Published: 2021-11-12 00:00:00 ET

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended October 9, 2021.

OR

For the transition period from                      to                     .

Commission File Number: 000-31127

 

SPARTANNASH COMPANY

(Exact Name of Registrant as Specified in Its Charter)

 

(616) 878-2000

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

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

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

As of November 9, 2021, the registrant had 35,944,358 outstanding shares of common stock, no par value.

 

 

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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.

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 January 2, 2021 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 disruptions associated with the COVID-19 pandemic, 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” discussions in Items 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2021, 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 January 2, 2021 and in Part I, Item 2 “Critical Accounting Policies” of this Quarterly Report on Form 10-Q, are intended to provide meaningful cautionary statements for purposes of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. This should not be construed as a complete list of all the economic, competitive, governmental, technological and other factors that could adversely affect the Company’s expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not currently known to SpartanNash or that SpartanNash currently believes are immaterial also may impair its business, operations, liquidity, financial condition and prospects. The Company undertakes no obligation to update or revise its forward-looking statements to reflect developments that occur, or information obtained after the date of this Quarterly Report.

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TABLE OF CONTENTS

 

 

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PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements

SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, Unaudited)

See accompanying notes to condensed consolidated financial statements.

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SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, Unaudited)

See accompanying notes to condensed consolidated financial statements.

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SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, Unaudited)

 

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SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, CONTINUED

(In thousands, Unaudited)

See accompanying notes to condensed consolidated financial statements.

 

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SPARTANNASH COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, Unaudited)

See accompanying notes to condensed consolidated financial statements.

 

 

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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 January 2, 2021.

In the opinion of management, the accompanying condensed consolidated financial statements, taken as a whole, contain all adjustments, including normal recurring items, necessary to present fairly the financial position of SpartanNash as of October 9, 2021, and the results of its operations and cash flows for the interim periods presented. The preparation of the condensed consolidated financial statements and related notes to the financial statements requires management to make estimates. Estimates are based on historical experience, where applicable, and expectations of future outcomes which management believes are reasonable under the circumstances. Interim results are not necessarily indicative of results for a full year.  

The unaudited information in the condensed consolidated financial statements for the third quarter and year-to-date periods of 2021 and 2020 include the results of operations of the Company for the 12- and 40-week periods ended October 9, 2021 and October 3, 2020, respectively.

Note 2 – Adoption of New Accounting Standards and Recently Issued Accounting Standards  

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments – Credit Losses”. The ASU changed the impairment model for most financial assets and certain other instruments. The standard requires entities to use a forward-looking “expected loss” model that replaces the previous “incurred loss” model, which generally results in earlier recognition of credit losses.

In the first quarter of 2020, the Company adopted this standard through the modified retrospective approach, with a cumulative-effect adjustment at the beginning of the fiscal year. As a result of the adoption, the Company has established revised processes and controls to estimate expected losses for trade and other receivables in accordance with the new standard. The Company’s process for estimating losses for trade and other receivables includes an evaluation of both historical collection experience and expectations for current credit risks based on several customer and environmental factors.

The adoption of the standard resulted in a transition adjustment to 2020 beginning of the year retained earnings of $2.2 million (gross of the deferred tax impact of $0.6 million). The transition adjustment relates to incremental trade and notes receivable allowances due to the earlier recognition of expected losses under the new standard of $1.9 million and $0.3 million, respectively.

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Note 3 – Revenue

Disaggregation of Revenue

The following table provides information about disaggregated revenue by type of products and customers for each of the Company’s reportable segments:

