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SpartanNash Co - Quarter Report: 2017 April (Form 10-Q)

 

 

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 April 22, 2017.

OR

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

For the transition period from                      to                     .

Commission File Number: 000-31127

 

SPARTANNASH COMPANY

(Exact Name of Registrant as Specified in Its Charter)

 

 

Michigan

 

38-0593940

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

850 76th Street, S.W.

P.O. Box 8700

Grand Rapids, Michigan

 

49518

(Address of Principal Executive Offices)

 

(Zip Code)

(616) 878-2000

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

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

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

 Large accelerated filer

 

 

Accelerated filer

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

As of May 23, 2017, the registrant had 37,844,852 outstanding shares of common stock, no par value.

 

 

 

 


FORWARD-LOOKING STATEMENTS

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

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

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

 

 

 

2


PART I

FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

 

April 22,

 

 

December 31,

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

     Cash and cash equivalents

$

 

19,516

 

 

$

 

24,351

 

     Accounts and notes receivable, net

 

 

342,364

 

 

 

 

291,568

 

     Inventories, net

 

 

539,908

 

 

 

 

539,857

 

     Prepaid expenses and other current assets

 

 

42,878

 

 

 

 

37,187

 

     Property and equipment held for sale

 

 

 

 

 

 

521

 

     Total current assets

 

 

944,666

 

 

 

 

893,484

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

628,047

 

 

 

 

559,722

 

Goodwill

 

 

367,497

 

 

 

 

322,686

 

Intangible assets, net

 

 

131,376

 

 

 

 

60,202

 

Other assets, net

 

 

109,029

 

 

 

 

94,242

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

 

2,180,615

 

 

$

 

1,930,336

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

     Accounts payable

$

 

370,682

 

 

$

 

372,432

 

     Accrued payroll and benefits

 

 

60,449

 

 

 

 

75,333

 

     Other accrued expenses

 

 

40,967

 

 

 

 

40,788

 

     Current maturities of long-term debt and capital lease obligations

 

 

17,404

 

 

 

 

17,424

 

     Total current liabilities

 

 

489,502

 

 

 

 

505,977

 

 

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

 

 

     Deferred income taxes

 

 

132,374

 

 

 

 

123,243

 

     Postretirement benefits

 

 

16,433

 

 

 

 

16,266

 

     Other long-term liabilities

 

 

42,592

 

 

 

 

45,768

 

     Long-term debt and capital lease obligations

 

 

658,261

 

 

 

 

413,675

 

     Total long-term liabilities

 

 

849,660

 

 

 

 

598,952

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

 

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

        authorized; 37,860 and 37,539 shares outstanding

 

 

529,235

 

 

 

 

521,984

 

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

 

 

 

 

 

 

 

     Accumulated other comprehensive loss

 

 

(11,412

)

 

 

 

(11,437

)

     Retained earnings

 

 

323,630

 

 

 

 

314,860

 

     Total shareholders’ equity

 

 

841,453

 

 

 

 

825,407

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

$

 

2,180,615

 

 

$

 

1,930,336

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

 

 

16 Weeks Ended

 

 

 

April 22,

 

 

April 23,

 

 

 

2017

 

 

2016

 

 

Net sales

$

 

2,402,504

 

 

$

 

2,278,770

 

 

Cost of sales

 

 

2,045,128

 

 

 

 

1,944,528

 

 

Gross profit

 

 

357,376

 

 

 

 

334,242

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

   Selling, general and administrative

 

 

322,694

 

 

 

 

296,381

 

 

   Merger/acquisition and integration

 

 

4,017

 

 

 

 

897

 

 

   Restructuring charges and asset impairment

 

 

1,021

 

 

 

 

15,304

 

 

Total operating expenses

 

 

327,732

 

 

 

 

312,582

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings

 

 

29,644

 

 

 

 

21,660

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) and expenses

 

 

 

 

 

 

 

 

 

 

   Interest expense

 

 

7,315

 

 

 

 

5,823

 

 

   Other, net

 

 

(105

)

 

 

 

(150

)

 

Total other expenses, net

 

 

7,210

 

 

 

 

5,673

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes and discontinued operations

 

 

22,434

 

 

 

 

15,987

 

 

   Income taxes

 

 

7,369

 

 

 

 

6,027

 

 

Earnings from continuing operations

 

 

15,065

 

 

 

 

9,960

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

(40

)

 

 

 

(109

)

 

Net earnings

$

 

15,025

 

 

$

 

9,851

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

   Earnings from continuing operations

$

 

0.40

 

 

$

 

0.27

 

 

   Loss from discontinued operations

 

 

 

 

 

 

(0.01

)

*

   Net earnings

$

 

0.40

 

 

$

 

0.26

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

   Earnings from continuing operations

$

 

0.40

 

 

$

 

0.27

 

 

   Loss from discontinued operations

 

 

 

 

 

 

(0.01

)

*

   Net earnings

$

 

0.40

 

 

$

 

0.26

 

 

See accompanying notes to condensed consolidated financial statements.

*

Includes rounding

 

 

 

4


SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

 

2017

 

 

2016

 

Net earnings

$

 

15,025

 

 

$

 

9,851

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, before tax

 

 

 

 

 

 

 

 

 

Pension and postretirement liability adjustment

 

 

41

 

 

 

 

2

 

Total other comprehensive income, before tax

 

 

41

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

Income tax expense related to items of other comprehensive income

 

 

(16

)

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income, after tax

 

 

25

 

 

 

 

1

 

Comprehensive income

$

 

15,050

 

 

$

 

9,852

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Common

 

 

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Outstanding

 

 

Stock

 

 

Income (Loss)

 

 

Earnings

 

 

Total

 

Balance at December 31, 2016

 

37,539

 

 

$

 

521,984

 

 

$

 

(11,437

)

 

$

 

314,860

 

 

$

 

825,407

 

Net earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

15,025

 

 

 

 

15,025

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

25

 

Dividends - $0.165 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,255

)

 

 

 

(6,255

)

Stock-based employee compensation

 

 

 

 

 

6,352

 

 

 

 

 

 

 

 

 

 

 

 

6,352

 

Issuances of common stock on stock option

   exercises and stock bonus plan

 

165

 

 

 

 

3,506

 

 

 

 

 

 

 

 

 

 

 

 

3,506

 

Issuances of restricted stock

 

271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cancellations of stock-based awards

 

(115

)

 

 

 

(2,607

)

 

 

 

 

 

 

 

 

 

 

 

(2,607

)

Balance at April 22, 2017

 

37,860

 

 

$

 

529,235

 

 

$

 

(11,412

)

 

$

 

323,630

 

 

$

 

841,453

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

6


SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)  

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

Net earnings

$

 

15,025

 

 

$

 

9,851

 

Loss from discontinued operations, net of tax

 

 

40

 

 

 

 

109

 

Earnings from continuing operations

 

 

15,065

 

 

 

 

9,960

 

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

 

Non-cash restructuring, asset impairment and other charges

 

 

916

 

 

 

 

14,662

 

Depreciation and amortization

 

 

25,850

 

 

 

 

23,895

 

LIFO expense

 

 

1,590

 

 

 

 

1,412

 

Postretirement benefits expense

 

 

465

 

 

 

 

112

 

Deferred taxes on income

 

 

9,719

 

 

 

 

2,816

 

Stock-based compensation expense

 

 

6,352

 

 

 

 

5,024

 

Other, net

 

 

(6

)

 

 

 

(53

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(18,879

)

