UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 13, 2019.
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
SPTN
NASDAQ Global Select Market
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 19, 2019, the registrant had 36,334,477 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 29, 2018 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 29, 2018 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 29, 2018 and in Part I, Item 2 “Critical Accounting Policies” 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 the economic, competitive, governmental, technological and other factors that could adversely affect the Company’s expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not currently known to SpartanNash or that SpartanNash currently believes are immaterial also may impair its business, operations, liquidity, financial condition and prospects. The Company undertakes no obligation to update or revise its forward-looking statements to reflect developments that occur, or information obtained after the date of this Quarterly Report.
2
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
SPARTANNASH COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, Unaudited)
July 13,
December 29,
2019
2018
Assets
Current assets
Cash and cash equivalents
$
19,949
18,585
Accounts and notes receivable, net
362,605
346,260
Inventories, net
572,723
553,799
Prepaid expenses and other current assets
43,219
73,798
Property and equipment held for sale
—
8,654
Total current assets
998,496
1,001,096
Property and equipment, net
619,613
579,060
Goodwill
181,035
178,648
Intangible assets, net
129,131
128,926
Operating lease assets
274,336
Other assets, net
89,353
84,182
Total assets
2,291,964
1,971,912
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable
406,896
357,802
Accrued payroll and benefits
53,072
57,180
Other accrued expenses
48,306
43,206
Current portion of operating lease liabilities
41,767
Current portion of long-term debt and finance lease liabilities
17,709
18,263
Total current liabilities
567,750
476,451
Long-term liabilities
Deferred income taxes
43,200
49,254
Operating lease liabilities
276,888
Other long-term liabilities
31,954
50,463
Long-term debt and finance lease liabilities
684,527
679,797
Total long-term liabilities
1,036,569
779,514
Commitments and contingencies (Note 8)
Shareholders’ equity
Common stock, voting, no par value; 100,000 shares
authorized; 36,334 and 35,952 shares outstanding
488,947
484,064
Preferred stock, no par value, 10,000 shares authorized; no shares outstanding
Accumulated other comprehensive loss
(8,932
)
(15,759
Retained earnings
207,630
247,642
Total shareholders’ equity
687,645
715,947
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)
(Unaudited)
12 Weeks Ended
28 Weeks Ended
July 13, 2019
July 14, 2018
Net sales
1,995,929
1,895,953
4,538,304
4,281,026
Cost of sales
1,706,922
1,630,293
3,871,568
3,672,152
Gross profit
289,007
265,660
666,736
608,874
Operating expenses
Selling, general and administrative
266,474
236,202
626,874
545,261
Merger/acquisition and integration
582
804
1,364
3,010
Restructuring charges (gains) and asset impairment
14,581
(1,164
8,919
5,037
Total operating expenses
281,637
235,842
637,157
553,308
Operating earnings
7,370
29,818
29,579
55,566
Other expenses and (income)
Interest expense
8,696
6,969
20,577
15,747
Postretirement benefit expense (income)
8,821
(10
9,456
(14
Other, net
(439
(226
(891
(447
Total other expenses, net
17,078
6,733
29,142
15,286
(Loss) earnings before income taxes and discontinued operations
(9,708
23,085
437
40,280
Income tax (benefit) expense
(2,941
5,247
(317
10,007
(Loss) earnings from continuing operations
(6,767
17,838
754
30,273
Loss from discontinued operations, net of taxes
(47
(66
(99
(158
Net (loss) earnings
(6,814
17,772
655
30,115
Basic (loss) earnings per share:
(0.19
0.50
0.02
0.84
Loss from discontinued operations
(0.01
*
0.49
0.83
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
8,937
84
9,016
195
Income tax expense related to items of other comprehensive income
(2,170
(21
(2,189
(48
Total other comprehensive income, after tax
6,767
63
6,827
147
Comprehensive (loss) income
17,835
7,482
30,262
5
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated
Other
Shares
Common
Comprehensive
Retained
Outstanding
Stock
Income (Loss)
Earnings
Total
Balance at December 29, 2018
35,952
Impact of adoption of new lease standard (ASU 2016-02)
(26,863
Net earnings
7,469
Other comprehensive income
60
Dividends - $0.19 per share
(6,902
Stock-based employee compensation
5,383
Issuances of common stock on stock option
exercises and for stock bonus plan and
associate stock purchase plan
30
452
Issuances of restricted stock
444
Cancellations of stock-based awards
(107
(1,744
Balance at April 20, 2019
36,319
488,155
(15,699
221,346
693,802
Net loss
715
Issuances of common stock for associate stock purchase plan
8
99
22
(15
(22
Balance at July 13, 2019
36,334
Balance at December 30, 2017
36,466
497,093
(15,136
239,993
721,950
12,343
Dividends - $0.18 per share
(6,526
Share repurchase
(952
(20,000
5,290
Issuances of common stock for stock bonus plan
and associate stock purchase plan
24
470
472
(87
(1,567
Balance at April 21, 2018
35,923
481,286
(15,052
245,810
712,044
(6,457
977
104
9
(2
(37
Balance at July 14, 2018
35,934
482,330
(14,989
257,125
724,466
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Loss from discontinued operations, net of tax
158
Earnings from continuing operations
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash restructuring, asset impairment, and other charges
15,226
5,189
Depreciation and amortization
48,496
44,877
Non-cash rent
(4,202
(632
LIFO expense
2,493
1,694
Pension termination settlement expense
8,877
Postretirement benefits income
(1,092
(244
Deferred taxes on income
2,509
7,077
Stock-based compensation expense
6,098
6,267
Postretirement benefit plan contributions
(231
(181
Gain on disposals of assets
(6,863
(89
Changes in operating assets and liabilities:
Accounts receivable
(15,480
(9,258
Inventories
12,755
32,641
Prepaid expenses and other assets
(41
(430
37,216
(10,390
(8,348
(5,373
Other accrued expenses and other liabilities
5,669
2,879
Net cash provided by operating activities
103,836
104,300
Cash flows from investing activities
Purchases of property and equipment
(31,771
(34,596
Net proceeds from the sale of assets
16,129
6,139
Acquisitions, net of cash acquired
(86,659
Loans to customers
(2,292
(698
Payments from customers on loans
2,034
1,021
(50
(7
Net cash used in investing activities
(102,609
(28,141
Cash flows from financing activities
Proceeds from senior secured revolving credit facility
623,276
486,095
Payments on senior secured revolving credit facility
(618,180
(522,367
Proceeds from other long-term debt
5,800
Repayment of other long-term debt and finance lease liabilities
(9,758
(4,790
Financing fees paid
(482
(122
Proceeds from resolution of acquisition contingencies
15,000
Net payments related to stock-based award activities
(1,766
(1,604
Proceeds from exercise of stock options
181
Dividends paid
(13,804
(12,983
Net cash provided by (used in) financing activities
267
(75,771
Cash flows from discontinued operations
Net cash used in operating activities
(130
(142
Net cash used in discontinued operations
Net increase in cash and cash equivalents
246
Cash and cash equivalents at beginning of period
15,667
Cash and cash equivalents at end of period
15,913
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 29, 2018.
