SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 7, 1995
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 1-8140
FLEMING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
OKLAHOMA 48-0222760
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6301 Waterford Boulevard, Box 26647
Oklahoma City, Oklahoma 73126
(Address of principal executive offices) (Zip Code)
(405) 840-7200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
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
The number of shares outstanding of each of the issuer's classes
of common stock, as of November 3, 1995 is as follows:
Class Shares Outstanding
Common stock, $2.50 par value 37,662,000
<PAGE>
FLEMING COMPANIES, INC.
INDEX
Page No.
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Condensed Statements of Earnings -
12 Weeks Ended October 7, 1995,
and October 1, 1994
Consolidated Condensed Statements of Earnings -
40 Weeks Ended October 7, 1995,
and October 1, 1994
Consolidated Condensed Balance Sheets -
October 7, 1995, and December 31, 1994
Consolidated Condensed Statements of Cash Flows -
40 Weeks Ended October 7, 1995,
and October 1, 1994
Notes to Consolidated Condensed Financial
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Consolidated Condensed Statements of Earnings
For the 12 weeks ended October 7, 1995, and October 1, 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net sales $3,896,272 $4,124,291
Costs and expenses:
Cost of sales 3,597,568 3,806,096
Selling and administrative 259,704 281,591
Interest expense 38,603 36,929
Interest income (13,762) (15,608)
Equity investment results 6,658 5,130
Total costs and expenses 3,888,771 4,114,138
Earnings before taxes 7,501 10,153
Taxes on income 3,833 7,437
Net earnings $ 3,668 $ 2,716
Net earnings per share $.10 $.07
Dividends paid per share $.30 $.30
Weighted average shares outstanding 37,619 37,332
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed
financial statements.
Consolidated Condensed Statements of Earnings
For the 40 weeks ended October 7, 1995, and October 1, 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net sales $13,351,305 $11,038,187
Costs and expenses:
Cost of sales 12,290,313 10,284,943
Selling and administrative 892,766 626,129
Interest expense 135,046 75,413
Interest income (51,655) (46,391)
Equity investment results 16,205 11,027
Facilities consolidation (8,982) ---
Total costs and expenses 13,273,693 10,951,121
Earnings before taxes 77,612 87,066
Taxes on income 39,660 41,356
Net earnings $ 37,952 $ 45,710
Net earnings per share $1.01 $1.23
Dividends paid per share $.90 $.90
Weighted average shares outstanding 37,548 37,211
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed
financial statements.
Consolidated Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
October 7, December 31,
1995 1994
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,750 $ 28,352
Receivables 353,829 364,884
Inventories 1,153,673 1,301,980
Other current assets 85,166 124,865
Total current assets 1,597,418 1,820,081
Investments and notes receivable 301,853 402,603
Investment in direct financing leases 228,492 230,357
Property and equipment 1,473,398 1,455,954
Less accumulated depreciation
and amortization (535,960) (467,830)
Net property and equipment 937,438 988,124
Other assets 143,045 179,332
Goodwill 1,008,432 987,832
Total assets $4,216,678 $4,608,329
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 981,602 $ 960,333
Current maturities of long-term debt 93,896 110,321
Current obligations under capital leases 18,482 15,780
Other current liabilities 221,591 237,197
Total current liabilities 1,315,571 1,323,631
Long-term debt 1,268,745 1,641,390
Long-term obligations under
capital leases 366,796 353,403
Deferred income taxes 24,708 51,279
Other liabilities 150,940 160,071
Shareholders' equity:
Common stock, $2.50 par value per share 94,152 93,705
Capital in excess of par value 500,314 494,966
Reinvested earnings 508,385 503,962
Cumulative currency
translation adjustment (3,891) (2,972)
1,098,960 1,089,661
Less ESOP note (9,042) (11,106)
Total shareholders' equity 1,089,918 1,078,555
Total liabilities and shareholders' equity $4,216,678 $4,608,329
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed
financial statements.