 

 

 

15,494

 

Inventories

 

 

3,713

 

 

 

 

(14,009

)

Prepaid expenses and other assets

 

 

(1,108

)

 

 

 

(8,356

)

Accounts payable

 

 

(26,159

)

 

 

 

(13,386

)

Accrued payroll and benefits

 

 

(19,527

)

 

 

 

(11,502

)

Postretirement benefit payments

 

 

(90

)

 

 

 

(77

)

Other accrued expenses and other liabilities

 

 

(8,192

)

 

 

 

(16,015

)

   Net cash (used in) provided by operating activities

 

 

(10,291

)

 

 

 

9,977

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(19,476

)

 

 

 

(18,090

)

Net proceeds from the sale of assets

 

 

557

 

 

 

 

4,739

 

Acquisitions, net of cash acquired

 

 

(214,595

)

 

 

 

 

Payments from customers on loans

 

 

754

 

 

 

 

522

 

Other

 

 

(133

)

 

 

 

(97

)

   Net cash used in investing activities

 

 

(232,893

)

 

 

 

(12,926

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

   Proceeds from revolving credit facility

 

 

652,573

 

 

 

 

428,755

 

   Payments on revolving credit facility

 

 

(406,140

)

 

 

 

(401,737

)

   Share repurchase

 

 

 

 

 

 

(9,000

)

   Net payments related to stock-based award activities

 

 

(2,607

)

 

 

 

(1,302

)

   Repayment of other long-term debt

 

 

(2,265

)

 

 

 

(2,841

)

   Financing fees paid

 

 

(216

)

 

 

 

(98

)

   Proceeds from exercise of stock options

 

 

3,207

 

 

 

 

936

 

   Dividends paid

 

 

(6,255

)

 

 

 

(5,632

)

   Net cash provided by financing activities

 

 

238,297

 

 

 

 

9,081

 

Cash flows from discontinued operations

 

 

 

 

 

 

 

 

 

   Net cash provided by (used in) operating activities

 

 

52

 

 

 

 

(164

)

   Net cash provided by (used in) discontinued operations

 

 

52

 

 

 

 

(164

)

Net (decrease) increase in cash and cash equivalents

 

 

(4,835

)

 

 

 

5,968

 

Cash and cash equivalents at beginning of period

 

 

24,351

 

 

 

 

22,719

 

Cash and cash equivalents at end of period

$

 

19,516

 

 

$

 

28,687

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

7


SPARTANNASH COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

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

In the opinion of management, the accompanying condensed consolidated financial statements, taken as a whole, contain all adjustments, including normal recurring items, necessary to present fairly the financial position of SpartanNash as of April 22, 2017, and the results of its operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

The Company’s first fiscal quarter is 16 weeks and generally includes the Easter holiday. The unaudited information in the condensed consolidated financial statements for the first quarters of 2017 and 2016 includes the results of operations of the Company for the 16-week periods ended April 22, 2017 and April 23, 2016, respectively.

Note 2 – Recently Issued Accounting Standards

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

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

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 provides for simplification of several aspects of the accounting for share-based payment transactions including income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. The Company adopted the new standard in the first quarter of fiscal 2017. Accordingly the tax benefits or deficiencies related to stock-based compensation are reflected in the condensed consolidated statements of earnings as a component of the provision for income taxes, whereas they previously were recognized in equity. As a result of the adoption, the Company recognized $1.1 million of tax benefits related to share-based payments in its provision for income taxes in the first quarter of 2017. Additionally, the Company’s condensed consolidated statements of cash flows now include tax benefits as an operating activity, while cash paid on associates’ behalf related to shares withheld for tax purposes is classified as a financing activity. Retrospective application of the cash flow presentation resulted in $1.4 million increases to both net cash provided by operating activities and net cash used in financing activities, respectively, for the first quarter of 2016. The Company’s stock compensation expense continues to reflect estimated forfeitures.

8


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

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

The Company is currently in the process of evaluating the impact of adoption of this standard on its consolidated financial statements and has substantially completed its initial evaluation of the major focus areas that could impact the Company. From a principal versus agent considerations perspective, the Company has evaluated its significant arrangements and has determined that revenue recognition on a gross reporting basis will remain relatively unchanged, with the exception of a few smaller contracts that could be reported on a net basis depending on the nature of the arrangements and management’s final assessment. As it pertains to the Food Distribution and Military segments, the Company determined that the promised goods or services other than grocery products outlined in the contracts with customers are immaterial in the context of the contracts. As a result of this determination, the Company is not required to assess whether these promised goods or services are performance obligations, and therefore, believes revenue recognition practices will remain relatively unchanged as there are no additional deliverables for which the transaction price will need to be allocated to. Many of these contracts also include contingent amounts of variable consideration, and the Company expects there to be few, if any, changes to the timing of revenue as the Company currently recognizes these amounts under the presumption that they are determinable and can be estimated. The Company also expects there to be few, if any, changes to revenue recognition in its Retail segment based on how the Company currently records gift card breakage and loyalty rewards, which are immaterial with respect to the consolidated financial statements. The Company expects to complete its evaluation of the standard in mid-2017 and is currently in the process of updating its existing accounting policies as well as implementing processes and controls to address the relevant changes that will result from adopting the new standard.

 

Note 3 Acquisitions

On January 6, 2017, the Company acquired certain assets and assumed certain liabilities of Caito Foods Service (“Caito”) and Blue Ribbon Transport (“BRT”) for $214.6 million in cash, net of $2.5 million of cash acquired. Acquired assets consist primarily of property and equipment of $77.9 million, intangible assets of $72.9 million, and working capital. Intangible assets are primarily composed of customer relationships, which will be amortized over fifteen years, and indefinite lived trade names. In connection with the purchase, the Company is providing certain earn-out opportunities that have the potential to pay the sellers an additional $27.4 million, collectively, if the business achieves certain performance targets during the first three years after acquisition. If certain performance targets are not met in the first year after acquisition, the Company will be reimbursed a portion of the initial purchase price at an amount not to exceed the sum of: a) $15.0 million, representing the funds paid into escrow, and b) any earn-out opportunities earned by the sellers. The reduction in purchase price, if applicable, will first be applied to funds paid into escrow and then as an offset against and a reduction to any payments owed on the various earn-out opportunities. The acquisition was funded with proceeds from the Company’s Credit Agreement. As of April 22, 2017, the Company has incurred $4.9 million of transaction costs related to the acquisition, of which $2.7 million was incurred in 2017 and is recorded in merger/acquisition and integration.

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

9


The acquired assets and assumed liabilities were recorded at their estimated fair values as of the acquisition date and were based on preliminary estimates. These estimates are subject to revision upon the finalization of the valuations of the acquired real estate and intangible assets. Any adjustments will be made prior to January 5, 2018. The excess of the purchase price over the fair value of net assets acquired, preliminarily estimated at $45.0 million, was recorded as goodwill in the consolidated balance sheet and allocated to the Food Distribution segment. The goodwill recognized is attributable primarily to the assembled workforce of Caito and BRT and expected synergies. The Company expects that all goodwill attributable to the acquisition will be deductible for tax purposes.