In the opinion of management, the accompanying condensed consolidated financial statements, taken as a whole, contain all adjustments, including normal recurring items, necessary to present fairly the financial position of SpartanNash as of July 13, 2019, and the results of its operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The unaudited information in the condensed consolidated financial statements for the second quarter and year to date periods of 2019 and 2018 include the results of operations of the Company for the 12- and 28-week periods ended July 13, 2019 and July 14, 2018, respectively.
Note 2 – Adoption of New Accounting Standards and Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases.” The FASB subsequently issued ASUs 2018-01, 2018-10, 2018-11, and 2019-01, which include clarifications and provide various practical expedients and transition options related to ASU 2016-02. ASU 2016-02 provides guidance for lease accounting and stipulates that lessees 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 is equal to the present value of future rent payments. Treatment in the consolidated statements of earnings is similar to the previous treatment of operating and capital leases.
In the first quarter of 2019, the Company adopted this standard retrospectively through a cumulative-effect adjustment recorded at the beginning of 2019. The Company has elected the practical expedient available under the guidance to not adjust comparative periods presented. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allow for a carry forward of the historical lease classification. The Company elected the hindsight practical expedient to reevaluate the lease term for existing leases. The election of the hindsight practical expedient resulted in the extension or reduction of lease terms for certain existing leases and adjustments to the useful lives of corresponding leasehold improvements. In the application of hindsight, the Company estimated the expected lease term based on management’s plans, including the performance of the leased properties and the associated market dynamics in relation to the overall operational, real estate and capital planning strategies of the Company.
The adoption of the new standard resulted in the recognition of operating lease assets and liabilities of $241.8 million and $292.3 million, respectively, as of the beginning of 2019. The adoption of the standard also resulted in a transition adjustment to beginning of the year retained earnings of $26.9 million (net of deferred tax impact of $8.5 million). The transition adjustment relates to impairment of right of use assets included in previously impaired asset groups and the impact of hindsight on the evaluation of lease term. Remaining differences between lease assets and liabilities relate to the derecognition of lease-related liabilities and assets recorded under ASC 840, which were included in beginning lease liabilities or assets under ASC 842.
Note 3 – Revenue
Disaggregation of Revenue
The following table provides information about disaggregated revenue by type of products and customers for each of the Company’s reportable segments:
12 Weeks Ended July 13, 2019
28 Weeks Ended July 13, 2019
(In thousands)
Food Distribution
Military
Retail
Type of products:
Center store (a)
268,299
226,031
219,753
714,083
623,770
536,441
490,526
1,650,737
Fresh (b)
343,853
146,201
218,942
708,996
772,621
343,223
481,889
1,597,733
Non-food (c)
303,043
116,574
92,618
512,235
666,037
278,630
219,013
1,163,680
Fuel
38,336
79,585
20,188
1,765
326
22,279
42,193
3,647
729
46,569
935,383
490,571
569,975
2,104,621
1,161,941
1,271,742
Type of customers:
Individuals
569,792
1,271,274
Manufacturers, brokers and distributors
41,196
468,242
509,438
101,907
1,110,878
1,212,785
Retailers
877,685
20,564
898,249
1,969,160
47,416
2,016,576
16,502
183
18,450
33,554
468
37,669
12 Weeks Ended July 14, 2018
28 Weeks Ended July 14, 2018
286,487
234,777
179,564
700,828
646,630
557,135
400,856
1,604,621
359,232
135,133
170,590
664,955
790,830
314,182
376,175
1,481,187
277,913
118,188
78,251
474,352
617,109
278,536
177,864
1,073,509
35,979
75,442
18,070
1,556
213
19,839
42,344
3,421
502
46,267
941,702
489,654
464,597
2,096,913
1,153,274
1,030,839
464,384
1,030,337
47,244
472,991
520,235
108,868
1,118,668
1,227,536
880,429
15,107
895,536
1,955,260
31,185
1,986,445
14,029
15,798
32,785
36,708
(a) Center store includes dry grocery, frozen and beverages.
(b) Fresh includes produce, meat, dairy, deli, bakery, prepared proteins, seafood and floral.
(c) Non-food includes general merchandise, health and beauty care, tobacco products and pharmacy.
Contract Assets and Liabilities
In the ordinary course of business, the Company may advance funds to certain 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. For volume-based arrangements, the Company estimates the amount of the advanced funds earned by the retailers based on the expected volume of purchases by the retailer and amortizes the advances as a reduction of the transaction price and revenue earned. These advances are not considered contract assets under ASC 606 as they are not generated through the transfer of goods or services to the retailers. These advances are included in Other assets, net on the Company’s balance sheets.
When the Company transfers goods or services to a customer, payment is due - subject to normal terms - and is not conditional on anything other than the passage of time. Typical payment terms range from due upon receipt to 30 days, depending on the type of customer and relationship. At contract inception, the Company expects that the period of time between the transfer of goods to the customer and when the customer pays for those goods will be less than one year, which is consistent with the Company’s standard payment terms. Accordingly, the Company has elected the practical expedient under ASC 606 to not adjust for the effects of a significant financing component. As such, these amounts are recorded as receivables and not contract assets. The Company had no contract assets for any period presented.
The Company does not typically incur incremental costs of obtaining a contract that are contingent upon successful contract execution and would therefore be capitalized.
Note 4 – Acquisitions
On December 31, 2018, the Company acquired all of the outstanding shares of Martin’s Super Markets, Inc. (“Martin’s”) for $86.7 million, net of $7.8 million of cash acquired. Acquired assets consist primarily of property and equipment of $55.0 million, intangible assets of $20.7 million, and working capital. Intangible assets are primarily composed of an indefinite-lived trade name of $17.5 million and customer lists of $3.1 million which are amortized over seven years. The acquired assets and assumed liabilities were recorded at their estimated fair values as of the acquisition date based on preliminary estimates. These estimates are subject to revision upon the finalization of the valuations of the acquired real estate, inventory and intangible assets. Any adjustments will be made prior to December 31, 2019. No goodwill was recorded related to the acquisition. As of July 13, 2019, the Company has incurred $2.4 million of merger/acquisition and integration costs related to the acquisition, of which $1.2 million was incurred in 2019. The acquisition was funded with proceeds from the Company’s Credit Agreement.
Martin’s currently operates 21 stores in Northern Indiana and Southwest Michigan with approximately 3,500 employees. Martin’s was an independent retailer and customer of the Company’s Food Distribution segment prior to the acquisition. Subsequent to the acquisition sales from the Food Distribution segment to Martin’s stores are eliminated. The acquisition expanded the footprint of the Company’s Retail segment into adjacent geographies in northern Indiana and southwestern Michigan.
