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 October 7, 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 November 7, 2017, the registrant had 36,971,731 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)
October 7,
December 31,
2017
2016
Assets
Current assets
Cash and cash equivalents
$
13,154
24,351
Accounts and notes receivable, net
370,482
291,568
Inventories, net
598,493
539,857
Prepaid expenses and other current assets
33,426
37,187
Property and equipment held for sale
—
521
Total current assets
1,015,555
893,484
Property and equipment, net
588,416
559,722
Goodwill
178,392
322,686
Intangible assets, net
135,656
60,202
Other assets, net
115,755
94,242
Total assets
2,033,774
1,930,336
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
440,590
372,432
Accrued payroll and benefits
60,632
75,333
Other accrued expenses
39,361
40,788
Current maturities of long-term debt and capital lease obligations
19,407
17,424
Total current liabilities
559,990
505,977
Long-term liabilities
Deferred income taxes
60,397
123,243
Postretirement benefits
16,564
16,266
Other long-term liabilities
39,330
45,768
Long-term debt and capital lease obligations
651,537
413,675
Total long-term liabilities
767,828
598,952
Commitments and contingencies (Note 8)
Shareholders’ equity
Common stock, voting, no par value; 100,000 shares
authorized; 36,974 and 37,539 shares outstanding
508,570
521,984
Preferred stock, no par value, 10,000 shares authorized; no shares outstanding
Accumulated other comprehensive loss
(11,373
)
(11,437
Retained earnings
208,759
314,860
Total shareholders’ equity
705,956
825,407
Total liabilities and shareholders’ equity
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
12 Weeks Ended
40 Weeks Ended
October 8,
Net sales
1,906,644
1,800,085
6,203,857
5,906,416
Cost of sales
1,644,952
1,544,790
5,313,763
5,054,180
Gross profit
261,692
255,295
890,094
852,236
Operating expenses
Selling, general and administrative
228,489
220,339
782,659
740,138
Merger/acquisition and integration
2,392
2,427
7,031
4,237
Goodwill impairment
189,027
Restructuring charges and asset impairment
35,626
2,662
36,633
23,714
Total operating expenses
455,534
225,428
1,015,350
768,089
Operating (loss) earnings
(193,842
29,867
(125,256
84,147
Other (income) and expenses
Interest expense
6,130
4,419
19,128
14,678
Other, net
(75
(146
(248
(416
Total other expenses, net
6,055
4,273
18,880
14,262
(Loss) earnings before income taxes and discontinued operations
(199,897
25,594
(144,136
69,885
Income taxes
(76,445
8,864
(56,809
25,635
(Loss) earnings from continuing operations
(123,452
16,730
(87,327
44,250
Loss from discontinued operations, net of taxes
(54
(82
(125
(268
Net (loss) earnings
(123,506
16,648
(87,452
43,982
Basic (loss) earnings per share:
(3.31
0.45
(2.32
1.18
Loss from discontinued operations
(0.01
*
(3.32
0.44
(2.33
1.17
Diluted (loss) earnings per share:
Includes rounding
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Other comprehensive income, before tax
Pension and postretirement liability adjustment
31
1
103
Total other comprehensive income, before tax
Income tax expense related to items of other comprehensive income
(12
(39
(1
Total other comprehensive income, after tax
19
64
Comprehensive (loss) income
(123,487
16,649
(87,388
43,985
5
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Accumulated
Other
Shares
Common
Comprehensive
Retained
Outstanding
Stock
Income (Loss)
Earnings
Total
Balance at December 31, 2016
37,539
Net loss
Other comprehensive income
Dividends - $0.495 per share
(18,649
Share repurchase
(862
(22,500
Stock-based employee compensation
8,593
Issuances of common stock on stock option
exercises and stock bonus plan
172
3,697
Issuances of restricted stock
296
Cancellations of stock-based awards
(171
(3,204
Balance at October 7, 2017
36,974
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Loss from discontinued operations, net of tax
125
268
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Non-cash goodwill/asset impairment, restructuring, and other charges
225,101
22,938
Depreciation and amortization
66,366
60,436
LIFO expense
2,474
2,130
Postretirement benefits expense
1,276
157
Deferred taxes on income
(62,257
(715
Stock-based compensation expense
7,010
(86
(234
Changes in operating assets and liabilities:
Accounts receivable
(44,737
(5,628
Inventories
(49,442
(44,115
Prepaid expenses and other assets
(3,546
(42,287
42,842
52,496
(19,881
(6,653
Postretirement benefit payments
(280
(256
Other accrued expenses and other liabilities
(7,533
(8,395
Net cash provided by operating activities
71,563
81,134
Cash flows from investing activities
Purchases of property and equipment
(55,292
(57,215
Net proceeds from the sale of assets
3,928
5,650
Acquisitions, net of cash acquired
(226,412
Loans to customers
(1,005
(1,962
Payments from customers on loans
1,904
1,697
(279
(706
Net cash used in investing activities
(277,156
(52,536
Cash flows from financing activities
Proceeds from revolving credit facility
1,160,066
1,013,812
Payments on revolving credit facility
(918,425
(1,004,077
(9,000
Net payments related to stock-based award activities
(2,229
Repayment of other long-term debt
(5,795
(7,071
Financing fees paid
(99
Proceeds from exercise of stock options
3,207
1,032
Dividends paid
(16,873
Net cash provided by (used in) financing activities