 

Note 4 – Goodwill

Changes in the carrying amount of goodwill were as follows:

 

(In thousands)

Food Distribution

 

 

Retail

 

 

 

Total

 

 

Balance at December 31, 2016

$

 

132,367

 

 

$

 

190,319

 

(a)

 

$

 

322,686

 

(a)

Acquisitions (Note 3)

 

 

44,982

 

 

 

 

 

 

 

 

 

44,982

 

 

Other

 

 

 

 

 

 

(171

)

 

 

 

 

(171

)

 

Balance at April 22, 2017

$

 

177,349

 

 

$

 

190,148

 

(a)

 

$

 

367,497

 

(a)

 

(a)

Net of accumulated impairment charges of $86.6 million.

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

The Company continues to assess whether indicators are present or if there are changes in circumstances that would suggest impairment may exist, including an evaluation of the significant judgments and estimates related to the Retail reporting unit’s projected weighted average cost of capital, future revenues and cash flows, and overall profitability. Since the most recent goodwill impairment test, the Company has continued to monitor the trends of the Retail reporting unit’s performance. Based on recent performance, the Company is not aware of any events or significant changes in its estimates that would indicate that impairment exists, and the Company has sufficient available information, both current and historical, to support its assumptions, judgments and estimates. From a sensitivity perspective, no goodwill impairment charge would be required for the Retail reporting unit if the estimate of future discounted cash flows was 10% lower or if the discount rate increased by 75 basis points. However, if the Company’s stock price experiences a significant and sustained decline or other events or changes in circumstances occur, such as interest rate increases, changes in macroeconomic conditions, or operating results of the Retail reporting unit not meeting the Company’s estimates, it could result in the Company recording a significant non-cash impairment charge.

Note 5 – Restructuring Charges and Asset Impairment

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

 

 

 

 

 

Lease and

 

 

 

 

 

 

 

(In thousands)

 

 

 

Ancillary Costs

 

 

Severance

 

 

Total

 

Balance at December 31, 2016

 

 

 

$

 

21,932

 

 

$

 

 

 

$

 

21,932

 

Provision for closing charges (a)

 

 

 

 

 

405

 

 

 

 

 

 

 

 

405

 

Provision for severance (b)

 

 

 

 

 

 

 

 

 

535

 

 

 

 

535

 

Lease termination adjustment (c)

 

 

 

 

 

(559

)

 

 

 

 

 

 

 

(559

)

Accretion expense

 

 

 

 

 

179

 

 

 

 

 

 

 

 

179

 

Payments

 

 

 

 

 

(1,662

)

 

 

 

(68

)

 

 

 

(1,730

)

Balance at April 22, 2017

 

 

 

$

 

20,295

 

 

$

 

467

 

 

$

 

20,762

 

(a)

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

10


(b)

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

(c)

The lease termination adjustment represents the benefit recognized in connection with a lease buyout on a previously closed store.

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

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

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

(In thousands)

2017

 

 

2016

 

Asset impairment charges (a)

$

 

521

 

 

$

 

 

Provision for closing charges (b)

 

 

405

 

 

 

 

12,453

 

(Gain) loss on sales of assets related to closed facilities (c)

 

 

(177

)

 

 

 

367

 

Provision for severance (d)

 

 

535

 

 

 

 

895

 

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

 

 

296

 

 

 

 

1,769

 

Changes in estimates (f)

 

 

 

 

 

 

120

 

Lease termination adjustment (g)

 

 

(559

)

 

 

 

(300

)

    Total

$

 

1,021

 

 

$

 

15,304

 

(a)

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

(b)

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

(c)

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

(d)

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

(e)

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

(f)

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

(g)

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

Note 6 – Long-Term Debt

Long-term debt consists of the following:

 

 

April 22,

 

 

December 31,

 

(In thousands)

2017

 

 

2016

 

Senior secured revolving credit facility, due December 2021

$

 

575,013

 

 

$

 

359,127

 

Senior secured term loan, due December 2021

 

 

57,500

 

 

 

 

26,954

 

Capital lease obligations

 

 

46,430

 

 

 

 

48,255

 

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

 

 

4,647

 

 

 

 

5,028

 

Total debt - Principal

 

 

683,590

 

 

 

 

439,364

 

Unamortized debt issuance costs

 

 

(7,925

)

 

 

 

(8,265

)

Total debt

 

 

675,665

 

 

 

 

431,099

 

Less current portion

 

 

17,404

 

 

 

 

17,424

 

Total long-term debt

$

 

658,261

 

 

$

 

413,675

 

 

11


Note 7 – Fair Value Measurements

Financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, accounts and notes receivable, and accounts payable approximate fair value because of the short-term maturities of these financial instruments. At April 22, 2017 and December 31, 2016, the book value and estimated fair value of the Company’s debt instruments, excluding debt financing costs, were as follows:

 

 

April 22,

 

 

December 31,

 

(In thousands)

2017

 

 

2016

 

Book value of debt instruments, excluding debt financing costs:

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and capital lease obligations

$

 

17,404

 

 

$

 

17,424

 

Long-term debt and capital lease obligations

 

 

666,186

 

 

 

 

421,940

 

Total book value of debt instruments

 

 

683,590

 

 

 

 

439,364

 

Fair value of debt instruments, excluding debt financing costs

 

 

684,936

 

 

 

 

440,759

 

Excess of fair value over book value

$

 

1,346

 

 

$

 

1,395

 

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

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

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

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

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

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

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

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

 

Unobservable Input

Range

 

Discount rate

 

11.80%

 

Probability of payments

0% - 100%

 

Projected fiscal year(s) of payments

2017 - 2019

 

The fair value of contingent consideration receivable and payable associated with the Caito acquisition was $18.4 million and $3.4 million, respectively, as of April 22, 2017. The net receivable of $15.0 million was recorded in “Other assets, net” in the condensed consolidated balance sheets as there is a right of offset for the payable and receivable. Upon payment, the portion of the contingent consideration related to the acquisition date fair value is reported as a financing activity in the condensed consolidated statements of cash flows. Amounts received or paid in excess of the acquisition date fair value are reported as an operating activity in the consolidated statements of cash flows.

12


 

Note 8 – Commitments and Contingencies

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

From time to time, the Company may advance funds to independent retailers which are earned by the retailers primarily through achieving specified purchase volume requirements, as outlined in their supply agreements with the Company, or in limited instances, for remaining a SpartanNash customer for a specified time period. These advances must be repaid if the purchase volume requirements are not met or if the retailer no longer remains a customer for the specified time period. As of April 22, 2017, the Company has an unearned advance to one independent retailer for an amount representing approximately two percent of the Company’s total assets, and also has outstanding receivables from this customer in the amount of $8.9 million, of which $4.7 million has been reserved for given the past due status on those receivables. The Company’s collateral related to the advanced funds is a security interest in select business assets of the independent retailer’s stores, including select real property assets and other collateral, including personal guarantees, from the shareholders. However, in the event of default, the Company may be unable to recover the unearned portion of the funds advanced to this independent retailer. Based on the uncertainty associated with estimating the value of the collateral and the risks related to taking possession of and divesting the secured business assets, the Company cannot reasonably estimate the amount of advanced funds, if any, that would not be recoverable. The Company estimates that the possible range of loss related to this customer is between zero and $25.0 million, depending on the circumstances discussed above.

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

Based on the most recent information available to the Company, management believes that the present value of actuarial accrued liabilities of 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, although management anticipates that the Company’s contributions to this plan will increase each year. Management is not aware of any significant change in funding levels since December 31, 2016. To reduce this underfunding, management expects meaningful increases in expense as a result of required incremental multi-employer pension plan contributions in future years. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined.