	12 Weeks Ended October 9, 2021																				40 Weeks Ended October 9, 2021
(In thousands)	Food Distribution					Retail					Military					Total					Food Distribution					Retail					Military					Total
Type of products:
Center store (a)	$		344,624			$		235,784			$		214,505			$		794,913			$		1,135,458			$		763,006			$		701,642			$		2,600,106
Fresh (b)			333,895					233,347					121,157					688,399					1,144,025					758,591					420,621					2,323,237
Non-food (c)			328,011					98,806					95,156					521,973					1,059,067					326,543					317,024					1,702,634
Fuel			—					40,544					—					40,544					—					118,880					—					118,880
Other			24,785					256					2,383					27,424					83,373					1,138					8,244					92,755
Total	$		1,031,315			$		608,737			$		433,201			$		2,073,253			$		3,421,923			$		1,968,158			$		1,447,531			$		6,837,612
Type of customers:
Individuals	$		—			$		608,506			$		—			$		608,506			$		—			$		1,967,372			$		—			$		1,967,372
Manufacturers, brokers and distributors			12,231					—					403,952					416,183					46,644					—					1,349,307					1,395,951
Retailers			1,008,172					—					26,866					1,035,038					3,339,578					—					89,980					3,429,558
Other			10,912					231					2,383					13,526					35,701					786					8,244					44,731
Total	$		1,031,315			$		608,737			$		433,201			$		2,073,253			$		3,421,923			$		1,968,158			$		1,447,531			$		6,837,612
	12 Weeks Ended October 3, 2020																				40 Weeks Ended October 3, 2020
(In thousands)	Food Distribution					Retail					Military					Total					Food Distribution					Retail					Military					Total
Type of products:
Center store (a)	$		333,988			$		245,652			$		226,507			$		806,147			$		1,144,335			$		837,655			$		790,266			$		2,772,256
Fresh (b)			334,173					229,368					128,895					692,436					1,184,091					774,498					463,013					2,421,602
Non-food (c)			324,565					94,959					94,588					514,112					1,079,971					316,255					358,157					1,754,383
Fuel			—					26,306					—					26,306					—					80,946					—					80,946
Other			19,478					374					1,963					21,815					63,164					1,129					7,893					72,186
Total	$		1,012,204			$		596,659			$		451,953			$		2,060,816			$		3,471,561			$		2,010,483			$		1,619,329			$		7,101,373
Type of customers:
Individuals	$		—			$		596,429			$		—			$		596,429			$		—			$		2,009,802			$		—			$		2,009,802
Manufacturers, brokers and distributors			13,477					—					422,662					436,139					64,654					—					1,510,859					1,575,513
Retailers			968,381					—					27,328					995,709					3,339,824					—					100,577					3,440,401
Other			30,346					230					1,963					32,539					67,083					681					7,893					75,657
Total	$		1,012,204			$		596,659			$		451,953			$		2,060,816			$		3,471,561			$		2,010,483			$		1,619,329			$		7,101,373
(a) Center store includes dry grocery, frozen and beverages.
(b) Fresh includes produce, meat, dairy, deli, bakery, prepared proteins, seafood and floral.
(c) Non-food includes general merchandise, health and beauty care, tobacco products and pharmacy.

Contract Assets and Liabilities

Under its contracts with customers, the Company stands ready to deliver product upon receipt of a purchase order. Accordingly, the Company has no performance obligations under its contracts until its customers submit a purchase order. The Company does not receive pre-payment from its customers or enter into commitments to provide goods or services that have terms greater than one year. As the performance obligation is part of a contract that has an original expected duration of less than one year, the Company has applied the practical expedient under ASC 606 to omit disclosures regarding remaining performance obligations.

Revenue recognized from performance obligations related to prior periods (for example, due to changes in estimated rebates and incentives impacting the transaction price) was not material in any period presented.

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For volume-based arrangements, the Company estimates the amount of the advanced funds earned by the retailers based on the expected volume of purchases by the retailer and amortizes the advances as a reduction of the transaction price and revenue earned. These advances are not considered contract assets under ASC 606 as they are not generated through the transfer of goods or services to the retailers. These advances are included in Other assets, net within the condensed consolidated balance sheets.

When the Company transfers goods or services to a customer, payment is due subject to normal terms and is not conditional on anything other than the passage of time. Typical payment terms range from due upon receipt to 30 days, depending on the customer. At contract inception, the Company expects that the period of time between the transfer of goods to the customer and when the customer pays for those goods will be less than one year, which is consistent with the Company’s standard payment terms. Accordingly, the Company has elected the practical expedient to not adjust for the effects of a significant financing component. As a result, these amounts are recorded as receivables and not contract assets. The Company had no contract assets for any period presented.

