Hannaford Bros: Latest 10Q Filing FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-7603 HANNAFORD BROS. CO. (Exact name of Registrant as specified in its charter) Maine 01-0085930 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 145 Pleasant Hill Road, Scarborough, Maine 04074 (Address of principal executive offices; Zip Code) Registrant's telephone number, including area code: (207) 883-2911 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of November 5, 1997, there were 42,284,784 outstanding shares of Common Stock, $.75 par value, the only authorized class of common stock of the Registrant. INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements: Consolidated Balance Sheets, September 27, 1997 and December 28, 1996 3-4 Consolidated Statements of Earnings, Three Months Ended September 27, 1997 and September 28, 1996 5 Consolidated Statements of Earnings, Nine Months Ended September 27, 1997 and September 28, 1996 6 Consolidated Statements of Cash Flows Nine Months Ended September 27, 1997 and September 28, 1996 7-8 Notes and Schedules to Consolidated Financial Statements 9-11 Item 2. Management's Discussion and Analysis of Third Quarter 1997 Results 12-18 PART II - OTHER INFORMATION Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8K 19 Signatures 20 HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (Dollars in thousands) (UNAUDITED) September 27, December 28, 1997 1996 Current assets: Cash and cash items $ 54,349 $ 42,505 Accounts receivable, net 13,428 17,384 Inventories 183,296 191,658 Prepaid expenses 8,575 5,834 Deferred income taxes 4,962 4,589 Total current assets 264,610 261,970 Property, plant and equipment, net 779,314 723,176 Leased property under capital leases, net 61,015 59,918 Other assets: Goodwill, net 91,532 95,654 Deferred charges, net 34,616 26,332 Computer software costs, net 16,385 13,658 Miscellaneous assets 2,032 3,019 Total other assets 144,565 138,663 $1,249,504 $1,183,727 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands except share amounts) (UNAUDITED) September 27, December 28, 1997 1996 Current liabilities: Current maturities of long-term debt $ 16,040 $ 14,213 Obligations under capital leases 1,908 1,775 Accounts payable 199,800 177,895 Accrued payroll 24,909 22,554 Other accrued expenses 24,234 21,205 Income taxes 4,685 2,532 Total current liabilities 271,576 240,174 Deferred income tax liabilities 27,300 23,757 Other liabilities 42,032 47,917 Long-term debt 223,854 227,525 Obligations under capital leases 77,928 75,198 Shareholders' equity: Class A Serial Preferred stock, no par, authorized 2,000,000 shares - - Class B Serial Preferred stock, par value $.01 per share, authorized 28,000,000 shares - - Common stock, par value $.75 per share: Authorized 110,000,000 shares; September 27, 1997: Issued, 42,338,316 shares, outstanding 42,290,226 shares. December 28, 1996: Issued, 42,338,316 Shares, outstanding 42,280,695 shares 31,754 31,754 Additional paid-in capital 115,713 119,399 Preferred stock purchase rights 423 423 Retained earnings 460,590 419,459 608,480 571,035 Less common stock in treasury (September 27, 1997: 48,090 shares at cost. December 28, 1996: 57,621 shares at cost) 1,666 1,879 Total shareholders' equity 606,814 569,156 $1,249,504 $1,183,727 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands except per share data) (UNAUDITED) THREE MONTHS ENDED September 27, September 28, 1997 1996 Sales and other revenues $820,115 $773,271 Cost of sales 617,055 589,178 Gross margin 203,060 184,093 Selling, general and administrative expenses 160,066 145,802 Operating profit 42,994 38,291 Interest expense, net 6,050 5,356 Earnings before income taxes 36,944 32,935 Income taxes 14,147 13,037 Net earnings $ 22,797 $ 19,898 Per share of common stock: Net earnings $ .54 $ .47 Cash dividends $ .135 $ .120 Weighted average number of common shares outstanding 42,290 42,284 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Amounts in thousands except per share data) (UNAUDITED) NINE MONTHS ENDED September 27, September 28, 1997 1996 Sales and other revenues $2,355,725 $2,192,877 Cost of sales 1,772,400 1,664,603 Gross margin 583,325 528,274 Selling, general and administrative expenses 469,183 422,684 Operating profit 114,142 105,590 Interest expense, net 19,635 16,075 Earnings before income taxes 94,507 89,515 Income taxes 36,242 35,434 Net earnings $ 58,265 $ 54,081 Per share of common stock: Net earnings $ 1.38 $ 1.28 Cash dividends $ .405 $ .360 Weighted average number of common shares outstanding 42,288 42,301 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED) NINE MONTHS ENDED September 27, September 28, 1997 1996 Cash