194,444
(24,505
Cash flows from discontinued operations
Net cash used in operating activities
(48
(414
Net cash used in discontinued operations
Net (decrease) increase in cash and cash equivalents
(11,197
3,679
Cash and cash equivalents at beginning of period
22,719
Cash and cash equivalents at end of period
26,398
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 October 7, 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 third quarter and year to date periods of 2017 and 2016 include the results of operations of the Company for the 12 and 40-week periods ended October 7, 2017 and October 8, 2016, respectively.
Note 2 – Adoption of New Accounting Standards and 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 Company early adopted this guidance as of the beginning of the third quarter of fiscal 2017.
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 the 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 operations 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 $2.6 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 October 8, 2016. The Company’s stock compensation expense continues to reflect estimated forfeitures.
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 operations 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.
8
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 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 October 7, 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 21 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 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. The Company has begun production in the Fresh Kitchen facility and is in the process of ramping up to full production. 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.
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. Additional adjustments, if any, will be made prior to January 5, 2018. During the third quarter of fiscal 2017, the Company increased goodwill by $0.8 million to reflect an updated valuation of certain acquired long-lived assets. The excess of the purchase price over the fair value of net assets acquired, currently estimated at $46.0 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.
9
Note 4 – Goodwill
Changes in the carrying amount of goodwill were as follows:
Food Distribution
Retail
132,367
190,319
(a)
Acquisitions (Note 3)
46,025
Impairment
(189,027
Disposals
(1,292
(b)
Net of accumulated impairment charges of $86.6 million.
Net of accumulated impairment charges of $275.6 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. Testing goodwill and other intangible assets for impairment requires management to make significant estimates about the Company’s future performance, cash flows, and other assumptions that can be affected by potential changes in economic, industry or market conditions, business operations, competition, or the Company’s stock price and market capitalization. On the first day of the third quarter of fiscal 2017, the Company early adopted ASU 2017-04, which simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test.
During the 12 weeks ended October 7, 2017, the Company experienced significantly lower than expected Retail operating results and, due to an increasingly competitive retail environment and the related pricing pressures that are anticipated to negatively impact gross margin, operating profit, and future cash flows, revised its future projections for the Retail reporting unit. As a result of the lower than previously estimated Retail operating results, the Company performed Step 1 of the goodwill impairment test by calculating the fair value of the Retail reporting unit based on its discounted estimated future cash flows. The Company then benchmarked the calculated fair value against a market approach using the guideline public companies method. Given there has been a sustained decline in the market multiples of publicly traded peer companies, management considered this market information when assessing the reasonableness of the fair value of the reporting unit under both the income and market approaches.
Based on the factors outlined above, together with the results of the Step 1 goodwill impairment test, it was determined that the carrying value of the Retail segment exceeded its fair value. Consequently, the Company recorded an estimated goodwill impairment charge of $189.0 million. The measurement of the fair value of the Retail segment requires significant judgments and estimates regarding short- and long-term growth rates and profitability, as well as assumptions regarding the market valuation of the business. These represent Level 3 valuation inputs under the ASC 820 fair value hierarchy, as further described in Note 7 – Fair Value Measurements. Due to the complexity and effort required to estimate the fair value of the reporting unit, the fair value estimates were based on preliminary analysis and assumptions that are subject to change. The measurement of impairment will be completed in the fourth quarter of fiscal 2017 as the Company performs its annual impairment test for the Food Distribution reporting unit as well as a market capitalization reconciliation to assess the reasonableness of the fair values determined for each of the reporting units.
The Food Distribution reporting unit has a fair value that is substantially in excess of its carrying value.