The Company does not typically incur incremental costs of obtaining a contract that are contingent upon successful contract execution and would therefore be capitalized.

Allowance for Credit Losses

Changes to the balance of the allowance for credit losses were as follows:

				Allowance for Credit Losses
				Current Accounts					Long-term
(In thousands)				and Notes Receivable					Notes Receivable					Total
Balance at January 2, 2021				$		6,232			$		371			$		6,603
Changes in credit loss estimates						(1,097	)				360					(737	)
Write-offs charged against the allowance						(693	)				—					(693	)
Balance at October 9, 2021				$		4,442			$		731			$		5,173

 

				Allowance for Credit Losses
				Current Accounts					Long-term
(In thousands)				and Notes Receivable					Notes Receivable					Total
Balance at December 28, 2019				$		2,739			$		233			$		2,972
Impact of adoption of new credit loss standard (ASU 2016-13)						1,911					259					2,170
Provision for expected credit losses						583					—					583
Write-offs charged against the allowance						(202	)				(121	)				(323	)
Balance at October 3, 2020				$		5,031			$		371			$		5,402

 

Note 4 – Goodwill and Other Intangible Assets

The Company has three reporting units; however, no goodwill exists within the Retail or Military reporting units. The carrying amount of goodwill recorded within the Food Distribution reporting unit was $181.0 million as of October 9, 2021 and January 2, 2021.

The Company has indefinite-lived intangible assets that are not amortized, consisting primarily of indefinite-lived trade names and licenses for the sale of alcoholic beverages. The carrying amount of indefinite-lived intangible assets was $67.6 million as of October 9, 2021 and January 2, 2021.

The Company reviews goodwill and other indefinite-lived intangible assets for impairment annually, during the fourth quarter of each year, and more frequently if circumstances indicate impairment is probable. Such circumstances have not arisen in the current fiscal year. Testing goodwill and other indefinite-lived intangible assets for impairment requires management to make significant estimates about the Company’s future performance, cash flows, and other assumptions that can be affected by potential changes in economic, industry or market conditions, business operations, competition, or the Company’s stock price and market capitalization.

During the third quarter of 2020, the Company made the decision to abandon a tradename within the Food Distribution segment to better integrate with the Company’s overall transportation operations, resulting in a $7.0 million impairment of the associated indefinite-lived tradename asset.

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Note 5 – Restructuring and Asset Impairment

The following table provides the activity of reserves for closed properties for the 40-week period ended October 9, 2021. Included in the liability are lease-related ancillary costs from the date of closure to the end of the remaining lease term, as well as related severance. Reserves for closed properties recorded in the condensed consolidated balance sheets are included in “Other accrued expenses” in Current liabilities and “Other long-term liabilities” in Long-term liabilities based on the timing of when the obligations are expected to be paid. Reserves for severance are recorded in “Accrued payroll and benefits”.

				Reserves for Closed Properties
				Lease
				Ancillary
(In thousands)				Costs					Severance					Total
Balance at January 2, 2021				$		3,349			$		114			$		3,463
Provision for closing charges						1,410					—					1,410
Provision for severance						—					357					357
Lease termination adjustments						(220	)				—					(220	)
Changes in estimates						(44	)				—					(44	)
Accretion expense						74					—					74
Payments						(1,027	)				(433	)				(1,460	)
Balance at October 9, 2021				$		3,542			$		38			$		3,580

Restructuring and asset impairment, net in the condensed consolidated statements of earnings consisted of the following:

	12 Weeks Ended									40 Weeks Ended
	October 9,				October 3,					October 9,					October 3,
(In thousands)	2021				2020					2021					2020
Asset impairment charges (a)	$		207		$		6,767			$		3,783			$		16,411
Provision for closing charges			—				—					1,410					325
Gain on sales of assets related to closed facilities (b)			(358	)			—					(2,544	)				(31	)
Provision for severance (c)			233				—					357					2,205
Other costs associated with site closures (d)			196				2					507					1,649
Changes in estimates (e)			15				(226	)				(44	)				(104	)
Lease termination adjustments (f)			(488	)			—					(488	)				—
Total	$		(195	)	$		6,543			$		2,981			$		20,455

(a) Asset impairment charges in the current year were incurred primarily in the Retail segment and relate to current year store closures and previously closed locations, as well as site closures in connection with the Company’s supply chain transformation within the Food Distribution segment. Prior year charges were incurred primarily within the Food Distribution segment and related to the evaluation of the expected net proceeds from the sale of the Fresh Kitchen facility, the exit of the Fresh Cut business, and the sale of equipment related to both Fresh Cut and Fresh Kitchen, which totaled $9.1 million. Due to a decision in the prior year to abandon a tradename within the Food Distribution segment an impairment charge of $7.0 million was recognized.

