will spring forward to September 15, 2020 if the Company’s 2020 Notes are not refinanced in full prior to such date. The 2014 Term Facility contains customary affirmative and negative covenants including restrictions on (i) dividends on, and redemptions of, equity interest and other restricted payment; (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) negative pledges and restrictions on subsidiary distributions and (viii) optional payments and modifications of certain debt instruments.

Borrowings under the 2014 Revolving Facility bear interest, at our option, at (x) adjusted LIBOR plus a margin of 1.50% - 2.00% per annum determined based on the Borrower’s excess availability or (y) alternate base rate plus a margin of 0.50% - 1.00% per annum determined based on the Borrower’s excess availability. In addition, there is a fee payable quarterly in an amount equal to either 0.375% or 0.25% per annum (determined based on the Borrower’s utilization of the Revolving Facility) of the undrawn portion of the 2014 Revolving Facility. The 2014 Revolving Facility will mature on March 3, 2019. The 2014 Revolving Facility contains customary affirmative and negative covenants including restrictions on (i) dividends on, and redemptions of, equity interest and other restricted payment; (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) negative pledges and restrictions on subsidiary distributions; and (viii) optional payments and modifications of certain debt instruments.

Cash Flows

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

 

     2011     2012     2013  

Net cash provided by operating activities

   $ 182,017      $ 105,734      $ 104,039   

Net cash used in investing activities

     (65,868     (61,554     (102,578

Net cash (used in) provided by financing activities

     (65,516     (58,359     7,828   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 50,633      $ (14,179   $ 9,289   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 87,068      $ 72,889      $ 82,178   
  

 

 

   

 

 

   

 

 

 

Net Cash Provided by Operating Activities. Net cash provided by operating activities in Fiscal 2012 was $105.7 million, compared to $182.0 million in Fiscal 2011. The decrease in cash provided by operating activities was due primarily to the higher use of cash for working capital in 2012, which was primarily related to the timing of vendor payments that were made in late 2010, rather than early 2011, together with lower operating income and higher income tax payments made during 2012.

 

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Net cash provided by operating activities in Fiscal 2013 was $104.0 million, compared to $105.7 million in Fiscal 2012. The decrease in cash provided by operating activities was due primarily to reduced operating income and timing of payments for payroll and employee benefits and income taxes, partially offset by reduced pension contributions and 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, as well as business acquisitions.

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 investing activities was $61.6 million during Fiscal 2012. Net cash used during the period related primarily to capital expenditures of $62.0 million, partially offset by $0.5 million of proceeds from asset sales.

Net cash used in investing activities was $102.6 million during Fiscal 2013. Net cash used during the period related primarily to capital expenditures of $67.1 million and cash used for the Chicago Stores Acquisition of $36.0 million, partially offset by $0.5 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 $65.5 million during Fiscal 2011. Net cash used during the period 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.

Net cash used in financing activities was $58.4 million during Fiscal 2012. Net cash used during the period consisted of payments of debt and capital lease obligations of $791.6 million, primarily to refinance our existing indebtedness and related financing costs of $18.2 million, offset somewhat by the net proceeds from our Term Loan of $664.9 million and net proceeds from our initial public offering of $111.8 million. In addition, during 2012, we paid dividends to shareholders in the amount of $26.0 million.

Net cash provided by financing activities was $7.8 million during Fiscal 2013. Net cash provided during the period consisted of the net proceeds of the 2020 Notes offering of $194.0 million, partially offset by payments of debt and capital lease obligations of $158.9 million, including the prepayment on our Term Loan of $148.0 million, as well as costs related to the 2020 Notes issuance and credit agreement amendment of $4.6 million and $0.6 million, respectively. In addition, during 2013, we paid dividends to shareholders in the amount of $21.7 million.

Capital Expenditures

Total capital expenditures for Fiscal 2014, excluding any acquisitions, are estimated to be approximately $90-$95 million.

Non-GAAP Measures

We present Adjusted EBITDA, a non-GAAP measure, to provide investors with a supplemental measure of our operating performance. We define Adjusted EBITDA as earnings before interest expense, provision for income taxes, depreciation and amortization, LIFO charges, amortization of deferred financing costs, non-cash compensation expenses arising from the issuance of stock, costs incurred in connection with our IPO (or subsequent offerings of our Roundy’s common stock), loss on debt extinguishment, certain non-recurring or

 

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unusual employee and pension related costs, costs related to acquisitions, costs related to debt financing activities and goodwill impairment charges. Omitting interest, taxes and the other items provides a financial 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 2011, 2012 and 2013 (in thousands):

 

     2011      2012     2013  

Net income (loss)

   $ 48,048       $ (69,249   $ 34,538   

Interest expense, current and long-term debt, net

     68,855         48,825        47,875   

Provision for income taxes

     30,041         10,759        16,703   

Depreciation and amortization expense

     69,480         66,136        64,983   

LIFO (credit) charge

     4,262         1,343        976   

Amortization of deferred financing costs

     3,469         2,413        4,354   

Non-cash stock compensation expense

             1,431        2,765   

Loss on debt extinguishment

             13,304          

Goodwill impairment charge

             120,800          

Executive recruiting fees and relocation expenses

             484          

Severance to former executives

             904          

Acquisition costs

                    375   

Term loan amendment fees

                    604   

One-time pension withdrawal expense/(benefit)

             1,006        (1,006

One-time IPO expenses

             519          
  

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $ 224,155       $ 198,675      $ 172,167   
  

 

 

    

 

 

   

 

 

 

 

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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.

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 28, 2013 (See Notes 6 and 10 to the consolidated financial statements included within Item 8—Financial Statements and Supplementary Data) 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):

 

    2014     2015     2016     2017     2018     Thereafter     Total  

Principal on long-term debt

  $ 214      $ 220      $ 227      $ 234      $ 241      $ 716,994      $ 718,130   

Interest on long-term debt (1)

    51,713        50,192        50,186        50,179        50,171        43,997        296,438   

Principal on capital leases

    4,524        4,964        5,139        4,659        3,005        13,811        36,102   

Interest on capital leases

    2,811        2,520        2,083        1,655        1,315        6,975        17,359   

Operating leases

    143,312        151,672        159,434        155,643        149,917        1,643,641        2,403,619   

Sublease income

    (5,663     (3,587     (2,910     (1,966     (1,351     (4,428     (19,905
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commitments

  $ 196,911      $ 205,981      $ 214,159      $ 210,404      $ 203,298      $ 2,420,990      $ 3,451,743   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Interest payments on long-term debt have been estimated based on the coupon rate for fixed rate obligations or the rate in effect at December 28, 2013 for variable rate obligations. Interest obligations exclude amounts which have been accrued through December 28, 2013.