Consolidated Condensed Statements of Cash Flows
For the 40 weeks ended October 7, 1995, and October 1, 1994
(In thousands)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Net cash provided by operating activities $369,770 $ 325,027
Cash flows from investing activities:
Collections on notes receivable 74,861 62,341
Notes receivable funded (67,742) (93,316)
Notes receivable sold 77,063 ---
Purchase of property and equipment (80,864) (85,448)
Proceeds from sale of
property and equipment 30,009 5,467
Investments in customers (8,867) (12,764)
Proceeds from sale of investment 17,873 4,665
Businesses acquired (6,989) (387,488)
Proceeds from sale of businesses --- 6,682
Other investing activities (3,083) (1,584)
Net cash provided by (used in)
investing activities 32,261 (501,445)
Cash flows from financing activities:
Proceeds from long-term borrowings --- 1,665,751
Principal payments on long-term debt (393,598) (1,425,563)
Principal payments on capital
lease obligations (13,872) (9,916)
Sale of common stock under incentive
stock and stock ownership plans 5,795 5,339
Dividends paid (33,530) (33,314)
Other financing activities 9,572 (21,888)
Net cash provided by (used in)
financing activities (425,633) 180,409
Net increase (decrease) in cash and cash
equivalents (23,602) 3,991
Cash and cash equivalents,
beginning of period 28,352 1,634
Cash and cash equivalents, end of period $ 4,750 $ 5,625
Supplemental information:
Cash paid for interest $129,612 $58,431
Cash paid (received) for taxes $(7,231) $36,504
</TABLE>
Fleming Companies, Inc. See notes to consolidated condensed
financial statements.
Notes to Consolidated Condensed Financial Statements
1. The consolidated condensed balance sheet as of October 7,
1995, and the consolidated condensed statements of earnings
and cash flows for the 12 and 40-week periods ended October
7, 1995, and October 1, 1994, have been prepared by the
company, without audit. In the opinion of management, all
adjustments necessary to present fairly the company's
financial position at October 7, 1995, and the results of
operations and cash flows for the periods presented have
been made. All such adjustments are of a normal, recurring
nature. Primary earnings per share are calculated using
the weighted average shares outstanding. The impact of
outstanding stock options on primary earnings per share is
not material. Certain reclassifications have been made to
the prior year amounts to conform to current years'
classification.
2. The statement of earnings for the 40 weeks ended October 7,
1995 reflects the effect of the change in management's
estimate of the cost associated with the general
merchandising portion of the facilities consolidation plan.
The estimate reflects reduced expense and cash outflow.
Accordingly, the company reversed $9 million of the
provision for restructuring during the first quarter of
1995. The reversal is shown as a credit to the facilities
consolidation expense line in the accompanying financial
statements.
3. Certain information and footnote disclosures normally
included in financial statements prepared in accordance
with generally accepted accounting principles have been
condensed or omitted. These consolidated condensed
financial statements should be read in conjunction with the
consolidated financial statements and related notes
included in the company's 1994 annual report on Form 10-K.
4. The LIFO method of inventory valuation is used for
determining the cost of most grocery and certain perishable
inventories. The excess of current cost of LIFO
inventories over their stated value was $20 million at
October 7, 1995, and $19 million at December 31, 1994.
5. The company and numerous other defendants have been named
in two suits filed in U.S. District Court in Miami. The
plaintiffs predicate liability on the part of the company
as a consequence of an allegedly fraudulent scheme
conducted by Premium Sales Corporation and others in which
unspecified but large losses in the Premium-related
entities occurred to the detriment of a purported class of
investors which has brought one of the suits. The other
suit is by the receiver/trustee of the estates of Premium
and certain of its affiliated entities. Plaintiffs seek
damages, treble damages, attorneys' fees, costs, expenses
and other appropriate relief. While the amount of damages
sought under most claims is not specified, plaintiffs
allege that hundreds of millions of dollars were lost as
the result of the allegations contained in the complaint.
The litigation is complex and the ultimate outcome cannot
presently be determined. Furthermore, management is unable
to predict a potential range of monetary exposure, if any,
to the company. Based on the large recovery sought, an
unfavorable judgment could have a material adverse effect
on the company. Management believes, however, that a
material adverse effect on the company's consolidated
financial position is not likely. The company is
vigorously defending the actions.
6. In July 1994, the company completed the acquisition of all
the outstanding stock of Haniel Corporation, the parent of
Scrivner Inc. ("Scrivner"). The company paid $388 million
in cash and refinanced substantially all of Scrivner's
existing indebtedness (approximately $670 million in
aggregate principal and premium).