10
Note 5 – Restructuring Charges and Asset Impairment
The following table provides the activity of reserves for closed properties for fiscal 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
Ancillary Costs
Severance
21,932
Provision for closing charges
886
Provision for severance
620
Lease termination adjustments
(1,910
Changes in estimates
1,141
Accretion expense
408
Payments
(5,045
(452
(5,497
17,412
168
17,580
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 operations consisted of the following:
Asset impairment charges
33,158
2,059
33,678
5,542
481
375
13,546
Loss on sales of assets related to closed facilities
238
912
266
76
895
Other costs associated with distribution center and store closings
532
1,306
3,371
(40
394
(300
Asset impairment charges were substantially all incurred on long-lived assets in the Retail segment due to the economic and competitive environment of certain stores and in conjunction with the Company’s retail store rationalization plan. The changes in estimates relate to revised estimates of lease and ancillary costs and sublease income associated with previously closed locations, due to lost subtenants and deterioration of the condition of certain properties. The lease termination adjustments represent the benefits recognized in connection with lease buyouts negotiated related to previously closed stores.
Long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs under the fair value hierarchy, as further described in Note 7 – Fair Value Measurements. Assets with a book value of $48.6 million were measured at a fair value of $14.9 million, resulting in an impairment charge of $33.7 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.
11
Note 6 – Long-Term Debt
Long-term debt consists of the following:
Senior secured revolving credit facility, due December 2021
575,550
359,127
Senior secured term loan, due December 2021
52,172
26,954
Capital lease obligations
44,114
48,255
Other, 2.61% - 8.75%, due 2019 - 2020
6,238
5,028
Total debt - Principal
678,074
439,364
Unamortized debt issuance costs
(7,130
(8,265
Total debt
670,944
431,099
Less current portion
Total long-term debt
Subsequent to the end of the third quarter of fiscal 2017, the Company paid the outstanding balance on the Senior secured term loan of $52.2 million with proceeds from its Senior secured revolving credit facility. As a result of this transaction, annual interest expense is expected to be reduced through a reduction of the average interest rates paid.
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. See Note 5 for discussion of the fair value measurements related to long-lived asset impairment charges and Note 4 for discussion of the fair value measurements related to goodwill. At October 7, 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:
Book value of debt instruments, excluding debt financing costs:
658,667
421,940
Total book value of debt instruments
Fair value of debt instruments, excluding debt financing costs
679,367
440,759
Excess of fair value over book value
1,293
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.
12
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.
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 October 7, 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 October 7, 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 October 7, 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 $6.2 million; the Company has established a reserve of $4.8 million 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, the Company may be unable to recover the entire unearned portion of the funds advanced to this independent retailer. The Company is currently involved in an ongoing state law proceeding pursuing recovery of amounts owed. 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, including past due amounts, 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.
The terms of the existing collective bargaining agreement between the Company and union representing its associates in the Grand Rapids distribution center have been mutually extended by the parties through December 2, 2017. The parties have agreed to continue negotiations in an effort to reach agreement on a longer term collective bargaining agreement.
Note 9 – Associate Retirement Plans
During the 12 weeks ended October 7, 2017 and October 8, 2016, the Company recognized net periodic pension income of $0.1 million and $0.2 million, respectively, related to the SpartanNash Company Pension Plan and net postretirement benefit costs of $0.1 million in both periods related to the SpartanNash Medical Plan.
For the 40 weeks ended October 7, 2017 and October 8, 2016, the Company recognized net periodic pension income of $0.5 and $0.8 million, respectively, related to the SpartanNash Company Pension Plan and net postretirement benefit costs of $0.3 million in both periods related to the SpartanNash Medical Plan.
The Company did not make any contributions to the SpartanNash Company Pension Plan during the 40 weeks ended October 7, 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 40 weeks ended October 7, 2017 and October 8, 2016 were $10.2 million and $10.1 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 38.2% and 34.6% for the 12 weeks ended October 7, 2017 and October 8, 2016, respectively. For the 40 weeks ended October 7, 2017 and October 8, 2016, the effective income tax rate was 39.4% and 36.7%, 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 operations 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. As discussed in Note 4 – Goodwill, during the third quarter of fiscal 2017, the Company recorded a goodwill impairment loss of $189.0 million. This loss resulted in a reduction of deferred income tax liabilities (net) of $70.9 million.