(b) Gain on sales of assets in the current year primarily relate to sales of pharmacy customer lists, equipment, and real estate associated with store closings in the Retail segment, in addition to gains on sale of vacant land in the Military segment.

(c) Severance in the current year relates to the closure of distribution centers in the Food Distribution segment as well as Retail store closings. In the prior year, severance was related to the exit of the Fresh Cut business.

(d) Other costs in the current year primarily relates to Retail and Food Distribution site closures and restructuring activities. In the prior year, other costs primarily related to the Fresh Cut business and Retail store closings.

(e) Changes in estimates primarily relate to revised estimates for turnover and other lease ancillary costs associated with previously closed locations due to favorable dispute resolutions with landlords and fluctuations in the amount of certain ancillary costs.  

(f) Lease termination adjustments relate to the gain recognized to terminate a lease agreement in the current year, which includes a $0.3 million write-off of the lease liability and $0.2 million of lease ancillary costs included in the reserve for closed properties.  

 

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Long-lived assets which are not recoverable are measured at fair value on a nonrecurring basis using Level 3 inputs under the fair value hierarchy, as further described in Note 6. In the current year, assets with a book value of $27.5 million were measured at a fair value of $23.7 million, resulting in impairment charges of $3.8 million. In the prior year, in connection primarily with the Company’s exit of the Fresh Cut operations and planned sales of certain Fresh Kitchen equipment assets, long-lived assets with a book value of $53.6 million were measured at a fair value of $44.2 million, resulting in impairment charges of $9.4 million. The fair value of long-lived assets is determined by estimating the amount and timing of net future cash flows, including the expected proceeds from the sale of assets, 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. Assets classified as held for sale in the condensed consolidated balance sheet are valued at the expected net proceeds. The Fresh Kitchen facility, which was classified as held for sale as of January 2, 2021, was sold in the first quarter of 2021 for proceeds of $20.5 million.

Note 6 – Fair Value Measurements

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

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

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

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

Financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, accounts and notes receivable, and accounts payable approximate fair value because of the short-term maturities of these financial instruments. See Notes 4 and 5 for discussion of the fair value measurements related to long- or indefinite-lived asset impairment charges. At October 9, 2021 and January 2, 2021 the book value and estimated fair value of the Company’s debt instruments, excluding debt financing costs, were as follows:

	October 9,					January 2,
(In thousands)	2021					2021
Book value of debt instruments, excluding debt financing costs:
Current maturities of long-term debt and finance lease liabilities	$		5,680			$		5,135
Long-term debt and finance lease liabilities			401,517					485,381
Total book value of debt instruments			407,197					490,516
Fair value of debt instruments, excluding debt financing costs			412,680					497,941
Excess of fair value over book value	$		5,483			$		7,425

 

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).

Note 7 – 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. 

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 certain of its collective bargaining agreements. Based on the most recent information available to the Company, management believes that the present value of actuarial accrued liabilities in the 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 the Plan, it is difficult to accurately determine the amount of the underfunding. Management is not aware of any significant change in funding levels since January 2, 2021. Any adjustment for withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably determined.

On March 10, 2021, the United States Congress passed the American Rescue Plan Act of 2021 (the “Act”), which provides financial relief to certain failing multiemployer pension plans. In accordance with the interim guidance issued by the Pension Benefit Guaranty Corporation on July 9, 2021, the Act is designed to prevent such plans from becoming insolvent for the next 30 years. The Central States Plan, which is in a critical and declining status, is expected to apply and qualify for relief under the Act when the filing period opens during the first half of fiscal year 2022. As a result, the legislation and the available relief will alleviate the risk of insolvency of the Plan for the next 30 years, and related potential adverse impacts to the Company.

