sptn-10q_20170715.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 15, 2017.

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: 000-31127

 

SPARTANNASH COMPANY

(Exact Name of Registrant as Specified in Its Charter)

 

 

Michigan

 

38-0593940

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

850 76th Street, S.W.

P.O. Box 8700

Grand Rapids, Michigan

 

49518

(Address of Principal Executive Offices)

 

(Zip Code)

(616) 878-2000

(Registrant’s Telephone Number, Including Area Code)

 

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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer

 

 

Accelerated filer

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of August 15, 2017, the registrant had 37,270,606 outstanding shares of common stock, no par value.

 

 

 

 


FORWARD-LOOKING STATEMENTS

The matters discussed in this Quarterly Report on Form 10-Q, in the Company’s press releases and in the Company’s website-accessible conference calls with analysts and investor presentations include “forward-looking statements” about the plans, strategies, objectives, goals or expectations of SpartanNash Company and subsidiaries (“SpartanNash” or “the Company”). These forward-looking statements are identifiable by words or phrases indicating that SpartanNash or management “expects,” “anticipates,” “plans,” “believes,” or “estimates,” or that a particular occurrence or event “will,” “may,” “could,” “should” or “will likely” result, occur or be pursued or “continue” in the future, that the “outlook” or “trend” is toward a particular result or occurrence, that a development is an “opportunity,” “priority,” “strategy,” “focus,” that the Company is “positioned” for a particular result, or similarly stated expectations. Accounting estimates, such as those described under the heading “Critical Accounting Policies” in Part I, Item 2 of this Quarterly Report on Form 10-Q, are inherently forward-looking. The Company’s asset impairment and restructuring cost provisions are estimates and actual costs may be more or less than these estimates and differences may be material. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date of the Quarterly Report, other report, release, presentation, or statement.

In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q, SpartanNash’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and other periodic reports filed with the Securities and Exchange Commission (“SEC”), there are many important factors that could cause actual results to differ materially. These risks and uncertainties include general business conditions, changes in overall economic conditions that impact consumer spending, the Company’s ability to integrate acquired assets, the impact of competition and other factors which are often beyond the control of the Company, and other risks listed in the “Risk Factors” discussion in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and risks and uncertainties not presently known to the Company or that the Company currently deems immaterial.

This section and the discussions contained in Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in Part I, Item 2 “Critical Accounting Policy” of the Quarterly Report on Form 10-Q, are intended to provide meaningful cautionary statements for purposes of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect the Company’s expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not currently known to SpartanNash or that SpartanNash currently believes are immaterial also may impair its business, operations, liquidity, financial condition and prospects. The Company undertakes no obligation to update or revise its forward-looking statements to reflect developments that occur or information obtained after the date of this Quarterly Report.

 

 

 

2


PART I

FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

July 15,

 

 

December 31,

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

     Cash and cash equivalents

$

 

22,726

 

 

$

 

24,351

 

     Accounts and notes receivable, net

 

 

349,279

 

 

 

 

291,568

 

     Inventories, net

 

 

555,578

 

 

 

 

539,857

 

     Prepaid expenses and other current assets

 

 

32,712

 

 

 

 

37,187

 

     Property and equipment held for sale

 

 

173

 

 

 

 

521

 

     Total current assets

 

 

960,468

 

 

 

 

893,484

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

621,618

 

 

 

 

559,722

 

Goodwill

 

 

366,636

 

 

 

 

322,686

 

Intangible assets, net

 

 

130,048

 

 

 

 

60,202

 

Other assets, net

 

 

119,765

 

 

 

 

94,242

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

 

2,198,535

 

 

$

 

1,930,336

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

     Accounts payable

$

 

394,276

 

 

$

 

372,432

 

     Accrued payroll and benefits

 

 

60,363

 

 

 

 

75,333

 

     Other accrued expenses

 

 

41,166

 

 

 

 

40,788

 

     Current maturities of long-term debt and capital lease obligations

 

 

19,001

 

 

 

 

17,424

 

     Total current liabilities

 

 

514,806

 

 

 

 

505,977

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

     Deferred income taxes

 

 

137,219

 

 

 

 

123,243

 

     Postretirement benefits

 

 

16,689

 

 

 

 

16,266

 

     Other long-term liabilities

 

 

39,496

 

 

 

 

45,768

 

     Long-term debt and capital lease obligations

 

 

641,257

 

 

 

 

413,675

 

     Total long-term liabilities

 

 

834,661

 

 

 

 

598,952

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

Common stock, voting, no par value; 100,000 shares

     authorized; 37,536 and 37,539 shares outstanding

 

 

522,046

 

 

 

 

521,984

 

     Preferred stock, no par value, 10,000 shares authorized; no shares outstanding

 

 

 

 

 

 

 

     Accumulated other comprehensive loss

 

 

(11,392

)

 

 

 

(11,437

)

     Retained earnings

 

 

338,414

 

 

 

 

314,860

 

     Total shareholders’ equity

 

 

849,068

 

 

 

 

825,407

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

$

 

2,198,535

 

 

$

 

1,930,336

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

 

July 15,

 

 

July 16,

 

 

July 15,

 

 

July 16,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

Net sales

$

 

1,894,709

 

 

$

 

1,827,562

 

 

$

 

4,297,213

 

 

$

 

4,106,332

 

 

Cost of sales

 

 

1,623,683

 

 

 

 

1,564,863

 

 

 

 

3,668,811

 

 

 

 

3,509,391

 

 

Gross profit

 

 

271,026

 

 

 

 

262,699

 

 

 

 

628,402

 

 

 

 

596,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Selling, general and administrative

 

 

231,476

 

 

 

 

223,418

 

 

 

 

554,170

 

 

 

 

519,799

 

 

   Merger/acquisition and integration

 

 

622

 

 

 

 

913

 

 

 

 

4,638

 

 

 

 

1,810

 

 

Restructuring (gains) charges and asset impairment

 

 

(14

)

 

 

 

5,748

 

 

 

 

1,008

 

 

 

 

21,052

 

 

Total operating expenses

 

 

232,084

 

 

 

 

230,079

 

 

 

 

559,816

 

 

 

 

542,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

 

38,942

 

 

 

 

32,620

 

 

 

 

68,586

 

 

 

 

54,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Interest expense

 

 

5,682

 

 

 

 

4,437

 

 

 

 

12,997

 

 

 

 

10,260

 

 

   Other, net

 

 

(67

)

 

 

 

(120

)

 

 

 

(172

)

 

 

 

(270

)

 

Total other expenses, net

 

 

5,615

 

 

 

 

4,317

 

 

 

 

12,825

 

 

 

 

9,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes and discontinued operations

 

 

33,327

 

 

 

 

28,303

 

 

 

 

55,761

 

 

 

 

44,290

 

 

   Income taxes

 

 

12,267

 

 

 

 

10,743

 

 

 

 

19,636

 

 

 

 

16,770

 

 

Earnings from continuing operations

 

 

21,060

 

 

 

 

17,560

 

 

 

 

36,125

 

 

 

 

27,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

(31

)

 

 

 

(76

)

 

 

 

(71

)

 

 

 

(185

)

 

Net earnings

$

 

21,029

 

 

$

 

17,484

 

 

$

 

36,054

 

 

$

 

27,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Earnings from continuing operations

$

 

0.56

 

 

$

 

0.47

 

 

$

 

0.96

 

 

$

 

0.73

 

 

   Loss from discontinued operations

 

 

 

 

 

 

 

*

 

 

 

 

 

 

 

 

   Net earnings

$

 

0.56

 

 

$

 

0.47

 

 

$

 

0.96

 

 

$

 

0.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Earnings from continuing operations

$

 

0.56

 

 

$

 

0.47

 

 

$

 

0.96

 

 

$

 

0.73

 

 

   Loss from discontinued operations

 

 

 

 

 

 

 

 

 

 

(0.01

)

*

 

 

 

 

   Net earnings

$

 

0.56

 

 

$

 

0.47

 

 

$

 

0.95

 

 

$

 

0.73

 

 

See accompanying notes to condensed consolidated financial statements.

*

Includes rounding

 

 

 

4


SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

 

July 15,

 

 

July 16,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net earnings

$

 

21,029

 

 

$

 

17,484

 

 

$

 

36,054

 

 

$

 

27,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, before tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement liability adjustment

 

 

31

 

 

 

 

1

 

 

 

 

72

 

 

 

 

3

 

Total other comprehensive income, before tax

 

 

31

 

 

 

 

1

 

 

 

 

72

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense related to items of other comprehensive income

 

 

(11

)

 

 

 

 

 

 

 

(27

)

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income, after tax

 

 

20

 

 

 

 

1

 

 

 

 

45

 

 

 

 

2

 

Comprehensive income

$

 

21,049

 

 

$

 

17,485

 

 

$

 

36,099

 

 

$

 

27,337

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Outstanding

 

 

Stock

 

 

Income (Loss)

 

 

Earnings

 

 

Total

 

Balance at December 31, 2016

 

37,539

 

 

$

 

521,984

 

 

$

 

(11,437

)

 

$

 

314,860

 

 

$

 

825,407

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

36,054

 

 

 

 

36,054

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

45

 

 

 

 

 

 

 

 

45

 

Dividends - $0.33 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,500

)

 

 

 

(12,500

)

Share repurchase

 

(300

)

 

 

 

(7,873

)

 

 

 

 

 

 

 

 

 

 

 

(7,873

)

Stock-based employee compensation

 

 

 

 

 

7,491

 

 

 

 

 

 

 

 

 

 

 

 

7,491

 

Issuances of common stock on stock option

   exercises and stock bonus plan

 

168

 

 

 

 

3,606

 

 

 

 

 

 

 

 

 

 

 

 

3,606

 

Issuances of restricted stock

 

292

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellations of stock-based awards

 

(163

)

 

 

 

(3,162

)

 

 

 

 

 

 

 

 

 

 

 

(3,162

)

Balance at July 15, 2017

 

37,536

 

 

$

 

522,046

 

 

$

 

(11,392

)

 

$

 

338,414

 

 

$

 

849,068

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

6


SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)  

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net earnings

$

 

36,054

 

 

$

 

27,335

 

Loss from discontinued operations, net of tax

 

 

71

 

 

 

 

185

 

Earnings from continuing operations

 

 

36,125

 

 

 

 

27,520

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Non-cash restructuring, asset impairment and other charges

 

 

588

 

 

 

 

19,271

 

Depreciation and amortization

 

 

46,362

 

 

 

 

42,040

 

LIFO expense

 

 

2,282

 

 

 

 

2,471

 

Postretirement benefits expense

 

 

399

 

 

 

 

50

 

Deferred taxes on income

 

 

14,565

 

 

 

 

4,752

 

Stock-based compensation expense

 

 

7,491

 

 

 

 

6,067

 

Other, net

 

 

(75

)

 

 

 

(79

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(25,904

)

 

 

 

9,680

 

Inventories

 

 

(12,764

)

 

 

 

(18,360

)

Prepaid expenses and other assets

 

 

(4,806

)

 

 

 

(9,512

)

Accounts payable

 

 

(2,369

)

 

 

 

(7,418

)

Accrued payroll and benefits

 

 

(18,961

)

 

 

 

(11,816

)

Postretirement benefit payments

 

 

(178

)

 

 

 

(150

)

Other accrued expenses and other liabilities

 

 

(4,398

)

 

 

 

(7,334

)

Net cash provided by operating activities

 

 

38,357

 

 

 

 

57,182

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(37,789

)

 

 

 

(41,336

)

Net proceeds from the sale of assets

 

 

3,701

 

 

 

 