Note 5 – Goodwill and Other Intangible Assets
The Company has three reporting units; however, no goodwill exists within the Military or Retail reporting units. Changes in the carrying amount of goodwill within the Food Distribution reporting unit were as follows:
Acquisitions (Note 8)
2,387
The Company reviews goodwill and other indefinite-lived intangible assets for impairment annually, during the fourth quarter of each year, and more frequently if circumstances indicate a risk of impairment. Testing goodwill and other indefinite-lived 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.
Beginning at the end of the first quarter and into the second quarter of 2019 the decline in the Company’s stock price substantially decreased market capitalization, and the decline became sustained during the second quarter. The Company recognized this event as an indicator of impairment and performed an interim goodwill impairment test during the second quarter. As a result of the test, the Company concluded that the fair value of the Food Distribution reporting unit was substantially in excess of its carrying value.
The Company has indefinite-lived intangible assets that are not amortized, consisting primarily of indefinite-lived trade names and licenses for the sale of alcoholic beverages. Changes in the carrying amount of indefinite-lived intangible assets were as follows:
Indefinite-lived Intangible Assets
69,746
Acquisitions (Note 4)
17,478
Disposals
Impairment (Note 6)
(13,966
73,208
10
Note 6 – Restructuring Charges and Asset Impairment
The following table provides the activity of reserves for closed properties for the 28-week period ended July 13, 2019. 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 the timing of when the obligations are expected to be paid.
Lease and
Ancillary Costs
Severance
16,386
Reclassification of lease liabilities
(8,177
Lease termination adjustments
(62
Provision for closing charges
543
Provision for severance
149
Changes in estimates
(211
Accretion expense
194
Payments
(2,431
(149
(2,580
6,242
Included in the liability are lease-related ancillary costs from the date of closure to the end of the remaining lease term. Prior to the adoption of ASU 2016-02 (Note 2), the liability included lease obligations recorded at the present value of future minimum lease payments, calculated using a risk-free interest rate, net of estimated sublease income. Upon the adoption of ASU 2016-02, these liabilities were reclassified as a reduction of the initial measurement of operating lease assets within the consolidated balance sheets.
Restructuring and asset impairment activity included in the condensed consolidated statements of earnings consisted of the following:
July 14,
Asset impairment charges
13,966
14,066
1,470
Charge on customer advance
1,941
177
3,903
Loss (gain) on sales of assets related to closed facilities
20
(1,544
(1,407
14
139
Other costs associated with distribution center and store closings
365
315
975
596
(246
51
336
(1,642
In the 28-week period ended July 13, 2019, the Food Distribution segment realized a gain on the sale of a previously closed distribution center. In the 12- and 28-week periods ended July 13, 2019 and July 14, 2018, restructuring and asset impairment charges were incurred in the Food Distribution and Retail segments due to the declining profitability of certain of the Company’s operations and the economic and competitive environment of certain stores and in conjunction with the Company’s retail store and supply chain rationalization plans. The charge on the customer advance relates to an advance to an independent retailer customer which was not fully recoverable. The changes in estimates relate to revised estimates of lease and ancillary costs associated with previously closed locations, due to favorable dispute resolutions with landlords and deterioration of the condition of certain properties.
In the second quarter of 2019 the Company announced a plan to reposition the Caito Fresh Production operations and to focus on traditional produce distribution and production of fresh cut produce and deli items. As a result of this plan, the Company evaluated the related indefinite-lived trade name and long-lived assets for potential impairment. The indefinite-lived trade name with a book value of $35.5 million was measured at a fair value of $21.5 million, resulting in an impairment charge of $14.0 million. The Company concluded the long-lived assets were not impaired. Indefinite lived intangible assets are tested for impairment at least annually, and as needed if an indicator of potential impairment exists. Indefinite lived intangible assets are measured at fair value using Level 3 inputs under the fair value hierarchy, as further described in Note 7 – Fair Value Measurements. Fair value of indefinite-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 and, in the case of indefinite-lived trade name assets, estimated royalty rates.
11
Long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs. Assets with a book value of $0.3 million were measured at a fair value of $0.2 million, resulting in an impairment charge of $0.1 million in 2019. Assets with a book value of $1.8 million were measured at a fair value of $0.3 million, resulting in an impairment charge of $1.5 million in 2018. 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.
Note 7 – Fair Value Measurements
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.
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 6 for discussion of the fair value measurements related to long-lived asset impairment charges. At July 13, 2019 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:
Current maturities of long-term debt and finance lease liabilities
690,734
Total book value of debt instruments
708,443
Fair value of debt instruments, excluding debt financing costs
714,044
Excess of fair value over book value
5,601
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).
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 operations. The Company measures the asset and liability on a recurring basis using Level 3 inputs. As of July 13, 2019, the probability of payment related to existing contingent consideration provisions was remote.
The fair value of contingent consideration associated with the Caito Foods Service, Inc. and Blue Ribbon Transport, LLC acquisition was zero as of July 13, 2019. During the period ended July 13, 2019, the Company received $15.0 million related to the resolution of certain acquisition contingencies. As of July 13, 2019, the potential for future payment of contingent consideration is remote and there is no opportunity for additional receipt of contingent consideration, therefore no assets or liabilities are recorded in the condensed consolidated balance sheet. Upon receipt of the proceeds, the portion of the contingent consideration related to the acquisition date fair value was reported as a financing activity in the condensed consolidated statements of cash flows. Amounts received in excess of the acquisition date fair value were reported as an operating activity in the condensed 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.
12
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. The Company had previously advanced funds to one independent retailer for a gross amount representing approximately two percent of the Company’s total assets. In the fourth quarter of 2018, the customer defaulted on the terms of the supply agreement and went into receivership. At that time, the Company performed an analysis of the net realizability of the underlying collateral which resulted in a $32.0 million charge. In the first quarter of 2019, to realize its collateral, the Company placed a credit bid and obtained the rights to acquire five stores. The Company subsequently assigned the rights to acquire three of the stores to an independent retailer in exchange for certain consideration as part of a long-term supply agreement, which was executed during the second quarter. The Company closed on the acquisition of the two remaining stores during the second quarter. The excess of the purchase price over the fair value of net assets acquired of $2.4 million was recorded as goodwill in the consolidated balance sheet and allocated to the Food Distribution segment based on the relative value of the assets acquired and the expected cash flows between the Retail and Food Distribution segments. At the conclusion of the operation of the retailer’s stores by the court-appointed receiver in the second quarter of 2019, the Company performed an additional analysis of the net realizability of the underlying collateral which resulted in a charge of $1.9 million.
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 (“CBAs”) 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 CBAs and vary by location. The Plan continues to be in red zone status, and according to the Pension Protection Act (“PPA”), is considered to be in “critical and declining” zone status. Among other factors, plans in the “critical and declining” zone are generally less than 65% funded and are projected to become insolvent within the next 15 years (or 20 years depending on the ratio of active-to-inactive participants). 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 29, 2018. To reduce this underfunding, management expects increases in expense as a result of required incremental multi-employer pension plan contributions in future years. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined.