The following table represents our material debt and lease commitments as of March 4, 2014, after giving effect for the 2014 Refinancing that occurred subsequent to year-end (in thousands):

 

    2014     2015     2016     2017     2018     Thereafter     Total  

Principal on long-term debt (1)

  $ 3,664      $ 4,820      $ 4,827      $ 4,834      $ 4,841      $ 638,268      $ 661,254   

Interest on long-term debt (2)

    48,153        46,553        46,283        46,012        45,740        83,167        315,908   

Principal on capital leases

    4,524        4,964        5,139        4,659        3,005        13,811        36,102   

Interest on capital leases

    2,811        2,520        2,083        1,655        1,315        6,975        17,359   

Operating leases

    143,312        151,672        159,434        155,643        149,917        1,643,641        2,403,619   

Sublease income

    (5,663     (3,587     (2,910     (1,966     (1,351     (4,428     (19,905
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commitments

  $ 196,801      $ 206,942      $ 214,856      $ 210,837      $ 203,467      $ 2,381,434      $ 3,414,337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes principal payments on our new 2014 Term Facility (as defined herein) and other long-term debt.

 

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(2) Includes interest payments on our existing Term Loan (through the date of the 2014 Refinancing) and on the new 2014 Term Facility. Interest payments have been estimated based on the coupon rate for fixed obligations or the rate in effect at December 28, 2013 for variable rate obligations related to the existing Term Loan, and the rate in effect for the new 2014 Term Facility on the date of the 2014 Refinancing. Interest payments do not include interest payments on the new 2014 Revolving Facility (as defined herein). While the Company expects there will be borrowings and interest payments on the new 2014 Revolving Facility, those borrowings and related interest payments cannot be estimated. Interest obligations exclude amounts which have been accrued through December 28, 2013.

As of December 28, 2013, we have $9.8 million of unrecognized tax benefits. The Company believes it is reasonably possible that tax audit resolutions could reduce its unrecognized tax benefits by $8.9 million in the next twelve 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 $29.6 million at December 28, 2013.

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 2014 minimum required contributions to our defined benefit plans are approximately $0.9 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 2014.

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 multi-employer 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 multi-employer 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.

During the fourth quarter of 2012, The Company recognized a charge of $1.0 million related to an expected liability for the withdrawal of approximately 3% of its employees who participate in the United Food and

 

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Commercial Workers Unions and Employers Pension Fund (“UFCW Fund”). These employees have resumed participation in the UFCW Fund and the Company therefore recognized a $1.0 million benefit during the third quarter of 2013 related to the reversal of the liability that was established in the fourth quarter of 2012.

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.

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 in Item 8—Financial Statements and Supplementary Data.

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 64% and 36%, and 66% and 34%, of our inventories at December 29, 2012 and December 28, 2013, 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 $23.5 million and $24.4 million as of December 29, 2012 and December 28, 2013, 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.

 

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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.

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 prior to Fiscal 2013 and beginning in Fiscal 2014, 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 plans which are underfunded or unfunded, or an asset for plans which are overfunded. U.S. GAAP also requires that we measure the benefit obligations and fair value of plan assets that determine our plans’ funded status as of our fiscal year end date. We historically have used a December 31 measurement date. For the fiscal year ended 2013, we used a measurement date of December 28 as it more closely approximated our fiscal year. 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

 

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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 December 28, 2013 was to match the plans’ 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 “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 4.64% weighted average discount rate as of December 28, 2013 represents the equivalent rate constructed under a broad-market yield curve. We utilized a weighted average discount rate of 3.77% as of December 29, 2012. A 100 basis point increase in the discount rate would decrease the projected pension benefit obligation as of December 28, 2013, by approximately $22 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 2012 and 2013, we assumed a pension plan investment return rate of 8.5% and 8.25%, respectively. For our fiscal year ending January 3, 2015, we have assumed a pension plan investment return rate of 8.25%.

Goodwill

We have a significant amount of goodwill. As of December 28, 2013, we had goodwill of approximately $610.2 million, which represented approximately 41.8% 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 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 of goodwill over the implied fair value.

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.

Fair value is determined by using the income approach and market approach. Determining fair value using an income approach requires that we make significant estimates and assumptions, including management’s long-term projections of cash flows, market conditions and appropriate discount 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. 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 deterioration in general economic conditions, successful efforts by our competitors to gain market share in our core markets, an increased competitive environment, our inability to compete effectively with other retailers or our inability to maintain price competitiveness. The rates used to discount projected future cash flows reflect a weighted average cost of capital based on the Company’s

 

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industry, capital structure and risk premiums including those reflected in the current market capitalization. The market approach is based upon applying a multiple of earnings based upon publicly traded companies in our industry.

Based on our annual impairment testing completed at the beginning of the third quarter of Fiscal 2011, 2012 and 2013, no impairment of goodwill was indicated. During the fourth quarter of Fiscal 2012, our market capitalization experienced a significant decline. As a result, management believed that there were circumstances evident which indicated that the fair value of our reporting unit could be below its carrying amount and management therefore updated its annual review of goodwill for impairment that had been completed in the third quarter. With the assistance of a third party valuation firm, we completed the first step of the impairment evaluation process in comparing the fair value of our reporting unit to its carrying value. At that time the carrying value exceeded the fair value of our reporting unit and therefore, the Company completed the second step of the impairment evaluation. The second step calculates the implied fair value of the goodwill, which is compared to the carrying value of goodwill. The implied fair value of goodwill is calculated by valuing all of the tangible and intangible assets of the reporting unit at the hypothetical fair value, assuming the reporting unit had been acquired in a business combination. The excess fair value of the entire reporting unit over the fair value of its identifiable assets and liabilities is the implied fair value of the goodwill. Based upon the calculation of the implied fair value of goodwill, it was determined that the carrying value of the goodwill exceeded the implied fair value of goodwill, which resulted in a non-cash, pre-tax impairment charge of $120.8 million ($106.4 million, net of taxes) during the fourth quarter of Fiscal 2012.