14
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 operations, and related tax benefits were as follows:
Restricted stock
1,103
944
Tax benefits
(439
(352
(3,149
(2,646
Stock-based compensation expense, net of tax
664
592
5,444
4,364
The following table summarizes activity in the stock-based compensation plans for the 40 weeks ended October 7, 2017:
Weighted
Restricted
Average
Under
Grant-Date
Options
Exercise Price
Awards
Fair Value
Outstanding at December 31, 2016
200,517
19.94
660,143
26.48
Granted
296,297
34.68
Exercised/Vested
(152,589
21.02
(258,183
25.90
Cancelled/Forfeited
(82,739
29.09
Outstanding at October 7, 2017
47,928
16.52
615,518
30.32
The Company has not issued any stock options since 2009 and all outstanding options are vested and exercisable at October 7, 2017.
As of October 7, 2017, total unrecognized compensation costs related to non-vested stock-based awards granted under the Company’s stock incentive plans were $5.1 million for restricted stock, and are expected to be recognized over a weighted average period of 2.2 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:
Numerator:
Adjustment for loss (earnings) attributable to participating securities
2,064
(292
1,522
(785
(Loss) earnings from continuing operations used in calculating earnings per share
(121,388
16,438
(85,805
43,465
Denominator:
Weighted average shares outstanding, including participating securities
37,254
37,470
37,596
37,479
Adjustment for participating securities
(623
(654
(655
(665
Shares used in calculating basic earnings per share
36,631
36,816
36,941
36,814
Effect of dilutive stock options
60
Shares used in calculating diluted earnings per share
36,892
36,874
Basic (loss) earnings per share from continuing operations
Diluted (loss) earnings per share from continuing operations
15
Note 13 – Supplemental Cash Flow Information
Supplemental cash flow information is as follows:
Non-cash financing activities:
405
3,490
Issuance of note payable as consideration for acquisition
2,460
Non-cash investing activities:
Capital expenditures included in accounts payable
1,711
1,429
Capital lease asset additions
Acquisition financed through issuance of note payable
Other supplemental cash flow information:
Cash paid for interest
18,379
12,830
16
Note 14 – Reporting Segment Information
The following tables set forth information about the Company by reporting segment:
Military
12 Weeks Ended October 7, 2017
Net sales to external customers
937,397
505,631
463,616
Inter-segment sales
204,605
939
1,453
379
500
34,747
6,354
2,786
9,807
18,947
Operating earnings (loss)
20,350
1,118
(215,310
Capital expenditures
4,402
1,940
11,161
17,503
12 Weeks Ended October 8, 2016
804,500
506,626
488,959
219,516
639
1,788
207
18
2,437
4,842
2,693
10,392
17,927
Operating earnings
18,957
2,862
8,048
3,386
1,151
11,342
15,879
40 Weeks Ended October 7, 2017
3,041,983
1,620,021
1,541,853
681,368
5,254
324
1,280
34,853
21,370
8,832
32,430
62,632
68,868
4,517
(198,641
18,431
5,994
30,867
55,292
40 Weeks Ended October 8, 2016
2,615,964
1,686,567
1,603,885
716,665
1,201
3,035
4,749
(241
19,206
16,139
8,850
33,942
58,931
64,040
8,792
11,315
13,581
4,198
39,436
57,215
October 7, 2017
December 31, 2016
Total Assets
1,088,383
776,725
449,845
395,737
492,079
754,625
Discontinued operations
3,467
3,249
17
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:
(In thousands, except percentages)
Center store (a)
1,187,631
62.3
%
1,143,964
63.6
3,784,779
61.0
3,731,362
63.2
Fresh (b)
608,136
31.9
544,200
30.2
2,051,954
33.1
1,821,347
30.8
Pharmacy
80,455
4.2
84,039
4.7
271,170
4.4
269,524
4.6
Fuel
30,422
1.6
27,882
1.5
95,954
84,183
1.4
Consolidated net sales
100.0
Consists primarily of general merchandise, grocery, beverages, snacks, tobacco products and frozen foods.
Consists primarily of produce, meat, dairy, deli, bakery, prepared proteins, seafood and floral.
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 and exchanges 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 14,100 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 is developing 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 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 began shipping private brand products to military commissaries during the second quarter of fiscal 2017.
At the end of the third quarter, the Company’s Retail segment operated 147 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 88 of its corporate owned retail stores and operates 31 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.
Fiscal 2017 Third Quarter Highlights
The Company’s sales growth trends accelerated in the third quarter of fiscal 2017 due to contributions from the recent acquisition, continued growth in the Food Distribution segment from both new and existing customers, and the significant improvement in the Military segment’s sales trends, despite challenging retail market conditions. The Company continues to execute against key elements of its long-term strategic plan as is demonstrated by the continued sales growth in its distribution operations, and is committed to delivering increased value and convenience to its customers.