flows from operating activities: Net income $ 58,265 $ 54,081 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 67,733 56,079 (Increase) decrease in inventories 8,362 (13,568) (Increase) decrease in receivables and prepayments 1,257 (1,647) Increase in accounts payable and accrued expenses 21,463 26,349 Increase in income taxes payable 2,153 2,720 Increase in deferred taxes 3,170 1,453 Other operating activities (202) 103 Net cash provided by operating activities 162,201 125,570 Cash flows from investing activities: Acquisition of property, plant and equipment (116,086) (148,116) Sale of property, plant and equipment, net 2,145 3,061 Increase in deferred charges (7,591) (6,945) Increase in computer software costs (4,958) (4,402) Net cash used in investing activities (126,490) (156,402) Cash flows from financing activities: Principal payments under capital lease obligations (1,330) (1,076) Proceeds from issuance of long-term debt 20,000 75,000 Issuance of common stock 7,381 7,300 Payments of long-term debt (21,929) (21,423) Purchase of Treasury Stock (10,855) (11,708) Dividends paid (17,134) (15,223) Net cash provided by (used in) financing activities (23,867) 32,870 Net increase in cash and cash items 11,844 2,038 Cash and cash items at beginning of period 42,505 7,017 Cash and cash items at end of period $ 54,349 $ 9,055 See accompanying notes to consolidated financial statements. HANNAFORD BROS. CO. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental disclosures of cash flow information (in thousands) (UNAUDITED) NINE MONTHS ENDED September 27, September 28, 1997 1996 Cash paid during the first nine months for: Interest (net of amount capitalized, $2,616 in 1997 and $2,493 in 1996) $18,643 $15,100 Income taxes $30,049 $30,019 Supplemental disclosure of non-cash investing and financing activity Capital lease obligations of $4,550,000 and $7,652,000 were incurred during the nine month period ended September 27, 1997 and September 28, 1996 respectively, when the Company entered into real estate leases. Disclosure of accounting policy For the purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments with maturities of three months or less when purchased to be cash items. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the amounts shown reflect all adjustments necessary to present fairly the financial position and results of operations for the periods presented. All such adjustments are of a normal recurring nature. The year-end consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Earnings per share of common stock have been determined by dividing net earnings by the weighted average number of shares of common stock outstanding. The assumed exercise of existing employee stock options has been excluded since it does not result in any material dilution. It is suggested that the financial statements be read in conjunction with the financial statements and notes included in the Company's latest annual report. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: (in thousands) (Unaudited) September 27, December 28, 1997 1996 Land and improvements $ 126,998 $ 117,218 Buildings 279,503 252,228 Furniture, fixtures & equipment 453,322 404,725 Leasehold interests & improvements 284,157 245,490 Construction in progress 13,935 31,850 1,157,915 1,051,511 Less accumulated depreciation and amortization 378,601 328,335 $ 779,314 $ 723,176 3. LEASED PROPERTY Leased property under capital leases consists of the following: (in thousands) (Unaudited) September 27, December 28, 1997 1996 Real property $86,780 $83,047 Less accumulated amortization 25,765 23,129 $61,015 $59,918 HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. LONG-TERM DEBT In February 1997, the Company received the proceeds of a $20 million senior uncollateralized debt financing. The term of the debt is 12 years with an average life of 10 years and an interest rate of 7.4%. 5. ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128 - Earnings per Share. This Statement is effective for financial statements issued for periods ending after December 15, 1997 with earlier application not permitted. The Statement requires dual presentation of basic and diluted earnings per share on the income statement. The Company's basic earnings per share for fiscal 1997 will be calculated similar to its currently disclosed earnings per share. Diluted earnings per share will not be materially different from basic earnings per share. In June 1997, the FASB issued SFAS No. 130 - Reporting Comprehensive Income, which requires the separate reporting of all changes to shareholders' equity, and SFAS No. 131 - Disclosures about Segments of an Enterprise and Related Information, which revises existing guidelines about the level of financial disclosure of a Company's operations. Both Statements are effective for financial statements issued for fiscal years beginning after December 15, 1997. The Company has not determined the impact of the new standards, but does not expect them to have a material impact to existing financial reporting. 