5,422

 

Acquisitions, net of cash acquired

 

 

(214,595

)

 

 

 

 

Loans to customers

 

 

(330

)

 

 

 

 

Payments from customers on loans

 

 

1,437

 

 

 

 

1,056

 

Other

 

 

(225

)

 

 

 

(670

)

Net cash used in investing activities

 

 

(247,801

)

 

 

 

(35,528

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

Proceeds from revolving credit facility

 

 

916,467

 

 

 

 

690,601

 

Payments on revolving credit facility

 

 

(683,807

)

 

 

 

(684,183

)

Share repurchase

 

 

(7,873

)

 

 

 

(9,000

)

Net payments related to stock-based award activities

 

 

(3,163

)

 

 

 

(2,229

)

Repayment of other long-term debt

 

 

(4,283

)

 

 

 

(5,145

)

Financing fees paid

 

 

(252

)

 

 

 

(99

)

Proceeds from exercise of stock options

 

 

3,207

 

 

 

 

1,032

 

Dividends paid

 

 

(12,500

)

 

 

 

(11,253

)

Net cash provided by (used in) financing activities

 

 

207,796

 

 

 

 

(20,276

)

Cash flows from discontinued operations

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

23

 

 

 

 

(281

)

Net cash provided by (used in) discontinued operations

 

 

23

 

 

 

 

(281

)

Net (decrease) increase in cash and cash equivalents

 

 

(1,625

)

 

 

 

1,097

 

Cash and cash equivalents at beginning of period

 

 

24,351

 

 

 

 

22,719

 

Cash and cash equivalents at end of period

$

 

22,726

 

 

$

 

23,816

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

7


SPARTANNASH COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 – Summary of Significant Accounting Policies and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of SpartanNash Company and its subsidiaries (“SpartanNash” or “the Company”). Intercompany accounts and transactions have been eliminated. For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

In the opinion of management, the accompanying condensed consolidated financial statements, taken as a whole, contain all adjustments, including normal recurring items, necessary to present fairly the financial position of SpartanNash as of July 15, 2017, and the results of its operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

The unaudited information in the condensed consolidated financial statements for the second quarters and year to date periods of 2017 and 2016 include the results of operations of the Company for the 12 and 28-week periods ended July 15, 2017 and July 16, 2016, respectively.

Note 2 – Recently Issued Accounting Standards

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment.” ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. If a reporting unit fails Step 1 of the goodwill impairment test, entities are no longer required to compute the implied fair value of goodwill following the same procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new guidance is effective for the Company in fiscal year ending January 2, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations – Clarifying the Definition of a Business.” ASU 2017-01 narrows the definition of a business and provides a screen to determine when a set of the three elements of a business—inputs, processes, and outputs – are not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The new guidance is effective for the Company in fiscal year ending December 29, 2018. The Company is currently evaluating the impact of adoption of this standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 provides for simplification of several aspects of the accounting for share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. The Company adopted the new standard in the first quarter of fiscal 2017. Accordingly the tax benefits or deficiencies related to stock-based compensation are reflected in the condensed consolidated statements of earnings as a component of the provision for income taxes, whereas they previously were recognized in equity. As a result of the adoption, the Company recognized $1.3 million of tax benefits related to share-based payments in its provision for income taxes in 2017. Additionally, the Company’s condensed consolidated statements of cash flows now include tax benefits as an operating activity, while cash paid on associates’ behalf related to shares withheld for tax purposes is classified as a financing activity. Retrospective application of the cash flow presentation resulted in $2.5 million increases to both net cash provided by operating activities and net cash used in financing activities, respectively, for the year-to-date period ended July 16, 2016. The Company’s stock compensation expense continues to reflect estimated forfeitures.

8


In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 provides guidance for lease accounting and stipulates that lessees will need to recognize a right-of-use asset and a lease liability for substantially all leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. Treatment in the consolidated statements of earnings will be similar to the current treatment of operating and capital leases. The new guidance is effective on a modified retrospective basis for the Company in the first quarter of its fiscal year ending December 28, 2019. The adoption of this ASU will result in a significant increase to the Company’s consolidated balance sheets for lease liabilities and right-of-use assets, and the Company is currently evaluating the other effects of adoption of this ASU on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The new guidance affects any reporting organization that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, “Deferral of the Effective Date,” which results in the guidance being effective for the Company in the first quarter of its fiscal year ending December 29, 2018. The adoption will include updates as provided under ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net);” ASU 2016-10, “Identifying Performance Obligations and Licensing;” and ASU 2016-12, “Narrow-Scope Improvements and Practical Expedients.” Adoption is allowed by either the full retrospective or modified retrospective approach.

The Company is currently in the process of evaluating the impact of adoption of this standard on its consolidated financial statements and has substantially completed its initial evaluation of the major focus areas that could impact the Company. From a principal versus agent considerations perspective, the Company has evaluated its significant arrangements and has determined that revenue recognition on a gross reporting basis will remain relatively unchanged, with the exception of a few smaller contracts that could be reported on a net basis depending on the nature of the arrangements and management’s final assessment. As it pertains to the Food Distribution and Military segments, the Company determined that the promised goods or services other than grocery products outlined in the contracts with customers are immaterial in the context of the contracts. As a result of this determination, the Company is not required to assess whether these promised goods or services are performance obligations, and therefore, believes revenue recognition practices will remain relatively unchanged as there are no additional deliverables for which the transaction price will need to be allocated. Many of these contracts also include contingent amounts of variable consideration, and the Company expects there to be few, if any, changes to the timing of revenue as the Company currently recognizes these amounts under the presumption that they are determinable and can be estimated. The Company also expects there to be few, if any, changes to revenue recognition in its Retail segment based on how the Company currently records gift card breakage and loyalty rewards, which are immaterial with respect to the consolidated financial statements.

 

Note 3 Acquisitions

On January 6, 2017, the Company acquired certain assets and assumed certain liabilities of Caito Foods Service (“Caito”) and Blue Ribbon Transport (“BRT”) for $214.6 million in cash, net of $2.5 million of cash acquired. Acquired assets consist primarily of property and equipment of $77.5 million, intangible assets of $72.9 million, and working capital. Intangible assets are primarily composed of customer relationships, which will be amortized over fifteen years, and indefinite lived trade names. In connection with the purchase, the Company is providing certain earn-out opportunities that have the potential to pay the sellers an additional $27.4 million, collectively, if the business achieves certain performance targets during the first three years after acquisition. If certain performance targets are not met in the first year after acquisition, the Company will be reimbursed a portion of the initial purchase price at an amount not to exceed the sum of: a) $15.0 million, representing the funds paid into escrow, and b) any earn-out opportunities earned by the sellers. The reduction in purchase price, if applicable, will first be applied to funds paid into escrow and then as an offset against and a reduction to any payments owed on the various earn-out opportunities. The acquisition was funded with proceeds from the Company’s Credit Agreement. As of July 15, 2017, the Company has incurred $4.9 million of costs related to the acquisition, of which $2.7 million was incurred in 2017, and is recorded in merger/acquisition and integration expense.

Founded in Indianapolis in 1965, Caito is a leading supplier of fresh fruits and vegetables as well as value-added meal solutions to grocery retailers and food service distributors across 22 states in the Southeast, Midwest and Eastern United States. BRT offers temperature-controlled distribution and logistics services throughout North America. Caito and BRT service customers from facilities in Indiana and Florida. Caito also has a fresh cut fruit and vegetable facility in Indianapolis and recently completed a new 118,000 square foot Fresh Kitchen facility, also in Indianapolis. The Fresh Kitchen provides the Company with the ability to process, cook, and package fresh protein-based foods and complete meal solutions. As of the second quarter of fiscal 2017, the Company has begun limited production in the Fresh Kitchen facility. The Company acquired Caito and BRT to strengthen its fresh product offerings to its existing customer base and to expand into fast-growing, value-added services, such as freshly-prepared centerplate and side dish categories.

9


The acquired assets and assumed liabilities were recorded at their estimated fair values as of the acquisition date and were based on preliminary estimates. These estimates are subject to revision upon the finalization of the valuations of the acquired real estate and intangible assets. Adjustments, if any, will be made prior to January 5, 2018. The excess of the purchase price over the fair value of net assets acquired, currently estimated at $45.2 million, was recorded as goodwill in the consolidated balance sheet and allocated to the Food Distribution segment. The goodwill recognized is attributable primarily to the assembled workforce of Caito and BRT and expected synergies. The Company expects that all goodwill attributable to the acquisition will be deductible for tax purposes.

 

Note 4 – Goodwill

Changes in the carrying amount of goodwill were as follows:

 

(In thousands)

Food Distribution

 

 

Retail

 

 

 

Total

 

 

Balance at December 31, 2016

$

 

132,367

 

 

$

 

190,319

 

(a)

 

$

 

322,686

 

(a)

Acquisitions (Note 3)

 

 

45,181

 

 

 

 

 

 

 

 

 

45,181

 

 

Disposals

 

 

 

 

 

 

(1,231

)

 

 

 

 

(1,231

)

 

Balance at July 15, 2017

$

 

177,548

 

 

$

 

189,088

 

(a)

 

$

 

366,636

 

(a)

 

(a)

Net of accumulated impairment charges of $86.6 million.

The Company reviews goodwill and other intangible assets for impairment annually, during the fourth quarter of each fiscal year, and more frequently if circumstances indicate the possibility of impairment. As of the date of the most recent goodwill impairment test, which utilized data and assumptions as of October 8, 2016, the Food Distribution reporting unit had a fair value that was substantially in excess of its carrying value and the fair value of the Retail reporting unit, which had $190.5 million of recorded goodwill as of the assessment date, exceeded its carrying value by 13.1%. The fair value calculations contain significant judgments and estimates related to the Retail reporting unit’s projected weighted average cost of capital, future revenues and cash flows, and overall profitability. These judgments and estimates are impacted by a number of different factors, both internal and external, that could result in changes in the estimates and their related outcomes. Specifically, certain changes in economic, industry or market conditions, business operations, competition, or the Company’s performance could affect the estimates used in the fair value calculations.

The Company continues to assess whether indicators are present or if there are changes in circumstances that would suggest impairment may exist, including an evaluation of business climate changes and the significant estimates related to the Retail reporting unit’s future revenues, cash flows and profitability. Since the most recent goodwill impairment test, the Company continues to monitor the trends of the Retail reporting unit’s performance. At this time the Company is not aware of any events or significant changes in its estimates that would indicate that impairment exists, and the Company has sufficient available information, both current and historical, to support its assumptions, judgments and estimates. From a sensitivity perspective, no goodwill impairment charge would be required for the Retail reporting unit if the estimate of future discounted cash flows was 2.5% lower or if the discount rate increased by 35 basis points. If the Company’s stock price experiences a significant and sustained decline or other events or changes in circumstances occur, such as interest rate increases, changes in macroeconomic conditions, or operating results of the Retail reporting unit not meeting the Company’s estimates, it could result in the Company recording a significant non-cash impairment charge.

 


10


Note 5 – Restructuring Charges and Asset Impairment

The following table provides the activity of reserves for closed properties for the first quarter of 2017. Reserves for closed properties recorded in the condensed consolidated balance sheets are included in “Other accrued expenses” in Current liabilities and “Other long-term liabilities” in Long-term liabilities based on when the obligations are expected to be paid.