Note 9 – Leases
A portion of the Company’s retail stores and warehouses operate in leased facilities. The Company also leases the majority of the tractors and trailers within its fleet and certain other assets. Most of the real property leases contain multiple renewal options, which generally range from one to ten years. In those locations in which it is economically feasible to continue to operate, management expects that lease options will be exercised. The terms of certain leases contain provisions requiring payment of percentage rent based on sales and payment of executory costs such as property taxes, utilities, insurance, maintenance and other occupancy costs applicable to the leased premises or, in the case of transportation equipment, provisions requiring payment of variable rent based upon miles driven. Certain properties or portions thereof are subleased to others. As most of the Company’s leases do not provide an implicit discount rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The components of lease expense were as follows:
Operating lease cost
12,586
29,646
Short-term lease cost
1,510
3,539
Finance lease cost
Amortization of assets
853
1,984
Interest on lease liabilities
713
1,695
Sublease income
(932
(2,267
Total net lease cost
14,730
34,597
13
Supplemental balance sheet information related to leases was as follows:
Operating leases:
Noncurrent operating lease liabilities
Total operating lease liabilities
318,655
Finance leases:
Property and equipment, at cost
62,118
Accumulated amortization
(29,371
32,747
Current portion of finance lease liabilities
5,794
Noncurrent finance lease liabilities
32,644
Total finance lease liabilities
38,438
Weighted average remaining lease term:
Operating leases
9.2 years
Finance leases
10.1 years
Weighted average discount rate:
5.7
%
8.2
Supplemental cash flow and other information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases
14,144
32,926
Operating cash flows used for finance leases
708
1,683
Financing cash flows used for finance leases
1,505
3,461
Leased assets obtained in exchange for lease liabilities:
14,691
19,300
The Company’s maturities of lease liabilities under operating and finance leases as of July 13, 2019 are as follows:
Operating
Finance
Leases
27,581
4,335
31,916
2020
55,754
7,416
63,170
2021
50,482
5,374
55,856
2022
44,140
4,784
48,924
2023
39,689
4,401
44,090
Thereafter
195,885
31,479
227,364
413,531
57,789
471,320
Less interest
94,876
19,351
114,227
Present value of lease liabilities
357,093
Less current portion
47,561
Long-term lease liabilities
309,532
Note 10 – Associate Retirement Plans
During the 12- and 28-week periods ended July 13, 2019, the Company recognized net periodic pension expense of $8.8 million and $9.2 million, respectively, related to the SpartanNash Company Pension Plan (“Pension Plan” or “Plan”) and net postretirement benefit costs of $0.1 million and $0.2 million, respectively, related to the SpartanNash Retiree Medical Plan. During the 12- and 28-week periods ended July 14, 2018, the Company recognized net periodic pension income of $0.1 million and $0.2 million, respectively, and net postretirement benefit costs of $0.1 million and $0.2 million, respectively for the aforementioned plans. Substantially all of these amounts are included in Postretirement benefit expense (income) in the condensed consolidated statements of operations.
On February 28, 2018, the Company’s Board of Directors granted approval to proceed with terminating the frozen Pension Plan. The Plan was terminated on July 31, 2018. The Company offered participants the option to receive an annuity or lump sum distribution which may be rolled over into another qualified plan. The distribution of assets to plan participants commenced in the second quarter and is expected to be completed in the third quarter of 2019. The Company will incur pre-tax settlement charges estimated to be $19 to $20 million to recognize the deferred losses in AOCI upon distribution of the Plan assets and related recognition of the settlement as well as other termination expenses, of which $8.9 million was recognized in the 28 weeks ended July 13, 2019. The Company expects the Plan termination will reduce administrative fees and premium funding costs in future periods.
The Company did not make any contributions to the Pension Plan during the 28-week period ended July 13, 2019. The Company may make contributions to the Pension Plan in 2019 depending on actual termination costs and the value of Pension Plan assets upon final distribution. The Company expects to make total contributions of $0.4 million in 2019 to the Retiree Medical Plan and has made $0.2 million in the year-to-date period.
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, 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 during the 12-week periods ended July 13, 2019 and July 14, 2018 were $3.4 million. The Company’s contributions during the 28-week periods ended July 13, 2019 and July 14, 2018 were $8.2 million and $7.9 million, respectively. See Note 8 for further information regarding contingencies related to the Company’s participation in the Central States Plan.
Note 11 – Income Taxes
The effective income tax rate was 30.3% and 22.7% for the 12 weeks ended July 13, 2019 and July 14, 2018, respectively. For the 28 weeks ended July 13, 2019 and July 14, 2018, the effective income tax rate was -72.5% and 24.8%, respectively. The difference from the federal statutory rate in the current year was primarily due to significant discrete book losses and impairments with corresponding tax effects which occurred during the quarter and changed the year-to-date tax rate. In the prior year, the difference from the federal statutory rate was primarily due to state taxes, federal tax credits and stock-based compensation.
Note 12 – 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
Tax benefits
(178
(255
(970
(929
Stock-based compensation expense, net of tax
537
722
5,128
5,338
15
The following table summarizes activity in the stock-based compensation plans for the 28 weeks ended July 13, 2019:
Weighted
Restricted
Average
Under
Grant-Date
Options
Exercise Price
Awards
Fair Value
Outstanding at December 29, 2018
13,052
13.87
822,819
23.07
Granted
466,005
18.14
Exercised/Vested
(13,052
(341,819
23.40
Cancelled/Forfeited
(23,101
20.22
Outstanding at July 13, 2019
923,904
20.53
As of July 13, 2019, total unrecognized compensation cost related to non-vested restricted stock awards granted under the Company’s stock incentive plans is $6.1 million and is expected to be recognized over a weighted average period of 2.7 years.
Note 13 – 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
172
(414
(19
(644
(Loss) earnings from continuing operations used in calculating earnings per share
(6,595
17,424
735
29,629
Denominator:
Weighted average shares outstanding, including participating securities
36,323
35,928
36,208
36,075
Adjustment for participating securities
(921
(833
(897
(767
Shares used in calculating basic (loss) earnings per share
35,402
35,095
35,311
35,308
Effect of dilutive stock options
Shares used in calculating diluted (loss) earnings per share
35,108
35,320
Basic (loss) earnings per share from continuing operations
Diluted (loss) earnings per share from continuing operations
Note 14 – Supplemental Cash Flow Information
Supplemental cash flow information is as follows:
Non-cash financing activities:
Recognition of finance lease liabilities
948
Non-cash investing activities:
Capital expenditures included in accounts payable
2,269
3,527
Finance lease asset additions
Other supplemental cash flow information:
Cash paid for interest
20,642
15,560
16
Note 15 – Reporting Segment Information
The following tables set forth information about the Company by reporting segment:
Net sales to external customers
Inter-segment sales
226,636
16,024
(1,443
7,744
2,736
10,049
20,529
Operating earnings (loss)
272
(1,603
8,701
Capital expenditures
3,189
1,271
11,305
15,765
198,388
745
59
100
(830
(434
7,318
2,763
8,926
19,007
18,724
3,099
7,995
5,965
1,275
6,315
13,555
515,044
1,494
9,681
(762
17,977
6,333
22,851
47,161
24,864
(3,160
7,875
7,438
2,413
21,920
31,771
451,712
2,940
66
1,360
4,507
16,858
6,441
20,945
44,244
43,245
4,612
7,709
18,410
1,529
14,657
34,596
Total Assets
1,096,965
1,074,125
412,734
405,587
779,175
489,049
Discontinued operations
3,090
3,151
17
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, the information contained under the caption “Forward-Looking Statements,” which appears at the beginning of this report, and the information in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
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 a diverse group of independent and chain retailers, its corporate owned retail stores, military commissaries and exchanges in the United States, as well as premier fresh produce distribution and fresh food processing. The Company operates three reportable business segments: Food Distribution, Military and Retail. The Company serves customers in all 50 states.