Third quarter and year-to-date fiscal 2017 operational highlights include:
•
The Company completed the Caito and BRT acquisition in the first quarter of fiscal 2017 and continues to make progress integrating operations. The Company now offers 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. While the startup of the facility has been slower than anticipated, the Company remains confident in the value of the product offerings to its customers and in the long-term growth of the business.
The Company realized sales growth in its Food Distribution segment due to contributions from the recent acquisition and organic sales growth of 5.2% for the quarter and 3.8% for the year-to-date period compared to the prior year. In the third quarter, the Company grew sales in the Food Distribution segment for the 7th consecutive quarter while also making continued improvements to its supply chain to further optimize its network.
Third quarter earnings were negatively impacted by non-cash goodwill and asset impairment charges resulting from lower than expected third quarter operating results in the Company’s Retail segment and the anticipation of a continued competitive retail environment, as well as the Company’s ongoing refinement of its retail store portfolio. Additionally, there has been a sustained decline in the market multiples of retail publicly traded peer companies, driving a reduction in the estimated fair value of the Retail segment using the market based approach to goodwill testing.
At the end of the second quarter, the Company first introduced Fast Lane, its new online ordering and curbside pick-up service, and now offers the service at more than 20 retail stores. The Company believes Fast Lane is essential to increasing customer satisfaction through quality service and convenience, and accordingly, anticipates rolling out the service to approximately 40 total stores by the end of the year with up to another 40 scheduled next year. Additionally, the Company is piloting home delivery services in the fourth quarter of 2017.
The Company continues to make targeted capital investments by remodeling select retail stores in key geographies, including the conversion of certain stores to the Family Fare banner. The Company also continued its store rationalization program, and in connection with overall business strategies, sold four corporate owned retail stores to new and existing Food Distribution customers and closed seven others in connection with lease expirations and store rationalization plans during 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 third quarter, the Company began 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. While it is still quite early in the process, the Company has been generally pleased with customer acceptance of the brand and the transition is progressing smoothly. In the second quarter, the Company began incorporating its own fresh-cut fruits and vegetables into the Open Acres™ private brand, and during the third quarter, continued to grow this initiative in volume and selection based on customer acceptance and demand. 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 enters the fourth quarter of fiscal 2017, it remains committed to delivering long-term value to its shareholders and focusing on top-line and earnings growth. At the beginning of the third quarter, the Company entered into an agreement to obtain incremental distribution business from a DeCA provider exiting these operations in the Southwest United States. This new business, together with increasing contributions from the DeCA private brand program, are expected to grow Military’s sales in the fourth quarter of fiscal 2017. Retail sales trends - while improving - are anticipated to remain negative for the remainder of the year. The Company also expects continued organic sales growth in the Food Distribution segment.
The Company expects a slight easing of deflationary pressures with modest food inflation anticipated in the fourth quarter, and therefore does not anticipate any of the LIFO benefit realized in the prior year fourth quarter to recur. The Company also anticipates that projected fourth quarter sales growth at Food Distribution and the continuation of improved sales trends at Military will be more than offset by the cycling of the prior year LIFO benefit, and that headwinds associated with hurricane impacts and the onboarding of new business will negatively affect fill rates and cause inbound freight disruptions in the fourth quarter. Retail earnings are anticipated to remain challenged for the remainder of the year as the competitive landscape and inflationary environment are expected to persist. Based on the factors noted above, the Company anticipates fourth quarter earnings will be significantly below the prior year.
20
Results of Operations
The following table sets forth items from the condensed consolidated statements of operations 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
Ended
5.9
13.7
14.2
14.3
14.4
2.5
Selling, general and administrative expenses
12.0
12.3
12.6
12.5
3.7
0.1
(1.4
Restructuring charges and goodwill/asset impairment
11.8
3.6
0.4
8,339.3
(10.2
1.7
(2.0
(749.0
Other income and expenses
0.3
0.2
41.7
(10.5
(2.3
1.2
(881.0
(4.0
0.5
(0.9
(962.4
(6.5
0.9
0.7
(837.9
(34.1
(841.9
Difference due to rounding
Net Sales – The following table presents net sales by segment and variances in net sales:
Variance
132,897
426,019
(995
(66,546
(25,343
(62,032
Total net sales
106,559
297,441
Net sales for the quarter ended October 7, 2017 (“third quarter”) increased $106.6 million, or 5.9%, to $1.91 billion from $1.80 billion in the quarter ended October 8, 2016 (“prior year quarter”). Net sales for the year-to-date period ended October 7, 2017 (“year-to-date period”) increased $297.4 million, or 5.0%, to $6.20 billion from $5.91 billion in the year-to-date period ended October 8, 2016 (“prior year-to-date period”). The increase was driven primarily by contributions from the Caito acquisition and organic growth from existing customers in the Food Distribution segment, which more than offset lower sales in the Retail segment. Third quarter net sales trends increased sequentially from the second quarter due to significantly improved sales comparisons in the Military commissary business.