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Note 8 – Associate Retirement Plans

During the 12- and 40- week periods ended October 9, 2021, the Company recognized net periodic postretirement benefit costs of $0.2 million and $0.5 million, respectively, related to the SpartanNash Retiree Medical Plan (“Retiree Medical Plan”). During the 12- and 40- week periods ended October 3, 2020, the Company recognized net periodic postretirement benefit costs of $0.1 million and $0.5 million, respectively, related to the Retiree Medical Plan. In the first quarter of the prior year, the Company realized a gain of $1.0 million related to a refund from the annuity provider associated with the final reconciliation of participant data of the terminated SpartanNash Company Pension Plan. Substantially all of these amounts are included in “Other, net” in the condensed consolidated statements of earnings.

The Company expects to make total contributions of approximately $0.5 million in 2021 to the Retiree Medical Plan and has made $0.3 million in the year-to-date period. The Company’s retirement programs also include defined contribution plans providing contributory benefits, as well as executive compensation plans for a select group of management personnel and/or highly compensated associates.

Multi-Employer Plans

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

With respect to the Company’s participation in the Central States Plan, expense is recognized as contributions are payable. The Company’s contributions during the 12-week periods ended October 9, 2021 and October 3, 2020 were $2.2 million and $2.5 million, respectively. The Company’s contributions during the 40-week periods ended October 9, 2021 and October 3, 2020 were $10.3 million and $10.6 million, respectively. See Note 7 for further information regarding contingencies related to the Company’s participation in the Central States Plan.

Note 9 – Income Taxes

The effective income tax rate was 23.1% and 21.8% for the 12 weeks ended October 9, 2021 and October 3, 2020, respectively. The effective income tax rate was 24.5% and 10.5% for the 40 weeks ended October 9, 2021 and October 3, 2020, respectively. The differences from the federal statutory rate in the current year were primarily due to state taxes and the limitations on the deductibility of executive compensation, partially offset by federal tax credits. In the prior year, the difference from the federal statutory rate was primarily the result of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, and related tax planning in the 40-week period, as well as federal tax credits, partially offset by state taxes, limitations on the deductibility of executive compensation, and the impacts of stock-based compensation in both the 12- and 40- week periods.

On March 27, 2020, the U.S. government enacted tax legislation to provide economic stimulus and support businesses and individuals during the COVID-19 pandemic, referred to as the CARES Act. In connection with the CARES Act, the Company recorded net discrete income tax benefits of $9.3 million in 2020 associated with the additional deductibility of certain expenses combined with provisions which enable companies to carry back tax losses to years prior to the enactment of the Tax Cuts and Jobs Act (“Tax Reform”), when the federal statutory income tax rate was 35%. In the first quarter of 2021, the Company received tax refunds totaling $25.7 million related to the amended prior year returns. 

Note 10 – Share-Based Payments

Share-Based Employee Awards

The Company sponsors shareholder-approved stock incentive plans that provide for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, performance shares, performance share units, dividend equivalent rights, and other stock-based and stock-related awards to directors, officers and other key associates.

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

	12 Weeks Ended										40 Weeks Ended
(In thousands)	October 9, 2021					October 3, 2020					October 9, 2021					October 3, 2020
Restricted stock expense	$		920			$		1,033			$		5,977			$		5,279
Income tax benefit			(253	)				(289	)				(1,483	)				(564	)
Restricted stock expense, net of tax	$		667			$		744			$		4,494			$		4,715

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The following table summarizes activity in the stock incentive plans for the 40 weeks ended October 9, 2021:

						Weighted
		Restricted				Average
		Stock				Grant-Date
		Awards				Fair Value
Outstanding at January 2, 2021			973,948			$		17.72
Granted			560,352					18.94
Vested			(388,403	)				19.81
Cancelled/Forfeited			(112,930	)				18.26
Outstanding at October 9, 2021			1,032,967			$		17.54

As of October 9, 2021, total unrecognized compensation cost related to non-vested restricted stock awards granted under the Company’s stock incentive plans is $8.2 million and is expected to be recognized over a weighted average period of 2.3 years.

