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PUBLIX SUPER MARKETS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Overview The Company is primarily engaged in the retail food industry, operating supermarkets in Florida, Georgia, Alabama, South Carolina, Tennessee and North Carolina. The Company opened its first supermarket in North Carolina in February 2014. As of June 28, 2014, the Company operated 1,077 supermarkets. Results of Operations Sales Sales for the three months ended June 28, 2014 were $7.5 billion as compared with $7.0 billion for the three months ended June 29, 2013, an increase of $465.5 million or 6.6%. The increase in sales for the three months ended June 28, 2014 as compared with the three months ended June 29, 2013 was primarily due to a 6.3% increase in comparable store sales (supermarkets open for the same weeks in both periods, including replacement supermarkets). Sales for supermarkets that are replaced on site are not included in comparable store sales since the replacement period for the supermarket is generally 9 to 12 months. The Company estimates that its sales for the three months ended June 28, 2014 were positively impacted 1.3% due to the Easter holiday being in the second quarter in 2014. In 2013, the Easter holiday was in the first quarter. Sales for the six months ended June 28, 2014 were $15.3 billion as compared with $14.5 billion for the six months ended June 29, 2013, an increase of $776.9 million or 5.3%. The increase in sales for the six months ended June 28, 2014 as compared with the six months ended June 29, 2013 was primarily due to a 5.1% increase in comparable store sales. Comparable store sales for the three and six months ended June 28, 2014 increased primarily due to product cost inflation and increased customer counts resulting from a better economic climate. Gross profit Gross profit (sales less cost of merchandise sold) as a percentage of sales was 27.1% and 27.9% for the three months ended June 28, 2014 and June 29, 2013, respectively. Gross profit as a percentage of sales was 27.7% and 28.1% for the six months ended June 28, 2014 and June 29, 2013, respectively. The decrease in gross profit as a percentage of sales for the three and six months ended June 28, 2014 as compared with the three and six months ended June 29, 2013 was primarily due to increases in promotional activities and product cost increases, some of which were not passed on to customers. Operating and administrative expenses Operating and administrative expenses as a percentage of sales were 20.5% and 20.6% for the three months ended June 28, 2014 and June 29, 2013, respectively. Operating and administrative expenses as a percentage of sales for the three months ended June 28, 2014 as compared with the three months ended June 29, 2013 remained relatively unchanged. Operating and administrative expenses as a percentage of sales were 20.2% for the six months ended June 28, 2014 and June 29, 2013. Investment income, net Investment income, net was $37.9 million and $26.6 million for the three months ended June 28, 2014 and June 29, 2013, respectively. Investment income, net was $63.6 million and $48.4 million for the six months ended June 28, 2014 and June 29, 2013, respectively. The increase in investment income, net for the three and six months ended June 28, 2014 as compared with the three and six months ended June 29, 2013 was primarily due to an increase in net realized gains on AFS securities. Income taxes The effective income tax rate was 33.1% and 33.7% for the three months ended June 28, 2014 and June 29, 2013, respectively. The effective income tax rate was 33.2% and 33.7% for the six months ended June 28, 2014 and June 29, 2013, respectively. The decrease in the effective income tax rate for the three and six months ended June 28, 2014 as compared with the three and six months ended June 29, 2013 was primarily due to an increase in qualified inventory donations and investment related tax credits partially offset by an increase in the effective income tax rate due to the adoption of the ASU discussed in Note 2 of the Notes to Condensed Consolidated Financial Statements. Net earnings Net earnings were $404.1 million or $0.52 per share and $400.9 million or $0.51 per share for the three months ended June 28, 2014 and June 29, 2013, respectively. Net earnings as a percentage of sales were 5.4% and 5.7% for the three months ended June 28, 2014 and June 29, 2013, respectively. Net earnings were $897.8 million or $1.15 per share and $872.1 million or $1.12 per share for the six months ended June 28, 2014 and June 29, 2013, respectively. Net earnings as a percentage of sales were 5.9% and 6.0% for the six months ended June 28, 2014 and June 29, 2013, respectively. The decrease in net earnings as a percentage of sales for the three and six months ended June 28, 2014 as compared with the three and six months ended June 29, 2013 was primarily due to a decrease in gross profit as a percentage of sales partially offset by an increase in investment income, net and a decrease in the effective income tax rate, as noted above. 11 -------------------------------------------------------------------------------- Liquidity and Capital Resources Cash and cash equivalents, short-term investments and long-term investments totaled $6,761.2 million as of June 28, 2014, as compared with $6,293.4 million as of December 28, 2013. This increase was primarily due to net cash provided by operating activities less payments for capital expenditures, net acquisitions of common stock and dividends. Net cash provided by operating activities Net cash provided by operating activities was $1,516.8 million for the six months ended June 28, 2014, as compared with $1,487.8 million for the six months ended June 29, 2013. The increase in net cash provided by operating activities for the six months ended June 28, 2014 as compared with the six months ended June 29, 2013 was primarily due to the increase in net earnings. Any net cash in excess of the amount needed for current operations is invested in short-term and long-term investments. Net cash used in investing activities Net cash used in investing activities was $1,088.3 million for the six months ended June 28, 2014, as compared with $1,066.3 million for the six months ended June 29, 2013. For the six months ended June 28, 2014, the primary use of net cash in investing activities was funding capital expenditures and net increases in investment securities. Capital expenditures totaled $540.5 million. These expenditures were incurred in connection with the opening of nine new supermarkets (including four replacement supermarkets) and remodeling 56 supermarkets. Eleven supermarkets were closed during the period. Replacement supermarkets that opened during the six months ended June 28, 2014 replaced two supermarkets closed during the same period and two supermarkets closed in 2013 that were replaced on site. Eight of the remaining supermarkets closed during the six months ended June 28, 2014 will be replaced on site in subsequent periods and one supermarket will not be replaced. Expenditures were also incurred for new supermarkets and remodels in progress, the acquisition of shopping centers with the Company as the anchor tenant, the construction of new