 

 

 

 

 

Lease and

 

 

 

 

 

 

 

(In thousands)

 

 

 

Ancillary Costs

 

 

Severance

 

 

Total

 

Balance at December 31, 2016

 

 

 

$

 

21,932

 

 

$

 

 

 

$

 

21,932

 

Provision for closing charges (a)

 

 

 

 

 

405

 

 

 

 

 

 

 

 

405

 

Provision for severance (b)

 

 

 

 

 

 

 

 

 

545

 

 

 

 

545

 

Lease termination adjustment (c)

 

 

 

 

 

(1,910

)

 

 

 

 

 

 

 

(1,910

)

Accretion expense

 

 

 

 

 

302

 

 

 

 

 

 

 

 

302

 

Payments

 

 

 

 

 

(3,681

)

 

 

 

(379

)

 

 

 

(4,060

)

Balance at July 15, 2017

 

 

 

$

 

17,048

 

 

$

 

166

 

 

$

 

17,214

 

(a)

The provision for closing charges represents initial costs estimated to be incurred for lease and related ancillary costs, net of sublease income, related to store closings in the Retail segment.

(b)

The provision for severance relates to store closings in the Retail segment and a distribution center closing in the Food Distribution segment.

(c)

The lease termination adjustment represents the benefit recognized in connection with a lease buyout on a previously closed store. The lease liability was formerly included in the Company’s restructuring cost liability based on initial estimates.

Included in the liability are lease obligations recorded at the present value of future minimum lease payments, calculated using a risk-free interest rate, and related ancillary costs from the date of closure to the end of the remaining lease term, net of estimated sublease income.

Restructuring and asset impairment charges included in the condensed consolidated statements of earnings consisted of the following:

 

 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

 

July 15,

 

 

July 16,

 

(In thousands)

2017

 

 

2016

 

 

2017

 

 

2016

 

Asset impairment charges (a)

$

 

 

 

$

 

3,483

 

 

$

 

521

 

 

$

 

3,483

 

Provision for closing charges (b)

 

 

 

 

 

 

718

 

 

 

 

405

 

 

 

 

13,171

 

Loss (gain) on sales of assets related to closed facilities (c)

 

 

850

 

 

 

 

(101

)

 

 

 

673

 

 

 

 

266

 

Provision for severance (d)

 

 

10

 

 

 

 

 

 

 

 

545

 

 

 

 

895

 

Other costs associated with distribution center and store closings (e)

 

 

477

 

 

 

 

1,334

 

 

 

 

774

 

 

 

 

3,103

 

Changes in estimates (f)

 

 

 

 

 

 

314

 

 

 

 

 

 

 

 

434

 

Lease termination adjustment (g)

 

 

(1,351

)

 

 

 

 

 

 

 

(1,910

)

 

 

 

(300

)

 

$

 

(14

)

 

$

 

5,748

 

 

$

 

1,008

 

 

$

 

21,052

 

(a)

Asset impairment charges were incurred in the Retail segment in conjunction with the Company’s retail store rationalization plan.

(b)

The provision for closing charges represents initial costs estimated to be incurred for lease and related ancillary costs, net of sublease income, related to store closings in the Retail segment.

(c)

The net (gain) loss on sales of assets resulted from the sales of previously closed retail stores and a food distribution center.

(d)

The provision for severance relates to distribution center closings in the Food Distribution segment and store closings in the Retail segment.

(e)

Other closing costs associated with distribution center and store closings represent additional costs, predominantly labor and inventory transfer costs, incurred in connection with winding down certain operations in the Food Distribution and Retail segments.

(f)

The changes in estimates relate to revised estimates of lease and ancillary costs associated with previously closed distribution centers in the Food Distribution segment.

(g)

The lease termination adjustments represent the benefits recognized in connection with lease buyouts on previously closed stores in the Retail segment.

 


11


Note 6 – Long-Term Debt

Long-term debt consists of the following:

 

 

July 15,

 

 

December 31,

 

(In thousands)

2017

 

 

2016

 

Senior secured revolving credit facility, due December 2021

$

 

564,069

 

 

$

 

359,127

 

Senior secured term loan, due December 2021

 

 

54,672

 

 

 

 

26,954

 

Capital lease obligations

 

 

45,101

 

 

 

 

48,255

 

Other, 2.61% - 8.75%, due 2019 - 2020

 

 

3,957

 

 

 

 

5,028

 

Total debt - Principal

 

 

667,799

 

 

 

 

439,364

 

Unamortized debt issuance costs

 

 

(7,541

)

 

 

 

(8,265

)

Total debt

 

 

660,258

 

 

 

 

431,099

 

Less current portion

 

 

19,001

 

 

 

 

17,424

 

Total long-term debt

$

 

641,257

 

 

$

 

413,675

 

 

Note 7 – Fair Value Measurements

Financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, accounts and notes receivable, and accounts payable approximate fair value because of the short-term maturities of these financial instruments. At July 15, 2017 and December 31, 2016, the book value and estimated fair value of the Company’s debt instruments, excluding debt financing costs, were as follows:

 

 

July 15,

 

 

December 31,

 

(In thousands)

2017

 

 

2016

 

Book value of debt instruments, excluding debt financing costs:

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and capital lease obligations

$

 

19,001

 

 

$

 

17,424

 

Long-term debt and capital lease obligations

 

 

648,798

 

 

 

 

421,940

 

Total book value of debt instruments

 

 

667,799

 

 

 

 

439,364

 

Fair value of debt instruments, excluding debt financing costs

 

 

669,130

 

 

 

 

440,759

 

Excess of fair value over book value

$

 

1,331

 

 

$

 

1,395

 

The estimated fair value of debt is based on market quotes for instruments with similar terms and remaining maturities (Level 2 inputs and valuation techniques).

ASC 820 prioritizes the inputs to valuation techniques used to measure fair value into the following hierarchy:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

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

Level 3: Unobservable inputs for the asset or liability, reflecting the reporting entity’s own assumptions about the assumptions that market participants would use in pricing.

Long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. Assets with a book value of $0.9 million were measured at a fair value of $0.4 million, resulting in an impairment charge of $0.5 million in 2017. Fair value of long-lived assets is determined by estimating the amount and timing of net future cash flows, discounted using a risk-adjusted rate of interest. The Company estimates future cash flows based on historical results of operations, external factors expected to impact future performance, experience and knowledge of the geographic area in which the assets are located, and when necessary, uses real estate brokers. See Note 5 for discussion of long-lived asset impairment charges.

Certain of the Company’s business combinations involve the potential for the receipt or payment of future contingent consideration upon the shortfall or achievement of various operating thresholds, respectively. The additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified EBITDA levels. For business combinations including contingent consideration provisions an asset or liability is recorded for the estimated fair value of the contingent consideration on the acquisition date. The fair value of the contingent consideration is remeasured at each reporting period with the change in fair value recognized as income or expense within operating expenses in the condensed consolidated statements of income. The Company measures the asset and liability on a recurring basis using Level 3 inputs.

12


The fair value of contingent consideration is measured using projected payment dates, discount rates, probabilities of payment, and projected EBITDA. Projected contingent payment or receipt amounts are discounted back to the current period using a discounted cash flow model. Projected EBITDA amounts are based on initial deal model forecasts at the time of acquisition as well as the Company’s most recent internal operational budget, and include a probability weighted range of outcomes. Changes in projected EBITDA, probabilities of payment, discount rates, or projected payment dates may result in higher or lower fair value measurements. The recurring Level 3 fair value measurements of contingent consideration include the following significant unobservable inputs as of July 15, 2017:

 

Unobservable Input

Range

 

Discount rate

 

11.80%

 

Probability of payments

0% - 100%

 

Projected fiscal year(s) of payments

2017 - 2019

 

The fair value of contingent consideration receivable and payable associated with the Caito and BRT acquisition was $18.4 million and $3.4 million, respectively, as of July 15, 2017. The net receivable of $15 million was recorded in other assets, net in the condensed consolidated balance sheets as there is a right of offset for the payable and receivable. Upon payment, the portion of the contingent consideration related to the acquisition date fair value is reported as a financing activity in the condensed consolidated statements of cash flows. Amounts received or paid in excess of the acquisition date fair value are reported as an operating activity in the consolidated statements of cash flows.

 

Note 8 – Commitments and Contingencies

The Company is engaged from time-to-time in routine legal proceedings incidental to its business. The Company does not believe that these routine legal proceedings, taken as a whole, will have a material impact on its business or financial condition. While the ultimate effect of such actions cannot be predicted with certainty, management believes that their outcome will not result in an adverse effect on the Company’s consolidated financial position, operating results or liquidity.

From time to time, the Company may advance funds to independent retailers which are earned by the retailers primarily through achieving specified purchase volume requirements, as outlined in their supply agreements with the Company, or in limited instances, for remaining a SpartanNash customer for a specified time period. These advances must be repaid if the purchase volume requirements are not met or if the retailer no longer remains a customer for the specified time period. As of July 15, 2017, the Company has an unearned advance to one independent retailer for an amount representing approximately two percent of the Company’s total assets, and also has outstanding receivables from this customer in the amount of $8.1 million, of which $4.8 million has been reserved for given the past due status on those receivables. The Company’s collateral related to the advanced funds is a security interest in select business assets of the independent retailer’s stores, including select real property assets and other collateral, including personal guarantees, from the shareholders. However, in the event of default, the Company may be unable to recover the unearned portion of the funds advanced to this independent retailer. Based on the uncertainty associated with estimating the value of the collateral and the risks related to taking possession of and divesting the secured business assets, the Company cannot reasonably estimate the amount of advanced funds, if any, that should be reserved. The Company estimates that the possible range of loss related to this customer is between zero and $25.0 million, depending on the circumstances discussed above.

13


The Company contributes to the Central States Southeast and Southwest Pension Fund (“Central States Plan” or “the Plan”), a multi-employer pension plan, based on obligations arising from its collective bargaining agreements in Bellefontaine, Ohio, Lima, Ohio, and Grand Rapids, Michigan covering its supply chain associates at those locations. This Plan provides retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed by contributing employers and unions; however, SpartanNash is not a trustee. The trustees typically are responsible for determining the level of benefits to be provided to participants, as well as for such matters as the investment of the assets and the administration of the plan. The Company currently contributes to the Central States Plan under the terms outlined in the “Primary Schedule” of Central States’ Rehabilitation Plan or those outlined in the “Default Schedule.” Both the Primary and Default schedules require varying increases in employer contributions over the previous year’s contribution. Increases are set within the collective bargaining agreement and vary by location. The Plan continues to be in red zone status, which according to the Pension Protection Act, is considered to be in critical status as red zone status plans are generally less than 65% funded.

Based on the most recent information available to the Company, management believes that the present value of actuarial accrued liabilities in this multi-employer plan significantly exceeds the value of the assets held in trust to pay benefits. Because SpartanNash is one of a number of employers contributing to this plan, it is difficult to ascertain what the exact amount of the underfunding would be. Management is not aware of any significant change in funding levels since December 31, 2016. To reduce this underfunding, management expects meaningful increases in expense as a result of required incremental multi-employer pension plan contributions in future years. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined.

Note 9 – Associate Retirement Plans

During the 12 and 28-week periods ended July 15, 2017, the Company recognized net periodic pension income of $0.2 million and $0.3 million, respectively, related to the SpartanNash Company Pension Plan and net postretirement benefit costs of $0.1 million and $0.2 million, respectively, related to the SpartanNash Medical Plan.

The Company did not make any contributions to the SpartanNash Company Pension Plan during the 28 weeks ended July 15, 2017. The Company does not expect, and is not required, to make any contributions for the remainder of the fiscal year ending December 30, 2017.

The Company’s retirement programs also include defined contribution plans providing contributory benefits, as well as executive compensation plans for a select group of management personnel and/or highly compensated associates.