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.

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 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 Facilities. Should the LIBOR rate exceed the floor provided in the Credit Facilities agreement, we would be required to make higher interest payments than we are currently making. We historically have not engaged in interest rate hedging activities related to our interest rate risk, however on August 27, 2013, we entered into a one-year forward starting interest rate swap (the “Swap”), which will mature on August 27, 2016, to hedge cash flows related to interest payments on a $75 million notional amount related to the Term Loan. The Swap effectively fixes the interest rate for $75 million of the term loan. The Swap involves the receipt of floating interest rate amounts in exchange for fixed rate interest payments over the duration of the Swap without an exchange of the underlying principal amount. In accordance with ASC 815, we designated the Swap as a cash flow hedge. Even after giving effect to the Swap, we are exposed to risks due to fluctuations in the market value of the Swap and changes in interest rates with respect to the portion of our Term Loan that is not covered by the Swap. A one percentage point increase in LIBOR above the 1.25% minimum floor would cause an increase to

 

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the interest expense on our borrowings under the Term Loan of approximately $4.4 million, after giving effect to the Swap. We may engage in additional hedging activities related to our interest rate risk from time to time in the future.

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

  

Reports of Independent Registered Public Accounting Firm

     53-54   

Consolidated Statements of Operations for the fiscal years ended December 31, 2011,  December 29, 2012 and December 28, 2013

     55   

Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2011,  December 29, 2012 and December 28, 2013

     56   

Consolidated Balance Sheets as of December 29, 2012 and December 28, 2013

     57   

Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2011,  December 29, 2012 and December 28, 2013

     58   

Consolidated Statements of Shareholders’ Equity for the fiscal years ended December  31, 2011 December 29, 2012, and December 28, 2013

     59   

Notes to Consolidated Financial Statements

     60   

 

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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 December 28, 2013 and December 29, 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 28, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15 (a)(2). 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as 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 December 28, 2013 and December 29, 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 28, 2013, 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 taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Roundy’s, Inc.’s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2014 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Milwaukee, Wisconsin

March 7, 2014

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited Roundy’s, Inc. internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Roundy’s, Inc. management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Roundy’s, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 28, 2013 based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), consolidated balance sheets of Roundy’s, Inc. as of December 28, 2013 and December 29, 2012, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 28, 2013 and our report dated March 7, 2014 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Milwaukee, Wisconsin

March 7, 2014

 

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CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

     Year Ended  
     December 31,
2011
     December 29,
2012
    December 28,
2013
 

Net Sales

   $ 3,841,984       $ 3,890,537      $ 3,949,906   

Costs and Expenses:

       

Cost of sales

     2,804,709         2,855,385        2,898,785   

Operating and administrative

     886,862         908,300        947,651   

Goodwill impairment charge

             120,800          

Interest:

       

Interest expense, current and long-term debt, net

     68,855         48,825        47,875   

Amortization of deferred financing costs

     3,469         2,413        4,354   

Loss on debt extinguishment

             13,304          
  

 

 

    

 

 

   

 

 

 
     3,763,895         3,949,027        3,898,665   
  

 

 

    

 

 

   

 

 

 

Income (Loss) before Income Taxes

     78,089         (58,490     51,241   

Provision for Income Taxes

     30,041         10,759        16,703   
  

 

 

    

 

 

   

 

 

 

Net Income (Loss)

   $ 48,048       $ (69,249   $ 34,538   
  

 

 

    

 

 

   

 

 

 

Net earnings (loss) per common share:

       

Basic

   $ 1.58       $ (1.61   $ 0.77   

Diluted

   $ 1.58       $ (1.61   $ 0.76   

Weighted average number of common shares oustanding:

       

Basic

     27,324         43,047        44,949   

Diluted

     30,374         43,047        45,299   

Dividends declared per share

   $       $ 0.58      $ 0.48   

See notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     Year Ended  
     December 31, 2011     December 29, 2012     December 28, 2013  

Net Income (Loss)

   $ 48,048      $ (69,249   $ 34,538   

Other Comprehensive Income (Loss):

      

Employee benefit plans funded status

   $ (22,886   $ (1,455   $ 18,764   

Interest rate swap fair value adjustment

         (264
  

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

     (22,886     (1,455     18,500   
  

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss)

   $ 25,162      $ (70,704   $ 53,038   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     December 29, 2012     December 28, 2013  
Assets     

Current Assets:

    

Cash and cash equivalents

   $ 72,889      $ 82,178   

Notes and accounts receivable, less allowance for losses of $792 and $557, respectively

     33,118        38,838   

Merchandise inventories

     292,673        302,122   

Prepaid expenses

     9,706        9,867   

Income taxes receivable

            1,704   

Deferred income taxes

     5,259        13,838   
  

 

 

   

 

 

 

Total current assets

     413,645        448,547   
  

 

 

   

 

 

 

Property and Equipment, net

     314,044        342,974   

Other Assets:

    

Other assets—net

     46,410        59,846   

Goodwill

     605,986        610,186   
  

 

 

   

 

 

 

Total other assets

     652,396        670,032   
  

 

 

   

 

 

 

Total assets

   $ 1,380,085      $ 1,461,553   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current Liabilities:

    

Accounts payable

   $ 240,392      $ 251,586   

Accrued wages and benefits

     39,540        38,652   

Other accrued expenses

     40,594        46,834   

Current maturities of long-term debt and capital lease obligations

     10,918        4,739   

Income taxes payable

     2,292        615   
  

 

 

   

 

 

 

Total current liabilities

     333,736        342,426   
  

 

 

   

 

 

 

Long-term Debt and Capital Lease Obligations

     685,644        737,724   

Deferred Income Taxes

     59,112        76,285   

Other Liabilities

     108,327        78,691   
  

 

 

   

 

 

 

Total liabilities

     1,186,819        1,235,126   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Shareholders’ Equity:

    

Preferred stock (5,000 shares authorized at 12/29/12 and 12/28/13, respectively, $0.01 par value, 0 shares at 12/29/12 and 12/28/13, respectively, issued and outstanding)

              