Note 9 – Associate Retirement Plans

During the first quarter of 2017, the Company recognized net periodic pension income of $0.2 million related to the SpartanNash Company Pension Plan and net postretirement benefit costs of $0.1 million related to the SpartanNash Medical Plan.

The Company did not make any contributions to the SpartanNash Company Pension Plan during the first quarter of 2017, and because there are no required payments, the Company does not expect to make any contributions for the remainder of the fiscal year ending December 30, 2017.

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

Multi-Employer Plans

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

With respect to the Company’s participation in the Central States Plan, expense is recognized as contributions are funded. The Company’s contributions for the first quarters of 2017 and 2016 were $4.4 million and $4.2 million, respectively. See Note 8 for further information regarding the Company’s participation in the Central States Plan.

13


Note 10 – Income Taxes

The effective income tax rate was 32.8% and 37.7% for the 16 weeks ended April 22, 2017 and April 23, 2016, respectively. The differences from the federal statutory rate are primarily due to tax benefits related to stock-based compensation, state taxes and federal tax credits in the current year and state taxes and federal tax credits in the prior year. The Company adopted ASU 2016-09 on January 1, 2017, which requires tax benefits or deficiencies related to stock-based compensation to be reflected in the condensed consolidated statements of earnings as a component of the provision for income taxes whereas they were previously recognized in equity. Total tax benefits recognized in the first quarter of fiscal 2017 were $1.1 million.

 

Note 11 – Stock-Based Compensation

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

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

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

(In thousands)

2017

 

 

2016

 

Restricted stock

$

 

6,352

 

 

$

 

5,024

 

Tax benefits

 

 

(3,434

)

 

 

 

(1,914

)

Stock-based compensation expense, net of tax

$

 

2,918

 

 

$

 

3,110

 

 

The following table summarizes activity in the stock-based compensation plans for the 16 weeks ended April 22, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Shares

 

 

Weighted

 

 

Restricted

 

 

Average

 

 

Under

 

 

Average

 

 

Stock

 

 

Grant-Date

 

 

Options

 

 

Exercise Price

 

 

Awards

 

 

Fair Value

 

Outstanding at December 31, 2016

 

200,517

 

 

$

 

19.94

 

 

 

660,143

 

 

$

 

26.48

 

Granted

 

 

 

 

 

 

 

 

271,397

 

 

 

 

34.78

 

Exercised/Vested

 

(152,589

)

 

 

 

21.02

 

 

 

(215,508

)

 

 

 

26.25

 

Cancelled/Forfeited

 

 

 

 

 

 

 

 

(42,479

)

 

 

 

27.89

 

Outstanding at April 22, 2017

 

47,928

 

 

$

 

16.52

 

 

 

673,553

 

 

$

 

29.81

 

The Company has not issued any stock options since 2009 and all outstanding options are vested and exercisable at April 22, 2017.

As of April 22, 2017, total unrecognized compensation costs related to non-vested stock-based awards granted under the Company’s stock incentive plans were $7.8 million for restricted stock, and are expected to be recognized over a weighted average period of 2.5 years. All compensation costs related to stock options have been recognized.

14


Note 12 – Earnings Per Share

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

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

(In thousands, except per share amounts)

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

$

 

15,065

 

 

$

 

9,960

 

Adjustment for earnings attributable to participating securities

 

 

(276

)

 

 

 

(178

)

Earnings from continuing operations used in calculating earnings per share

$

 

14,789

 

 

$

 

9,782

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, including participating securities

 

 

37,692

 

 

 

 

37,488

 

Adjustment for participating securities

 

 

(690

)

 

 

 

(669

)

Shares used in calculating basic earnings per share

 

 

37,002

 

 

 

 

36,819

 

Effect of dilutive stock options

 

 

64

 

 

 

 

56

 

Shares used in calculating diluted earnings per share

 

 

37,066

 

 

 

 

36,875

 

Basic earnings per share from continuing operations

$

 

0.40

 

 

$

 

0.27

 

Diluted earnings per share from continuing operations

$

 

0.40

 

 

$

 

0.27

 

 

Note 13 – Supplemental Cash Flow Information

Supplemental cash flow information is as follows:

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

(In thousands)

2017

 

 

2016

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

 

Capital lease obligations

$

 

60

 

 

$

 

3,651

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable

 

 

685

 

 

 

 

2,644

 

Capital lease asset additions

 

 

60

 

 

 

 

3,651

 

Other supplemental cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

6,636

 

 

 

 

4,479

 

 

 

15


Note 14 – Reporting Segment Information

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

 

(In thousands)

Food Distribution

 

 

Military

 

 

Retail

 

 

Total

 

16 Weeks Ended April 22, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

$

 

1,162,950

 

 

$

 

643,313

 

 

$

 

596,241

 

 

$

 

2,402,504

 

Inter-segment sales

 

 

280,926

 

 

 

 

 

 

 

 

 

 

 

 

280,926

 

Merger/acquisition and integration

 

 

3,847

 

 

 

 

 

 

 

 

170

 

 

 

 

4,017

 

Depreciation and amortization

 

 

8,944

 

 

 

 

3,439

 

 

 

 

13,039

 

 

 

 

25,422

 

Operating earnings

 

 

25,315

 

 

 

 

890

 

 

 

 

3,439

 

 

 

 

29,644

 

Capital expenditures

 

 

5,754

 

 

 

 

2,451

 

 

 

 

11,271

 

 

 

 

19,476

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16 Weeks Ended April 23, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales to external customers

$

 

991,137

 

 

$

 

674,523

 

 

$

 

613,110

 

 

$

 

2,278,770

 

Inter-segment sales

 

 

277,003

 

 

 

 

 

 

 

 

 

 

 

 

277,003

 

Merger/acquisition and integration

 

 

468

 

 

 

 

1

 

 

 

 

428

 

 

 

 

897

 

Depreciation and amortization

 

 

6,470

 

 

 

 

3,475

 

 

 

 

13,424

 

 

 

 

23,369

 

Operating earnings (loss)

 

 

25,856

 

 

 

 

3,433

 

 

 

 

(7,629

)

 

 

 

21,660

 

Capital expenditures

 

 

5,522

 

 

 

 

2,335

 

 

 

 

10,233

 

 

 

 

18,090

 

 

(In thousands)

 

 

 

 

 

 

April 22, 2017

 

 

December 31, 2016

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Food Distribution

 

 

 

 

 

 

$

 

1,056,312

 

 

$

 

776,725

 

Military

 

 

 

 

 

 

 

 

396,921

 

 

 

 

395,737

 

Retail

 

 

 

 

 

 

 

 

724,134

 

 

 

 

754,625

 

Discontinued operations

 

 

 

 

 

 

 

 

3,248

 

 

 

 

3,249

 

Total

 

 

 

 

 

 

$

 

2,180,615

 

 

$

 

1,930,336

 

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

 

 

16 Weeks Ended

 

April 22,

 

April 23,

(In thousands, except percentages)

2017

 

2016

Non-perishables (a)

$

 

1,466,226

 

 

 

61.0

 

%

 

$

 

1,452,576

 

 

 

63.7

 

%

Perishables (b)

 

 

790,096

 

 

 

32.9

 

 

 

 

 

694,450

 

 

 

30.5

 

 

Pharmacy

 

 

110,360

 

 

 

4.6

 

 

 

 

 

104,590

 

 

 

4.6

 

 

Fuel

 

 

35,822

 

 

 

1.5

 

 

 

 

 

27,154

 

 

 

1.2

 

 

Consolidated net sales

$

 

2,402,504

 

 

 

100.0

 

%

 

$

 

2,278,770

 

 

 

100.0

 

%

(a) 

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

(b) 

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

 


16


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

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

Overview

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

The Company’s Food Distribution segment provides a wide variety of nationally branded and private brand grocery products and perishable food products to over 2,000 independent retailers, food distributors and the Company’s corporate owned retail stores. The Food Distribution segment currently conducts business in 47 states, primarily in the Midwest, Great Lakes, and Southeast regions of the United States. Through its Food Distribution segment, the Company also services select national retailers, including Dollar General. Sales to Dollar General are made to approximately 13,600 of its retail locations.