Food Distribution net sales, after intercompany eliminations, increased $132.9 million, or 16.5%, to $937.4 million in the third quarter from $804.5 million in the prior year quarter. Net sales for the year-to-date period increased $426.0 million, or 16.3%, from $2.62 billion in the prior year-to-date period to $3.04 billion. The third quarter and year-to-date increases were due to contributions from the Caito acquisition and organic volume growth from existing customers.
21
Military net sales decreased $1.0 million, or 0.2%, to $505.6 million in the third quarter from $506.6 million in the prior year quarter, representing a significant improvement from the 6.8% decline in the second quarter. Net sales for the year-to-date period decreased $66.5 million, or 3.9%, from $1.69 billion in the prior year-to-date period to $1.62 billion. The third quarter and year-to-date decreases were primarily due to lower sales at the DeCA operated commissaries, which for the third quarter were mostly offset by new business.
Retail net sales decreased $25.4 million, or 5.2%, to $463.6 million in the third quarter from $489.0 million in the prior year quarter. Net sales for the year-to-date period decreased $62.0 million, or 3.9%, from $1.60 billion in the prior year-to-date period to $1.54 billion. The decrease in net sales was primarily attributable to lower sales resulting from the closures and sales of retail stores ($16.7 million for the quarter and $42.8 million year-to-date) and negative comparable store sales. Comparable store sales, excluding fuel, were down 2.5% for the quarter and 2.2% 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. Please note that 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 $261.7 million in the third quarter from $255.3 million in the prior year quarter. As a percent of net sales, gross profit was 13.7% compared to 14.2% in the prior year quarter. Gross profit for the year-to-date period increased $37.9 million, or 4.4%, from $852.2 million in the prior year-to-date period to $890.1 million. As a percent of net sales, gross profit for the year-to-date period was 14.3% compared to 14.4% in the prior year-to-date period. As a percent of net sales, the third quarter and year-to-date changes in gross margin were primarily due to the increased mix of Food Distribution sales as a percentage of total sales combined with margin investments in the Retail segment.
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 $8.2 million, or 3.7%, to $228.5 million in the third quarter from $220.3 million in the prior year quarter, representing 12.0% of net sales in the third quarter compared to 12.3% in the prior year quarter. SG&A expenses for the year-to-date period increased $42.6 million, or 5.7%, from $740.1 million in the prior year-to-date period to $782.7 million, and increased to 12.6% as a percentage of net sales compared to 12.5% in the prior year-to-date period. The third quarter and year-to-date increases in expense were primarily due to the addition of the Caito acquisition, partly offset by lower incentive compensation expenses. The rate to sales decrease in the third quarter was primarily due to the mix of business operations and lower incentive compensation expenses.
Merger/Acquisition and Integration – Third quarter and year-to-date period results included $2.4 million and $7.0 million, respectively, of merger/acquisition and integration expenses mainly associated with recent acquisitions. Prior year quarter and year-to-date results included $2.4 million and $4.2 million, respectively, of merger/acquisition and integration primarily associated with the merger of Spartan Stores, Inc. and Nash-Finch Company.
22
Restructuring Charges and Goodwill and Asset Impairment – Third quarter and year-to-date results included $224.7 million and $225.7 million, respectively, of net restructuring and asset impairment charges predominantly associated with third quarter goodwill and asset impairment charges. In the third quarter, the Company recorded a non-cash goodwill impairment charge of $189.0 million related to the Retail segment. As a result of significantly lower than expected Retail operating results due to an increasingly competitive retail environment and the related pricing pressures that are anticipated to negatively impact gross margin, operating profit, and future cash flows, the Company revised its future projections for the Retail reporting unit. The Company performed Step 1 of the goodwill impairment test by calculating the fair value of the Retail reporting unit based on its discounted estimated future cash flows. It was determined that the carrying value of the Retail segment exceeded its fair value, and consequently, the Company recorded an estimated goodwill impairment charge of $189.0 million. The Company also recorded $35.6 million of asset impairment and restructuring charges in the third quarter primarily associated with the underlying performance of Company’s retail store base and the execution of its store rationalization program. Prior year quarter and year-to-date results included $2.7 million and $23.7 million, respectively, of restructuring and asset impairment charges. Prior year quarter restructuring charges and asset impairment consisted primarily of impairment charges related to three underperforming retail stores and additional 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.