Multi-Employer Plans

In addition to the plans listed above, the Company participates in the Central States Southeast and Southwest Pension Fund (EIN 7456500), the Michigan Conference of Teamsters and Ohio Conference of Teamsters Health and Welfare plans (collectively referred to as “multi-employer plans”), and other company-sponsored defined contribution plans for most associates covered by collective bargaining agreements.

With respect to the Company’s participation in the Central States Plan, expense is recognized as contributions are funded. The Company’s contributions for the 28 weeks ended July 15, 2017 and July 16, 2016 were $7.8 million and $7.5 million, respectively. See Note 8 for further information regarding the Company’s participation in the Central States Plan.

Note 10 – Income Taxes

The effective income tax rate was 36.8% and 38.0% for the 12 weeks ended July 15, 2017 and July 16, 2016, respectively. For the 28 weeks ended July 15, 2017 and July 16, 2016, the effective income tax rate was 35.2% and 37.9%, respectively. The differences from the federal statutory rate are primarily due to tax benefits related to state taxes, stock-based compensation and federal tax credits in the current year and state taxes and federal tax credits in the prior year. The Company adopted ASU 2016-09 on January 1, 2017, which requires tax benefits or deficiencies related to stock-based compensation to be reflected in the condensed consolidated statements of earnings as a component of the provision for income taxes whereas they were previously recognized in equity. Total tax benefits related to stock-based compensation recognized in fiscal 2017 were $1.3 million.

 

Note 11 – Stock-Based Compensation

The Company has a shareholder-approved stock incentive plan that provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, and other stock-based and stock-related awards to directors, officers and other key associates.

Stock-based compensation expense recognized and included in “Selling, general and administrative expenses” in the condensed consolidated statements of earnings, and related tax benefits were as follows:

 

14


 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

 

July 15,

 

 

July 16,

 

(In thousands)

2017

 

 

2016

 

 

2017

 

 

2016

 

Restricted stock

$

 

1,139

 

 

$

 

1,043

 

 

$

 

7,491

 

 

$

 

6,067

 

Tax benefits

 

 

(427

)

 

 

 

(395

)

 

 

 

(2,810

)

 

 

 

(2,300

)

Stock-based compensation expense, net of tax

$

 

712

 

 

$

 

648

 

 

$

 

4,681

 

 

$

 

3,767

 

 

The following table summarizes activity in the stock-based compensation plans for the 28 weeks ended July 15, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Shares

 

 

Weighted

 

 

Restricted

 

 

Average

 

 

Under

 

 

Average

 

 

Stock

 

 

Grant-Date

 

 

Options

 

 

Exercise Price

 

 

Awards

 

 

Fair Value

 

Outstanding at December 31, 2016

 

200,517

 

 

$

 

19.94

 

 

 

660,143

 

 

$

 

26.48

 

Granted

 

 

 

 

 

 

 

 

292,205

 

 

 

 

34.82

 

Exercised/Vested

 

(152,589

)

 

 

 

21.02

 

 

 

(253,280

)

 

 

 

25.85

 

Cancelled/Forfeited

 

 

 

 

 

 

 

 

(75,951

)

 

 

 

29.03

 

Outstanding at July 15, 2017

 

47,928

 

 

$

 

16.52

 

 

 

623,117

 

 

$

 

30.34

 

The Company has not issued any stock options since 2009 and all outstanding options are vested and exercisable at July 15, 2017.

As of July 15, 2017, total unrecognized compensation costs related to non-vested stock-based awards granted under the Company’s stock incentive plans were $6.3 million for restricted stock, and are expected to be recognized over a weighted average period of 2.3 years. All compensation costs related to stock options have been recognized.

Note 12 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share from continuing operations:

 

 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

 

July 15,

 

 

July 16,

 

(In thousands, except per share amounts)

2017

 

 

2016

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

$

 

21,060

 

 

$

 

17,560

 

 

$

 

36,125

 

 

$

 

27,520

 

Adjustment for earnings attributable to participating securities

 

 

(357

)

 

 

 

(314

)

 

 

 

(640

)

 

 

 

(492

)

Earnings from continuing operations used in calculating earnings per share

$

 

20,703

 

 

$

 

17,246

 

 

$

 

35,485

 

 

$

 

27,028

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, including participating securities

 

 

37,809

 

 

 

 

37,475

 

 

 

 

37,742

 

 

 

 

37,483

 

Adjustment for participating securities

 

 

(641

)

 

 

 

(670

)

 

 

 

(669

)

 

 

 

(670

)

Shares used in calculating basic earnings per share

 

 

37,168

 

 

 

 

36,805

 

 

 

 

37,073

 

 

 

 

36,813

 

Effect of dilutive stock options

 

 

22

 

 

 

 

71

 

 

 

 

45

 

 

 

 

59

 

Shares used in calculating diluted earnings per share

 

 

37,190

 

 

 

 

36,876

 

 

 

 

37,118

 

 

 

 

36,872

 

Basic earnings per share from continuing operations

$

 

0.56

 

 

$

 

0.47

 

 

$

 

0.96

 

 

$

 

0.73

 

Diluted earnings per share from continuing operations

$

 

0.56

 

 

$

 

0.47

 

 

$

 

0.96

 

 

$

 

0.73

 

 

15


Note 13 – Supplemental Cash Flow Information

Supplemental cash flow information is as follows:

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

(In thousands)

2017

 

 

2016

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

 

Capital lease obligations

$

 

60

 

 

$

 

3,524

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable

 

 

609

 

 

 

 

2,133

 

Capital lease asset additions

 

 

60

 

 

 

 

3,524

 

Other supplemental cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

12,224

 

 

 

 

8,648

 

 

 

Note 14 – Reporting Segment Information

The following tables set forth information about the Company by reporting segment:

 

(In thousands)

Food Distribution

 

 

Military

 

 

Retail

 

 

Total

 

12 Weeks Ended July 15, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

$

 

941,636

 

 

$

 

471,077

 

 

$

 

481,996

 

 

$

 

1,894,709

 

Inter-segment sales

 

 

209,435

 

 

 

 

 

 

 

 

 

 

 

 

209,435

 

Merger/acquisition and integration

 

 

468

 

 

 

 

 

 

 

 

154

 

 

 

 

622

 

Depreciation and amortization

 

 

6,073

 

 

 

 

2,607

 

 

 

 

9,584

 

 

 

 

18,264

 

Operating earnings

 

 

23,204

 

 

 

 

2,509

 

 

 

 

13,229

 

 

 

 

38,942

 

Capital expenditures

 

 

8,275

 

 

 

 

1,603

 

 

 

 

8,435

 

 

 

 

18,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Weeks Ended July 16, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

$

 

820,328

 

 

$

 

505,418

 

 

$

 

501,816

 

 

$

 

1,827,562

 

Inter-segment sales

 

 

220,146

 

 

 

 

 

 

 

 

 

 

 

 

220,146

 

Merger/acquisition and integration

 

 

93

 

 

 

 

 

 

 

 

820

 

 

 

 

913

 

Depreciation and amortization

 

 

4,827

 

 

 

 

2,682

 

 

 

 

10,126

 

 

 

 

17,635

 

Operating earnings

 

 

19,227

 

 

 

 

2,497

 

 

 

 

10,896

 

 

 

 

32,620

 

Capital expenditures

 

 

4,673

 

 

 

 

712

 

 

 

 

17,861

 

 

 

 

23,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 Weeks Ended July 15, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

$

 

2,104,586

 

 

$

 

1,114,390

 

 

$

 

1,078,237

 

 

$

 

4,297,213

 

Inter-segment sales

 

 

476,763

 

 

 

 

 

 

 

 

 

 

 

 

476,763

 

Merger/acquisition and integration

 

 

4,315

 

 

 

 

 

 

 

 

323

 

 

 

 

4,638

 

Depreciation and amortization

 

 

15,016

 

 

 

 

6,046

 

 

 

 

22,624

 

 

 

 

43,686

 

Operating earnings

 

 

48,518

 

 

 

 

3,399

 

 

 

 

16,669

 

 

 

 

68,586

 

Capital expenditures

 

 

14,029

 

 

 

 

4,054

 

 

 

 

19,706

 

 

 

 

37,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 Weeks Ended July 16, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

$

 

1,811,465

 

 

$

 

1,179,941

 

 

$

 

1,114,926

 

 

$

 

4,106,332

 

Inter-segment sales

 

 

497,149

 

 

 

 

 

 

 

 

 

 

 

 

497,149

 

Merger/acquisition and integration

 

 

561

 

 

 

 

1

 

 

 

 

1,248

 

 

 

 

1,810

 

Depreciation and amortization

 

 

11,297

 

 

 

 

6,157

 

 

 

 

23,550

 

 

 

 

41,004

 

Operating earnings

 

 

45,083

 

 

 

 

5,930

 

 

 

 

3,267

 

 

 

 

54,280

 

Capital expenditures

 

 

10,195

 

 

 

 

3,047

 

 

 

 

28,094

 

 

 

 

41,336

 

16


 

(In thousands)

 

 

 

 

 

 

July 15, 2017

 

 

December 31, 2016

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food Distribution

 

 

 

 

 

 

$

 

1,071,156

 

 

$

 

776,725

 

Military

 

 

 

 

 

 

 

 

408,054

 

 

 

 

395,737

 

Retail

 

 

 

 

 

 

 

 

716,077

 

 

 

 

754,625

 

Discontinued operations

 

 

 

 

 

 

 

 

3,248

 

 

 

 

3,249

 

Total

 

 

 

 

 

 

$

 

2,198,535

 

 

$

 

1,930,336

 

The Company offers a wide variety of grocery products, general merchandise and health and beauty care, pharmacy, fuel, and other items and services. The following table presents sales by type of similar products and services:

 

 

12 Weeks Ended

 

28 Weeks Ended

 

July 15,

 

July 16,

 

July 15,

 

July 16,

(In thousands, except percentages)

2017

 

2016

 

2017

 

2016

Center store (a)

$

 

1,130,910

 

 

 

59.7

 

%

 

$

 

1,134,822

 

 

 

62.1

 

%

 

$

 

2,597,127

 

 

 

60.4

 

%

 

$

 

2,587,398

 

 

 

63.0

 

%

Fresh (b)

 

 

653,735

 

 

 

34.5

 

 

 

 

 

582,697

 

 

 

31.9

 

 

 

 

 

1,443,840

 

 

 

33.6

 

 

 

 

 

1,277,147

 

 

 

31.1

 

 

Pharmacy

 

 

80,355

 

 

 

4.2

 

 

 

 

 

80,895

 

 

 

4.4

 

 

 

 

 

190,715

 

 

 

4.5

 

 

 

 

 

185,485

 

 

 

4.5

 

 

Fuel

 

 

29,709

 

 

 

1.6

 

 

 

 

 

29,148

 

 

 

1.6

 

 

 

 

 

65,531

 

 

 

1.5

 

 

 

 

 

56,302

 

 

 

1.4

 

 

Consolidated net sales

$

 

1,894,709

 

 

 

100.0

 

%

 

$

 

1,827,562

 

 

 

100.0

 

%

 

$

 

4,297,213

 

 

 

100.0

 

%

 

$

 

4,106,332

 

 

 

100.0

 

%

(a) 

Consists primarily of general merchandise, grocery, beverages, snacks, tobacco products and frozen foods.

(b) 

Consists primarily of produce, meat, dairy, deli, bakery, prepared proteins, seafood and floral.