Stock Warrant

On October 7, 2020, in connection with its entry into a commercial agreement with Amazon.com, Inc. (“Amazon”), the Company issued Amazon.com NV Investment Holdings LLC, a subsidiary of Amazon, a warrant to acquire up to an aggregate of 5,437,272 shares of the Company’s common stock (the “Warrant”), subject to certain vesting conditions. Warrant shares equivalent to 2.5% of the Company’s outstanding and issuable shares, or 1,087,455 shares, vested upon the signing of the commercial agreement, and had a grant date fair value of $5.51 per share. Warrant shares equivalent to up to 10.0% of the Company’s outstanding and issuable shares, or 4,349,817 shares, may vest in connection with conditions defined by the terms of the Warrant, as Amazon makes payments to the Company in connection with the commercial supply agreement, in increments of $200 million, and had a grant date fair value of $5.33 per share. Upon vesting, shares may be acquired at an exercise price of $17.7257. The right to purchase shares in connection with the Warrant expires on October 7, 2027.

Share-based payment expense recognized as a reduction of “Net sales” in the condensed consolidated statements of earnings, and related tax benefits were as follows:

	12 Weeks Ended										40 Weeks Ended
(In thousands)	October 9, 2021					October 3, 2020					October 9, 2021					October 3, 2020
Warrant expense	$		403			$		—			$		1,478			$		—
Income tax benefit			(28	)				—					(121	)				—
Warrant expense, net of tax	$		375			$		—			$		1,357			$		—

 

The following table summarizes stock warrant activity for the 40 weeks ended October 9, 2021:

								Warrant
Outstanding and nonvested at January 2, 2021									4,349,817
Vested									326,238
Outstanding and nonvested at October 9, 2021									4,023,579

As of October 9, 2021, total unrecognized cost related to non-vested warrant shares was $21.2 million, which may be expensed as vesting conditions are satisfied over the remaining term of the agreement, or 6.0 years. Additionally, 1,413,693 warrant shares are vested and exercisable. As of October 9, 2021, nonvested warrant shares had an intrinsic value of $20.5 million, and vested warrant shares had an intrinsic value of $7.2 million.

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Note 11 – Earnings Per Share

Outstanding nonvested restricted stock awards under the 2015 Stock Incentive Plan contain nonforfeitable rights to dividends or dividend equivalents, which participate in undistributed earnings with common stock. These awards are classified as participating securities and are included in the calculation of basic earnings per share. Awards under the 2020 Stock Incentive Plan do not contain nonforfeitable rights to dividends or dividend equivalents and are therefore not classified as participating securities. There were no stock warrants outstanding during the 12- and 40- week periods ended October 3, 2020. The dilutive impact of both the restricted stock awards and warrants are presented below, as applicable. The following table sets forth the computation of basic and diluted net earnings per share:

	12 Weeks Ended										40 Weeks Ended
(In thousands, except per share amounts)	October 9, 2021					October 3, 2020					October 9, 2021					October 3, 2020
Numerator:
Net earnings	$		15,176			$		19,952			$		51,506			$		63,821
Adjustment for earnings attributable to participating securities			(264	)				(494	)				(999	)				(1,577	)
Net earnings used in calculating earnings per share	$		14,912			$		19,458			$		50,507			$		62,244
Denominator:
Weighted average shares outstanding, including participating securities			35,525					35,730					35,671					35,900
Adjustment for participating securities			(618	)				(884	)				(692	)				(887	)
Shares used in calculating basic earnings per share			34,907					34,846					34,979					35,013
Effect of dilutive restricted stock awards			94					1					54					—
Effect of dilutive stock warrant			197					—					146					—
Shares used in calculating diluted earnings per share			35,198					34,847					35,179					35,013
Basic earnings per share	$		0.43			$		0.56			$		1.44			$		1.78
Diluted earnings per share	$		0.42			$		0.56			$		1.44			$		1.78

 

Note 12 – Supplemental Cash Flow Information

Supplemental cash flow information is as follows:

	40 Weeks Ended
(In thousands)	October 9, 2021					October 3, 2020
Non-cash investing activities:
Capital expenditures included in accounts payable	$		2,268			$		2,604
Operating lease asset additions			29,448					22,805
Finance lease asset additions			2,665					3,026
Non-cash financing activities:
Dividends declared but unpaid			372					65
Recognition of operating lease liabilities			29,448					22,805
Recognition of finance lease liabilities			2,665					3,026
Other supplemental cash flow information:
Cash paid for interest			9,464					15,148

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Note 13 – Reporting Segment Information

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

(In thousands)	Food Distribution					Retail					Military					Total
12 Weeks Ended October 9, 2021
Net sales to external customers	$		1,031,315			$		608,737			$		433,201			$		2,073,253
Inter-segment sales			250,055					154					—					250,209
Acquisition and integration			—					101					—					101
Restructuring and asset impairment			36					137					(368	)				(195	)
Depreciation and amortization			7,954					10,633					3,176					21,763
Operating earnings (loss)			9,969					16,802					(4,040	)				22,731
Capital expenditures			7,895					4,971					2,253					15,119
12 Weeks Ended October 3, 2020
Net sales to external customers	$		1,012,204			$		596,659			$		451,953			$		2,060,816
Inter-segment sales			247,968					—					—					247,968
Acquisition and integration			—					242					—					242
Restructuring and asset impairment			6,538					5					—					6,543
Depreciation and amortization			7,413					10,489					2,956					20,858
Operating earnings (loss)			9,191					22,318					(2,511	)				28,998
Capital expenditures			5,223					9,302					746					15,271
40 Weeks Ended October 9, 2021
Net sales to external customers	$		3,421,923			$		1,968,158			$		1,447,531			$		6,837,612
Inter-segment sales			830,313					572					—					830,885
Acquisition and integration			—					281					—					281
Restructuring and asset impairment			799					2,550					(368	)				2,981
Depreciation and amortization			25,348					35,559					10,353					71,260
Operating earnings (loss)			47,793					43,705					(12,651	)				78,847
Capital expenditures			22,288					22,648					10,021					54,957
40 Weeks Ended October 3, 2020
Net sales to external customers	$		3,471,561			$		2,010,483			$		1,619,329			$		7,101,373
Inter-segment sales			845,988					—					—					845,988
Acquisition and integration			—					242					—					242
Restructuring and asset impairment			19,222					1,233					—					20,455
Depreciation and amortization			24,934					34,570					9,480					68,984
Operating earnings (loss)			34,990					59,416					(9,406	)				85,000
Capital expenditures			16,619					24,492					4,769					45,880

 

							October 9,					January 2,
(In thousands)							2021					2021
Total Assets
Food Distribution							$		1,105,679			$		1,112,961
Retail									738,347					763,876
Military									398,654					400,554
Total							$		2,242,680			$		2,277,391

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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 January 2, 2021.

Overview

SpartanNash, headquartered in Grand Rapids, Michigan, is a leading multi-regional grocery distributor and grocery retailer whose core businesses include distributing grocery products to a diverse group of independent and chain retailers, its corporate owned retail stores, military commissaries and exchanges in the United States, as well as operating a premier fresh produce distribution network. The Company operates three reportable business segments: Food Distribution, Retail and Military. The Company serves customers in all 50 states.

The Company’s Food Distribution segment provides a wide variety of nationally branded and private brand grocery products and perishable food products to independent grocers, the Company’s corporate owned retail stores, national retailers, food service distributors, and other customers. The Food Distribution segment primarily conducts business in the Midwest and Southeast regions of the United States.

As of the end of the third quarter, the Company’s Retail segment operated 147 corporate owned retail stores in the Midwest region primarily under the banners of Family Fare, Martin’s Super Markets, D&W Fresh Market, VG’s Grocery, and Dan’s Supermarket. The Company also offered pharmacy services in 92 of its corporate owned retail stores and operated 36 fuel centers. The retail stores have a “neighborhood market” focus to distinguish them from supercenters and limited assortment stores. The Company’s Customer Growth strategy is focused on meeting changing customer needs and preferences through a data-based decision-making process, while also increasing customer satisfaction through quality, service and convenience.