The acquisition has been accounted for as a purchase and
the results of operations of Scrivner have been included in
the consolidated financial statements since the beginning
of the third quarter of 1994. The purchase price was
allocated based on estimated fair values at the date of the
acquisition. At October 7, 1995, the excess of purchase
price over assets acquired was $584 million and is being
amortized on a straight-line basis over 40 years. Pro
forma information for the 40 weeks ending October 1, 1994,
summarizing the results of operations of the company
(including the results of Scrivner since acquisition as of
July 9, 1994) and Scrivner (27 weeks ended July 9, 1994) as
if the acquisition had occurred at the beginning of 1994,
with pro forma adjustments to give effect to amortization
of goodwill, interest expense on acquisition debt and
certain other adjustments, together with related income tax
effects, are as follows: net sales - $14.3 billion; net
earnings - $33 million; and net earnings per share - $.89.
7. The senior notes issued in 1994 are guaranteed by all
direct and indirect subsidiaries of the company (except for
certain inconsequential subsidiaries), all of which are
wholly owned. The guarantees are joint and several, full,
complete and unconditional. There are no restrictions on
the ability of the subsidiary guarantors to transfer funds
to the company in the form of cash dividends, loans or
advances. Full financial statements for the subsidiary
guarantors are not presented herein because management does
not believe such information would be material.
The following summarized financial information for the
combined subsidiary guarantors has been prepared from the
books and records maintained by the subsidiary guarantors
and the company. Intercompany transactions are eliminated.
The summarized financial information may not necessarily be
indicative of the results of operations or financial
position had the subsidiary guarantors been operated as
independent entities. The summarized financial information
includes allocations of material amounts of expenses such
as corporate services and administration, interest expense
on indebtedness and taxes on income. The allocations are
generally based on proportional amounts of sales or assets,
and taxes on income are allocated consistent with the asset
and liability approach used for consolidated financial
statement purposes. Management believes these allocation
methods are reasonable. During 1995, several subsidiary
guarantors have been merged into Fleming Companies, Inc.,
resulting in a reduction in the amounts appearing in the
summarized financial information.
<TABLE>
<CAPTION>
October 7,
(In millions) 1995
<S> <C>
Current assets $383
Noncurrent assets 603
Current liabilities 188
Noncurrent liabiilities 23
</TABLE>
<TABLE>
<CAPTION>
40 weeks ended
October 7,
(In millions) 1995
<S> <C>
Net sales $3,575
Costs and expenses 3,565
Net earnings 5
</TABLE>
8. The accompanying earnings statements include the following:
<TABLE>
<CAPTION>
40 weeks 12 weeks
(In thousands) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Depreciation and
amortization
(includes amortized
financing costs) $140,543 $102,397 $42,151 $43,613
Amortized financing
costs (part of
interest expense) $5,096 $2,570 $1,525 $2,570
</TABLE>
9. In October 1995, ABCO Holding, Inc., a customer of the company
in which the company owns an equity interest and with whom the company
has a long-term supply agreement, defaulted on its $21 million senior
credit facility with its bank and on its loan and supply agreement
with the company (totaling approximately $39 million). These obligations
are secured by a pledge of substantially all of ABCO's assets. In
November, the company purchased additional shares of ABCO's common
stock for nominal consideration and now holds a majority of ABCO's
common stock. The company also purchased ABCO's indebtedness to
the bank, took an assignment of the bank's senior priority security
interest and has agreed to cause ABCO's obligations to its other trade
creditors to be brought current. The company has advised ABCO that
it will commence foreclosure proceedings on the collateral held to
secure the defaulted indebtedness. The company does not anticipate
that the foreclosure will result in a material adverse effect on the
company's financial position or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
In January 1994, the company announced the details of a plan
to restructure its organizational alignment, reengineer its
operations and consolidate its facilities. The company's
objective is to lower product costs to retail customers while
providing the company with a fair and adequate return for its
products and services. To achieve this objective, management is
making major organizational changes, introducing the Fleming
Flexible Marketing Plan ("FFMP") and investing in technology.
The actions contemplated by the reengineering plan will affect the company's
food and general merchandise wholesaling operations as well as
certain retail operations and are expected to be substantially
completed by the middle of 1997.
In the first quarter of 1995, management changed its
estimates with respect to the general merchandising operations
portion of the reengineering plan. The revised estimate reflects
reduced expense and cash outflow. Accordingly, during the first
quarter the company reversed $9 million of the related provision.