 


17


ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, the information contained under the caption “Forward-Looking Statements,” which appears at the beginning of this report, and the information in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Overview

SpartanNash, headquartered in Grand Rapids, Michigan, is a leading multi-regional grocery distributor and grocery retailer whose core businesses include distributing grocery products to independent grocery retailers (“independent retailers”), select national retailers, its corporate owned retail stores, and military commissaries in the United States. The Company operates three reportable business segments: Food Distribution, Military and Retail.

The Company’s Food Distribution segment provides a wide variety of nationally branded and private brand grocery products and perishable food products to over 2,000 independent retailers, food distributors and the Company’s corporate owned retail stores. The Food Distribution segment currently conducts business in 47 states, primarily in the Midwest, Great Lakes, and Southeast regions of the United States. Through its Food Distribution segment, the Company also services select national retailers, including Dollar General. Sales to Dollar General are made to over 13,700 of its retail locations. Through its recent acquisition of Caito Foods Service (“Caito”) and Blue Ribbon Transport (“BRT”) (“the recent acquisition”) on January 7, 2017, the Company processes fresh-cut fruits and vegetables and other value-added meal solutions and supplies these products to grocery retailers and food service distributors through its Indiana and Florida facilities. With the new Caito Fresh Kitchen facility, the Company also has the ability to process, cook and package fresh protein-based foods and complete meal solutions for a number of different customers. With the acquisition of BRT, the Company offers temperature-controlled distribution and logistics services throughout North America.

The Company’s Military segment contracts with manufacturers to distribute a wide variety of grocery products primarily to military commissaries and exchanges located in the United States, the District of Columbia, Europe, Cuba, Puerto Rico, Bahrain and Egypt. The Company has over 40 years of experience acting as a distributor to U.S. military commissaries and exchanges. As of December 8, 2016, the Company is the exclusive worldwide supplier of private brand products to U.S. military commissaries and just recently began shipping private brand products to military commissaries during the second quarter of fiscal 2017.

As of July 15, 2017, the Company’s Retail segment operated 151 corporate owned retail stores in the Midwest and Great Lakes regions primarily under the banners of Family Fare Supermarkets, VG’s Food and Pharmacy, D&W Fresh Markets, Sun Mart and Family Fresh Market. The Company also offers pharmacy services in 90 of its corporate owned retail stores and operates 30 fuel centers. The retail stores have a “neighborhood market” focus to distinguish them from supercenters and limited assortment stores.

All fiscal quarters are 12 weeks, except for the Company’s first quarter, which is 16 weeks and will generally include the Easter holiday. The fourth quarter includes the Thanksgiving and Christmas holidays, and depending on the fiscal year end, may include the New Year’s holiday.

In certain geographic areas, the Company’s sales and operating performance may vary with seasonality. Many stores are dependent on tourism and therefore, are most affected by seasons and weather patterns, including, but not limited to, the amount and timing of snowfall during the winter months and the range of temperature during the summer months. The Company’s first quarter is typically its lowest sales quarter. Therefore, operating results are generally lower during this quarter.

Fiscal 2017 Second Quarter Highlights

The Company delivered both top-line and earnings growth in the second quarter of fiscal 2017 despite slower-than-anticipated contributions from the recent acquisition and challenging retail market conditions. Growth from new and existing customers in Food Distribution and ongoing supply chain improvements helped offset Fresh Kitchen start-up and acquisition integration costs, as well as the negative impact of lower sales at Military and Retail. During the quarter, the Company continued to integrate the operations of its recent acquisition, refine and expand production at its Fresh Kitchen facility, and invest in personalized marketing initiatives and other channels to provide its retail customers with improved convenience and a better overall shopping experience. The Company also began shipping DeCA private brand products to U.S. military commissaries during the quarter.

18


Second quarter and year-to-date fiscal 2017 operational highlights include:

 

The Company completed its recent acquisition in the first quarter of fiscal 2017 and continues to make progress integrating operations. The Company is now offering its own fresh-cut fruits and vegetables to a number of different customers and corporate owned retail stores, and has also begun limited production at its new Fresh Kitchen facility. The Company remains confident about what the addition of fresh-cut fruits and vegetables, as well as the ability to produce fresh protein meal alternatives means to its value-added product offerings and future results. By strengthening its fresh product offerings and tapping into the significant ready-to-eat growth opportunities, the Company believes the recent acquisition will drive long-term growth in a challenging environment.

 

The Company realized sales growth in its Food Distribution segment due to contributions from the recent acquisition and organic sales growth of 3.2 percent for the first half of the fiscal year compared to the prior year. In the second quarter the Company grew sales in the Food Distribution segment for the 6th consecutive quarter. The Company also continued to make improvements to its supply chain and further optimize its network to gain better economies of scale, attract and retain accounts and increase asset utilization. With respect to the operations of the recent acquisition, the Company consolidated the Newcomerstown, Ohio warehouse into its Indianapolis, Indiana facility. The Company expects that the consolidation of this facility will continue to result in lower costs and improved efficiencies within the consolidated company.

 

During the quarter, the Company introduced Fast Lane, its new online ordering and curbside pick-up service, and anticipates rolling out the service to up to 50 corporate owned retail stores by the end of the year. Despite the difficult retail environment, the Company believes it is well positioned against the market backdrop and will continue to evolve its merchandising efforts and customer personalization initiatives to deliver an even better experience for its customers.

 

The Company continues to make targeted capital investments by converting certain stores to the Family Fare banner and remodeling others, including two major remodels during the second quarter. The Company also continued its store rationalization program, and in connection with overall business strategies, sold three corporate owned retail stores to new and existing Food Distribution customers and closed three others in connection with lease expirations and store rationalization plans during the first half of the fiscal year. The Company was also able to negotiate favorable lease terminations at two of its previously closed Retail stores during the year.

 

The Company continues to enhance its private brand programs for both independent customers and corporate owned stores. In the second quarter, the Company announced the launch of its Our Family® private brand into the Michigan region, which provides the Company with a system-wide, national brand equivalent or better quality program. The move to Our Family® also allows the Company to streamline its supply chain to deliver a larger variety of product offerings at a lower cost to consumers. In the second quarter, the Company began incorporating fresh-cut fruits and vegetables produced in the recent acquisition’s facility to the Open Acres™ private brand, the Company’s fresh private brand offering that features items in meat, deli, bakery and produce. Lastly, the Company continues to expand its living well offering, which includes the natural and organic Full Circle™ private brand line, fresh products offered through the recent acquisition, and a significant number of new SKUs across organic produce and healthier specialty items.

As the Company moves into the second half of the year, it remains committed to top-line and earnings growth as well as continued focus on delivering long-term value to its shareholders. At the beginning of the third quarter, the Company entered into an agreement to obtain all of the commissary distribution business from a DeCA provider exiting these operations in the Southwest. The recently secured new business, together with increasing contributions from the DeCA private brand program, are expected to return Military’s sales and earnings to positive in the second half of the fiscal year. The Company anticipates third quarter earnings to be flat to slightly ahead of the prior year as continued strong performance in its distribution operations will be partially offset by delayed contributions from the recent acquisition and a challenging marketplace for Retail.

On the acquisition front, the Company continues to see progress integrating operations, has begun limited production at the Fresh Kitchen facility, and remains confident about the ultimate growth potential and long-term vision for this business and its ready-to-eat categories. The performance of these operations, however, is currently not anticipated to meet original expectations for the current fiscal year but is projected to be accretive in fiscal 2018. To address the challenging retail landscape, the Company is continuing to invest in its store base, personalized marketing initiatives, customer convenience and experience through efforts such as Fast Lane and meal solutions, and the launch of its Our Family® brand into the Michigan region. The Company continues to expect an easing of deflationary pressures with modest food inflation anticipated in the second half of the year. Accordingly, and depending on the variability associated with inflation by commodity and its related impact on LIFO, the Company does not expect the deflation-related LIFO benefit of $0.07 per diluted share realized in the prior year to repeat in the fourth quarter of fiscal 2017.

19


Results of Operations

The following table sets forth items from the condensed consolidated statements of earnings as a percentage of net sales and the year-to-year percentage change in the dollar amounts:

 

 

Percentage of Net Sales

 

 

Percentage Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 Weeks

 

 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

Ended

 

 

July 15,

 

 

July 16,

 

 

July 15,

 

 

July 16,

 

 

July 15,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

Net sales

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

 

3.7

 

Gross profit

 

14.3

 

 

 

14.4

 

 

 

14.6

 

 

 

14.5

 

 

 

3.2

 

Selling, general and administrative expenses

 

12.2

 

 

 

12.3

 

*

 

12.9

 

 

 

12.7

 

 

 

3.6

 

Merger/acquisition and integration

 

0.0

 

 

 

0.0

 

 

 

0.1

 

 

 

0.0

 

 

 

(31.9

)

Restructuring charges and asset impairment

 

(0.0

)

 

 

0.3

 

 

 

0.0

 

 

 

0.5

 

 

 

(100.2

)

Operating earnings

 

2.1

 

 

 

1.8

 

 

 

1.6

 

 

 

1.3

 

 

 

19.4

 

Other income and expenses

 

0.3

 

 

 

0.3

 

*

 

0.3

 

 

 

0.2

 

 

 

30.1

 

Earnings before income taxes and discontinued operations

 

1.8

 

 

 

1.5

 

 

 

1.3

 

 

 

1.1

 

 

 

17.8

 

Income taxes

 

0.7

 

*

 

0.5

 

*

 

0.5

 

 

 

0.4

 

 

 

14.2

 

Earnings from continuing operations

 

1.1

 

 

 

1.0

 

 

 

0.8

 

 

 

0.7

 

 

 

19.9

 

Loss from discontinued operations, net of taxes

 

(0.0

)

 

 

(0.0

)

 

 

(0.0

)

 

 

(0.0

)

 

 

(59.2

)

Net earnings

 

1.1

 

%

 

1.0

 

%

 

0.8

 

%

 

0.7

 

%

 

20.3

 

*

Difference due to rounding

Net Sales The following table presents net sales by segment and variances in net sales:

 

 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

 

 

 

 

July 15,

 

 

July 16,

 

 

 

 

(In thousands)

2017

 

 

2016

 

 

Variance

 

 

2017

 

 

2016

 

 

Variance

 

Food Distribution

$

 

941,636

 

 

$

 

820,328

 

 

$

 

121,308

 

 

$

 

2,104,586

 

 

$

 

1,811,465

 

 

$

 

293,121

 

Military

 

 

471,077

 

 

 

 

505,418

 

 

 

 

(34,341

)

 

 

 

1,114,390

 

 

 

 

1,179,941

 

 

 

 

(65,551

)

Retail

 

 

481,996

 

 

 

 

501,816

 

 

 

 

(19,820

)

 

 

 

1,078,237

 

 

 

 

1,114,926

 

 

 

 

(36,689

)

Total net sales

$

 

1,894,709

 

 

$

 

1,827,562

 

 

$

 

67,147

 

 

$

 

4,297,213

 

 

$

 

4,106,332

 

 

$

 

190,881

 

Net sales for the quarter ended July 15, 2017 (“second quarter”) increased $67.1 million, or 3.7%, to $1.89 billion from $1.83 billion in the quarter ended July 16, 2016 (“prior year quarter”). Net sales for the year-to-date period ended July 15, 2017 (“year-to-date period”) increased $190.9 million, or 4.6%, to $4.30 billion from $4.11 billion in the year-to-date period ended July 16, 2016 (“prior year-to-date period”). The increase was driven primarily by contributions from the recent acquisition and organic growth from new and existing customers in the Food Distribution segment, which more than offset lower sales in the Military and Retail segments.