Common stock (150,000 shares authorized, $0.01 par value, 45,654 shares and 46,777 shares at 12/29/12 and 12/28/13, respectively, issued and outstanding)

     457        468   

Additional paid-in capital

     114,120        116,874   

Retained earnings

     125,649        137,545   

Accumulated other comprehensive loss

     (46,960     (28,460
  

 

 

   

 

 

 

Total shareholders’ equity

     193,266        226,427   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,380,085      $ 1,461,553   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year Ended  
     December 31,
2011
    December 29,
2012
    December 28,
2013
 

Cash Flows From Operating Activities:

      

Net income (loss)

   $ 48,048      $ (69,249   $ 34,538   

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

      

Goodwill impairment charge

            120,800          

Depreciation of property and equipment and amortization of intangible assets

     69,480        66,136        64,983   

Amortization of deferred financing costs

     3,469        2,413        4,354   

(Gain) loss on sale of property and equipment and other assets

     (542     (438     125   

LIFO charges

     4,262        1,343        976   

Deferred income taxes

     18,030        (5,659     3,894   

Interest earned on shareholder notes receivable

     (187              

Loss on debt extinguishment

            13,304          

Amortization of debt discount

     500        1,381        3,040   

Stock-based compensation expense

            1,431        2,765   

Forgiveness of shareholder notes receivable

     75                 

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

      

Notes and accounts receivable

     4,609        (651     (5,720

Merchandise inventories

     (32,565     (7,479     (10,425

Prepaid expenses

     (2,061     9,174        (161

Other assets

     532        329        360   

Accounts payable

     79,744        (4,824     11,194   

Accrued expenses and other liabilities

     (19,725     (21,458     2,312   

Income taxes

     8,348        (819     (8,196
  

 

 

   

 

 

   

 

 

 

Net cash flows provided by operating activities

     182,017        105,734        104,039   
  

 

 

   

 

 

   

 

 

 

Cash Flows From Investing Activities:

      

Capital expenditures

     (66,497     (62,004     (67,109

Proceeds from sale of property and equipment and other assets

     629        450        531   

Payment for business acquisitions

                   (36,000
  

 

 

   

 

 

   

 

 

 

Net cash flows used in investing activities

     (65,868     (61,554     (102,578
  

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities:

      

Dividends paid to common shareholders

            (25,998     (21,676

Payments of withholding taxes for vesting of restricted stock shares

                   (390

Borrowings on revolving credit facility

            117,500        54,750   

Payments made on revolving credit facility

            (117,500     (54,750

Proceeds from long-term borrowings

            664,875          

Issuance of notes

                   193,998   

Payments of debt and capital lease obligations

     (64,367     (791,610     (158,902

Purchase of common stock

     (439              

Issuance of common stock, net of issuance costs

            112,540          

Payment of equity issuance costs in advance of stock issuance

     (710              

Debt issuance and refinancing fees and related expenses

            (18,166     (4,566

Credit agreement amendment fees and expenses

                   (636
  

 

 

   

 

 

   

 

 

 

Net cash flows (used in) provided by financing activities

     (65,516     (58,359     7,828   
  

 

 

   

 

 

   

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

     50,633        (14,179     9,289   

Cash and Cash Equivalents, Beginning of Year

     36,435        87,068        72,889   
  

 

 

   

 

 

   

 

 

 

Cash and Cash Equivalents, End of Year

   $ 87,068      $ 72,889      $ 82,178   
  

 

 

   

 

 

   

 

 

 

Supplemental Cash Flow Information:

      

Cash paid for interest

   $ 71,122      $ 53,484      $ 44,195   

Cash paid for income taxes

     3,663        17,237        21,005   

Shareholder notes cancelled in exchange for common stock

     4,203                 

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
    Total
Shareholders’
Equity
 
    Shares     Amount     Shares     Amount            

Balance, January 1, 2011

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

Net income

                                       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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

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

Net loss

                                       (69,249                   (69,249

Conversion of preferred stock to common stock

    (10     (1,044     3,050        31        1,013                               

Issuance of common stock, net of issuance costs

                  14,706        147        111,684                             111,831   

Restricted stock grants, net of forfeitures

                  830        8        1,423                             1,431   

Rounding of partial shares held prior to stock split

                  (4                                          

Common stock dividends

                                       (26,467                   (26,467

Employee benefit plans, net of ($971) tax

                                                     (1,455     (1,455
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 29, 2012

         $        45,654      $ 457      $ 114,120      $ 125,649      $      $ (46,960   $ 193,266   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

                                       34,538                      34,538   

Restricted stock grants, net of forfeitures

                  1,181        12        2,753                             2,765   

Withholding tax on restricted stock grant vesting

                  (58                   (357                   (357

Common stock dividends

                                       (22,285                   (22,285

Employee benefit plans, net of $12,665 tax

                                                     18,764        18,764   

Interest rate swap fair value, net of ($176) tax

                                                     (264     (264
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 28, 2013

         $        46,777      $ 469      $ 116,873      $ 137,545      $      $ (28,460   $ 226,427   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ROUNDY’S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2011, DECEMBER 29, 2012 AND DECEMBER 28, 2013

1. ORGANIZATION

Roundy’s, Inc. (“Roundy’s” or the “Company”) 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 28, 2013, Roundy’s owned and operated 163 retail grocery stores, of which 121 are located in Wisconsin, 29 are located in Minnesota and 13 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 grocery store in Wisconsin.

Initial Public Offering—On February 7, 2012, Roundy’s priced the initial public offering (the “IPO”) of its common stock which began trading on the New York Stock Exchange on February 8, 2012. On February 13, 2012, Roundy’s completed the offering of 22,059,091 shares of its common stock at a price of $8.50 per share, which included 14,705,883 shares sold by Roundy’s and 7,353,208 shares sold by existing shareholders. Roundy’s received approximately $125.0 million in gross proceeds from the IPO, or approximately $111.8 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds of the IPO were used to pay down RSI’s existing debt (see the Long-Term Debt footnote below).

A summary of Roundy’s 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

     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 at IPO, February 7, 2012

     44,824   
  

 

 

 

On January 24, 2012, the Board of Directors approved an amendment to the articles of incorporation to increase the number of shares Roundy’s is authorized to issue to 150,000,000 shares of common stock and 5,000,000 shares of preferred stock, and to convert all of its 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 an approximately 292.2-for-one stock split on all common shares outstanding as of that date. In accordance with applicable accounting rules, the Company has 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 at December 31, 2011 are reflected as having been converted and then subsequently split in January 2012.