Facilities consolidation has resulted in the closure of four
distribution centers since inception and will result in the closure of one
additional facility.
Results have been materially affected by the acquisition of
Scrivner at the beginning of the third quarter of 1994. Sales
have increased dramatically and gross margin and selling and
administrative expenses as a percent of sales are significantly
higher due to the higher percentage of retail food operations in
Scrivner. Due to the acquisition, interest expense increased
materially as a result of both increased borrowing levels and
higher interest rates, and expense for the amortization of
goodwill increased significantly. Since the acquisition, the
company has closed nine Scrivner distribution centers.
Management has identified certain on-going expenses to be
incurred during the transitional phases of the company's
consolidation, reorganization and reengineering plan and the
integration of Scrivner. These expenses include travel and
training costs, additional expenditures associated with
maintaining two operational systems during the integration of
Scrivner and the roll-out of FFMP, software installation costs and
other miscellaneous costs associated with facilities consolidations
(including costs relating to operational inefficiencies during the
change-over, deferred sales growth and lost business opportunities).
These costs are difficult to isolate, quantify or predict, and the
timing of various components is erratic. Nevertheless, management
believes that such expenses have been incurred at a significant rate
since the end of the second quarter of 1994 and that consolidation,
reorganization and reengineering expenses will continue to negatively
impact earnings until sometime in 1997.
Results of Operations
Set forth in the following table is information for the third
interim and year to date periods of 1995 and 1994 regarding
certain components of the company's earnings expressed as a
percentage of net sales.
<TABLE>
<CAPTION>
Third Interim Period 1995 1994
<S> <C> <C>
Net sales 100.00% 100.00%
Gross margin 7.67 7.72
Less:
Selling and administrative expense 6.67 6.82
Interest expense .99 .90
Interest income (.35) (.37)
Equity investment results .17 .12
Total expenses 7.48 7.47
Earnings before taxes .19 .25
Taxes on income .10 .18
Net earnings .09% .07%
Year to Date 1995 1994
Net sales 100.00% 100.00%
Gross margin 7.95 6.82
Less:
Selling and administrative expense 6.69 5.67
Interest expense 1.01 .68
Interest income (.38) (.42)
Equity investment results .12 .10
Facilities consolidation (.07) ---
Total expenses 7.37 6.03
Earnings before taxes .58 .79
Taxes on income .30 .38
Net earnings .28% .41%
</TABLE>
Net sales. Sales for the third quarter (12 weeks) of 1995
decreased by $.2 billion, or 6%, to $3.9 billion from $4.1
billion for the same period in 1994. Year to date, sales
increased by $2.4 billion, or 21%, to $13.4 billion from $11.0
billion for the 40 weeks in 1994. Net sales for both the quarter
and year-to-date period were adversely impacted by sales lost
through normal attrition which were not replaced as marketing
efforts were directed toward training existing customers on
implementing FFMP. In response to the situation, management is
establishing a sales organization that will be dedicated to
prospecting for new accounts. The company's tighter credit
policies, which result in credit extensions being limited to new
customers that meet certain minimum financial standards, has also
had a dampening effect on generating replacement sales.
The increase in year to date net sales was due to the Scrivner
acquisition as Scrivner's sales were not included in 28 of the 40 weeks
in 1994. Without the acquisition, net sales for the year-to-date periods
would have declined slightly. Several other factors, none of which are
individually material, adversely affected net sales including:
the loss of certain customers at three different distribution
centers, the loss of business due to the bankruptcy of Megafoods
Stores, Inc. ("Megafoods"), the closing or sale of certain
corporate stores, the sale of a distribution center and the
expiration of a temporary agreement with Albertson's, Inc. as its
Florida distribution center came on line.
In August 1994, Megafoods and certain of its affiliates
filed Chapter 11 bankruptcy proceedings. At such date,
Megafoods' total indebtedness to Fleming for goods sold on open
account, equipment leases and loans aggregated approximately $20
million. The company holds collateral with respect to a
substantial portion of these obligations. Megafoods is also
liable to the company under store sublease agreements for
approximately $37 million, and the company is contingently liable
on certain lease guarantees given on behalf of Megafoods. The
company is partially secured as to these obligations. The
company took a charge to earnings of $6.5 million in the third
quarter of 1994 to cover its estimated net credit exposure.