Operating Earnings – The following table presents operating (loss) earnings by segment and variances in operating earnings:
1,393
4,828
(1,744
(4,275
(223,358
(209,956
Total operating (loss) earnings
(223,709
(209,403
Operating earnings decreased $223.7 million to a loss of $193.8 million in the third quarter from earnings of $29.9 million in the prior year quarter. Operating earnings for the year-to-date period decreased $209.4 million to a loss of $125.3 million from earnings of $84.1 million in the prior year-to-date period. The third quarter decrease was primarily due to the goodwill impairment, higher asset impairment charges, start-up costs associated with the new Fresh Kitchen operation and the negative impact of lower sales in the Retail segment, which more than offset lower incentive compensation costs and organic sales growth in Food Distribution. The year-to-date decrease was primarily due to the goodwill impairment, higher asset impairment and restructuring charges predominantly related to the Retail segment as well as higher merger/acquisition and integration expenses and start-up costs associated with the recent acquisition, which more than offset the positive impacts of lower incentive compensation and organic sales growth in Food Distribution.
Food Distribution operating earnings increased $1.4 million, or 7.3%, to $20.3 million in the third quarter from $19.0 million in the prior year quarter. Operating earnings for the year-to-date period increased $4.8 million, or 7.5%, to $68.9 million from $64.0 million in the prior year-to-date period. The increase for the quarter was driven by organic sales growth and lower incentive compensation, partially offset by Fresh Kitchen start-up costs. The increase for the year-to-date period was driven by organic sales growth and lower incentive compensation, and lower restructuring charges related to the Company’s warehouse optimization plan, partially offset by charges related to Fresh Kitchen start-up costs and merger/acquisition and integration expenses.
Military operating earnings decreased $1.7 million, or 60.9%, to $1.1 million from $2.9 million in the prior year quarter. Operating earnings for the year-to-date period decreased $4.3 million, or 48.6%, to $4.5 million from $8.8 million in the prior year-to-date period. The third quarter decrease was due to higher merger/acquisition and integration and impairment expenses partly offset by margin rate improvements and lower incentive compensation expenses. The year-to-date decrease in operating earnings was primarily due to higher merger/acquisition and integration expenses, the negative impact of the shift of New Year’s Day into the first quarter, and higher costs for health care and a large insurance claim.
Retail operating earnings decreased $223.4 million to a loss of $215.3 million in the third quarter from earnings of $8.0 million in the prior year quarter. Operating earnings for the year-to-date period decreased $210.0 million to a loss of $198.6 million from earnings of $11.3 million in the prior year-to-date period. The third quarter decrease was primarily due to the goodwill impairment, higher asset impairment charges, lower sales, and investments in margin, partly offset by lower merger/acquisition and integration expenses. The year-to-date decrease was primarily due to higher asset impairment charges, higher health care costs, lower comparable store sales and the shift of New Year’s Day, partially offset by lower merger/acquisition and integration expenses and the closure of unprofitable stores.
23
Interest Expense – Interest expense increased $1.7 million, or 38.7%, to $6.1 million in the third quarter from $4.4 million in the prior year quarter. Interest expense for the year-to-date period increased $4.4 million, or 30.3%, from $14.7 million in the prior year-to-date period to $19.1 million. The increase in interest expense was primarily due to increased borrowings related to the Caito and BRT acquisition.
Income Taxes – The effective income tax rates were 38.2% and 34.6% for the third quarter and prior year quarter, respectively. For the year-to-date period and prior year-to-date period, the effective income tax rates were 39.4% and 36.7%, 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 was impacted by 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.
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, 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.
24
Following is a reconciliation of operating (loss) earnings to adjusted operating earnings for the 12 weeks and 40 weeks ended October 7, 2017 and October 8, 2016.
Adjustments:
224,653
225,660
Fresh Kitchen start-up costs
2,086
6,688
Stock compensation associated with executive retirement
1,172
Severance associated with cost reduction initiatives
149
27
839
Adjusted operating earnings
35,293
35,105
115,322
112,937
Reconciliation of operating earnings (loss) to adjusted operating earnings by segment:
Food Distribution:
591
25
218
23,758
19,815
82,706
70,208
Military:
Restructuring charges (gains)
147
242
3,071
2,900
6,618
8,794
Retail:
223,774
223,880
434
117
8,464
12,390
25,998
33,935
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.