Food Distribution net sales, after intercompany eliminations, increased $121.3 million, or 14.8%, to $941.6 million in the second quarter from $820.3 million in the prior year quarter. Net sales for the year-to-date period increased $293.1 million, or 16.2%, from $1.81 billion in the prior year-to-date period to $2.1 billion. The second quarter and year-to-date increases were due to contributions from the recent acquisition and organic volume growth from new and existing customers.

20


Military net sales decreased $34.3 million, or 6.8%, to $471.1 million in the second quarter from $505.4 million in the prior year quarter. Net sales for the year-to-date period decreased $65.6 million, or 5.6%, from $1.18 billion in the prior year-to-date period to $1.11 billion. The second quarter and year-to-date decreases were primarily due to lower sales at the DeCA operated commissaries.

Retail net sales decreased $19.8 million, or 3.9%, to $482.0 million in the second quarter from $501.8 million in the prior year quarter. Net sales for the year-to-date period decreased $36.7 million, or 3.3%, from $1.1 billion in the prior year-to-date period to $1.1 billion. The decrease in net sales was primarily attributable to lower sales resulting from the closures and sales of retail stores ($11.6 million for the quarter and $24.8 million year-to-date) and negative comparable store sales. Comparable store sales, excluding fuel, were -1.8 percent for the quarter and -2.0 percent for the year-to-date period, and reflect continued strong competition within the industry. The Company defines a retail store as comparable when it is in operation for 14 accounting periods (a period equals four weeks), regardless of remodels, expansions or relocated stores. The Company’s definition of comparable store sales may differ from similarly titled measures at other companies.

Gross Profit – Gross profit represents net sales less cost of sales, which for all non-production operations includes product purchase costs, in-bound freight, physical inventory adjustments, markdowns and promotional allowances and excludes warehousing costs, depreciation and other administrative expenses. For the Company’s food processing operations, cost of sales includes direct product and production costs, inbound freight, purchasing and receiving costs, utilities, depreciation, and other indirect production costs and excludes out-bound freight and other administrative expenses. The Company’s gross profit may not be identical to similarly titled measures reported by other companies. Vendor allowances that relate to the buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for the Company’s merchandising costs, such as setting up warehouse infrastructure. Vendor allowances associated with product cost are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms.

Gross profit increased to $271.0 million in the second quarter from $262.7 million in the prior year quarter. As a percent of net sales, gross profit was 14.3% compared to 14.4% in the prior year quarter. Gross profit for the year-to-date period increased $31.5 million, or 5.3%, from $596.9 million in the prior year-to-date period to $628.4 million. As a percent of net sales, gross profit for the year-to-date period was 14.6% compared to 14.5% in the prior year-to-date period. As a percent of net sales, the second quarter and year-to-date changes in gross margin were primarily due to the recent acquisition and the mix of business operations.

Selling, General and Administrative Expenses – Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, shipping and handling, utilities, equipment rental, depreciation (to the extent not included in Cost of sales), out-bound freight and other administrative expenses.

SG&A expenses increased $8.1 million, or 3.6%, to $231.5 million in the second quarter from $223.4 million in the prior year quarter, representing 12.2% percent of net sales in the second quarter compared to 12.3% in the prior year quarter. SG&A expenses for the year-to-date period increased $34.4 million, or 6.6%, from $519.8 million in the prior year-to-date period to $554.2 million, and increased to 12.9% as a percentage of net sales compared to 12.7% in the prior year-to-date period. The second quarter and year-to-date increases in expense and rate to sales were primarily due to the addition of the recent acquisition, partly offset by supply chain improvements and lower incentive compensation expenses.

Merger/Acquisition and Integration – Second quarter and year-to-date period results included $0.6 million and $4.6 million, respectively, of merger/acquisition and integration expenses mainly associated with the recent acquisition. Prior year quarter and year-to-date results included $0.9 million and $1.8 million, respectively, of merger/acquisition and integration primarily associated with the merger of Spartan Stores, Inc. and Nash-Finch Company.

Restructuring Charges and Asset Impairment –Year-to-date period results included $1.0 million of net restructuring and asset impairment charges, which were incurred in the first quarter, primarily associated with the Company’s retail store and warehouse rationalization plans, partially offset by favorable lease terminations. Prior year quarter results and year-to-date included $5.7 million and $21.1 million, respectively, of restructuring and asset impairment charges. Prior quarter restructuring charges and asset impairment consisted primarily of impairment charges related to three underperforming retail stores and additional costs, predominantly labor and inventory transfer costs, incurred in connection with winding down operations at certain closed facilities in the Food Distribution and Retail segments. Prior year-to-date period restructuring charges and asset impairment consisted primarily of charges related to the closure of three retail stores and two food distribution centers, which were part of the Company’s retail store and warehouse rationalization plan, as well as impairment charges related to three underperforming retail stores.

21


Operating Earnings The following table presents operating earnings by segment and variances in operating earnings:

 

 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

 

 

 

 

July 15,

 

 

July 16,

 

 

 

 

(In thousands)

2017

 

 

2016

 

 

Variance

 

 

2017

 

 

2016

 

 

Variance

 

Food Distribution

$

 

23,204

 

 

$

 

19,227

 

 

$

 

3,977

 

 

$

 

48,518

 

 

$

 

45,083

 

 

$

 

3,435

 

Military

 

 

2,509

 

 

 

 

2,497

 

 

 

 

12

 

 

 

 

3,399

 

 

 

 

5,930

 

 

 

 

(2,531

)

Retail

 

 

13,229

 

 

 

 

10,896

 

 

 

 

2,333

 

 

 

 

16,669

 

 

 

 

3,267

 

 

 

 

13,402

 

Total operating earnings

$

 

38,942

 

 

$

 

32,620

 

 

$

 

6,322

 

 

$

 

68,586

 

 

$

 

54,280

 

 

$

 

14,306

 

Operating earnings increased $6.3 million, or 19.4%, to $38.9 million in the second quarter from $32.6 million in the prior year quarter. Operating earnings for the year-to-date period increased $14.3 million, or 26.4%, to $68.6 million from $54.3 million in the prior year-to-date period. The second quarter increase was primarily due to lower restructuring and asset impairment charges, lower warehousing and incentive compensation costs and organic sales growth in Food Distribution, which more than offset start-up costs associated with the new Fresh Kitchen operation and the negative impact of lower sales in the Military and Retail segments. The year-to-date increase was primarily due to lower restructuring and asset impairment charges as well as organic sales growth in Food Distribution, which more than offset higher merger/acquisition and integration expenses and start-up costs associated with the recent acquisition, the negative impact of lower sales in the Military and Retail segments and the shift of New Year’s Day into the first quarter.

Food Distribution operating earnings increased $4.0 million, or 20.7%, to $23.2 million in the second quarter from $19.2 million in the prior year quarter. Operating earnings for the year-to-date period increased $3.4 million, or 7.6%, to $48.5 million from $45.1 million in the prior year-to-date period. The increases for the quarter and year-to-date period were driven by organic sales growth and benefits associated with continued supply chain improvements, partially offset by charges related to merger/acquisition and integration expenses, Fresh Kitchen start-up costs, and restructuring charges related to the Company’s warehouse optimization plan.

Military operating earnings were $2.5 million in both the second quarter and prior year quarter. Operating earnings for the year-to-date period decreased $2.5 million, or 42.7%, to $3.4 million from $5.9 million in the prior year-to-date period. The second quarter was comparable to the prior year as margin rate improvements and lower health care and incentive compensation expenses offset the impact of lower sales. The year-to-date decrease in operating earnings was primarily due to lower sales volume, the negative impact of the shift of New Year’s Day into the first quarter, and higher costs in the first quarter for health care and a large insurance claim.

Retail operating earnings increased $2.3 million to $13.2 million in the second quarter from $10.9 million in the prior year quarter. Operating earnings for the year-to-date period increased $13.4 million, or 410%, to $16.7 million from $3.3 million in the prior year-to-date period. The second quarter increase was primarily due to lower restructuring and impairment charges, partially offset by the impact of lower sales and the incremental margin investment in fresh departments. The year-to-date increase was primarily due to lower restructuring and impairment charges, improved margin rates and the closure of unprofitable stores, partially offset by higher health care costs, lower comparable store sales and the shift of New Year’s Day.

Interest Expense – Interest expense increased $1.3 million, or 28.1%, to $5.7 million in the second quarter from $4.4 million in the prior year quarter. Interest expense for the year-to-date period increased $2.7 million, or 26.7%, from $10.3 million in the prior year-to-date period to $13.0 million. The increase in interest expense was primarily due to increased borrowings related to the recent acquisition.

Income Taxes – The effective income tax rates were 36.8% and 38.0% for the second quarter and prior year quarter, respectively. For the year-to-date period and prior year-to-date period, the effective income tax rates were 35.2% and 37.9%, respectively. The differences from the federal statutory rate are primarily due to state taxes, tax benefits related to stock-based compensation and federal tax credits in the current year and state taxes and federal tax credits in the prior year. The Company’s effective tax rate decreased due to the stock-based compensation benefits recognized resulting from the adoption of ASU 2016-09. The tax impacts of stock-based compensation are primarily generated in the first quarter due to the timing of awards and vesting schedules.

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with GAAP, the Company also provides information regarding adjusted operating earnings, adjusted earnings from continuing operations, and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“adjusted EBITDA”). These are non-GAAP financial measures, as defined below, and are used by management to allocate resources, assess performance against its peers and evaluate overall performance. The Company believes these measures provide useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its financial results in these adjusted formats.

22


Current year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude start-up costs associated with the new Fresh Kitchen operation as well as an executive retirement stock compensation award. The Fresh Kitchen is a newly constructed facility that provides the Company with the ability to process, cook, and package fresh protein-based foods and complete meal solutions. Given the Fresh Kitchen represents a new line of business for the Company in a fast growth category, the start-up activities associated with testing, training, and preparing the Fresh Kitchen for production, as well as incorporating the related operations into the business, are considered “non-operational” or “non-core” in nature. The retirement stock compensation award represents incremental compensation expense in connection with an executive retirement that is also considered “non-operational” or “non-core” in nature.

Adjusted Operating Earnings

Adjusted operating earnings is a non-GAAP operating financial measure that the Company defines as operating earnings plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.

The Company believes that adjusted operating earnings provide a meaningful representation of its operating performance for the Company as a whole and for its operating segments. The Company considers adjusted operating earnings as an additional way to measure operating performance on an ongoing basis. Adjusted operating earnings is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature, and also excludes the contributions of activities classified as discontinued operations. Because adjusted operating earnings and adjusted operating earnings by segment are performance measures that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in adjusted operating earnings format.

Adjusted operating earnings is not a measure of performance under accounting principles generally accepted in the United States of America (“GAAP”), and should not be considered as a substitute for operating earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definition of adjusted operating earnings may not be identical to similarly titled measures reported by other companies.

23


Following is a reconciliation of operating earnings to adjusted operating earnings for the 12 weeks and 28 weeks ended July 15, 2017 and July 16, 2016.