2. 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”, “Roundy’s” or similar words are to Roundy’s, Inc. and its subsidiaries.

Fiscal Year—The Company’s fiscal year is the 52 or 53 week period ending on the Saturday nearest to December 31. The years ended December 31, 2011 (“Fiscal 2011”), December 29, 2012 (“Fiscal 2012”) and December 28, 2013 (“Fiscal 2013”) included 52 weeks.

 

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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 the Company considers itself a pass-through conduit for collecting and remitting sales taxes.

The Company records deferred revenue when Roundy’s gift cards are sold. A sale is then recognized when the gift card is redeemed to purchase product from the Company. Gift card breakage is recognized when redemption is deemed remote. The amount of breakage has not been material in Fiscal 2011, Fiscal 2012 or Fiscal 2013.

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

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 supply chain operations.

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 the Company’s expense for such related advertising or other expense if such vendor allowances reimburse the Company for specific, identifiable and incremental costs incurred in selling the vendor’s product. Any excess reimbursement over 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 $127.7 million, $125.7 million and $113.5 million for Fiscal 2011, Fiscal 2012 and Fiscal 2013, respectively.

Operating and Administrative Expenses—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 supply chain operations, internal management expenses and expenses for finance, legal, business development, human resources, purchasing and other administrative departments. Pre-opening costs associated with opening new and remodeled stores are expensed as incurred. The Company expenses advertising costs as incurred. Advertising expenses totaled $31.2 million, $28.4 million and $26.9 million for Fiscal 2011, Fiscal 2012 and Fiscal 2013, respectively.

Interest Expense—Interest expense includes interest on the Company’s outstanding indebtedness and is net of interest income earned on invested cash.

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 the Company files in the appropriate tax

 

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jurisdictions. The Company provides 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. The Company periodically reviews 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 (loss) refers to revenues, expenses, gains and losses that are not included in net income (loss) but rather are recorded directly in shareholders’ equity in the consolidated statements of shareholders’ equity. The Company’s other comprehensive income (loss) is comprised of the adjustments for pension liabilities and the fair value of interest rate swaps.

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: Unadjusted quoted prices are available in active markets for identical assets or liabilities that can be accessed at the measurement date;

 

   

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

 

   

Level 3: Unobservable inputs for which little or no market activity exists.

The Company has one item carried at (or adjusted to) fair value in the consolidated financial statements as of December 28, 2013, which is an interest rate derivative liability of $0.4 million. Interest rate derivatives are valued using forward curves and volatility levels as determined on the basis of observable market inputs when available and on the basis of estimates when observable market inputs are not available. These forward curves are classified as Level 2 within the fair value hierarchy. The Company had no interest rate swaps as of December 29, 2012.

The carrying values of the Company’s cash and cash equivalents, notes and accounts receivable and accounts payable approximated fair value as of December 28, 2013. Based on estimated market rents for those leased properties which are recorded as capital leases, the fair value of capital lease obligations is approximately $22.4 million and $28.2 million, as of December 29, 2012 and December 28, 2013, respectively. Based on recent open market transactions of the Company’s Term Loan and the 2020 Notes, the fair value of long-term debt, including current maturities, is approximately $673.6 million and $732.7 million as of December 29, 2012 and December 28, 2013, respectively. The Company considers the fair value of the capital leases, Term Loan and 2020 Notes to be Level 2 within the fair value hierarchy.

Cash Equivalents—The Company considers all highly liquid investments with maturities of three months or less when acquired to be cash equivalents. Accounts payable includes $47.3 million and $53.2 million at December 29, 2012 and December 28, 2013, respectively, of checks written in excess of related bank balances but not yet presented to banks for collection.

Accounts Receivable—The Company is exposed to credit risk with respect to accounts receivable. The Company continually monitors its 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.

 

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Inventories—Inventories are recorded at the lower of cost or market. Substantially all of the Company’s inventories consist of finished goods. Cost is calculated on a first-in-first-out (“FIFO”) and last-in-first-out (“LIFO”) basis for approximately 64% and 36%, and 66% and 34%, of inventories at December 29, 2012 and December 28, 2013, respectively. If the FIFO method was used to calculate the cost for the Company’s entire inventory, inventories would have been approximately $23.5 million and $24.4 million greater at December 29, 2012 and December 28, 2013, respectively.

Additionally, cost of sales would have been approximately $0.1 million greater during Fiscal 2011, $0.3 million greater during Fiscal 2012, and $0.2 million greater during Fiscal 2013, 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 72% and 70% of total inventories at December 29, 2012 and December 28, 2013, respectively. Cost for supply chain inventory is determined based on the weighted average costing method and such inventory totals 28% and 30% of total inventories at December 29, 2012 and December 28, 2013, respectively.

The Company records an inventory shrink adjustment based on a physical count and also provides an estimated inventory shrink adjustment for the period between the last physical inventory count and each balance sheet date. The Company performs physical counts of perishable store inventories approximately every month and nonperishable store inventories at least twice per year. 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 the Company’s 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—The Company categorizes leases at inception as either operating leases or capital leases. The Company records rent liabilities for contingent percentage of sales lease provisions when it is determined 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.

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

Interest Rate Risk Management— In August 2013, the Company entered into a one-year forward starting interest rate swap. The Company accounts for derivatives in accordance with the provisions of FASB ASC Topic 815 “Derivatives and Hedging” (“ASC 815”), which requires companies to recognize all of its derivative instruments as either an asset or liability in the balance sheet at fair value. The Company had no interest rate swaps in Fiscal 2011 and Fiscal 2012.

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. The Company considers factors such as current results, trends and future prospects, current

 

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market value, and other economic and regulatory factors in performing these analyses. The Company determined that no long-lived assets were impaired in Fiscal 2011, Fiscal 2012 and Fiscal 2013, other than goodwill in Fiscal 2012 as described below.

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 occur or circumstances change that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount.

The Company has determined that it has one financial reporting unit. The Company has determined that a single financial reporting unit is appropriate for goodwill impairment testing purposes because while its 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 the Company’s financial reporting unit is determined by using an income approach based on the discounted cash flows of the reporting unit and a market approach based on 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 amount, 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 amount of goodwill over the implied fair value.