6. COMMON STOCK In May 1997, the shareholders of the Company approved an amendment to the Hannaford Bros. Co. Employee Stock Purchase Plan. This amendment increased the total authorized shares by an additional 750,000 thereby permitting continued use of the Plan during 1997 and future years. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THIRD QUARTER 1997 RESULTS RESULTS OF OPERATIONS SALES Sales and other revenues rose 7.4% for the first three quarters of 1997, to $2,355.7 million, an increase of $162.8 million over the first three quarters of 1996. Sales from supermarkets that were open in both periods presented ("identical store sales") increased $11.9 million or 0.6%. Additional supermarket sales of $143.1 million resulted from the net impact of new, expanded, relocated and closed stores. Other sales and revenues, which include wholesale, trucking, home delivery, real estate and miscellaneous retail operations, increased $7.8 million. In the third quarter of 1997, sales and other revenues were $820.1 million, an increase of $46.8 million or 6.1% over those reported for the same period of 1996. Identical store sales decreased $1.7 million or 0.2%. Additional supermarket sales of $47.4 million resulted from the net impact of new, expanded, relocated and closed stores. Other sales and revenues increased $1.1 million. Identical store sales were up 0.6% for three quarters and down 0.2% for the third quarter this year as compared to increases of 3.3% in the first three quarters of 1996 and 3.2% for the full year 1996. The Company attributes a portion of this decline to a very low inflation rate in food prices, the current competitive environment and a decrease in the availability of food stamps. Comparable store sales, which include results from expanded and relocated stores in both periods presented, increased 1.5% in the third quarter of 1997 and 2.1% for the first three quarters of 1997. GROSS MARGIN Gross margins increased in the first three quarters of 1997 to 24.8% of sales and other revenues in comparison to 24.1% in the first three quarters of 1996. For the third quarter of 1997, gross margin was 24.8% versus 23.8% for the third quarter of 1996. The 1997 increases HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF THIRD QUARTER 1997 RESULTS are the result of improved selling margin in certain of the Company's marketing territories coupled with better operations in the Southeast, including the Company's new distribution facility which began product delivery in November 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to 19.9% of sales and other revenues in the first nine months of 1997 as compared to 19.3% in the comparable period of 1996. For the third quarter of 1997, selling, general and administrative expenses were 19.5% of sales and other revenues up from 18.9% for the third quarter of 1996, but down from the 20.0% reported in the second quarter of 1997. Payroll and payroll related expenses, which exceeded 50% of selling, general and administrative expenses in all periods presented, increased as a percentage of sales in the 1997 reporting periods. In addition to rising payroll costs, the 1997 increases reflect higher advertising costs and depreciation charges. These increases reflect the high level of store openings in the quarter coupled with the continuing costs of establishing the Company's position in the Southeast. INTEREST EXPENSE, NET Net interest expense expressed as a percentage of sales and other revenues was 0.8% in the first three quarters of 1997 versus 0.7% in the first three quarters of 1996. Net interest expense was 0.7% of sales and other revenues in both the third quarter of 1997 and the third quarter of 1996. Net interest expense in the first three quarters of 1997 was $19.6 million, an increase of 22.1% from the 1996 first three quarters net interest expense of $16.1 million. This increase is primarily the result of an increase in average debt levels coupled with a decrease in invested cash which is reflected as a decrease in interest income. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF THIRD QUARTER 1997 RESULTS INCOME TAXES The effective income tax rate decreased in both the first three quarters and third quarter of 1997 to 38.3% from 39.6% in the corresponding periods of 1996. This lower rate is the result of a reduction in the Company's overall state income tax rate. Assuming there are no federal or state income tax rate changes, the Company expects the effective tax rate for fiscal 1997 to be in the 38.2% to 38.4% range. NET EARNINGS AND EARNINGS PER COMMON SHARE Net earnings increased 7.7% in the first three quarters of 1997 to $58.3 million or 2.5% of sales and other revenues, an increase of $4.2 million from 1996 first three quarters earnings of $54.1 million or 2.5% of sales and other revenues. Third quarter 1997 net earnings were $22.8 million or 2.8% of sales and other revenues as compared to $19.9 million or 2.6% of sales and other revenues in the third quarter of 1996. Expressed as a percentage of sales, net earnings increased in the third quarter of 1997 as increased margins and a reduction in the Company's income tax provision were only partially offset by increased selling, general and administrative expenses. Net earnings per common share in the first three quarters of 1997 were $1.38 as compared to $1.28 in the first three quarters of 1996, an increase of 7.8%. Net earnings per common share increased 14.9% to $0.54 in the third quarter of 1997 versus $0.47 in the third quarter of 1996. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF THIRD QUARTER 1997 RESULTS CAPITAL RESOURCES AND LIQUIDITY GENERAL The current ratio (FIFO basis) at September 27, 1997, was 1.04 while working capital (FIFO basis) was $10.5 million, or 0.8% of total assets. The Company values the majority of its inventories using the LIFO method. The current cost of inventories exceeded the LIFO valuation by approximately $17.7 million on September 27, 1997 and $17.1 million on December 28, 1996. The Company's liquidity position is stronger than indicated by stated working capital and current ratios because of available unused lines of revolving credit of $81.1 million and available unused lines of short-term credit of $35.0 million on September 27, 1997. Cash and cash items increased $11.8 million to $54.3 million from $42.5 million at December 28, 1996. This increase is primarily the result of cash provided by operating activities partially offset by cash used in investing and financing activities. CASH FLOWS FROM OPERATING ACTIVITIES Cash provided by operating activities was $162.2 million in the first three quarters of 1997, an increase of $36.6 million over the $125.6 million provided in the first three quarters of 1996. This increase is attributable to a decrease in inventories coupled with higher depreciation and amortization. CASH FLOWS FROM INVESTING ACTIVITIES Cash used in investing activities decreased $29.9 million during the first three quarters of 1997 to $126.5 million from $156.4 million in the first three quarters of 1996. This decrease is primarily the result of lower capital expenditures during the current period. Total capital expenditures totaled $133.2 million in the first three quarters of 1997 and were composed of $116.1 million in additions to property, plant and equipment, $9.5 million in deferred charges and computer software costs and $4.5 million in non-cash capital lease additions. HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF THIRD QUARTER 1997 RESULTS These capital expenditures are primarily composed of costs incurred in meeting the Company's 1997 capital program. The Company expects to spend in excess of $170 million on new, relocated and expanded stores to open in 1997 and 1998, and improvements necessary to maintain current facilities and systems. During the first three quarters of 1997, the Company opened seventeen supermarkets including ten new stores, five relocations and two expansions, and temporarily closed one supermarket as it undergoes a substantial expansion. The 1997 store openings, together wth their square footage of selling area, are listed below: Square Footage Location Selling Area Northeast Chelmsford, MA 35,000 Dracut, MA 30,000 Guilderland, NY 33,000 Rutland, VT 34,000 Southeast Shallotte, NC 35,000 Danville, VA 41,000 Wilmington, NC (Murrayville Rd.) 35,000 Wilmington, NC (Carolina Beach) 41,000 Richmond, VA (Rt. 1 and Parham) 44,000 Charlotte, NC (Independence Blvd.) 41,000 Virginia Beach, VA (Shore Drive) 35,000 Virginia Beach, VA (Princess Anne) 40,000 Newport News, VA 37,000 Rock Hill, SC 40,000 Charlotte, NC (Eastland Mall) 41,000 Richmond, VA (Willow Lawn) 34,000 Virginia Beach, VA (Republic Drive) 40,000 HANNAFORD BROS. CO. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF THIRD QUARTER 1997 RESULTS During the fourth quarter of 1997, the Company does not expect to open any additional supermarkets. Net square footage of retail selling space is expected to increase by approximately 11% in 1997. Construction is ongoing for a number of stores to be opened in 1998. This program is subject to continuing change and review as conditions warrant. The 1997 capital program is being financed by internally generated funds, long-term debt, leases and lines of credit. CASH FLOWS FROM FINANCING ACTIVITIES Cash used in financing activities was $23.9 million in the first three quarters of 1997 as compared to $32.9 million of cash provided by financing activities in the first three quarters of 1996. This decrease in cash flows of $56.8 million is principally the result of reduced proceeds from the issuance of long-term debt. The Company purchased 312,398 shares of common stock during the first three quarters of 1997 at a cost of $10.9 million. This repurchased stock was used to fund the Company's stock based benefit plans with the balance being held in treasury. This amount was offset by proceeds of $7.4 million received during the first three quarters of 1997 from the issuance of 321,929 shares of treasury stock. The Company paid $17.1 million in dividends to common shareholders in the first three quarters of 1997. These dividend amounts represent 29.4% of net earnings available to common shareholders. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) MANAGEMENT'S DISCUSSION AND ANALYSIS OF THIRD QUARTER 1997 RESULTS FORWARD-LOOKING INFORMATION From time to time, information provided by the Company or statements made by its associates may contain forward-looking information, as defined in the Private Securities Litigation Reform Act of 1995. Examples of such statements in this report include those concerning the Company's expected future tax rates, construction schedules and capital expenditures. The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors and risks including, but not limited to the following: (1) Hannaford's future operating results are dependent on its ability to achieve increased sales and to control expenses. Factors such as lower than expected inflation, product cost fluctuations particularly in perishable categories, changes in product mix or the use of promotional items, both of which may affect pricing strategy, continued or increased competitive pressures from existing competitors and new entrants, including price cutting strategies, and deterioration in general or regional economic conditions are all factors which could adversely affect sales projections. Other components of operating results could be adversely affected by state or federal legislation or regulation that increases costs, increases in interest rates or the Company's cost of borrowing, increases in labor rates due to low unemployment or other factors, unanticipated costs related to the opening of new stores or the inability to control various expense categories. (2) Hannaford's future growth is dependent on its ability to expand its retail square footage. Increases in interest rates or the Company's cost of capital, the unavailability of funds for capital expenditures and the inability to develop new stores or convert existing stores as rapidly as planned are all risks to our projected future expansion. (3) Adverse determinations with respect to pending or future litigation or other material claims against Hannaford could affect actual results. Furthermore, the market price of Hannaford common stock could be subject to fluctuations in response to quarter to quarter variations in operating results, changes in analysts' earnings estimates, market conditions in the retail sector, especially in the supermarket industry, as well as general economic conditions and other factors external to Hannaford. PART II Item 5: Other Information A limited review was made of the results of the three-month and nine-month periods ended September 27, 1997, by Coopers & Lybrand. Item 6: Exhibits and Reports on Form 8-K (a) Exhibits required by Item 601 of Regulation SK 10.1 Amended and Restated Hannaford Bros. Co. Deferred Compensation Plan for Officers, effective January 1, 1998. 15 Letter of Coopers & Lybrand L.L.P. furnished pursuant to Regulation SX. 23 Letter of Coopers & Lybrand L.L.P. regarding incorporation by reference to certain Forms S-8 of the Registrant 27 Financial Data Schedule (b) There were no reports on Form 8-K filed during the quarter ended September 27, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HANNAFORD BROS. CO. Date November 6, 1997 s/Blythe J. McGarvie Blythe J. McGarvie Senior Vice President (Chief Financial Officer) Date November 6, 1997 s/Charles H. Crockett Charles H. Crockett Assistant Secretary Ends.