 

 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

 

July 15,

 

 

July 16,

 

(In thousands)

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating earnings

$

 

38,942

 

 

$

 

32,620

 

 

$

 

68,586

 

 

$

 

54,280

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

622

 

 

 

 

913

 

 

 

 

4,638

 

 

 

 

1,810

 

Restructuring (gains) charges and asset impairment

 

 

(14

)

 

 

 

5,748

 

 

 

 

1,008

 

 

 

 

21,052

 

Fresh Kitchen start-up costs

 

 

1,854

 

 

 

 

 

 

 

 

4,602

 

 

 

 

 

Stock compensation associated with executive retirement

 

 

 

 

 

 

 

 

 

 

1,172

 

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

21

 

 

 

 

11

 

 

 

 

24

 

 

 

 

690

 

Adjusted operating earnings

$

 

41,425

 

 

$

 

39,292

 

 

$

 

80,030

 

 

$

 

77,832

 

Reconciliation of operating earnings to adjusted operating earnings by segment:

 

Food Distribution:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

23,204

 

 

$

 

19,227

 

 

$

 

48,518

 

 

$

 

45,083

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

468

 

 

 

 

93

 

 

 

 

4,315

 

 

 

 

561

 

Restructuring charges and asset impairment

 

 

301

 

 

 

 

2,308

 

 

 

 

901

 

 

 

 

4,541

 

Fresh Kitchen start-up costs

 

 

1,854

 

 

 

 

 

 

 

 

4,602

 

 

 

 

 

Stock compensation associated with executive retirement

 

 

 

 

 

 

 

 

 

 

591

 

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

21

 

 

 

 

 

 

 

 

22

 

 

 

 

206

 

Adjusted operating earnings

$

 

25,848

 

 

$

 

21,628

 

 

$

 

58,949

 

 

$

 

50,391

 

Military:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

2,509

 

 

$

 

2,497

 

 

$

 

3,399

 

 

$

 

5,930

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Restructuring gains

 

 

 

 

 

 

(291

)

 

 

 

 

 

 

 

(259

)

Stock compensation associated with executive retirement

 

 

 

 

 

 

 

 

 

 

147

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

 

 

 

 

1

 

 

 

 

1

 

 

 

 

223

 

Adjusted operating earnings

$

 

2,509

 

 

$

 

2,207

 

 

$

 

3,547

 

 

$

 

5,895

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

13,229

 

 

$

 

10,896

 

 

$

 

16,669

 

 

$

 

3,267

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

154

 

 

 

 

820

 

 

 

 

323

 

 

 

 

1,248

 

Restructuring (gains) charges and asset impairment

 

 

(315

)

 

 

 

3,731

 

 

 

 

107

 

 

 

 

16,770

 

Stock compensation associated with executive retirement

 

 

 

 

 

 

 

 

 

 

434

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

 

 

 

 

10

 

 

 

 

1

 

 

 

 

261

 

Adjusted operating earnings

$

 

13,068

 

 

$

 

15,457

 

 

$

 

17,534

 

 

$

 

21,546

 

Adjusted Earnings from Continuing Operations

Adjusted earnings from continuing operations is a non-GAAP operating financial measure that the Company defines as earnings from continuing operations plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.

The Company believes that adjusted earnings from continuing operations provide a meaningful representation of its operating performance for the Company. The Company considers adjusted earnings from continuing operations as an additional way to measure operating performance on an ongoing basis. Adjusted earnings from continuing operations is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature, and also excludes the contributions of activities classified as discontinued operations. Because adjusted earnings from continuing operations is a performance measure that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in adjusted earnings from continuing operations format.

 

24


Adjusted earnings from continuing operations is not a measure of performance under accounting principles generally accepted in the United States of America, and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definition of adjusted earnings from continuing operations may not be identical to similarly titled measures reported by other companies.

Following is a reconciliation of earnings from continuing operations to adjusted earnings from continuing operations for the 12 weeks and 28 weeks ended July 15, 2017 and July 16, 2016.

 

 

12 Weeks Ended

 

 

 

July 15, 2017

 

 

July 16, 2016

 

 

 

 

 

 

per diluted

 

 

 

 

 

per diluted

 

 

(In thousands, except per share amounts)

Earnings

 

 

share

 

 

Earnings

 

 

share

 

 

Earnings from continuing operations

$

 

21,060

 

 

$

 

0.56

 

 

$

 

17,560

 

 

$

 

0.47

 

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

622

 

 

 

 

 

 

 

 

 

913

 

 

 

 

 

 

 

Restructuring (gains) charges and asset impairment

 

 

(14

)

 

 

 

 

 

 

 

 

5,748

 

 

 

 

 

 

 

Fresh Kitchen start-up costs

 

 

1,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

21

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

Total adjustments

 

 

2,483

 

 

 

 

 

 

 

 

 

6,672

 

 

 

 

 

 

 

Income tax effect on adjustments (a)

 

 

(932

)

 

 

 

 

 

 

 

 

(2,525

)

 

 

 

 

 

 

Total adjustments, net of taxes

 

 

1,551

 

 

 

 

0.04

 

 

 

 

4,147

 

 

 

 

0.11

 

 

Adjusted earnings from continuing operations

$

 

22,611

 

 

$

 

0.60

 

 

$

 

21,707

 

 

$

 

0.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 Weeks Ended

 

 

 

July 15, 2017

 

 

July 16, 2016

 

 

 

 

 

 

per diluted

 

 

 

 

 

per diluted

 

 

(In thousands, except per share amounts)

Earnings

 

 

share

 

 

Earnings

 

 

share

 

 

Earnings from continuing operations

$

 

36,125

 

 

$

 

0.96

 

 

$

 

27,520

 

 

$

 

0.73

 

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger integration and acquisition expenses

 

 

4,638

 

 

 

 

 

 

 

 

 

1,810

 

 

 

 

 

 

 

Restructuring charges and asset impairment

 

 

1,008

 

 

 

 

 

 

 

 

 

21,052

 

 

 

 

 

 

 

Fresh Kitchen start-up costs

 

 

4,602

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

24

 

 

 

 

 

 

 

 

 

690

 

 

 

 

 

 

 

Stock compensation associated with executive retirement

 

 

1,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total adjustments

 

 

11,444

 

 

 

 

 

 

 

 

 

23,552

 

 

 

 

 

 

 

Income tax effect on adjustments (a)

 

 

(4,295

)

 

 

 

 

 

 

 

 

(8,953

)

 

 

 

 

 

 

Total adjustments, net of taxes

 

 

7,149

 

 

 

 

0.19

 

 

 

 

14,599

 

 

 

 

0.39

 

 

Adjusted earnings from continuing operations

$

 

43,274

 

 

$

 

1.15

 

 

$

 

42,119

 

 

$

 

1.12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

The income tax effect on adjustments is computed by applying the effective tax rate, before discrete tax items, to the total adjustments for the period.

25


Adjusted EBITDA

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“adjusted EBITDA”) is a non-GAAP operating financial measure that the Company defines as net earnings plus interest, discontinued operations, depreciation and amortization, and other non-cash items including deferred (stock) compensation, the LIFO provision, as well as adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.

The Company believes that adjusted EBITDA provides a meaningful representation of its operating performance for the Company as a whole and for its operating segments. The Company considers adjusted EBITDA as an additional way to measure operating performance on an ongoing basis. Adjusted EBITDA is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature, and also excludes the contributions of activities classified as discontinued operations. Because adjusted EBITDA and adjusted EBITDA by segment are performance measures that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in adjusted EBITDA format.

Adjusted EBITDA and adjusted EBITDA by segment are not measures of performance under accounting principles generally accepted in the United States of America, and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definitions of adjusted EBITDA and adjusted EBITDA by segment may not be identical to similarly titled measures reported by other companies.

26


Following is a reconciliation of net earnings to adjusted EBITDA for the 12 weeks and 28 weeks ended July 15, 2017 and July 16, 2016.

 

 

12 Weeks Ended

 

 

28 Weeks Ended

 

 

July 15,

 

 

July 16,

 

 

July 15,

 

 

July 16,

 

(In thousands)

2017

 

 

2016

 

 

2017

 

 

2016

 

Net earnings

$

 

21,029

 

 

$

 

17,484

 

 

$

 

36,054

 

 

$

 

27,335

 

Loss from discontinued operations, net of tax

 

 

31

 

 

 

 

76

 

 

 

 

71

 

 

 

 

185

 

Income taxes

 

 

12,267

 

 

 

 

10,743

 

 

 

 

19,636

 

 

 

 

16,770

 

Other expenses, net

 

 

5,615

 

 

 

 

4,317

 

 

 

 

12,825

 

 

 

 

9,990

 

Operating earnings

 

 

38,942

 

 

 

 

32,620

 

 

 

 

68,586

 

 

 

 

54,280

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIFO expense

 

 

692

 

 

 

 

1,059

 

 

 

 

2,282

 

 

 

 

2,471

 

Depreciation and amortization

 

 

19,018

 

 

 

 

17,635

 

 

 

 

44,099

 

 

 

 

41,004

 

Merger/acquisition and integration

 

 

622

 

 

 

 

913

 

 

 

 

4,638

 

 

 

 

1,810

 

Restructuring (gains) charges and asset impairment

 

 

(14

)

 

 

 

5,748

 

 

 

 

1,008

 

 

 

 

21,052

 

Fresh Kitchen start-up costs

 

 

1,854

 

 

 

 

 

 

 

 

4,602

 

 

 

 

 

Stock-based compensation

 

 

1,139

 

 

 

 

1,043

 

 

 

 

7,491

 

 

 

 

6,067

 

Other non-cash (gains) charges

 

 

(300

)

 

 

 

(295

)

 

 

 

(523

)

 

 

 

76

 

Adjusted EBITDA

$

 

61,953

 

 

$

 

58,723

 

 

$

 

132,183

 

 

$

 

126,760

 

Reconciliation of operating earnings to adjusted EBITDA by segment:

 

Food Distribution:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

23,204

 

 

$

 

19,227

 

 

$

 

48,518

 

 

$

 

45,083

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIFO expense

 

 

380

 

 

 

 

551

 

 

 

 

1,263

 

 

 

 

1,288

 

Depreciation and amortization

 

 

6,827

 

 

 

 

4,827

 

 

 

 

15,429

 

 

 

 

11,297

 

Merger/acquisition and integration

 

 

468

 

 

 

 

93

 

 

 

 

4,315

 

 

 

 

561

 

Restructuring charges and asset impairment

 

 

301

 

 

 

 

2,308

 

 

 

 

901

 

 

 

 

4,541

 

Fresh Kitchen start-up costs

 

 

1,854

 

 

 

 

 

 

 

 

4,602

 

 

 

 

 

Stock-based compensation

 

 

551

 

 

 

 

369

 

 

 

 

3,511

 

 

 

 

2,681

 

Other non-cash (gains) charges

 

 

(1

)

 

 

 

25

 

 

 

 

46

 

 

 

 

201

 

Adjusted EBITDA

$

 

33,584

 

 

$

 

27,400

 

 

$

 

78,585

 

 

$

 

65,652

 

Military:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

2,509

 

 

$

 

2,497

 

 

$

 

3,399

 

 

$

 

5,930

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIFO expense

 

 

84

 

 

 

 

234

 

 

 

 

392

 

 

 

 

545

 

Depreciation and amortization

 

 

2,607

 

 

 

 

2,682

 

 

 

 

6,046

 

 

 

 

6,157

 

Merger/acquisition and integration

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Restructuring gains

 

 

 

 

 

 

(291

)

 

 

 

 

 

 

 

(259

)

Stock-based compensation

 

 

165

 

 

 

 

226

 

 

 

 

1,127

 

 

 

 

1,007

 

Other non-cash (gains) charges

 

 

(14

)

 

 

 

(5

)

 

 

 

(16

)

 

 

 

203

 

Adjusted EBITDA

$

 

5,351

 

 

$

 

5,343

 

 

$

 

10,948

 

 

$

 

13,584

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

13,229

 

 

$

 

10,896

 

 

$

 

16,669

 

 

$

 

3,267

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIFO expense

 

 

228

 

 

 

 

274

 

 

 

 

627

 

 

 

 

638

 

Depreciation and amortization

 

 

9,584

 

 

 

 

10,126

 

 

 

 

22,624

 