The Company completed its annual impairment reviews for Fiscal 2011, Fiscal 2012 and Fiscal 2013 and concluded there was no impairment of goodwill. During the fourth quarter of Fiscal 2012, the Company’s market capitalization experienced a significant decline. As a result, management believed that there were circumstances evident which indicated that the fair value of the Company’s reporting unit could be below its carrying amount and management therefore updated its annual review of goodwill for impairment that had been completed in the third quarter. With the assistance of a third party valuation firm, the Company completed the first step of the impairment evaluation process in comparing the fair value of its reporting unit to its carrying value. At that time the carrying value exceeded the fair value of the Company’s reporting unit and therefore, the Company completed the second step of the impairment evaluation. The second step calculates the implied fair value of the goodwill, which is compared to the carrying value of goodwill. The implied fair value of goodwill is calculated by valuing all of the tangible and intangible assets of the reporting unit at the hypothetical fair value, assuming the reporting unit had been acquired in a business combination. The excess fair value of the entire reporting unit over the fair value of its identifiable assets and liabilities is the implied fair value of the goodwill. Based upon the calculation of the implied fair value of goodwill, it was determined that the carrying value of the goodwill exceeded the implied fair value of goodwill, which resulted in a non-cash, pre-tax impairment charge of $120.8 million ($106.4 million, net of taxes) during the fourth quarter of 2012.

The testing for impairment of goodwill requires the extensive use of management judgment and financial estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities.

 

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

 

     Year Ended  
     December 29,
2012
    December 28,
2013
 

Balance at beginning of year:

    

Goodwill

   $ 726,879      $ 726,786   

Accumulated impairment losses

            (120,800
  

 

 

   

 

 

 
   $ 726,879      $ 605,986   

Activity during the year:

    

Acquistion activity

            4,260   

Impairment charge

     (120,800       

Adjustment to acquisition liabilities, net of tax

     (93     (60
  

 

 

   

 

 

 

Balance at end of year:

    

Goodwill

     726,786        730,986   

Accumulated impairment losses

     (120,800     (120,800
  

 

 

   

 

 

 

Balance at end of year

   $ 605,986      $ 610,186   
  

 

 

   

 

 

 

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 the 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. The review consists of comparing the estimated fair value to the carrying value. Fair value of the Company’s trade names is determined primarily by discounting an assumed royalty value applied to managements’ estimate of projected future revenues associated with the trade name. The royalty cash flows are discounted using rates based on the weighted average cost of capital. There was no impairment in Fiscal 2011, Fiscal 2012, or Fiscal 2013.

Self-Insurance—The Company is primarily self-insured for potential liabilities for workers’ compensation, general liability and employee pharmacy prescriptions. Prior to Fiscal 2013, we were also self-insured for employee health care benefits. It is the Company’s 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 the Company’s self-insurance liability is as follows (in thousands):

 

     Year Ended  
     December 31,
2011
    December 29,
2012
    December 28,
2013
 

Balance at beginning of year

   $ 32,143      $ 30,334      $ 31,521   

Claim payments

     (79,738     (76,867     (33,666

Reserve accruals

     77,929        78,054        29,142   
  

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 30,334      $ 31,521      $ 26,997   
  

 

 

   

 

 

   

 

 

 

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

 

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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  
     December 29,
2012
    December 28,
2013
 

Balance at beginning of year

   $ 14,909      $ 8,636   

Charges for closed stores

     445        363   

Payments

     (6,506     (1,511

Adjustments

     (212     (60
  

 

 

   

 

 

 

Balance at end of year

   $ 8,636      $ 7,428   
  

 

 

   

 

 

 

Concentrations of Risk—Certain of the Company’s employees are covered by collective bargaining agreements. As of December 28, 2013, the Company had 44 union contracts covering approximately 56% of its employees. Of these contracts, none were expired as of December 28, 2013 but there were 282 employees that were previously non-union employees operating without a negotiated contract. There are 10 union contracts that expire in 2014. In the aggregate, contracts not yet negotiated or expiring in 2014 cover approximately 15% of the Company’s employees. The remaining 34 contracts expire in 2015 through 2016. The Company believes that its relationships with its employees are good; therefore, it does not anticipate significant difficulty in renegotiating these contracts.

Stock-based Compensation—The Company accounts for stock-based compensation to employees and directors based on the fair value on the date of the grant. Stock-based compensation expense is recognized over the requisite service period of the award, net of an estimated forfeiture rate.

Reclassifications—Payments and borrowings related to the Company’s revolving credit facility were previously reported on a net basis and are now presented on a gross basis. Amortization of deferred financing costs were previously included within depreciation and amortization within the Consolidated Statement of Cash Flows and are now presented separately within the Consolidated Statement of Cash Flows.

Subsequent Events—On February 12, 2014, the Company completed a public offering of 10,170,989 shares of its common stock at a price of $7.00 per share, which included 2,948,113 shares sold by Roundy’s and 7,222,876 shares sold by existing shareholders. The Company received approximately $20.6 million in gross proceeds from the offering, or approximately $19.1 million in net proceeds after deducting the underwriting discount and expenses related to the offering. The net proceeds will be used for general corporate purposes, which the Company expects to include funding working capital and operating expenses as well as capital expenditures to build out the Chicago stores acquired from Safeway. On March 4, 2014, the Company announced that RSI had refinanced its Credit Facilities with a $460 million new term loan and an asset-based revolving credit facility of $220 million. In connection with the refinancing, the Company expects to recognize a loss on debt extinguishment, which will include the write-off of deferred financing costs and original issue discount on the Term Loan. The amount of the transaction expenses that will be expensed rather than capitalized, as well as the portion of the deferred financing costs and original issue discount that will be written off, cannot be determined at this time.

3. ACQUISITION

On December 20, 2013, the Company acquired eleven Dominick’s stores from Safeway in a $36 million cash transaction. As a result of the transaction, the Company assumed the operating leases for ten of the stores and a capital lease liability for one store. The acquired stores will be converted to the Company’s Mariano’s banner and will open during Fiscal 2014. The transaction enables the Company to expand its presence in the Chicago market

 

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and accelerate the number of Mariano’s locations, the Company’s growth banner. In order to complement and enhance the Company’s existing Chicago store presence, the Company paid an amount in excess of the fair value of the assets acquired and recorded goodwill of approximately $4.3 million. The amount of goodwill recorded in connection with the transaction is entirely tax deductible over a 15-year period.