The Company’s Military segment contracts with manufacturers to distribute a wide variety of grocery products primarily to military commissaries and exchanges located in the United States, the District of Columbia, Europe, Cuba, Puerto Rico, Bahrain and Egypt. The Company has over 40 years of experience acting as a distributor to U.S. military commissaries and exchanges.

As of April 22, 2017, the Company’s Retail segment operated 153 corporate owned retail stores in the Midwest and Great Lakes regions primarily under the banners of Family Fare Supermarkets, VG’s Food and Pharmacy, D&W Fresh Markets, Sun Mart and Family Fresh Market. As of April 22, 2017, the Company also offers pharmacy services in 90 of its corporate owned retail stores and operates 30 fuel centers. The retail stores have a “neighborhood market” focus to distinguish them from supercenters and limited assortment stores.

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

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

Recent Developments

On January 6, 2017, the Company acquired certain assets and assumed certain liabilities of Caito Foods Service (“Caito”) and Blue Ribbon Transport (“BRT”) for $214.6 million in cash, net of $2.5 million of cash acquired. In connection with the purchase, the Company is providing certain earn-out opportunities that have the potential to pay the sellers an additional $27.4 million, collectively, if the business achieves certain performance targets during the first three years after acquisition. If certain performance targets are not met in the first year after acquisition, the Company will be reimbursed a portion of the initial purchase price at an amount not to exceed the sum of: a) $15.0 million, representing the funds paid into escrow, and b) any earn-out opportunities earned by the sellers. Founded in Indianapolis in 1965, Caito is a leading supplier of fresh fruits and vegetables as well as value-added meal solutions to grocery retailers and food service distributors across 22 states in the Southeast, Midwest and Eastern United States. Through its affiliate, BRT, the company also offers temperature-controlled distribution and logistics services throughout North America. Caito and BRT service customers from facilities in Indiana and Florida.

Caito also has a central fresh cut fruit and vegetable facility in Indianapolis and a recently completed, new 118,000 square foot Fresh Kitchen facility, also in Indianapolis. The Fresh Kitchen will provide the Company with the ability to process, cook, and package fresh protein-based foods and complete meal solutions. The kitchen has begun initial operations and is starting to produce a very limited product set for a select customer. The Company anticipates completing the start-up phase of this operation in the second or third quarter of fiscal 2017. The Company acquired Caito and BRT to strengthen its fresh product offerings to its existing customer base and to expand into fast-growing, value-added services, such as freshly-prepared centerplate and side dish categories.

17


On December 8, 2016, the Company announced that it had been competitively awarded by the Defense Commissary Agency (“DeCA”) the program to provide a variety of private brand products to commissaries for the first time in the agency’s history. As part of the arrangement, the Company will be the exclusive worldwide supplier of private brand products to U.S. military commissaries and will sell grocery products directly to DeCA. The Company expects to begin shipping DeCA private brand products to commissaries during the second quarter of fiscal 2017. The Company anticipates a steady ramp up of private brand products throughout fiscal 2017 but expects limited financial contribution for the year due to start-up costs associated with the rollout of the program. The Company anticipates that it will take several years for the full private brand roll out.

Fiscal 2017 First Quarter Highlights

During the first quarter of fiscal 2017, the Company continued to demonstrate its ability to leverage its network to generate sales and earnings growth in a challenging operating environment. Organic growth in Food Distribution and ongoing supply chain improvements helped mitigate the negative impact of food deflation, the shift of New Year’s Day into the first quarter, and higher health care costs, which were partially due to the timing of certain health care funding requirements. During the quarter, the Company began integrating Caito into its operations and further optimizing its network, made progress toward launching production at Caito’s new Fresh Kitchen facility and prepared for the introduction of private brand products to U.S. military commissaries.

First quarter fiscal 2017 operational highlights include:

 

The Company completed the acquisition of Caito and BRT in the first quarter and although the integration is proceeding slower than anticipated, has begun to realize benefits from the initial integration efforts. By strengthening its fresh product offerings and tapping into the significant ready-to-eat growth opportunities, the Company believes the acquisition will help drive growth in a challenging environment.

 

The Company realized sales growth in its Food Distribution segment due to contributions from the Caito acquisition and organic sales growth of 4.2 percent compared to the prior year quarter. Despite the negative impact of prolonged deflation and the shift of New Year’s Day, the Company grew sales in the Food Distribution segment for the 5th consecutive quarter.

 

The Company continued to make improvements to its supply chain and further optimize its network to gain better economies of scale, attract and retain accounts and increase asset utilization, particularly within the Caito operations. In the first quarter, the Company consolidated the Newcomerstown, Ohio warehouse into its Indianapolis, Indiana facility. The Company expects that the consolidation of this facility will lead to lower costs and will improve efficiencies within the consolidated company.

 

The Company continued the roll out of Open Acres™, a new private brand for fresh items. This new brand features items in meat, deli, bakery and produce. The introduction of the brand closes a gap in the private brands portfolio that existed in the non-Michigan footprint. Open Acres™ commits to deliver national brand quality or better products at a significant savings to consumers in both corporate owned and independent store locations.

 

The Company also continues to expand its private brand program and living well offering for both its independent customers and corporate owned stores. This expanded offering includes the Company’s natural and organic Full Circle™ private brand line as well as a significant increase in SKUs across organic produce and healthier specialty items.

 

The Company continued to invest in analytical capabilities to provide helpful data and insights to help drive more targeted and personalized marketing as well as more relevant product and assortment selections. The Company continues to refine its customer segmentation, market basket and pricing to better target and offer relevant products to its customers.

While deflationary headwinds are expected to continue through the second quarter, the Company is well positioned to benefit from continued organic growth in Food Distribution, contributions from Caito and from ongoing efficiency improvements to its supply chain, including warehouse optimization and enhanced transportation capabilities. The Company also expects to benefit from slight inflation in the second half of the year.