warehouses and new or enhanced information technology hardware and applications. For the six months ended June 28, 2014, the payment for investments, net of the proceeds from the sale and maturity of such investments, was $559.7 million. For the six months ended June 29, 2013, the primary use of net cash in investing activities was funding capital expenditures and net increases in investment securities. Capital expenditures totaled $271.8 million. These expenditures were incurred in connection with the opening of 10 new supermarkets (including one replacement supermarket) and remodeling 48 supermarkets. Seven supermarkets were closed during the period. The replacement supermarket that opened during the six months ended June 29, 2013 replaced one of the supermarkets closed during the same period. Five of the remaining supermarkets closed during the six months ended June 29, 2013 were replaced on site in subsequent periods and one supermarket was not replaced. Expenditures were also incurred for new supermarkets and remodels in progress, the construction of new warehouses and new or enhanced information technology hardware and applications. During the first quarter of 2013, the Company wrote off $1,061.6 million of fully depreciated furniture, fixtures and equipment. Since the assets were fully depreciated, the write off had no effect on the Company's financial condition, results of operations or cash flows. For the six months ended June 29, 2013, the payment for investments, net of the proceeds from the sale and maturity of such investments, was $799.2 million. Capital expenditure projection Capital expenditures for the remainder of 2014 are expected to be approximately $560 million, primarily consisting of new supermarkets, remodeling existing supermarkets, construction of new warehouses, new or enhanced information technology hardware and applications and acquisition of shopping centers with the Company as the anchor tenant. The shopping center acquisitions are financed with internally generated funds and assumed debt, if prepayment penalties for the debt are determined to be significant. This capital program is subject to continuing change and review. In the normal course of operations, the Company replaces supermarkets and closes supermarkets that are not meeting performance expectations. The impact of future supermarket closings is not expected to be material. Net cash used in financing activities Net cash used in financing activities was $529.7 million for the six months ended June 28, 2014, as compared with $468.7 million for the six months ended June 29, 2013. The primary use of net cash in financing activities was funding net common stock repurchases and payment of dividends. Net common stock repurchases totaled $235.5 million for the six months ended June 28, 2014, as compared with $191.2 million for the six months ended June 29, 2013. The Company currently repurchases common stock at the stockholders' request in accordance with the terms of the Company's Employee Stock Purchase Plan (ESPP), 401(k) Plan, ESOP and Non-Employee Directors Stock Purchase Plan (Directors Plan). The amount of common stock offered to the Company for repurchase is not within the control of the Company, but is at the discretion of the stockholders. The Company expects to continue to repurchase its common stock, as offered by its stockholders from time to time, at its then current value for amounts similar to those in prior years. However, with the exception of certain shares distributed from the ESOP, such purchases are not required and the Company retains the right to discontinue them at any time. 12 --------------------------------------------------------------------------------Dividends On June 2, 2014, the Company paid a semi-annual dividend on its common stock of $0.37 per share or $289.8 million to stockholders of record as of the close of business April 30, 2014. On June 3, 2013, the Company paid a semi-annual dividend on its common stock of $0.35 per share or $274.6 million to stockholders of record as of the close of business April 30, 2013. Cash requirements In 2014, the cash requirements for current operations, capital expenditures, net common stock repurchases and dividend payments are expected to be financed by internally generated funds or liquid assets. Based on the Company's financial position, it is expected that short-term and long-term borrowings would be available to support the Company's liquidity requirements, if needed. Forward-Looking Statements From time to time, certain information provided by the Company, including written or oral statements made by its representatives, may contain forward-looking information as defined in Section 21E of the Securities Exchange Act of 1934. Forward-looking information includes statements about the future performance of the Company, which is based on management's assumptions and beliefs in light of the information currently available to them. When used, the words "plan," "estimate," "project," "intend," "believe" and other similar expressions, as they relate to the Company, are intended to identify such forward-looking statements. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from those statements including, but not limited to, the following: competitive practices and pricing in the food and drug industries generally and particularly in the Company's principal markets; results of programs to increase sales, including private-label sales; results of programs to control or reduce costs; changes in buying, pricing and promotional practices; changes in shrink management; changes in the general economy; changes in consumer spending; changes in population, employment and job growth in the Company's principal markets; and other factors affecting the Company's business within or beyond the Company's control. These factors include changes in the rate of inflation, changes in state and federal legislation or regulation, adverse determinations with respect to litigation or other claims, ability to recruit and retain employees, increases in operating costs including, but not limited to, labor costs, credit card fees and utility costs, particularly electric utility costs, ability to construct new supermarkets or complete remodels as rapidly as planned and stability of product costs. Other factors and assumptions not identified above could also cause the actual results to differ materially from those set forth in the forward-looking statements. The Company assumes no obligation to publicly update these forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. There have been no material changes in the market risk factors from those disclosed in the Company's Form 10-K for the year ended December 28, 2013. Item 4. Controls and Procedures As of the end of the period covered by this quarterly report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer each concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and that such information has been accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure. There have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation that occurred during the quarter ended June 28, 2014 that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting. 13-------------------------------------------------------------------------------- |