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 (loss) earnings from continuing operations to adjusted earnings from continuing operations for the 12 weeks and 40 weeks ended October 7, 2017 and October 8, 2016.
October 8, 2016
per diluted
share
Total adjustments
229,135
5,238
Income tax effect on adjustments (a)
(85,546
(1,918
Total adjustments, net of taxes
143,589
3.85
3,320
0.08
Adjusted earnings from continuing operations
20,137
0.54
20,050
0.53
Merger integration and acquisition expenses
240,578
28,790
(89,840
(10,871
150,738
4.01
17,919
0.48
63,411
1.69
62,169
1.66
* Includes rounding
The income tax effect on adjustments is computed by applying the tax rate, before discrete tax items, to the total adjustments for the period.
26
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.
Following is a reconciliation of net earnings to adjusted EBITDA for the 12 weeks and 40 weeks ended October 7, 2017 and October 8, 2016.
54
82
Other expenses, net
LIFO expense (benefit)
192
(341
19,455
63,553
Stock-based compensation
1,102
943
Other non-cash (gains) charges
(138
(71
(661
55,900
53,414
188,082
180,172
Reconciliation of operating earnings (loss) to adjusted EBITDA by segment:
98
(348
1,361
941
6,862
22,291
488
409
3,999
3,090
(57
(61
(11
137
31,145
24,645
109,730
90,297
LIFO (benefit) expense
(63
134
329
678
186
171
1,313
1,178
Other non-cash charges (gains)
58
(15
262
5,981
5,936
16,929
19,520
(127
784
511
428
363
3,281
2,742
Other non-cash gains
(68
(635
(396
18,774
22,833
61,423
70,355
28
Liquidity and Capital Resources
Cash Flow Information
The following table summarizes the Company’s consolidated statements of cash flows:
Cash flow activities
Net cash provided by operating activities (a)
Net cash provided by (used in) financing activities (a)
Cash and cash equivalents at beginning of fiscal year
Cash and cash equivalents at end of fiscal year
(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 $9.6 million mainly due to the timing of working capital requirements, particularly higher accounts receivable balances associated with sales to new and existing distribution customers, largely offset by lower customer advances to support sales growth compared to the prior year period.
Net cash used in investing activities. Net cash used in investing activities increased $224.6 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 25.1%, 11.1% and 63.8% of capital expenditures, respectively, in the current year.
Net cash provided by (used in) financing activities. Net cash provided by financing activities increased $218.9 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 used in discontinued operations. Net cash 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 $670.9 million and $431.1 million as of October 7, 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 October 7, 2017, the senior secured revolving credit facility and senior secured term loan collectively had outstanding borrowings of $627.7 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 $348.2 million at October 7, 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 October 7, 2017. The revolving credit facility matures December 2021, and is secured by substantially all of the Company’s assets.
29
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.
The Company’s current ratio (current assets to current liabilities) was 1.81-to-1 at October 7, 2017 compared to 1.77-to-1 at December 31, 2016, and its investment in working capital was $455.6 million at October 7, 2017 compared to $387.5 million at December 31, 2016. Net debt to total capital ratio was 0.48-to-1 at October 7, 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 October 7, 2017 and December 31, 2016.
(13,154
(24,351
Total net long-term debt
657,790
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 October 7, 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 October 7, 2017, the Company returned $41.1 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 October 7, 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 October 7, 2017, and interest on long-term debt and capital lease obligations.
30
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.
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 October 7, 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 third 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.
32
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 October 7, 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.
Number
of Shares
Price Paid
Period
Purchased
per Share
July 16 – August 12, 2017
Repurchase Program
265,378
26.86
August 13 – September 9, 2017
None
September 10 – October 7, 2017
Employee Transactions
1,550
26.46
296,472
25.30
Total for Quarter ended October 7, 2017
561,850
26.03
33
ITEM 6. Exhibits
The following documents are filed as exhibits to this Quarterly Report on Form 10-Q:
ExhibitNumber
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 November 4, 2016. 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. Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 15, 2017. Incorporated herein by reference.
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
Executive Employment Agreement between SpartanNash Company and Mark Shamber.
10.2
Executive Severance Agreement between SpartanNash Company and Mark Shamber.
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
34
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.
(Registrant)
Date: November 9, 2017
By
/s/ Mark E. Shamber
Mark E. Shamber
Executive Vice President and Chief Financial Officer
35