The Company’s Food Distribution segment provides a wide variety of nationally branded and private brand grocery products and perishable food products to approximately 2,100 independent retail locations, the Company’s corporate owned retail stores, food service distributors and other customers. The Food Distribution segment primarily conducts business in the Midwest and Southeast regions of the United States. 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.
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, Honduras, Bahrain, Djibouti and Egypt. The Company has over 40 years of experience acting as a distributor to U.S. military commissaries and exchanges. The Company is the exclusive worldwide supplier of private brand products to U.S. military commissaries and is continuing to partner with DeCA in the rollout of private brand products to military commissaries which began during the second quarter of fiscal 2017.
At the end of the second quarter, the Company’s Retail segment operated 160 corporate owned retail stores in the Midwest region primarily under the banners of Family Fare, Martin’s Super Markets, VG’s Food and Pharmacy, D&W Fresh Markets, Sun Mart and Family Fresh Market. The Company also offers pharmacy services in 98 of its corporate owned retail stores and operates 37 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.
2019 Second Quarter Highlights
During the quarter ended July 13, 2019, the Company made significant progress on its strategic objectives and better positioned itself for long-term growth and profitability. In addition to realizing sales growth, the Company remains focused on its other top objectives for the current year, including strengthening its management team, systems and supply chain operations, generating improvements through its Project One Team initiative, and reducing its debt, working capital and financial leverage ratios, which will all contribute to improved growth in adjusted operating earnings and adjusted EBITDA.
Second quarter 2019 operational highlights include:
•
The Company realized sales growth of over 5% from the same quarter in the prior year. This growth was driven by contributions from the newly acquired Martin’s business in the Retail segment and growth in the Military Distribution segment. Before the intercompany elimination of Martin’s sales, the Food Distribution segment also realized growth of 3.0%.
In connection with Project One Team, the Company has completed the implementation of a number of the initiatives and remains on track to achieve a run rate of over $20 million in annual cost savings within the next 24 months. Initiatives currently in the process of being implemented include improving the systems and policies for inventory procurement and management, supply chain efficiency and automation of routine administrative tasks.
18
During the second quarter, the Company appointed Walt Lentz as the President of Food Distribution. Mr. Lentz has an extensive background in logistics, supply chain and food manufacturing, including roles as Acting Chief Executive Officer and Chief Supply Chain Officer of Peapod LLC, the grocery eCommerce business division of Ahold Delhaize. He oversees the Food Distribution segment and has assumed responsibility for the Company’s supply chain. He has joined the other leaders of SpartanNash in developing teams to position the Company for long-term sustainable growth.
Since the second quarter of 2018, the Company has paid down over $90.0 million in debt, resulting in an $8 million reduction in the debt balance despite using approximately $87.0 million to fund the acquisition of Martin’s at the beginning of fiscal 2019. The Company also reduced its working capital by over $15.0 million from the second quarter of fiscal 2018, while continuing to grow sales. The Company will continue to focus on working capital improvements and debt reduction and is targeting total working capital improvements of $30.0 million for the full fiscal year.
The Company recently made the decision to reposition its Fresh Production operations. As a result of this change, the Company’s Fresh Production operations will continue to produce the high-quality cut fruits, vegetables and core deli offerings such as salads, sandwiches and wraps that have been a hallmark of these operations for over a decade. However, the Company will exit the Fresh Kitchen operations, an area of the business which has been unable to deliver on management’s expectations, resulting in lower volume production runs which were neither efficient nor profitable, significantly contributing to unfavorable performance within the Food Distribution segment. The annual net sales impact of exiting the Fresh Kitchen operations will be approximately $20 million.
For the remainder of 2019, the Company expects Food Distribution to achieve low- to mid-single digit sales growth driven by existing customers and new business. This expectation excludes the impact of the elimination of intercompany sales related to the acquisition of the Martin’s business. In the Military segment, the Company expects that new business within the segment, including continued private brand growth, will largely offset the negative DeCA comparable sales trend. Within the Retail segment, the Company expects total sales will increase due to the acquisition of Martin’s and the significant current year implementation of the Company’s brand positioning, partly offset by the impact of store rationalization plans.
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
100.0
5.3
6.0
14.5
14.0
14.7
14.2
8.8
9.5
Selling, general and administrative expenses
13.4
12.5
13.8
12.7
12.8
15.0
0.0
0.1
(27.6
(54.7
0.7
(0.1
0.2
**
77.1
0.4
1.6
1.3
(75.3
(46.8
Other income and expenses
0.9
0.6
153.6
90.6
(0.5
1.2
(142.1
(98.9
0.3
(0.0
(156.1
(103.2
(0.3
(137.9
(97.5
(138.3
(97.8
Note: Certain totals do not sum due to rounding.
** Not meaningful
19
Net Sales – The following table presents net sales by segment and variances in net sales:
Variance
(6,319
7,708
917
8,667
105,378
240,903
Total net sales
99,976
257,278
Net sales for the quarter ended July 13, 2019 (“second quarter”) increased $100.0 million, or 5.3%, to $2.00 billion from $1.90 billion in the quarter ended July 14, 2018 (“prior year quarter”). Net sales for the year-to-date period ended July 13, 2019 (“year-to-date period”) increased $257.3 million, or 6.0%, to $4.54 billion from $4.28 billion in the year-to-date period ended July 14, 2018 (“prior year-to-date period”). The increases were driven primarily by incremental sales from the Martin’s acquisition.
Food Distribution net sales decreased $6.3 million, or 0.7%, to $935.4 million in the second quarter from $941.7 million in the prior year quarter. Net sales for the year-to-date period increased $7.7 million, or 0.4%, from $2.10 billion in the prior year-to-date period. Before the impact of the elimination of sales to Martin’s, following the acquisition at the beginning of 2019, sales grew 3.0% and 4.2% in the second quarter and year-to-date period, respectively. The second quarter and year-to-date increases excluding the impact of the Martin’s elimination were due to sales growth from existing customers. The Company’s rate of sales growth within this segment decelerated from recent quarters, largely due to unseasonably cool and wet weather during the months of May and June. These trends improved during the month of July as the weather improved and the rate of growth returned to that observed in recent quarters.