The transaction was accounted for as a business combination under Accounting Standards Codification 805 (“ASC 805”). As such, the purchase price was allocated based on a fair value appraisal by a third party valuation firm. The Company considers the inputs used in the fair value calculations of property under capital lease and the favorable lease rights to be Level 2 within the fair value hierarchy. The Company considers the inputs used in the fair value calculations of the equipment, leasehold improvements and customer lists to be Level 3 within the fair value hierarchy.

The purchase price was allocated as follows (in thousands):

 

Consideration

  

Purchase price

   $ 36,000   

Capital lease liability assumed

     7,765   
  

 

 

 

Total Consideration

   $ 43,765   
  

 

 

 

Assets Acquired

  

Equipment

   $ 9,706   

Leasehold improvements

     6,859   

Property under capital lease

     8,608   

Intangible assets:

  

Favorable lease rights

     11,216   

Customer lists

     3,116   

Goodwill

     4,260   
  

 

 

 

Fair Value of Assets Acquired

   $ 43,765   
  

 

 

 

The favorable lease rights will be amortized over the lease term of the acquired stores. The customer lists will be amortized over an expected life of 5 years. Other than the capital lease liability assumed, there were no other liabilities recorded assumed in the transaction.

The transaction did not generate any revenue or earnings for the Company in Fiscal 2013.

4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, “Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” ASU No. 2012-02 permits an entity to first assess qualitative factors to determine whether certain events and circumstances exist that indicate it is more likely than not that an indefinite-lived intangible asset is impaired. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If as a result of the qualitative assessment it is determined that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the company is not required to take further action and calculate the fair value of the asset. ASU No. 2012-02 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company has adopted this standard for its annual test of impairment of intangible assets.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income”. ASU No. 2013-02 requires companies to provide additional information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, companies

 

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are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. This ASU does not change the requirements for reporting net income or other comprehensive income. Because the standard only affects the presentation of comprehensive income and does not affect what is included in comprehensive income, this standard did not have a material effect on the Company’s consolidated financial statements. The Company adopted this at the beginning of Fiscal 2013 and has included disclosures in the footnotes to its consolidated financial statements. There was no impact to financial results of the Company.

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes” (“ASU No. 2013-11”). ASU No. 2013-11 requires companies to present unrecognized tax benefits as a reduction of the deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, if net settlement is required or expected. To the extent that net settlement is not required or expected, the unrecognized tax benefit must be presented as a liability. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. ASU No. 2013-11 is effective for reporting periods beginning after December 15, 2013, and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Because this standard only affects the presentation of unrecognized tax benefits and not the measurement of an unrecognized tax benefit, the Company expects this standard will not have a material impact on its consolidated financial statements.

5. PROPERTY AND EQUIPMENT AND OTHER ASSETS

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

 

     December 29,
2012
     December 28,
2013
 

Land

   $ 7,722       $ 7,965   

Buildings

     29,867         29,448   

Equipment

     625,965         681,100   

Property under capital leases

     45,684         54,292   

Leasehold improvements

     175,715         191,909   
  

 

 

    

 

 

 
     884,953         964,714   

Less accumulated depreciation and amortization

     570,909         621,740   
  

 

 

    

 

 

 

Property and equipment, net

   $ 314,044       $ 342,974   
  

 

 

    

 

 

 

Depreciation expense for property and equipment, including amortization of property under capital leases was $67.0 million, $63.8 million, and $62.7 million for Fiscal 2011, Fiscal 2012 and Fiscal 2013, respectively.

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

 

     December 29, 2012      December 28, 2013  
     Gross      Accumulated
Amortization
    Net      Gross      Accumulated
Amortization
    Net  

Trademarks

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

Deferred financing costs

     20,288         (7,673     12,615         25,491         (12,027     13,464   

Customer lists

     12,053         (6,431     5,622         14,616         (7,811     6,805   

Favorable lease rights

     5,000         (3,453     1,547         16,216         (3,803     12,413   

Prepaid pension asset

                            905                905   

Other assets

     3,553         (795     2,758         3,263         (905     2,358   

Assets held for sale

     468                468         501                501   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other assets

   $ 64,762       $ (18,352   $ 46,410       $ 84,392       $ (24,546   $ 59,846   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Amortization expense (including the amortization of deferred financing costs) was $5.9 million, $4.7 million and $6.7 million for Fiscal 2011, Fiscal 2012 and Fiscal 2013, respectively.

Amortization of other assets (including the amortization of deferred financing costs), excluding trademarks which have indefinite lives, will be approximately $6.1 million in 2014 and 2015, $4.3 million in 2016, $3.5 million in 2017 and $3.2 million in 2018 and $9.7 million thereafter. The remaining weighted average life of the Company’s customer lists is 3.3 years.

6. LONG-TERM DEBT

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

 

     December 29,
2012
     December 28,
2013
 

Term Loan

   $ 671,625       $ 516,875   

Second Lien Notes

             200,000   

Capital lease obligations, 7.6% to 10.0%, due 2014 to 2031

     32,298         36,102   

Other long-term debt

     1,445         1,255   
  

 

 

    

 

 

 
     705,368         754,232   

Less: Unamortized discount on Term Loan

     8,806         5,793   

Less: Unamortized discount on Second Lien Notes

             5,976   

Less: Current maturities

     10,918         4,739   
  

 

 

    

 

 

 

Total long-term debt, net of current maturities

   $ 685,644       $ 737,724   
  

 

 

    

 

 

 

In connection with our IPO on February 13, 2012, RSI entered into a new senior credit facility (the “2012 Refinancing”), consisting of a $675 million term loan (the ‘‘Term Loan’’) and a $125 million revolving credit facility (the ‘‘Revolving Facility’’ and together with the Term Loan, the ‘‘Credit Facilities”) with the Term Loan maturing in February 2019 and the Revolving Facility maturing in February 2017. The Company used the net proceeds from the IPO, together with borrowings under the Credit Facilities, to refinance RSI’s then existing indebtedness and to pay accrued interest thereon and related prepayment premiums.

