January 14, 2013
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C. 20549-3651
Attention: Jennifer Thompson
Re: Nash-Finch Company
Comment letter dated December 28, 2012
Form 10-K for the year ended December 31, 2011, filed on March 1, 2012
Definitive Proxy Statement on Schedule 14A filed April 4, 2012
Form 8-K filed on November 15, 2012
Form 10-Q for the quarter ended October 6, 2012, filed on November 15, 2012
File No. 000-00785
Dear Ms. Thompson:
Set forth below is the response by Nash-Finch Company (“we” or the “Company”) to the comment raised by the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) in its letter to Alec C. Covington dated December 28, 2012, with respect to the above mentioned filings. We have reproduced below the full text of the Staff’s comment in bold type, which is followed by the Company’s response.
Form 10-K for the year ended December 31, 2011
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 23
Results of Operations, page 24
1. In future filings, when you identify intermediate causes of changes in revenues, such as an increase or decrease in domestic or overseas sales or an increase or decrease in same store sales, please provide your readers with insight into the underlying drivers of those changes. Please provide us with sample disclosures of how you intend to comply with this comment.
Response:
Sales
Total Company sales declined X.X% during fiscal 201X as compared to the prior year period. However, excluding the impact of the sales decrease of $XX.X million attributable to the previously announced transition of a portion of a Food Distribution customer buying group to another supplier during 201X, and the sales decrease of $XX.X million due to the sale or closing of retail stores, total Company year-to-date comparable sales decreased X.X% relative to last year. The decline in total Company comparable sales was due to the items specifically outlined in our discussion of the sales of our reporting segments below, as well as market conditions impacting our industry, such as competition from supercenters and warehouse clubs, changes in consumer buying habits, and changes impacting sales to commissaries, including changes in purchasing patterns by DeCA for certain geographical regions, among other factors.
1
Fiscal 201X Military sales increased X.X% in comparison to the previous fiscal year. However, a larger portion of Military sales during the current year have been on a consignment basis, which are included in our reported sales on a net basis. The year-over-year increase in consignment sales was approximately $XX.X million in fiscal 201X. Including the impact of consignment sales, comparable Military sales increased X.X% in fiscal 201X compared to the prior year. The comparable increase in fiscal 201X Military sales is due to a X.X% increase in sales overseas and a X.X% increase in domestic sales. The geographic distribution of Military sales is affected by changes in the global deployment of military personnel. Military sales also increased due to increased orders under existing distribution contracts and/or our entry into distribution contracts with additional manufacturers during fiscal 201X.
Fiscal 201X Food Distribution sales decreased X.X% in comparison to the previous fiscal year. However, excluding the impact of the sales decrease of $XX.X million attributable to the previously announced transition of a portion of a Food Distribution customer buying group to another supplier during fiscal 201X, Food Distribution sales declined X.X%. This decrease was primarily due to account losses exceeding new account gains.
Retail sales for fiscal 201X decreased X.X% in comparison to the previous fiscal year. The decrease in Retail sales for fiscal 201X was primarily attributable to the sale or closing of retail stores since the end of the previous fiscal year. Retail same store sales, which compare retail sales for stores which were in operation for the same number of weeks in the comparative periods decreased by X.X% in fiscal 201X. Our same store sales were affected by several factors, including increased competition and changes in consumer buying and spending patterns, reflected in a reduction in the number of customers and/or a reduction in the average amount of purchases per customer.
2. In your discussion of selling, general and administrative expense at the bottom of page 66 you state that you experienced unusual professional fees of $2.5 million, a loss on the write-down of long-lived assets of $2.1 million, and restructuring costs related to Food Distribution overhead centralization of $1.6 million which negatively impacted your SG&A margin. Please expand your disclosure to discuss why these costs were incurred and/or increased from the prior year and whether you expect these types of expenses to be incurred going forward. Please provide us with sample disclosures of how you intend to comply with this comment.