Military net sales increased $0.9 million, or 0.2%, to $490.6 million in the second quarter from $489.7 million in the prior year quarter. Net sales for the year-to-date period increased $8.7 million, or 0.8%, from $1.15 billion in the prior year-to-date period to $1.16 billion. The increases were primarily due to incremental volume from new business with an existing customer that commenced late in the fourth quarter of 2018 and growth in DeCA’s private brand program, partially offset by lower comparable sales at DeCA operated locations.
Retail net sales increased $105.4 million, or 22.7%, to $570.0 million in the second quarter from $464.6 million in the prior year quarter. Net sales for the year-to-date period increased $240.9 million, or 23.4%, from $1.03 billion in the prior year-to-date period to $1.27 billion. The increase in net sales was primarily attributable to incremental sales from the Martin’s acquisition. Excluding the impact of Martin’s, sales decreased 3.3% and 3.1% in the second quarter and year-to-date period, respectively, as a result of store closures and negative comparable store sales. Comparable store sales, excluding fuel, decreased 2.0% for the quarter and decreased 1.1% percent for the year-to-date period. Comparable store sales for the quarter were negatively impacted by the shift of the post-Easter week into the second quarter by 0.5%. The Company defines a retail store as comparable when it is in operation for 14 accounting periods (a period equals four weeks), regardless of remodels, expansions or relocated stores. The Company’s definition of comparable store sales may differ from similarly titled measures at other companies.
Gross Profit – Gross profit represents net sales less cost of sales, which for all non-production operations includes 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 definition 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 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. The distribution segments include shipping and handling costs in the Selling, general and administrative section of operating expenses in the consolidated statements of earnings.
Gross profit increased $23.3 million, or 8.8%, to $289.0 million in the second quarter from $265.7 million in the prior year quarter. As a percent of net sales, gross profit was 14.5% compared to 14.0% in the prior year quarter. Gross profit for the year-to-date period increased $57.9 million, or 9.5%, from $608.9 million in the prior year-to-date period to $666.7 million in the current year. As a percent of net sales, gross profit for the year-to-date period was 14.7% compared to 14.2% in the prior year-to-date period. As a percent of net sales, the second quarter and year-to-date period change in gross margin was primarily due to the acquisition of Martin’s, partially offset by lower margins in other business segments.
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 to $266.5 million in the second quarter from $236.2 million in the prior year quarter, representing 13.4% of net sales in the second quarter compared to 12.5% in the prior year quarter. SG&A expenses for the year-to-date period increased $81.6 million, or 15.0%, from $545.3 million in the prior year-to-date period to $626.9 million, and increased from 12.7% as a percentage of net sales in the prior year-to-date period compared to 13.8%. The increase in expenses as a rate of sales compared to the prior year quarter and year-to-date period was primarily due to an increase in the mix of Retail segment operations with the acquisition of Martin’s as well as higher supply chain costs in both Military and Food Distribution segments. These increases were offset by favorable variances related to incentive compensation expense across all segments.
Merger/Acquisition and Integration – Second quarter and prior year quarter results included $0.6 million and $0.8 million of merger/acquisition and integration expenses, respectively. The year-to-date period and the prior year-to-date period results included $1.4 million and $3.0 million of merger/acquisition and integration expenses, respectively. The expenses are mainly associated with the acquisition and integration of Martin’s in the current year and the integration of Spartan Stores, Inc. and Nash-Finch Company in the prior year.
Restructuring Charges (Gains) and Asset Impairment – Second quarter and prior year quarter results included charges of $14.6 million and gains of $1.2 million, respectively, of restructuring and asset impairment activity. The year-to-date period and the prior year-to-date period results included charges of $8.9 million and $5.0 million, respectively, of restructuring and asset impairment activity. The second quarter and year-to-date amounts consist primarily of asset impairment charges associated with the changes the Company announced related to the Caito Fresh Production business, including the decision to exit the Fresh Kitchen operations and the year-to-date charges are partially offset by gains on the sale of a previously closed distribution center. The prior year-to-date amount includes charges associated with the Company’s retail store and warehouse rationalization plans, partially offset by gains on sales of real estate in the prior year quarter.
The Company performs goodwill impairment tests on an annual basis, or whenever events or circumstances indicate that it would be more likely than not that the fair value of a reporting unit is below its carrying amount. During the second quarter of 2019, the Company assessed whether there were any indicators that the carrying value of the Food Distribution reporting unit was in excess of its fair value. One of the considerations performed by the Company is whether the carrying value of the enterprise as a whole is greater than the market capitalization, considering a reasonable control premium. At the end of the first quarter and into the second quarter of 2019 the decline in the Company’s stock price substantially decreased market capitalization, and the decline became sustained during the second quarter. As a result of this indicator of impairment, the Company performed an interim goodwill impairment test for the Food Distribution reporting unit, the only reporting unit which carries a goodwill balance.
The Company estimates the fair value of the Food Distribution reporting unit primarily based on the income approach using a discounted cash flow model and also incorporates the market approach using observable comparable company information. As a result of the second quarter impairment test, the Company concluded that the fair value of the Food Distribution reporting unit was substantially in excess of its carrying value.
Key assumptions used by the Company in preparing the fair value estimate under the discounted cash flow method include:
Weighted average cost of capital (“WACC”): The determination of the weighted average cost of capital incorporates current interest rates, equity risk premiums, and other market-based expectations regarding expected investment returns. The development of the WACC requires estimates of an equity rate of return and a debt rate of return, which are specific to the industry in which the Food Distribution reporting unit operates.
Revenue growth rates: The Company develops its forecasts based on recent sales data for existing operations and other factors, including management’s future expectations.
Operating profits: The Company uses historical operating margins as a basis for our projections within the discounted cash flow model. Margins within the forecast may vary due to future expectations related to both product and administrative costs.
The Company compared the results of the discounted cash flow model to observable comparable company market multiples to support the appropriateness of the fair value estimates. The Company concluded that the implied multiple was reasonable with respect to the comparable company range, and that the assumptions used in the fair value estimate were supportable.
Additionally, the Company reconciled the fair value estimate for the Food Distribution reporting unit to the current market capitalization of the enterprise as a whole. While the Retail and Military reporting units do not carry goodwill balances, their fair values are combined with the fair value estimate of the Food Distribution reporting unit in determining the enterprise value of the total Company. During the second quarter goodwill impairment test, the reconciliation between the enterprise value of the Company and market capitalization, implying a reasonable control premium, was within the Company’s expectations based on recent market transactions.