On December 9, 2013, RSI amended its credit agreement governing the Credit Facilities (“as amended, the “Credit Agreement”) to, among other things, permit the occurrence of the issuance of second lien notes and the second-priority liens securing the notes and related obligations and to revise certain financial maintenance and other covenants.

On December 20, 2013, RSI completed the private placement offering of $200 million of 2020 Notes that mature on December 15, 2020. The Company will pay interest at a rate of 10.25% on the 2020 Notes semiannually, commencing on June 15, 2014. The 2020 Notes were issued with a 3.01% discount, which will be amortized over the seven year term of the 2020 Notes. The Company capitalized $4.6 million of financing costs related to the issuance of the 2020 Notes which will be also amortized over the seven year term of the 2020 Notes.

The Company used the net proceeds from the issuance of the 2020 Notes to prepay approximately $148 million in principal amount of the Company’s outstanding Term Loan and to fund the Chicago Stores Acquisition. The Company capitalized $0.6 million related to an amendment fee paid to lenders of the Credit Facilities. In addition, the Company expensed $3.5 of unamortized loan costs, including $2.0 million of previously capitalized financing costs and $1.5 million of the unamortized discount on the Term Loan.

At any time prior to December 15, 2016, the Company may redeem some or all of the notes with the net cash proceeds received by the Company from any equity offering at a price of 110.250% of the principal amount of the notes, plus accrued and unpaid interest, in an aggregate principal amount for all such redemptions not to exceed 35% of the original aggregate principal amount of the notes issued on the issuance date and any

 

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additional notes, provided that: (i) in each case the redemption takes place not later than 180 days after the closing of the related Equity Offering, and (ii) not less than 65% of the aggregate principal amount of the notes (including additional notes) remains outstanding immediately thereafter.

At any time and from time to time on or after December 15, 2016, we may redeem the 2020 Notes, in whole or in part, at the following redemption prices (expressed as percentages of the principal amount) plus accrued and unpaid interest:

 

12-month period commencing on December 15 in year

      

2016

     107.688

2017

     105.125

2018

     102.563

2019 and thereafter

     100

In connection with the 2012 Refinancing, the Company recognized a loss on debt extinguishment of $13.3 million, which consisted primarily of the write-off of $4.5 million of previously capitalized financing costs, the write-off of the remaining unamortized discount of $2.1 million on our old second lien loan that was repaid, prepayment premiums on our old first and second lien loans that were repaid of $4.7 million and certain fees and expenses of $2.0 million related to the Credit Facilities.

As of December 28, 2013, there were no outstanding borrowings under the Revolving Facility. Outstanding letters of credit, totaling $29.6 million on December 28, 2013, reduce availability under the Revolving Facility.

Borrowings under the Credit Facilities bear interest, at the Company’s 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 Credit Facilities contain customary provisions regarding prepayments and restrictive covenants, and are also secured by substantially all of our tangible and intangible assets. Our credit agreement contains various restrictive covenants which, among other things: (i) prohibit us from prepaying other indebtedness; (ii) require us to maintain specified financial ratios; and (iii) limit our capital expenditures. In addition, the credit agreement limits our ability to declare or pay dividends.

At December 28, 2013, the Company was in compliance with all financial covenants relating to our indebtedness.

On December 28, 2013, repayment of principal on long-term debt outstanding was as follows (in thousands):

 

2014

   $ 4,739   

2015

     5,184   

2016

     5,366   

2017

     4,893   

2018

     3,246   

Thereafter

     730,804   
  

 

 

 

Total debt

   $ 754,232   
  

 

 

 

7. DERIVATIVE FINANCIAL INSTRUMENTS

The Company accounts for derivatives in accordance with the provisions of FASB ASC Topic 815 “Derivatives and Hedging” (“ASC 815”). ASC 815 requires companies to recognize all of its derivative instruments as either an asset or liability in the balance sheet at fair value. Changes in the fair value of derivative instruments designated as cash flow hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects, and are reclassified into earnings in the period in which the hedged

 

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transaction affects earnings. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. The Company does not anticipate any ineffectiveness to the Swap.

The Company is exposed to market risk from interest rate fluctuations. In order to manage this risk from interest rate fluctuations, on August 27, 2013, the Company entered into a one-year forward starting interest rate swap, which will mature on August 27, 2016, to hedge cash flows related to interest payments on $75 million notional amount related to its Term Loan (the “Swap”). The Swap involves the receipt of floating interest rate amounts in exchange for fixed rate interest payments over the duration of the Swap without an exchange of the underlying principal amount. In accordance with ASC 815, the Company has designated the Swap as a cash flow hedge. The Company has not entered into any other hedging instruments.

As of December 28, 2013, the Company has recorded $0.4 million in other liabilities in the Company’s Consolidated Balance Sheet, which represents the fair value of the Swap on that date. As of December 28, 2013, the Company recorded $0.3 million in accumulated other comprehensive loss in the Company’s Consolidated Balance Sheet, which represents the loss on the effective portion of the Swap, net of tax, on that date. The Company does not expect the amount of losses that will be reclassified into earnings over the next twelve months to be material.

The Company had no derivatives as of December 29, 2012.

During the year ended December 28, 2013 there were no amounts reclassified into earnings because the hedged transaction has not yet occurred. Beginning in the period that the hedged transaction affects earnings, the Company will record the ineffective portion of the Swap into earnings within the interest expense line item in the Consolidated Statement of Income.

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, the Company amended its agreement with the Pension Benefit Guaranty Corporation (“PBGC”) dated November 3, 2005, whereby, among other things, it 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, in April 2010 the Company increased the amount of the letter of credit it had posted in favor of the PBGC to $12.5 million from $10 million, for the benefit of the pension plan. During 2012, the Company was allowed to reduce the letter of credit, and as of December 28, 2013, the amount was $10 million.

 

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The benefit obligation and related assets under all plans have been measured as of the end of Fiscal 2012 and Fiscal 2013, the plans’ measurement dates. The following tables set forth pension obligations and plan assets information (in thousands):

 

     Year Ended  
     December 29, 2012     December 28, 2013  

Change in projected benefit obligations:

    

Projected benefit obligation-beginning of year

   $ 185,605      $ 199,655   

Service cost

     482          

Interest cost

     7,835        7,432   

Actuarial (gain)/loss