However, the exact amount of the ultimate loss may vary depending
upon future developments in the bankruptcy proceedings, including
those related to collateral values, priority issues, the
company's ultimate expense, if any, related to certain customer
store leases and the outcome of the litigation described below.
In October 1995, Megafoods filed suit in the bankruptcy proceedings
against the company alleging intentional interference with business
relationship, intentional misrepresentation, negligent misrepresentation,
conversion of a $12 million cash security deposit, breach of contract
and for equitable subordination of the company's claims. The company
denies these allegations and will vigorously defend the action.
The company estimates that its annualized sales to Megafoods
prior to the bankruptcy were approximately $335 million. Shortly
after the commencement of the bankruptcy proceedings, Megafoods
moved its business in the Texas market (approximately $100
million of annualized sales) to a new supplier and in June 1995,
Megafoods moved the majority of its business in the Arizona
market (approximately $150 million of annualized sales) to another
supplier. In November 1995, at the company's request,
Megafoods will move the balance of its business.
Fleming has a substantial business base in its Phoenix division
which services more than 400 locations. In response to the lost
Megafoods business, the company has adjusted its Phoenix operation's
overhead costs and has pursued new business opportunities.
Fleming measures inflation using data derived from the
average cost of a ton of product sold by the company. For the
year-to-date period in 1995, food price inflation was not
significant.
Gross margin. Gross margin for the third quarter of 1995
decreased by $19 million, or 6%, to $299 million from $318
million for the same period of 1994 and decreased slightly as a
percentage of net sales to 7.67% from 7.72% for the same period
in 1994. Year to date, gross margin increased by $308 million,
or 41%, to $1.1 billion from $753 million for the same period of
1994. As a percentage of net sales, gross margin was 7.95%
versus 6.82% in 1994. The increase in gross margin for year to
date was due to the addition of retail operations, principally
the Scrivner retail operations, which were not in 28 of the 40
weeks of the 1994 period. Retail operations typically have a
higher gross margin and higher selling expenses than food
distribution operations. Product handling expenses, consisting
of warehouse, truck and building expenses, were essentially
unchanged as a percentage of net sales in 1995 when compared to
the 1994 periods.
Selling and administrative expenses. Selling and
administrative expenses for the third quarter of 1995 decreased
by $22 million, or 8%, to $260 million from $282 million for the
same period in 1994 and decreased as a percentage of net sales
to 6.67% for 1995 from 6.82% in 1994. For the year-to-date
period, selling and administrative expenses increased by $267
million, or 43%, to $893 million from $626 million in the 1994
period. The decrease in the quarter was due in part to the
reduction in credit loss expense, described below, and
to a reduction in the estimate of liabilities required for
various obligations, partially offset by an increase in retail
expenses. The 1994 period did not include a full quarter of
activity for Scrivner retail and other retail operations
acquired. The increase in year to date was due primarily to the
acquisition of Scrivner and other retail operations which were
not in the 1994 period for most of the 40 weeks. Selling and
administrative expenses also have increased due to additional
goodwill amortization related to the acquisition.
As more fully described in its 1994 Annual Report on Form
10-K, the company has a significant amount of credit extended to
its customers through various methods. These methods include
customary and extended credit terms for inventory purchases,
secured loans with terms generally up to ten years, and equity
investments in and secured and unsecured loans to certain
customers. In addition, the company guarantees debt and lease
obligations of certain customers. Usually, these capital
investments are made in and guarantees extended to customers with
whom the company enjoys long-term supply agreements.
Credit loss expense is included in selling and
administrative expenses and for the third quarter decreased by
$13 million to $9 million from $22 million for the comparable
period in 1994. Year to date, credit losses decreased by $25
million to $24 million from $49 million for the 40 weeks in 1994.
The more stringent credit practices and reduced emphasis on
credit extensions to and investments in customers are resulting
in lower losses. While there can be no assurance that credit
losses from existing or future investments or commitments will
not have a material adverse effect on results of operations or
financial position, management expects that credit losses for
fiscal year 1995 will be lower than those experienced in 1994.