Response:
Selling, General and Administrative Expense
Consolidated SG&A for fiscal 2011 remained flat at 5.4% in comparison to the prior year. Since our Military segment has lower SG&A expenses as a percent of sales compared to our other business segments, our SG&A margin benefited by 0.2% of sales in fiscal 2011 from the sales mix shift between our business segments due to the higher level of Military sales relative to the other business segments in 2011. However, we incurred professional fees that were infrequent in nature of $2.5 million primarily for costs related to a merger and acquisition transaction that was not completed, a loss on the write-down of long-lived assets of $2.1 million which was in connection with the sale of four retail stores completed in the second quarter, and restructuring costs related to Food Distribution overhead centralization of $1.6 million that negatively impacted our SG&A margin during fiscal 2011. Transactions of the types noted above are infrequent in nature; however, the pursuit of future acquisition opportunities, testing the value of long-lived assets, as well as the potential for restructuring of certain operations or divestment of certain locations, may result in the recognition of similar charges in the future.
2
Liquidity and Capital Resources, page 29
3. We note your non-GAAP measure, free cash flow as a percent of net assets, on page 35 and note that you define net assets as total assets less current liabilities plus current portion of long-term debt and capital leases. Since net assets is typically assumed to be shareholder’s equity, please modify your description of this metric to ensure that readers of your financial statements do not assume your presentation of net assets is shareholders’ equity.
Response:
Free cash flow and the ratio of free cash flow to adjusted net assets are measures used by management to measure operating performance. Our free cash flow to adjusted net assets ratio is defined as cash provided from operations less capital expenditures for property, plant and equipment during the trailing four quarters divided by the average Adjusted Net Assets for the current period and prior year comparable period. Adjusted Net Assets is defined as total assets less current liabilities plus current portion of long-term debt and capital leases. Adjusted Net Assets is not a recognized term under GAAP and does not purport to be an alternative for Net Assets or equate to the value of Shareholders’ Equity. Free cash flow is not a recognized term under GAAP and does not purport to be an alternative to net earnings as an indicator of operating performance or any other GAAP measure. In addition, free cash flow is not intended to represent the residual cash flow available for discretionary expenditures as certain non-discretionary expenditures, including debt service payments, are not deducted from the measure. The strategic project adjustment is defined as capital expenditures related to strategic projects.
Definitive Proxy Statement on Schedule 14A
Executive Compensation and Other Benefits, page 21
Elements of Executive Compensation, page 26
4. In future filings, please elaborate upon the terms of the LTIP Awards so that readers can appreciate the relative weight of the metrics you list on page 27 for purposes of the grants you made in 2011.
Response:
3
• Below is a sample of our proposed modified disclosure:
LTIP Awards
Long-term incentive awards are designed to align the interests of the executives with our longer-term objectives and those of our stockholders and to reward them in relation to the achievement of these objectives. The goals are set by the Compensation Committee at levels that we believe are aggressive but achievable and reflect performance in excess of what we would consider normal performance. Awards under the LTIP plan consist solely of performance units. The performance units vest after a three-year performance period, with a payout that can vary between 0% and 200% of a participant’s target payout.
With the assistance of Towers Watson, the Compensation Committee established the metrics for the 2012 LTIP as:
The two metrics are weighed equally. The following graph sets forth the matrix that is used to determine whether a payout is earned under the 2012 LTIP.