18


Results of Operations

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

 

 

Percentage of Net Sales

Percentage Change

 

 

 

 

 

 

 

 

 

 

16 Weeks

 

 

16 Weeks Ended

 

 

Ended

 

 

April 22,

 

 

April 23,

 

 

April 22,

 

 

2017

 

 

2016

 

 

2017

 

Net sales

 

100.0

 

%

 

100.0

 

%

 

5.4

 

Gross profit

 

14.9

 

 

 

14.7

 

 

 

6.9

 

Selling, general and administrative expenses

 

13.5

 

*

 

13.0

 

 

 

8.9

 

Merger/acquisition and integration

 

0.2

 

 

 

0.0

 

 

 

347.8

 

Restructuring charges and asset impairment

 

0.0

 

 

 

0.7

 

 

 

(93.3

)

Operating earnings

 

1.2

 

 

 

1.0

 

 

 

36.9

 

Other income and expenses

 

0.3

 

 

 

0.3

 

*

 

27.1

 

Earnings before income taxes and discontinued operations

 

0.9

 

 

 

0.7

 

 

 

40.3

 

Income taxes

 

0.3

 

 

 

0.3

 

 

 

22.3

 

Earnings from continuing operations

 

0.6

 

 

 

0.4

 

 

 

51.3

 

Loss from discontinued operations, net of taxes

 

(0.0

)

 

 

(0.0

)

 

 

(63.3

)

Net earnings

 

0.6

 

%

 

0.4

 

%

 

52.5

 

*

Difference due to rounding

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

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

 

 

 

(In thousands)

2017

 

 

2016

 

 

Variance

 

Food Distribution

$

 

1,162,950

 

 

$

 

991,137

 

 

$

 

171,813

 

Military

 

 

643,313

 

 

 

 

674,523

 

 

 

 

(31,210

)

Retail

 

 

596,241

 

 

 

 

613,110

 

 

 

 

(16,869

)

Total net sales

$

 

2,402,504

 

 

$

 

2,278,770

 

 

$

 

123,734

 

Net sales for the quarter ended April 22, 2017 (“first quarter”) increased $123.7 million, or 5.4%, to $2.40 billion from $2.28 billion in the quarter ended April 23, 2016 (“prior year quarter”). The increase was driven primarily by contributions from the Caito acquisition and organic growth in the Food Distribution segment, which more than offset lower sales in the Military and Retail segments.

Food Distribution net sales, after intercompany eliminations, increased $171.8 million, or 17.3%, to $1.16 billion in the first quarter from $991.1 million in the prior year quarter. The increase was due to contributions from the Caito acquisition and organic sales growth of 4.2 percent, which more than offset the negative impact of food deflation.

Military net sales decreased $31.2 million, or 4.6%, to $643.3 million in the first quarter from $674.5 million in the prior year quarter. The decrease was primarily due to lower sales at the DeCA operated commissaries and the shift of New Year’s Day into the first quarter, partially offset by growth of new fresh business.

Retail net sales decreased $16.9 million, or 2.8%, to $596.2 million in the first quarter from $613.1 million in the prior year quarter. The decrease in net sales was primarily attributable to negative comparable store sales and $11.5 million in lower sales resulting from retail store closures, partially offset by higher sales from increased fuel prices. Comparable store sales, excluding fuel, were -2.2 percent for the quarter and reflect a 40 basis point negative impact from the New Year’s Day shift, competitive new store openings, the impact of ongoing deflation and unseasonably warm weather in the northern geographies. 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 store relocations. 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 include purchase costs, in-bound freight, physical inventory adjustments, markdowns and promotional allowances. Vendor allowances that relate to the buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for the Company’s merchandising costs, such as setting up warehouse infrastructure. Vendor allowances associated with product cost are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms.

19


Gross profit increased to $357.4 million in the first quarter from $334.2 million in the prior year quarter. As a percent of net sales, gross profit improved from 14.7% to 14.9% primarily due to higher margins at Caito and the mix of business operations.

Selling, General and Administrative Expenses – Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, shipping and handling, utilities, equipment rental, depreciation and other administrative costs.

SG&A expenses increased $26.3 million, or 8.9%, to $322.7 million in the first quarter from $296.4 million in the prior year quarter, representing 13.5% percent of net sales in the first quarter compared to 13.0% in the prior year quarter. The increase was primarily due to the addition of Caito, and to a lesser extent, higher health care costs.

Merger/Acquisition and Integration – First quarter results included $4.0 million of merger/acquisition and integration expenses mainly associated with the acquisition of Caito and BRT. Prior year quarter results included $0.9 million of merger/acquisition and integration primarily associated with the merger of Nash-Finch Company.

Restructuring Charges and Asset Impairment – First quarter results included $1.0 million of net restructuring and asset impairment charges primarily associated with the Company’s retail store and warehouse rationalization plans, partially offset by a favorable lease termination. Prior year quarter results included $15.3 million of restructuring and asset impairment charges primarily related to the closure of three retail stores and a food distribution center.

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

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

 

 

 

(In thousands)

2017

 

 

2016

 

 

Variance

 

Food Distribution

$

 

25,315

 

 

$

 

25,856

 

 

$

 

(541

)

Military

 

 

890

 

 

 

 

3,433

 

 

 

 

(2,543

)

Retail

 

 

3,439

 

 

 

 

(7,629

)

 

 

 

11,068

 

Total operating earnings

$

 

29,644

 

 

$

 

21,660

 

 

$

 

7,984

 

Operating earnings increased $7.9 million, or 36.9%, to $29.6 million in the first quarter from $21.7 million in the prior year quarter. The increase was primarily due to lower restructuring and asset impairment charges and organic sales growth in Food Distribution, which more than offset higher merger/acquisition and integration expenses and start-up costs associated with the new Caito Fresh Kitchen operation, higher health care costs, and the negative impact of food deflation and shift of New Year’s Day into the first quarter.

Food Distribution operating earnings decreased $0.6 million, or 2.1%, to $25.3 million in the first quarter from $25.9 million in the prior year quarter. The decrease was driven by charges related to merger/acquisition and integration expenses, Caito Fresh Kitchen start-up costs, restructuring charges related to the Company’s warehouse optimization plan, and the impact of the New Year’s Day shift and continued deflation, partially offset by higher organic sales and benefits associated with continued supply chain improvements.

Military operating earnings decreased $2.5 million, or 74.1%, to $0.9 million in the first quarter from $3.4 million in the prior year quarter. The decrease in operating earnings was primarily due to lower sales volume, the negative impact of the shift of New Year’s Day into the first quarter, higher health care costs and a large insurance claim.

Retail operating earnings increased $11.1 million to $3.4 million in the first quarter from a loss of $7.6 million in the prior year quarter. The increase was primarily due to lower restructuring and impairment charges, improved margin rates and the closure of unprofitable stores, partially offset by higher health care costs, lower comparable store sales and the shift of New Year’s Day.

Interest Expense – Interest expense increased $1.5 million, or 25.6%, to $7.3 million in the first quarter from $5.8 million in the prior year quarter. The increase in interest expense was primarily due to increased borrowings related to the Caito acquisition.

Income Taxes – The effective income tax rates were 32.8% and 37.7% for the first quarter and prior year quarter, respectively. The differences from the federal statutory rate are primarily due to tax benefits related to stock-based compensation, state taxes and federal tax credits in the current year and state taxes and federal tax credits in the prior year. The Company’s provision for income taxes and effective tax rate decreased due to the stock-based compensation benefits recognized resulting from the adoption of ASU 2016-09. The tax benefits related to stock-based compensation are primarily generated in the first quarter due to the timing of awards and vesting schedules.

20


Non-GAAP Financial Measures

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

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

Adjusted Operating Earnings

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

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

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

21


Following is a reconciliation of operating earnings to adjusted operating earnings for the 16 weeks ended April 22, 2017 and April 23, 2016.