Interest expense. Interest expense for the third quarter of
1995 increased $2 million to $39 million from $37 million for the
same period in 1994. Year to date, interest expense increased
$60 million to $135 million from $75 million for the comparable
period in 1994. The increase for the third quarter was due to
the acquisition indebtedness (which was outstanding for all of the
1995 quarter compared to ten fewer days in the 1994 quarter)
coupled with higher rates. Year to date, the increase was due
principally to higher borrowing due to the Scrivner acquisition,
higher interest rates in the capital and credit markets, and
higher borrowing margins resulting from changes in the company's
credit rating resulting from the Scrivner acquisition and the
1995 credit rating downgrade.
The company enters into interest rate hedge agreements to
manage interest costs and exposure to changing interest rates.
The credit agreement with the company's banks requires the
company to provide interest rate protection on a substantial
portion of the indebtedness outstanding thereunder. The company
has entered into interest rate swaps and caps covering $850
million aggregate principal amount of floating rate indebtedness.
The company's hedged position exceeds the hedge requirements set
forth in the company's bank credit agreement.
The interest rate on the company's floating rate
indebtedness is equal to the London interbank offered interest
rate ("LIBOR") plus a margin. The average fixed interest rate
paid by the company on the interest rate swaps is 6.95%, covering
$600 million of floating rate indebtedness. The interest rate
swap agreements, which were implemented through seven
counterparty banks, and which have an average remaining life of
4.1 years, provide for the company to receive substantially the
same LIBOR that the company pays on its floating rate
indebtedness. For the remaining $250 million, the company has
purchased interest rate cap agreements from two counterparty
banks covering $250 million of its floating rate indebtedness.
The agreements cap LIBOR at 7.33% over the next 3.9 years. The
company's net payment obligations and receivables under the
interest rate swap and cap agreements meet the criteria for hedge
accounting treatment. Accordingly, the company's payment
obligations and receivables are accounted for as interest
expense. For the year to date period in 1995, the interest rate
hedge agreements added $5.4 million to interest expense.
With respect to the interest rate hedging agreements, the
company believes its exposure to potential credit loss
is minimized primarily due to the relatively strong credit
ratings of the counterparties for their unsecured long-term debt
(A+ or higher from Standard & Poor's Ratings Group and A2 or
higher from Moody's Investors Service, Inc.) and the size and
diversity of the counterparty banks. The hedge agreements are
subject to market risk to the extent that market interest rates
for similar instruments decrease, and the company terminates the
hedges prior to their maturity.
Interest income. Interest income for the 1995 quarter
decreased by $2 million to $14 million from $16 million for the
same period in 1994. Year to date, interest income increased by
$6 million to $52 million compared to $46 million for the 40
weeks in 1994. The decrease in the quarter is primarily due to
the notes receivable sale in the second quarter of 1995. At the
end of June 1995, the company sold $77 million of notes
receivable with limited recourse. The sale reduced the amount
of notes receivable available to produce interest income and
resulted in lower interest income. The year to date increase is
primarily due to earnings on the notes receivable acquired in the
Scrivner loan portfolio, partially offset by the note sale.
Equity investment results. The company's portion of
operating losses from equity investments for the third quarter
of 1995 increased by less than $2 million to $7 million compared
to the same period in 1994. Year to date, such operating losses
have increased by $5 million to $16 million compared to the same period
in 1994. Certain of the strategic multi-store customers in which the
company has made equity investments under its business development venture
program experienced increased losses during both the third quarter and the
year to date period; such losses are expected to continue during the fourth
quarter. Additionally, losses from retail stores which are part of the
company's equity store program and are accounted for under the equity method
also increased.
In October 1995, ABCO Holding, Inc., a customer of the company
in which the company owns an equity interest and with whom the
company has a long-term supply agreement, defaulted on its $21
million senior credit facility with its bank and on its loan and
supply agreement with the company (totaling approximately $39
million). These obligations are secured by a pledge of substantially
all of ABCO's assets. In November, the company purchased additional
shares of ABCO's common stock for nominal consideration and now holds
a majority of ABCO's common stock. The company also purchased ABCO's
indebtedness to the bank, took an assignment of the bank's senior priority
security interest and has agreed to cause ABCO's obligations to its other
trade creditors to be brought current. The company has advised ABCO
that it will commence foreclosure proceedings on the collateral held
to secure the defaulted indebtedness. The company does not anticipate
that the foreclosure will result in a material adverse effect on the
company's financial position or results of operations.