21
Operating Earnings (Loss) – The following table presents operating earnings (loss) by segment and variances in operating earnings (loss):
(18,452
(18,381
(4,702
(7,772
706
166
Total operating earnings
(22,448
(25,987
Operating earnings decreased $22.4 million, or 75.3% to $7.4 million in the second quarter from $29.8 million in the prior year quarter. Operating earnings for the year-to-date period decreased $26.0 million, or 46.8%, to $29.6 million from $55.6 million in the prior year-to-date period. The decreases were primarily attributable to the asset impairment charges, lower margin rates on comparable sales, higher supply chain costs and incremental losses from the Fresh Kitchen operations, partially offset by favorable incentive compensation, incremental earnings from the newly acquired Martin’s business, and lower recall charges than in the prior year. The year-to-date decrease was also attributable to one-time expenses associated with the Project One Team initiative.
Food Distribution operating earnings decreased $18.5 million, or 98.5%, to $0.3 million in the second quarter from $18.7 million in the prior year quarter. Operating earnings for the year-to-date period decreased $18.4 million, or 42.5%, to $24.9 million from $43.2 million in the prior year-to-date period. The decrease in operating earnings was due to asset impairment charges, losses associated with the Fresh Kitchen operations and higher supply chain expenses, partially offset by lower recall charges than in the prior year and favorable adjustments to incentive compensation.
Military operating earnings decreased $4.7 million, or 151.7%, to a $1.6 million operating loss in the second quarter from $3.1 million in operating earnings in the prior year quarter. Operating earnings for the year-to-date period decreased $7.8 million, or 168.5%, to a $3.2 million operating loss from $4.6 million in operating earnings in the prior year-to-date period. The second quarter and year-to-date decreases were primarily attributable to lower margin rates, partly due to a shift in the mix of business, and higher supply chain costs, as well as the cycling of gains related to the sale of a closed facility in the prior year quarter, partially offset by favorable adjustments to incentive compensation. The year-to-date period decrease was also attributable to operational issues at one distribution center as well as one-time costs associated with Project One Team and organizational realignment costs.
Retail operating earnings increased $0.7 million, or 8.8% to $8.7 million in the second quarter from $8.0 million in the prior year quarter. Operating earnings for the year-to-date period increased $0.2 million, or 2.2%, to $7.9 million from $7.7 million in the prior year-to-date period. The increases in reported operating earnings was primarily attributable to lower incentive compensation, the contribution of the acquired Martin’s stores, the favorable impact of closing underperforming stores, and favorable adjustments to incentive compensation, partially offset by higher fees paid to pharmacy benefit managers. The year-to-date increase in operating earnings was offset by the allocation of one-time costs associated with Project One Team.
Interest Expense – Interest expense increased $1.7 million, or 24.8%, to $8.7 million in the second quarter from $7.0 million in the prior year quarter. Interest expense for the year-to-date period increased $4.9 million, or 30.7% from $15.7 million in the prior year-to-date period to $20.6 million. The increases in interest expense were primarily due to an increase in interest rates compared to the prior year and incremental borrowings to fund the Martin’s acquisition.
Income Taxes – The effective income tax rate was 30.3% and 22.7% for the second quarter and prior year quarter, respectively. For the year-to-date period and prior year-to-date period, the effective income tax rates were -72.5% and 24.8%, respectively. The difference from the federal statutory rate in the current year was primarily due to state taxes and stock compensation, partially offset by federal tax credits. In the prior year, the difference from the federal statutory rate was primarily due to state taxes, federal tax credits and stock-based compensation. The tax impacts of stock-based compensation are primarily realized 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. The Company believes these non-GAAP measures are useful to investors because they provide additional understanding of the trends and special circumstances that affect its business. These measures provide useful supplemental information that helps investors to establish a basis for expected performance and the ability to evaluate actual results against that expectation. The measures, when considered in connection with GAAP results, can be used to assess the overall performance of the Company as well as assess the Company’s performance against its peers. These measures are also used as a basis for certain compensation programs sponsored by the Company. 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 costs associated with organizational realignment, which include significant changes to the Company’s management team. Also excluded are the fees paid to a third-party advisory firm associated with Project One Team, the Company’s initiative to drive growth while increasing efficiency and reducing costs. Pension termination costs, primarily related to non-operating settlement expense associated with the distribution of pension assets, are excluded from adjusted earnings from continuing operations, and to a lesser extent adjusted operating earnings. These items are considered “non-operational” or “non-core” in nature. Prior year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude start-up costs associated with the Fresh Kitchen operation, which concluded during the first quarter of 2018. The Fresh Kitchen represented a new line of business for the Company, and provides the Company with the ability to process, cook, and package fresh protein-based foods and complete meal solutions.
Adjusted Operating Earnings
Adjusted operating earnings is a non-GAAP operating financial measure that the Company defines as operating earnings plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.
The Company believes that adjusted operating earnings provide a meaningful representation of its operating performance for the Company as a whole and for its operating segments. The Company considers adjusted operating earnings as an additional way to measure operating performance on an ongoing basis. Adjusted operating earnings is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature and also excludes the contributions of activities classified as discontinued operations. Because adjusted operating earnings and adjusted operating earnings by segment are performance measures that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in adjusted operating earnings format.
Adjusted operating earnings is not a measure of performance under accounting principles generally accepted in the United States of America (“GAAP”) and should not be considered as a substitute for operating earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definition of adjusted operating earnings may not be identical to similarly titled measures reported by other companies.
23
Following is a reconciliation of operating earnings (loss) to adjusted operating earnings for the 12 and 28 weeks ended July 13, 2019 and July 14, 2018.
Adjustments:
Fresh Kitchen start-up costs
1,366
Costs associated with Project One Team
810
5,428
Organizational realignment costs
877
Pension termination
Severance associated with cost reduction initiatives
80
344
442
618
Adjusted operating earnings
23,462
29,802
46,629
65,597
Reconciliation of operating earnings (loss) to adjusted operating earnings (loss) by segment:
Food Distribution:
Restructuring charges and asset impairment
429
2,877
465
37
258
361
451
16,783
19,827
38,129
49,362
Military:
Operating (loss) earnings
Restructuring gains
106
114
70
Adjusted operating (loss) earnings
(1,492
2,287
(2,329
3,856
Retail:
Restructuring (gains) charges and asset impairment
275
1,845
298
43
68
72
97
8,171
7,688
10,829
12,379
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 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 earnings from continuing operations to adjusted earnings from continuing operations for the 12 and 28 weeks ended July 13, 2019 and July 14, 2018.
per diluted
share
8,998
Total adjustments
25,070
(16
Income tax effect on adjustments (a)
(6,112
48
Total adjustments, net of taxes
18,958
0.53
32
Adjusted earnings from continuing operations
12,191
0.34
17,870
9,351
26,381
10,031
(6,416
(2,388
19,965
0.55
7,643
0.21
20,719
0.57
37,916
1.05
(a) The income tax effect on adjustments is computed by applying the effective tax rate, before discrete tax items, to the total adjustments for the period.
25
Adjusted EBITDA
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“adjusted EBITDA”) is a non-GAAP operating financial measure that the Company defines as net earnings plus interest, discontinued operations, depreciation and amortization, and other non-cash items including deferred (stock) compensation, the LIFO provision, as well as adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.