2012 LTIP Payout Matrix | |||||||||||
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(1) 3 Year Compound Annual Growth Rate in EBITDA vs Performance Peer Group | |||||||||||
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(2) Blend of Absolute RONA vs. Peers and CAGR of RONA vs. Peers | |||||||||||
Weighting of 75% Absolute RONA and 25% CAGR of RONA | |||||||||||
% of Payout for Blended RONA Matrix Will Be Interpolated Between Deciles Based Weighting of Rankings | |||||||||||
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3 Year Compound Annual Growth Rate in EBITDA vs Performance Peer Group | |||||||||
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1st Decile |
2nd Decile |
3rd Decile |
4th Decile |
5th Decile |
6th Decile |
7th Decile |
8th Decile |
9th Decile |
10th Decile |
|
10th Decile |
0.0% |
0.0% |
130.0% |
140.0% |
150.0% |
160.0% |
170.0% |
180.0% |
190.0% |
200.0% |
Blended Decile rankings |
9th Decile |
0.0% |
0.0% |
120.0% |
130.0% |
140.0% |
150.0% |
160.0% |
170.0% |
180.0% |
190.0% |
of RONA and Absolute |
8th Decile |
0.0% |
0.0% |
110.0% |
120.0% |
130.0% |
140.0% |
150.0% |
160.0% |
170.0% |
180.0% |
RONA. |
7th Decile |
0.0% |
0.0% |
100.0% |
110.0% |
120.0% |
130.0% |
140.0% |
150.0% |
160.0% |
170.0% |
Weighting of 75% |
6th Decile |
0.0% |
0.0% |
87.5% |
100.0% |
110.0% |
120.0% |
130.0% |
140.0% |
150.0% |
160.0% |
Absolute RONA and |
5th Decile |
0.0% |
0.0% |
75.0% |
87.5% |
100.0% |
110.0% |
120.0% |
130.0% |
140.0% |
150.0% |
25% on RONA CAGR |
4th Decile |
0.0% |
0.0% |
62.5% |
75.0% |
87.5% |
100.0% |
110.0% |
120.0% |
130.0% |
140.0% |
vs. Peers |
3rd Decile |
0.0% |
0.0% |
50.0% |
62.5% |
75.0% |
87.5% |
100.0% |
110.0% |
120.0% |
130.0% |
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2nd Decile |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
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1st Decile |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
0.0% |
The size of performance unit awards made to the NEOs was based on position level, and consistent with competitive practices for long-term incentives and overall direct compensation as reported by Towers Watson. In accordance with the compensation competitive review conducted by Towers Watson, in 2012 we awarded Mr. Covington a grant of performance units equal in value at the grant date to $2,000,000, and the remaining NEOs were awarded a grant equal in value at the grant date to 100% of their base salary.
In 2012, the Company determined the amount of the payout of compensation earned under the 2009 LTIP for the period fiscal 2009-2011. The metrics for that plan were 1) a blend of absolute RONA and CAGR of RONA and (2) the comparison of the cumulative three-year actual EBITDA results to the cumulative three-year strategic plan EBITDA targets. Each metric was equally weighted. Because the metrics of that plan were not achieved, no 2009 LTIP participants received a payout. All NEOs were participants in that plan and, like all other plan participants, did not receive a payout under the 2009 LTIP.
The 2009 LTIP numerical performance targets were internal targets and were tied to the Company’s internal strategic five year plans. To disclose the Company’s retrospective performance against such targets would require the disclosure of confidential information that would put us at a competitive disadvantage as well as causing the disclosure of confidential commercial and business information.
4
Moreover, disclosure of this confidential information would require us to provide guidance when the Company has determined that providing guidance is not in the best interests of the Company and its stockholders further justifying our decision not to disclose this information. As a result we decline to disclose the Company’s actual performance against these targets.
The measurement period for the 2010 LTIP plan ended with fiscal 2012. The metrics for that plan were (1) a blend of absolute RONA and CAGR of RONA and (2) the comparison of the cumulative three-year actual EBITDA results to the cumulative three-year strategic plan EBITDA targets. Each metric was equally weighted. In 2013 the Compensation Committee determined that the Company had not achieved the 2010 LTIP numerical performance targets for such metrics and as a result, no 2010 LTIP participants received a payout under the 2010 LTIP. All NEOs were participants in that plan and, like all other plan participants, did not receive a payout under the 2010 LTIP .
The 2010 LTIP performance targets were internal targets and were tied to the Company’s internal strategic five year plans. To disclose the Company’s retrospective performance against each numerical target would require the disclosure of confidential information that would put us at a competitive disadvantage as well as causing the disclosure of confidential commercial and business information. Moreover, disclosure of this confidential information would require us to provide guidance when the Company has determined that providing guidance is not in the best interests of the Company and its stockholders further justifying our decision not to disclose this information. As a result we decline to disclose the Company’s actual performance against these targets.
5. Please tell us why you have not disclosed the retrospective targets that were associated with the awards that were just paid out under the 2008 LTIP
Response:
5
Form 8-K filed November 15, 2012
6. We note that you have identified non-GAAP financial measures that are included in your earnings releases, including Adjusted Consolidated EBITDA, Adjusted EPS, Consolidated EBITDA, Total Leverage Ratio, Organic Revenue Growth, Consolidated EBITDA Margin, Trailing Four Quarter Free Cash Flow to Net Assets and Trailing Four Quarter Free Cash Flow to Net Assets Excluding Strategic Projects. We note that you have also discussed earnings adjusted for certain events. Although we note you have reconciled some of these measures to their most comparable GAAP measure, please tell us how you believe you fully met the disclosure requirements of Item 10(e)(1)(i) of Regulation S-K and Regulation G for each non-GAAP financial measure. Please provide a clear description of how each measure is calculated and reconciliation to the most directly comparable GAAP measure. Please provide us with sample disclosures of how you intend to comply with this comment.