Taxes on income. The estimated effective tax rate for the
third quarter 1995 was 51.1%, down from 73.2% recorded in the
third quarter 1994. The high third quarter 1994 rate resulted
principally from recording the effects during the quarter of the
higher estimated annual rate due to the Scrivner acquisition.
The increase was primarily due to increased goodwill amortization
with no related tax deduction, operations in higher tax rate
states and the significance of certain nondeductible expenses to
pretax earnings. The company's estimated annual effective tax
rate year to date in 1995 was 51.1%, up from 47.5% recorded in
the comparable period in 1994. The 1994 annual rate was 50.0%.
Other. Several factors negatively affecting earnings year
to date in 1995 are likely to continue. Management believes that
these factors include: lower sales; increased interest expense and
goodwill amortization; little or no food price inflation; and
operating losses in certain company-owned retail stores.
Additionally, costs associated with the transitional phases of
the company's consolidation, reorganization and reengineering plan are
expected to continue until sometime in 1997.
The company has been named in two related legal actions
filed in the U.S. District Court in Miami in December 1993. The
litigation is complex and the ultimate outcome cannot presently
be determined. Furthermore, the company is unable to predict a
potential range of monetary exposure, if any, to the company.
Based on the recovery sought, an unfavorable judgment could have
a material adverse effect on the company.
Segment information. Sales and operating earnings for the
company's food distribution and retail food segments are
presented below.
<TABLE>
<CAPTION>
Third Interim
Period Year to Date
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Sales
($ in billions)
Food distribution $ 3.2 $ 3.4 $ 10.9 $ 9.7
Retail food .7 .7 2.5 1.3
Total Sales $ 3.9 $ 4.1 $ 13.4 $ 11.0
Operating earnings
($ in millions)
Food distribution $59 $54 $217 $183
Retail food 9 10 43 19
Corporate (29) (27) (92) (75)
Total $39 $37 $168 $127
</TABLE>
Operating earnings for industry segments consist of net
sales less related operating expenses. Operating expenses
exclude interest expense, interest income, equity investment
results, income taxes and general corporate expenses. The
transfer pricing between segments is at cost.
Liquidity and Capital Resources
Set forth below is certain information regarding the
company's capital position at the end of the third quarter of
1995 and at the end of fiscal 1994:
<TABLE>
<CAPTION>
Capital Structure October 7, December 31,
(In millions) 1995 % 1994 %
<S> <C> <C> <C> <C>
Long-term debt $1,363 48.0 $1,752 54.8
Capital lease obligations 385 13.6 369 11.5
Total debt 1,748 61.6 2,121 66.3
Shareholders' equity 1,090 38.4 1,079 33.7
Total capital $2,838 100.0 $3,200 100.0
</TABLE>
(Current maturities of long-term debt and current obligations
under capital leases are included in the respective
captions.)
The company's current debt capital structure includes an $800 million
six-year amortizing term loan which matures June 2000, a $596 million
five-year revolving credit facility which matures July 1999, $300
million of 10.625% seven-year senior notes maturing December
2001, $200 million of floating rate seven-year senior notes, and
$139 million of medium-term notes.
Presently the company's senior unsecured debt is rated Ba1
by Moody's Investors Service and BB- by Standard & Poor's Ratings
Group. Pricing under the bank credit agreement automatically
increases or decreases with respect to certain credit rating
declines or improvements, respectively, based upon the higher of
Moody's or Standard & Poor's ratings.
The company's principal sources of liquidity are cash flows
from operating activities and borrowings under the bank credit
agreement. Despite the effect of reduced earnings, management
believes the company can maintain adequate liquidity for the
foreseeable future at acceptable rates. At third quarter end
1995, $683 million was borrowed on the six-year amortizing term
loan and $30 million was drawn on or supported by the $596
million five-year revolving credit facility.
The bank credit agreement and the indentures for the
company's senior notes issued in 1994 contain customary covenants
associated with similar facilities. The bank credit agreement
currently contains the following covenants: maintenance of a
consolidated debt-to-net worth ratio of not more than 2.45 to 1;
maintenance of a minimum consolidated net worth of at least $880
million; maintenance of a fixed charge coverage ratio of at least
1.25 to 1; a limitation on restricted payments (including
dividends and company stock repurchases); prohibition of certain
liens; prohibitions of certain mergers, consolidations and sales
of assets; restrictions on the incurrence of debt and additional
guarantees; limitations on transactions with affiliates;
limitations on acquisitions and investments; limitations on
capital expenditures; and a limitation on payment restrictions
affecting subsidiaries.