The Company believes that adjusted EBITDA provides a meaningful representation of its operating performance for the Company 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 (loss) earnings to adjusted EBITDA for the 12 and 28 weeks ended July 13, 2019 and July 14, 2018.
47
Other expenses, net
1,068
155
44,025
Stock-based compensation
976
(1,516
(3,434
(117
Other non-cash charges
154
135
496
44,312
49,690
98,981
116,861
26
Following is a reconciliation of operating earnings (loss) to adjusted EBITDA by segment for the 12 and 28 weeks ended July 13, 2019 and July 14, 2018.
LIFO expense (benefit)
527
(82
1,230
683
16,639
341
441
3,017
2,968
1
206
204
378
25,555
27,451
60,565
69,621
284
(26
662
399
124
220
978
1,025
(92
(1
(214
Other non-cash charges (gains)
(76
(11
(148
1,567
5,149
5,408
11,502
257
263
601
613
250
2,103
2,274
(1,573
(3,426
(95
86
129
(281
17,190
17,090
33,008
35,738
27
Liquidity and Capital Resources
Cash Flow Information
The following table summarizes the Company’s consolidated statements of cash flows:
Cash flow activities
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
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 $0.5 million and was primarily due to lower cash generated from earnings, mostly offset by improvements in working capital.
Net cash used in investing activities. Net cash used in investing activities increased $74.5 million in the current year compared to the prior year primarily due to the Martin’s acquisition made in the current year quarter, partially offset by proceeds from the sale of real property for a previously closed site.
The Food Distribution, Military and Retail segments utilized 23.4%, 7.6% and 69.0% of capital expenditures, respectively, in the current year.
Net cash provided by (used in) financing activities. Net cash provided by financing activities increased $76.0 million in the current year compared to the prior year use of cash primarily due to borrowings on the revolving credit facility to fund the Martin’s 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 finance lease liabilities, was $702.2 million and $698.1 million as of July 13, 2019 and December 29, 2018, respectively. The increase in total debt was driven by the current year acquisition of Martin’s, partially offset by payments.
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 $1.1 billion. As of July 13, 2019, the senior secured credit facility had outstanding borrowings of $660.9 million. Additional available borrowings under the Company’s $1.1 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 $249.0 million at July 13, 2019. 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 $10.8 million were outstanding as of July 13, 2019. The revolving credit facility matures December 18, 2023 and is secured by substantially all of the Company’s assets.
The Company believes that cash generated from operating activities and available borrowings under the credit facility will be sufficient to meet anticipated requirements for working capital, capital expenditures, dividend payments, and debt service obligations for the foreseeable future. However, there can be no assurance that the business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the Credit Agreement. Subsequent to the end of the second quarter, the Company executed an early payment of its term loan (Tranche A-2) in the amount of $55.0 million with available borrowings from its revolving credit facility. The Company expects to generate interest savings of nearly $2 million annually as a result of utilizing lower rate financing.
28
The Company’s current ratio (current assets to current liabilities) was 1.76-to-1 at July 13, 2019 compared to 2.10-to-1 at December 29, 2018, and its investment in working capital was $430.7 million at July 13, 2019 compared to $524.6 million at December 29, 2018. Net debt to total capital ratio was 0.50-to-1 at July 13, 2019 compared to 0.49-to-1 at December 29, 2018. The current year ratios include the impact of the adoption of the new lease standard (ASU 2016-02) and therefore lack comparability to the prior year ratios.
Total net debt is a non-GAAP financial measure that is defined as long-term debt and finance lease liabilities, plus current maturities of long-term debt and finance lease liabilities, 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 finance lease liabilities to total net long-term debt and finance lease liabilities as of July 13, 2019 and December 29, 2018.
Total debt
702,236
698,060
(19,949
(18,585
Total net long-term debt
682,287
679,475
For information on contractual obligations, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018. At July 13, 2019, there have been no material changes to the Company’s significant contractual obligations outside the ordinary course of business.
Cash Dividends
During the quarter ended July 13, 2019, the Company returned $6.9 million to shareholders from dividend payments. A 5.6% increase in the quarterly dividend rate from $0.18 per share to $0.19 per share was approved by the Board of Directors and announced on February 28, 2019. 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 $35.0 million. Additionally, the Company is generally permitted to pay cash dividends and repurchase shares in excess of $35.0 million in any fiscal year so long as its Excess Availability, as defined in the senior revolving credit facility, is in excess of 10% of the Total Borrowing Base, as defined in the senior revolving credit facility, before and after giving effect to the repurchases and dividends.
Off-Balance Sheet Arrangements
The Company has also made certain commercial commitments that extend beyond July 13, 2019. These commitments consist primarily of purchase commitments (as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 29, 2018), standby letters of credit of $10.8 million as of July 13, 2019, and interest on long-term debt and finance lease liabilities.
29
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, assets held for sale, long-lived assets, income taxes, self-insurance reserves, restructuring costs, retirement benefits, stock-based compensation, contingencies and litigation. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Based on the Company’s ongoing review, the Company makes adjustments it considers appropriate under the facts and circumstances. This discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements. The Company believes these accounting policies and others set forth in Item 8, Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 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 29, 2018.
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 29, 2018.
ITEM 4. Controls and Procedures
An evaluation of the effectiveness of the design and operation of SpartanNash Company’s disclosure controls and procedures (as currently defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was performed as of July 13, 2019 (the “Evaluation Date”). This evaluation was performed under the supervision and with the participation of SpartanNash Company’s management, including its Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”). As of the Evaluation Date, SpartanNash Company’s management, including the CEO, CFO and CAO, concluded that SpartanNash’s disclosure controls and procedures were effective as of the Evaluation Date to ensure that material information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including its principal executive and principal financial officers as appropriate to allow for timely decisions regarding required disclosure. During the second quarter there was no change in SpartanNash’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, SpartanNash’s internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information regarding SpartanNash’s purchases of its own common stock during the 12 week period ended July 13, 2019. 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. For the first quarter of 2019, all shares purchased by SpartanNash related to shares submitted for cancellation to satisfy tax withholding obligations that occur upon the vesting of the restricted shares.
During the fourth quarter of 2017, the Board authorized a publicly announced $50 million share repurchase program, expiring in 2022. No repurchases were made under this program during the second quarter of 2019. At July 13, 2019 $45.0 million remains available under the program.
Total Number
Price Paid
Fiscal Period
of Shares Purchased
per Share
April 21 - May 18, 2019
Employee Transactions
Repurchase Program
May 19 - June 15, 2019
1,821
12.72
June 16 - July 13, 2019
Total for quarter ended July 13, 2019
31
ITEM 6. Exhibits
The following documents are filed as exhibits to this Quarterly Report on Form 10-Q:
ExhibitNumber
Document
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. Incorporated herein by reference.
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
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 13, 2019, has been formatted in Inline XBRL.
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: August 21, 2019
By
/s/ Mark E. Shamber
Mark E. Shamber
Executive Vice President and Chief Financial Officer
33