Response:
On November 15, 2012, Nash-Finch Company (“Nash Finch”) issued a press release announcing its results for the sixteen weeks ended October 6, 2012. The press release by which these results were announced is furnished herewith as Exhibit 99.1.
The press release (including the schedules attached thereto) includes six financial measures that are considered “non-GAAP” financial measures for purposes of the SEC’s Regulation G – Adjusted Consolidated EBITDA, Adjusted EPS, Consolidated EBITDA, Total Leverage Ratio, Organic Revenue Growth, Consolidated EBITDA Margin, Trailing Four Quarter Free Cash Flow to Net Assets and Trailing Four Quarter Free Cash Flow to Net Assets Excluding Strategic Projects. Each of these financial measures is defined in the press release and, as required by Regulation G, Nash Finch has disclosed in the press release information regarding the GAAP financial measures which are most directly comparable to each of these non-GAAP financial measures, and reconciling information between the GAAP and non-GAAP financial measures. Relevant reconciling information is also provided on the “Investor Relations” portion of our website, under the caption “Presentations – Supplemental Financial Information.”
6
Form 10-Q for the quarter ended October 6, 2012
Note 2 – Goodwill Impairment, page 6
7. We note you performed a goodwill impairment test in the second quarter of 2012 and recorded a goodwill impairment charge of $132.0 million, of which $113.0 million related to your Food Distribution segment and $19.0 million related to your Retail segment. It appears that your impairment is based mainly on the decline in your market capitalization resulting in a market value significantly lower than the fair value of the business segments. Please explain the events and circumstances that occurred in the second quarter that caused you to perform the goodwill impairment test and what specifically caused the decline in your market capitalization. Refer to ASC 350-20-35-30. Please also provide the disclosures required by ASC 350-20-50. Furthermore, please also tell us whether you previously considered either of these reporting units as at risk for goodwill impairment prior to the second quarter of 2012.
Response:
7
* * * *
In connection with this response, the Company acknowledges the following:
After you have had an opportunity to review the above responses to your comments, please contact me at 952-844-1060 or David Pollak of Morgan, Lewis & Bockius LLP at 212-309-6058 to discuss any further questions or comments you might have.
Sincerely,
/s/ Robert B. Dimond
Robert B. Dimond
Executive Vice President, Chief Financial Officer & Treasurer
cc: David Pollak
Morgan, Lewis & Bockius LLP
Jeffrey Letalien
Morgan, Lewis & Bockius LLP
8
Attachment 1 |
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Non-GAAP Reconciliation of Adjusted Consolidated EBITDA | |||||||||
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Adjusted Consolidated EBITDA Reconciliation (In thousands) |
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3rd Qtr |
YTD |
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3rd Qtr |
YTD |
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Pre-tax earnings (loss) |
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16,737 |
45,721 |
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22,955 |
(81,276) |
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Add/(deduct) |
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LIFO charge (credit) |
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7,085 |
9,717 |
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1,438 |
2,040 |
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Depreciation and amortization |
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10,738 |
27,688 |
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11,924 |
28,510 |
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Interest expense |
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7,014 |
17,828 |
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8,074 |
18,672 |
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Impairments |
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13 |
362 |
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- |
62 |
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Lease reserves |
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24 |
631 |
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- |
(33) |
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Subsequent cash payments on non-cash charges |
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(650) |
(1,726) |
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(616) |
(1,788) |
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Loss (gain) on sale of real estate |
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(106) |
1,299 |
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(1,119) |
(1,506) |
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Share-based compensation expense (reversal of) |
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1,761 |
4,292 |
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(2,935) |
(1,295) |
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Gain on acquisition of a business |
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- |
- |
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- |
(6,639) |
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Goodwill impairment |
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- |
- |
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- |
131,991 |
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Total Consolidated EBITDA |
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42,616 |
105,812 |
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39,721 |
88,738 |
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Add/(deduct) |
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Transaction and integration costs related to business acquisitions |
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- |
- |
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694 |
1,908 |
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Net costs associated with retail store closings |
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- |
256 |
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- |
- |
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Restructuring costs for centralization |
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894 |
1,392 |
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- |
- |
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Military distribution center conversion and transition costs |
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431 |
1,414 |
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3,167 |
4,457 |
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Food distribution transition costs |
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- |
238 |
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188 |
330 |
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Unusual professional fees |
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1,950 |