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

(In thousands)

2017

 

 

2016

 

Operating earnings

$

 

29,644

 

 

$

 

21,660

 

Adjustments:

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

4,017

 

 

 

 

897

 

Restructuring charges and asset impairment

 

 

1,021

 

 

 

 

15,304

 

Caito Fresh Kitchen start-up costs

 

 

2,748

 

 

 

 

 

Stock compensation associated with executive retirement

 

 

1,172

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

3

 

 

 

 

679

 

Adjusted operating earnings

$

 

38,605

 

 

$

 

38,540

 

Reconciliation of operating earnings to adjusted operating earnings by segment:

 

Food Distribution:

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

25,315

 

 

$

 

25,856

 

Adjustments:

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

3,847

 

 

 

 

468

 

Restructuring charges and asset impairment

 

 

599

 

 

 

 

2,233

 

Caito Fresh Kitchen start-up costs

 

 

2,748

 

 

 

 

 

Stock compensation associated with executive retirement

 

 

591

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

1

 

 

 

 

206

 

Adjusted operating earnings

$

 

33,101

 

 

$

 

28,763

 

Military:

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

890

 

 

$

 

3,433

 

Adjustments:

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

 

 

 

 

1

 

Restructuring charges and asset impairment

 

 

 

 

 

 

32

 

Stock compensation associated with executive retirement

 

 

147

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

1

 

 

 

 

222

 

Adjusted operating earnings

$

 

1,038

 

 

$

 

3,688

 

Retail:

 

 

 

 

 

 

 

 

 

Operating earnings (loss)

$

 

3,439

 

 

$

 

(7,629

)

Adjustments:

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

170

 

 

 

 

428

 

Restructuring charges and asset impairment

 

 

422

 

 

 

 

13,039

 

Stock compensation associated with executive retirement

 

 

434

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

1

 

 

 

 

251

 

Adjusted operating earnings

$

 

4,466

 

 

$

 

6,089

 

Adjusted Earnings from Continuing Operations

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

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

 

22


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 16 weeks ended April 22, 2017 and April 23, 2016.

 

  

16 Weeks Ended

 

 

 

April 22, 2017

 

 

April 23, 2016

 

 

 

 

 

 

per diluted

 

 

 

 

 

per diluted

 

 

(In thousands, except per share amounts)

Earnings

 

 

share

 

 

Earnings

 

 

share

 

 

Earnings from continuing operations

$

 

15,065

 

 

$

 

0.40

 

 

$

 

9,960

 

 

$

 

0.27

 

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Merger/acquisition and integration

 

 

4,017

 

 

 

 

 

 

 

 

 

897

 

 

 

 

 

 

 

Restructuring charges and asset impairment

 

 

1,021

 

 

 

 

 

 

 

 

 

15,304

 

 

 

 

 

 

 

Caito Fresh Kitchen start-up costs

 

 

2,748

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation associated with executive retirement

 

 

1,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance associated with cost reduction initiatives

 

 

3

 

 

 

 

 

 

 

 

 

679

 

 

 

 

 

 

 

Total adjustments

 

 

8,961

 

 

 

 

 

 

 

 

 

16,880

 

 

 

 

 

 

 

Income tax effect on adjustments (a)

 

 

(3,362

)

 

 

 

 

 

 

 

 

(6,428

)

 

 

 

 

 

 

Total adjustments, net of taxes

 

 

5,599

 

 

 

 

0.15

 

 

 

 

10,452

 

 

 

 

0.27

 

*

Adjusted earnings from continuing operations

$

 

20,664

 

 

$

 

0.55

 

 

$

 

20,412

 

 

$

 

0.54

 

 

* Includes rounding

 

(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.

Adjusted EBITDA

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

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

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

23


Following is a reconciliation of net earnings to adjusted EBITDA for the 16 weeks ended April 22, 2017 and April 23, 2016.

 

 

16 Weeks Ended

 

 

April 22,

 

 

April 23,

 

(In thousands)

2017

 

 

2016

 

Net earnings

$

 

15,025

 

 

$

 

9,851

 

Loss from discontinued operations, net of tax

 

 

40

 

 

 

 

109

 

Income taxes

 

 

7,369

 

 

 

 

6,027

 

Other expenses, net

 

 

7,210

 

 

 

 

5,673

 

Operating earnings

 

 

29,644

 

 

 

 

21,660

 

Adjustments:

 

 

 

 

 

 

 

 

 

LIFO expense

 

 

1,590

 

 

 

 

1,412

 

Depreciation and amortization

 

 

25,080

 

 

 

 

23,369

 

Merger/acquisition and integration

 

 

4,017

 

 

 

 

897

 

Restructuring charges and asset impairment

 

 

1,021

 

 

 

 

15,304

 

Caito Fresh Kitchen start-up costs

 

 

2,748

 

 

 

 

 

Stock-based compensation

 

 

6,352

 

 

 

 

5,024

 

Other non-cash (gains) charges

 

 

(222

)

 

 

 

371

 

Adjusted EBITDA

$

 

70,230

 

 

$

 

68,037

 

Reconciliation of operating earnings to adjusted EBITDA by segment:

 

Food Distribution:

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

25,315

 

 

$

 

25,856

 

Adjustments:

 

 

 

 

 

 

 

 

 

LIFO expense

 

 

883

 

 

 

 

737

 

Depreciation and amortization

 

 

8,602

 

 

 

 

6,470

 

Merger/acquisition and integration

 

 

3,847

 

 

 

 

468

 

Restructuring charges and asset impairment

 

 

599

 

 

 

 

2,233

 

Caito Fresh Kitchen start-up costs

 

 

2,748

 

 

 

 

 

Stock-based compensation

 

 

2,961

 

 

 

 

2,312

 

Other non-cash charges

 

 

46

 

 

 

 

176

 

Adjusted EBITDA

$

 

45,001

 

 

$

 

38,252

 

Military:

 

 

 

 

 

 

 

 

 

Operating earnings

$

 

890

 

 

$

 

3,433

 

Adjustments:

 

 

 

 

 

 

 

 

 

LIFO expense

 

 

308

 

 

 

 

311

 

Depreciation and amortization

 

 

3,439

 

 

 

 

3,475

 

Merger/acquisition and integration

 

 

 

 

 

 

1

 

Restructuring charges and asset impairment

 

 

 

 

 

 

32

 

Stock-based compensation

 

 

962

 

 

 

 

781

 

Other non-cash (gains) charges

 

 

(2

)

 

 

 

208

 

Adjusted EBITDA

$

 

5,597

 

 

$

 

8,241

 

Retail:

 

 

 

 

 

 

 

 

 

Operating earnings (loss)

$

 

3,439

 

 

$

 

(7,629

)

Adjustments:

 

 

 

 

 

 

 

 

 

LIFO expense

 

 

399

 

 

 

 

364

 

Depreciation and amortization

 

 

13,039

 

 

 

 

13,424

 

Merger/acquisition and integration

 

 

170

 

 

 

 

428

 

Restructuring charges and asset impairment

 

 

422

 

 

 

 

13,039

 

Stock-based compensation

 

 

2,429

 

 

 

 

1,931

 

Other non-cash gains

 

 

(266

)

 

 

 

(13

)

Adjusted EBITDA

$

 

19,632

 

 

$

 

21,544

 

24


Liquidity and Capital Resources

Cash Flow Information

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

 

 

 

 

 

16 Weeks Ended

 

 

 

 

 

April 22,

 

 

April 23,

 

(In thousands)

 

 

 

2017

 

 

2016

 

Cash flow activities

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

 

 

$

 

(10,291

)

 

$

 

9,977

 

Net cash used in investing activities (a)

 

 

 

 

 

(232,893

)

 

 

 

(12,926

)

Net cash provided by financing activities (a)

 

 

 

 

 

238,297

 

 

 

 

9,081

 

Net cash provided by (used in) discontinued operations

 

 

 

 

 

52

 

 

 

 

(164

)

Net (decrease) increase in cash and cash equivalents

 

 

 

 

 

(4,835

)

 

 

 

5,968

 

Cash and cash equivalents at beginning of fiscal year

 

 

 

 

 

24,351

 

 

 

 

22,719

 

Cash and cash equivalents at end of fiscal year

 

 

 

$

 

19,516

 

 

$

 

28,687

 

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

Net cash (used in) provided by operating activities. Net cash (used in) provided by operating activities decreased during the current year-to-date period ended April 22, 2017 (“current year”) over the prior year-to-date period ended April 23, 2016 (“prior year”) by approximately $20.3 million primarily due to the timing of working capital payments.