The company is permitted to pay dividends or repurchase
capital stock in the aggregate amount of approximately $26
million for the remainder of fiscal 1995. At quarter-end 1995
the consolidated debt-to-net worth test would have allowed the
company to borrow an additional $888 million and the fixed charge
coverage test would have allowed the company to incur an
additional $23 million of annual interest and rent expense.
Covenants associated with the senior notes are generally
less restrictive than those of the bank credit agreement.
At the end of the third quarter 1995, the company was in
compliance with all financial covenants under the credit
agreement and the senior note indentures. Continued compliance
over the near-term will depend on the company's ability to
generate sufficient earnings during the implementation of its
reengineering plan.
Operating activities generated $370 million of net cash
flows year to date in 1995 compared to $325 million in the
comparable period in 1994. Working capital was $282 million at
third-quarter end 1995, a decrease from $496 million at year-end
1994. The current ratio decreased to 1.21 to 1, from 1.38 to 1
at year-end 1994. Management believes that cash flows from
operating activities and the company's ability to borrow under
the credit agreement will be adequate to meet working capital
needs, capital expenditures and cash needs for the facilities
consolidation, restructuring and reengineering plan.
Capital expenditures year to date in 1995 were approximately
$69 million. Management expects that 1995 capital expenditures,
excluding acquisitions, if any, will approximate $100 million.
The debt-to-capital ratio decreased to 61.6% from 66.3% at
year-end 1994. The company's long-term target ratio is
approximately 50%. Total capital was $2.8 billion at quarter
end, down $.4 billion from year-end 1994.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Page Number
12 Computation of Ratio of Earnings
to Fixed Charges
27 Financial Data Schedule
<PAGE>
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.
FLEMING COMPANIES, INC.
(Registrant)
Date: November 20, 1995 /s/ KEVIN J. TWOMEY
Kevin J. Twomey
Vice President-Controller
(Chief Accounting Officer)
<PAGE>
Exhibit 12
<TABLE>
<CAPTION>
40 Weeks Ended
October 7, October 1,
(In thousands of dollars) 1995 1994
<S> <C> <C>
Earnings:
Pretax income $ 77,612 $ 87,066
Fixed charges, net 164,560 96,832
Total earnings $242,172 $183,898
Fixed charges:
Interest expense $135,046 $ 75,413
Portion of rental charges
deemed to be interest 29,239 21,169
Capitalized interest 664 254
Total fixed charges $164,949 $ 96,836
Ratio of earnings
to fixed charges 1.47 1.90
</TABLE>
"Earnings" consists of income before income taxes and fixed
charges excluding capitalized interest. Capitalized interest
amortized during the respective periods is added back to
earnings.
"Fixed charges, net" consists of interest expense, an estimated
amount of rental expense which is deemed to be representative of
the interest factor and amortization of capitalized interest.
The pro forma ratio of earnings to fixed charges is omitted as
it is not applicable.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE THIRD QUARTERLY PERIOD ENDED OCTOBER 7, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000352949
<NAME> FLEMING COMPANIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-END> OCT-07-1995
<CASH> 4,750
<SECURITIES> 0
<RECEIVABLES> 403,326
<ALLOWANCES> 49,497
<INVENTORY> 1,153,673
<CURRENT-ASSETS> 1,597,418
<PP&E> 1,473,398
<DEPRECIATION> 535,960
<TOTAL-ASSETS> 4,216,678
<CURRENT-LIABILITIES> 1,315,571
<BONDS> 1,268,745
<COMMON> 94,152
0
0
<OTHER-SE> 995,766
<TOTAL-LIABILITY-AND-EQUITY> 4,216,678
<SALES> 13,351,305
<TOTAL-REVENUES> 13,351,305
<CGS> 12,290,313
<TOTAL-COSTS> 13,114,303
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24,344
<INTEREST-EXPENSE> 135,046
<INCOME-PRETAX> 77,612
<INCOME-TAX> 39,660
<INCOME-CONTINUING> 37,952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,952
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.01
</TABLE>