1,950 |
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- |
- |
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Total significant charges impacting Consolidated EBITDA |
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3,275 |
5,250 |
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4,049 |
6,695 |
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Total Adjusted Consolidated EBITDA |
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45,891 |
111,062 |
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43,770 |
95,433 |
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(1) Adjusted Consolidated EBITDA is calculated as earnings before interest, income tax, depreciation and amortization, adjusted to exclude extraordinary gains or losses, gains or losses from sales of assets other | |||||||||
than inventory in the ordinary course of business, and non-cash charges (such as LIFO, asset impairments, closed store lease costs and share-based compensation), less cash payments made during the current | |||||||||
period on non-cash charges recorded in prior periods, adjusted for significant items of an infrequently occurring nature. Adjusted Consolidated EBITDA should not be considered an alternative measure of our net | |||||||||
income, operating performance, cash flows or liquidity. |
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9
Attachment 2 |
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Non-GAAP Reconciliation of Adjusted EPS | ||||||||||||
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Adjusted EPS Reconciliation (In thousands, except per share amounts) |
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2011 |
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2012 | ||||||
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3rd Qtr |
Annual |
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3rd Qtr |
Annual | ||||
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Pre-tax earnings (loss) |
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16,737 |
45,721 |
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22,955 |
(81,276) | |||||
Income tax expense (benefit) |
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6,644 |
18,096 |
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8,351 |
(16,366) | |||||
Net earnings |
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10,093 |
27,625 |
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14,604 |
(64,910) | |||||
Add/(deduct) |
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Transaction and integration costs related to business acquisitions |
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- |
- |
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694 |
1,908 | |||||
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Net costs associated with retail store closings |
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- |
256 |
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- |
- | ||||
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Restructuring costs for centralization |
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894 |
1,392 |
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- |
- | ||||
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Military distribution center conversion and transition costs |
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431 |
1,414 |
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3,167 |
4,457 | ||||
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Food distribution transition costs |
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- |
238 |
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188 |
330 | ||||
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Unusual professional fees |
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1,950 |
1,950 |
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- |
- | ||||
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Military distribution center non-cash pre-opening expense |
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- |
- |
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- |
143 | ||||
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LIFO charges |
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7,085 |
9,717 |
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1,438 |
2,040 | ||||
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Goodwill impairment |
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- |
- |
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- |
131,991 | ||||
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Retail impairments |
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- |
349 |
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- |
- | ||||
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Early termination of capital lease |
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- |
(402) |
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- |
- | ||||
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Gain on acquisition of a business |
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- |
- |
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- |
(6,639) | ||||
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Non-cash loss on sale of retail stores |
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- |
2,232 |
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- |
- | ||||
Total significant charges impacting earnings before tax |
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10,360 |
17,146 |
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5,487 |
134,230 | |||||
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Income tax (benefit) on significant net charges |
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4,040 |
6,686 |
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2,140 |
3,462 | |||||
Tax on gain on acquisition of business |
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- |
- |
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- |
(2,492) | |||||
Tax on goodwill impairment |
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- |
- |
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- |
35,098 | |||||
Total significant charges (credits) impacting net earnings |
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6,320 |
10,460 |
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3,347 |
98,162 | |||||
Net earnings, as adjusted |
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16,413 |
38,085 |
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17,951 |
33,252 | |||||
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Weighted average number of common shares |
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outstanding and common equivalent shares outstanding: |
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13,105 |
13,056 |
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13,040 |
13,101 | |||||
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Diluted earnings per share, as adjusted |
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$ 1.25 |
$ 2.92 |
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$ 1.38 |
$ 2.54 | |||||
10