Net cash used in investing activities. Net cash used in investing activities increased $220.0 million in the current year compared to the prior year primarily due to the acquisition of Caito and BRT (see Note 3 to the condensed consolidated financial statements).

The Military, Food Distribution and Retail segments utilized 12.6%, 29.5% and 57.9% of capital expenditures, respectively, in the current year.

Net cash provided by financing activities. Net cash provided by financing activities increased $229.2 million in the current year compared to the prior year primarily due to borrowings on the revolving credit facility to fund the Caito and BRT acquisition and working capital requirements.

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

Debt Management

Total debt, including capital lease obligations and current maturities, was $675.7 million and $431.1 million as of April 22, 2017 and December 31, 2016, respectively. The increase in total debt was driven by drawdowns on the credit facility to finance the acquisition of Caito and BRT and fund working capital requirements.

Liquidity

The Company’s principal sources of liquidity are cash flows generated from operations and its senior secured credit facility which has maximum available credit of $1.0 billion. As of April 22, 2017, the senior secured revolving credit facility and senior secured term loan collectively had outstanding borrowings of $632.5 million. Additional available borrowings under the Company’s $1.0 billion Credit Agreement 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 $300.9 million at April 22, 2017. Payment of dividends and repurchases of outstanding shares are permitted, provided that certain levels of excess availability are maintained. The credit facility provides for the issuance of letters of credit, of which $9.2 million were outstanding as of April 22, 2017. The revolving credit facility matures December 2021, and is secured by substantially all of the Company’s assets.

The Company believes that cash generated from operating activities and available borrowings under the Credit Agreement 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.

25


The Company’s current ratio (current assets to current liabilities) was 1.93:1.00 at April 22, 2017 compared to 1.77:1.00 at December 31, 2016 and its investment in working capital was $455.2 million at April 22, 2017 compared to $387.5 million at December 31, 2016. Net debt to total capital ratio was 0.44:1.00 at April 22, 2017 compared to 0.33:1.00 at December 31, 2016.

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

Following is a reconciliation of long-term debt and capital lease obligations to total net long-term debt and capital lease obligations as of April 22, 2017 and December 31, 2016.

 

 

April 22,

 

 

December 31,

 

 

2017

 

 

2016

 

Current maturities of long-term debt and capital lease obligations

$

 

17,404

 

 

$

 

17,424

 

Long-term debt and capital lease obligations

 

 

658,261

 

 

 

 

413,675

 

Total debt

 

 

675,665

 

 

 

 

431,099

 

Cash and cash equivalents

 

 

(19,516

)

 

 

 

(24,351

)

Total net long-term debt

$

 

656,149

 

 

$

 

406,748

 

For information on contractual obligations, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. At April 22, 2017, there have been no material changes to the Company’s significant contractual obligations outside the ordinary course of business.

Cash Dividends

During the year-to-date period ended April 22, 2017, the Company returned $6.3 million to shareholders from dividend payments. A 10.0% increase in the quarterly dividend rate from $0.15 per share to $0.165 per share was approved by the Board of Directors and announced on March 6, 2017. Although the Company expects to continue to pay a quarterly cash dividend, adoption of a dividend policy does not commit the Board of Directors to declare future dividends. Each future dividend will be considered and declared by the Board of Directors at its discretion. Whether the Board of Directors continues to declare dividends depends on a number of factors, including the Company’s future financial condition, anticipated profitability and cash flows and compliance with the terms of its credit facilities.

Under the Credit Agreement, the Company is generally permitted to pay dividends in any fiscal year up to an amount such that all cash dividends, together with any cash distributions and share repurchases, do not exceed $25.0 million. Additionally, the Company is generally permitted to pay cash dividends in excess of $25.0 million in any fiscal year so long as its Excess Availability, as defined in the Credit Agreement, is in excess of 10% of the Total Borrowing Base, as defined in the Credit Agreement, 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 April 22, 2017. These commitments consist primarily of standby letters of credit of $9.2 million as of April 22, 2017.

26


Critical Accounting Policies

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

Recently Issued Accounting Standards

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


27


ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

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

ITEM 4. Controls and Procedures

An evaluation of the effectiveness of the design and operation of SpartanNash Company’s disclosure controls and procedures (as currently defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was performed as of April 22, 2017 (the “Evaluation Date”). This evaluation was performed under the supervision and with the participation of SpartanNash Company’s management, including its Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”). As of the Evaluation Date, SpartanNash Company’s management, including the CEO, CFO and CAO, concluded that SpartanNash’s disclosure controls and procedures were effective as of the Evaluation Date to ensure that material information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including its principal executive and principal financial officers as appropriate to allow for timely decisions regarding required disclosure. During the first 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.

 

 

 

28


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 16 week period ended April 22, 2017. All employee transactions are under associate stock compensation plans. These may include: (1) shares of SpartanNash common stock delivered in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options, and (2) shares submitted for cancellation to satisfy tax withholding obligations that occur upon the vesting of the restricted shares. The value of the shares delivered or withheld is determined by the applicable stock compensation plan.

 

 

 

Total

 

 

 

 

 

 

 

 

Number

 

 

Average

 

 

 

of Shares

 

 

Price Paid

 

Period

 

Purchased

 

 

per Share

 

January 1 – January 28, 2017

 

 

 

 

 

 

 

 

 

Employee Transactions

 

 

 

 

$

 

 

January 29 – February 25, 2017

 

 

 

 

 

 

 

 

 

Employee Transactions

 

 

24,854

 

 

 

 

38.42

 

February 26 – March 25, 2017

 

 

 

 

 

 

 

 

 

Employee Transactions

 

 

24,297

 

 

 

 

34.78

 

March 26 – April 22, 2017

 

 

 

 

 

 

 

 

 

Employee Transactions

 

 

23,065

 

 

 

 

34.99

 

Total for Quarter ended April 22, 2017

 

 

 

 

 

 

 

 

 

Employee Transactions

 

 

72,216

 

 

$

 

36.10

 

 

29


ITEM 6. Exhibits

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

 

Exhibit
Number

 

Document

 

 

 

2.1

 

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

 

 

 

2.2

 

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

 

 

 

3.1

 

Restated Articles of Incorporation of SpartanNash Company, as amended. Previously filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 23, 2016. Herein incorporated 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. Herein incorporated by reference.

 

 

 

10.1

 

Form of Restricted Stock Award to Non-Employee Directors.

 

 

 

10.2

 

Form of Restricted Stock Award to Executive Officers.

 

 

 

10.3

 

Summary of 2017 Long-Term Cash Incentive Award.

 

 

 

10.4

 

Summary of 2017 Annual Cash Incentive Award.

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

31.3

 

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

 

 

 

32.1

 

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

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

30


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

SPARTANNASH COMPANY

(Registrant)

 

Date: May 25, 2017

 

By

 

/s/ Christopher P. Meyers

 

 

 

 

Christopher P. Meyers

Executive Vice President and Chief Financial Officer

 

 

31