 

 

 

23,550

 

Merger/acquisition and integration

 

 

154

 

 

 

 

820

 

 

 

 

323

 

 

 

 

1,248

 

Restructuring charges and asset impairment

 

 

(315

)

 

 

 

3,731

 

 

 

 

107

 

 

 

 

16,770

 

Stock-based compensation

 

 

423

 

 

 

 

448

 

 

 

 

2,853

 

 

 

 

2,379

 

Other non-cash gains

 

 

(285

)

 

 

 

(315

)

 

 

 

(553

)

 

 

 

(328

)

Adjusted EBITDA

$

 

23,018

 

 

$

 

25,980

 

 

$

 

42,650

 

 

$

 

47,524

 

27


Liquidity and Capital Resources

Cash Flow Information

The following table summarizes the Company’s consolidated statements of cash flows:

 

 

 

 

 

28 Weeks Ended

 

 

 

 

 

July 15,

 

 

July 16,

 

(In thousands)

 

 

 

2017

 

 

2016

 

Cash flow activities

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities (a)

 

 

 

$

 

38,357

 

 

$

 

57,182

 

Net cash used in investing activities

 

 

 

 

 

(247,801

)

 

 

 

(35,528

)

Net cash provided by (used in) financing activities (a)

 

 

 

 

 

207,796

 

 

 

 

(20,276

)

Net cash provided by (used in) discontinued operations

 

 

 

 

 

23

 

 

 

 

(281

)

Net (decrease) increase in cash and cash equivalents

 

 

 

 

 

(1,625

)

 

 

 

1,097

 

Cash and cash equivalents at beginning of fiscal year

 

 

 

 

 

24,351

 

 

 

 

22,719

 

Cash and cash equivalents at end of fiscal year

 

 

 

$

 

22,726

 

 

$

 

23,816

 

(a) Prior period amounts have been adjusted for the impact of the adoption of ASU 2016-09. Refer to Note 2 of the notes to condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for further information.

Net cash provided by operating activities. Net cash provided by operating activities decreased during the current year-to-date period from the prior year-to-date period by approximately $18.8 million was mainly due to changes in working capital, particularly higher accounts receivable balances at Military as certain customers were addressing system conversion issues and payments were temporarily delayed..

Net cash used in investing activities. Net cash used in investing activities increased $212.3 million in the current year compared to the prior year primarily due to the recent acquisition (see Note 3 to the condensed consolidated financial statements).

The Food Distribution, Military and Retail segments utilized 45.2%, 8.8% and 46.0% of capital expenditures, respectively, in the current year.

Net cash provided by (used in) financing activities. Net cash provided by financing activities increased $228.1 million in the current year compared to the prior year primarily due to borrowings on the revolving credit facility to fund the recent acquisition.

Net cash provided by (used in) discontinued operations. Net cash provided by (used in) discontinued operations contains the net cash flows of the Company’s Retail and Food Distribution discontinued operations and is primarily composed of facility maintenance expenditures.

Debt Management

Total debt, including capital lease obligations and current maturities, was $660.3 million and $431.1 million as of July 15, 2017 and December 31, 2016, respectively. The increase in total debt was driven by drawdowns on the credit facility to finance the recent acquisition.

Liquidity

The Company’s principal sources of liquidity are cash flows generated from operations and its senior secured credit facility which has maximum available credit of $1.0 billion. As of July 15, 2017, the senior secured revolving credit facility and senior secured term loan collectively had outstanding borrowings of $618.7 million. Additional available borrowings under the Company’s $1.0 billion credit facility are based on stipulated advance rates on eligible assets, as defined in the Credit Agreement. The Credit Agreement requires that the Company maintain excess availability of 10% of the borrowing base, as such term is defined in the Credit Agreement. The Company had excess availability after the 10% covenant of $320.6 million at July 15, 2017. Payment of dividends and repurchases of outstanding shares are permitted, provided that certain levels of excess availability are maintained. The credit facility provides for the issuance of letters of credit, of which $9.2 million were outstanding as of July 15, 2017. The revolving credit facility matures December 2021, and is secured by substantially all of the Company’s assets.

The Company believes that cash generated from operating activities and available borrowings under the credit facility will be sufficient to meet anticipated requirements for working capital, capital expenditures, dividend payments, and debt service obligations for the foreseeable future. However, there can be no assurance that the business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the credit facility.

28


The Company’s current ratio (current assets to current liabilities) was 1.87-to-1 at July 15, 2017 compared to 1.77-to-1 at December 31, 2016, and its investment in working capital was $445.7 million at July 15, 2017 compared to $387.5 million at December 31, 2016. Net debt to total capital ratio was 0.43-to-1 at July 15, 2017 compared to 0.33-to-1 at December 31, 2016.

Total net debt is a non-GAAP financial measure that is defined as long-term debt and capital lease obligations, plus current maturities of long-term debt and capital lease obligations, less cash and cash equivalents. The ratio of net debt to capital is a non-GAAP financial measure that is calculated by dividing net debt, as defined previously, by total capital (net debt plus total shareholders’ equity). The Company believes both management and its investors find the information useful because it reflects the amount of long-term debt obligations that are not covered by available cash and temporary investments. Total net debt is not a substitute for GAAP financial measures and may differ from similarly titled measures of other companies.

Following is a reconciliation of long-term debt and capital lease obligations to total net long-term debt and capital lease obligations as of July 15, 2017 and December 31, 2016.

 

 

July 15,

 

 

December 31,

 

 

2017

 

 

2016

 

Current maturities of long-term debt and capital lease obligations

$

 

19,001

 

 

$

 

17,424

 

Long-term debt and capital lease obligations

 

 

641,257

 

 

 

 

413,675

 

Total debt

 

 

660,258

 

 

 

 

431,099

 

Cash and cash equivalents

 

 

(22,726

)

 

 

 

(24,351

)

Total net long-term debt

$

 

637,532

 

 

$

 

406,748

 

For information on contractual obligations, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. At July 15, 2017, there have been no material changes to the Company’s significant contractual obligations outside the ordinary course of business.

Cash Dividends

During the year-to-date period ended July 15, 2017, the Company returned $20.4 million to shareholders from dividend payments and share repurchases. A 10.0% increase in the quarterly dividend rate from $0.15 per share to $0.165 per share was approved by the Board of Directors and announced on March 6, 2017. Although the Company expects to continue to pay a quarterly cash dividend, adoption of a dividend policy does not commit the Board of Directors to declare future dividends. Each future dividend will be considered and declared by the Board of Directors at its discretion. Whether the Board of Directors continues to declare dividends depends on a number of factors, including the Company’s future financial condition, anticipated profitability and cash flows and compliance with the terms of its credit facilities.

Under the senior revolving credit facility, the Company is generally permitted to pay dividends in any fiscal year up to an amount such that all cash dividends, together with any cash distributions and share repurchases, do not exceed $25.0 million. Additionally, the Company is generally permitted to pay cash dividends in excess of $25.0 million in any fiscal year so long as its Excess Availability, as defined in the senior revolving credit facility, is in excess of 10% of the Total Borrowing Base, as defined in the senior revolving credit facility, before and after giving effect to the repurchases and dividends.

Off-Balance Sheet Arrangements

The Company has also made certain commercial commitments that extend beyond July 15, 2017. These commitments consist primarily of operating leases and purchase commitments (as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016), standby letters of credit of $9.2 million as of July 15, 2017, and interest on long-term debt and capital lease obligations.

29


Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, assets held for sale, long-lived assets, income taxes, self-insurance reserves, restructuring costs, retirement benefits, stock-based compensation, contingencies and litigation. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Based on the Company’s ongoing review, the Company makes adjustments it considers appropriate under the facts and circumstances. This discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements. The Company believes these accounting policies and others set forth in Item 8, Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 should be reviewed as they are integral to the understanding the Company’s financial condition and results of operations. The Company has discussed the development, selection and disclosure of these accounting policies with the Audit Committee of the Board of Directors. The accompanying financial statements are prepared using the same critical accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Recently Issued Accounting Standards

Refer to Note 2 in the notes to the condensed consolidated financial statements for further information.


30


ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

There have been no material changes in market risk of SpartanNash from the information provided in Part II, Item 7A, “Quantitative and Qualitative Disclosure About Market Risk,” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

ITEM 4. Controls and Procedures

An evaluation of the effectiveness of the design and operation of SpartanNash Company’s disclosure controls and procedures (as currently defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was performed as of July 15, 2017 (the “Evaluation Date”). This evaluation was performed under the supervision and with the participation of SpartanNash Company’s management, including its Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”). As of the Evaluation Date, SpartanNash Company’s management, including the CEO, CFO and CAO, concluded that SpartanNash’s disclosure controls and procedures were effective as of the Evaluation Date to ensure that material information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including its principal executive and principal financial officers as appropriate to allow for timely decisions regarding required disclosure. During the second quarter there was no change in SpartanNash’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, SpartanNash’s internal control over financial reporting.

 

 

 

31


PART II

OTHER INFORMATION

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding SpartanNash’s purchases of its own common stock during the 12 week period ended July 15, 2017. All employee transactions are under associate stock compensation plans. These may include: (1) shares of SpartanNash common stock delivered in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options, and (2) shares submitted for cancellation to satisfy tax withholding obligations that occur upon the vesting of the restricted shares. The value of the shares delivered or withheld is determined by the applicable stock compensation plan.

 

 

 

Total

 

 

 

 

 

 

 

 

Number

 

 

Average

 

 

 

of Shares

 

 

Price Paid

 

Period

 

Purchased

 

 

per Share

 

April 23 – May 20, 2017

 

 

 

 

 

 

 

 

 

Employee Transactions

 

 

14,887

 

 

$

 

37.34

 

May 21 – June 17, 2017

 

 

 

 

 

 

 

 

 

None

 

 

 

 

$

 

 

June 18 – July 15, 2017

 

 

 

 

 

 

 

 

 

Repurchase Program

 

 

300,292

 

 

$

 

26.22

 

Total for Quarter ended July 15, 2017

 

 

 

 

 

 

 

 

 

Employee Transactions

 

 

14,887

 

 

$

 

37.34

 

Repurchase Program

 

 

300,292

 

 

$

 

26.22

 

 


32


ITEM 6. Exhibits

The following documents are filed as exhibits to this Quarterly Report on Form 10-Q:

 

Exhibit
Number

 

Document

 

 

 

2.1

 

Asset Purchase Agreement dated as of November 3, 2016 by and among SpartanNash Company, Caito Food Service, Inc., Blue Ribbon Transport, Inc., and Matthew Caito as Seller’s Representative. Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on January 9, 2017. Incorporated herein by reference.

 

 

 

2.2

 

Amendment to Asset Purchase Agreement dated as of January 6, 2017 by and among SpartanNash Company, Caito Food Service, Inc., Blue Ribbon Transport, Inc., and Matthew Caito as Seller’s Representative. Previously filed as an exhibit to the Company’s Current Report on Form 8-K filed on January 9, 2017. Incorporated herein by reference.

 

 

 

3.1

 

Restated Articles of Incorporation of SpartanNash Company, as amended.

 

 

 

3.2

 

Bylaws of SpartanNash Company, as amended. Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed on March 1, 2017. Here incorporated by reference.

 

 

 

10.1

 

Description of Compensation Arrangements of Interim Chief Financial Officer.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.3

 

Certification of Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

33


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.

 

 

 

SPARTANNASH COMPANY

(Registrant)

 

Date: August 17, 2017

 

By

 

/s/ Thomas A. Van Hall

 

 

 

 

Thomas A. Van Hall

Interim Chief Financial Officer

 

 

34