The Company’s Military segment contracts with manufacturers to distribute a wide variety of grocery products primarily to military commissaries and exchanges located in the United States, the District of Columbia, Europe, Cuba, Puerto Rico, Honduras, Iraq, Kuwait, Bahrain, Qatar and Djibouti. The Company distributes grocery products to 160 military commissaries and over 400 exchanges and, together with its third-party partner, Coastal Pacific Food Distributors, represents the only delivery solution to service the Defense Commissary Agency (“DeCA”) worldwide. The Company is the exclusive worldwide supplier of private brand products to U.S. military commissaries, a partnership with DeCA which began in fiscal 2017.

All fiscal quarters are 12 weeks, except for the Company’s first quarter, which is 16 weeks and will generally include the Easter holiday. Fiscal 2020 contained 53 weeks; therefore, the fourth quarter of fiscal 2020 contained 13 weeks. The fourth quarter includes the Thanksgiving and Christmas holidays, and depending on the fiscal year end, may include the New Year’s holiday.

The majority of the Company’s revenues are not seasonal in nature. However, in certain geographic areas, corporate retail stores and independent retail customers are dependent on tourism, and therefore, are affected by seasons and weather patterns.

2021 Third Quarter Highlights

Key financial and operational highlights for the third quarter include the following:

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The Company increased the low end of the fiscal 2021 adjusted EBITDA outlook range. Adjusted EBITDA is now expected to range from $205 to $210 million. The Company also now expects that Retail comparable sales will be negative 1.0% to 2.0% for 2021. Food Distribution sales are still expected to decline 1.0% to 3.0%, while Military Distribution sales are now expected to decline 9.0% to 13.0%.

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:

Note: Certain totals do not sum due to rounding.

 

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

Net sales for the quarter ended October 9, 2021 (the “third quarter”) increased $12.4 million, or 0.6%, to $2.07 billion from $2.06 billion in the quarter ended October 3, 2020 (the “prior year quarter”). Net sales for the year-to-date period ended October 9, 2021 (the “year-to-date period”) decreased $263.8 million, or 3.7%, to $6.84 billion from $7.10 billion in the year-to-date period ended October 3, 2020 (the “prior year-to-date period”). The third quarter increase was attributable to continued growth with certain existing Food Distribution customers and an increase in comparable store sales within the Retail segment, partially offset by lower sales within the Military segment. The decrease in net sales for the year-to-date period was due to favorable prior year sales, attributable to increased consumer demand related to COVID-19, as well as continuation of lower volumes within the Military segment, partially offset by continued growth with certain existing Food Distribution customers.

Food Distribution net sales increased $19.1 million, or 1.9%, to $1.03 billion in the third quarter from $1.01 billion in the prior year quarter. Net sales for the year-to-date period decreased $49.6 million, or 1.4%, to $3.42 billion in the year-to-date period from $3.47 billion in the prior year-to-date period. The third quarter increase was attributable to continued growth with certain existing Food Distribution customers, and the favorable impact of inflation. The decrease in the year-to-date period was due to favorable prior year sales attributable to increased consumer demand related to COVID-19, as well as impacts from the Company’s decision to exit its Fresh Production business, which accounted for a $21.7 million decline in segment revenues from the prior year-to-date period, partly offset by continued growth with certain existing Food Distribution customers and the favorable impact of inflation.

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Retail net sales increased $12.1 million, or 2.0%, to $608.7 million in the third quarter from $596.7 million in the prior year quarter. Net sales for the year-to-date period decreased $42.3 million, or 2.1%, from $2.01 billion in the prior year-to-date period to $1.97 billion. The third quarter increase was primarily due to increases in comparable store sales and fuel sales in the current year, partially offset by store closures. The year-to-date decrease in net sales was primarily due to cycling favorable prior year sales attributable to increased consumer demand related to COVID-19, partially offset by an increase in fuel sales. Comparable store sales increased 3.1% for the quarter and decreased 2.7% for the year. On a two-year comparable store basis, sales increased 13.5% and 11.4% during the quarter and year-to-date periods, respectively. The Company defines a retail store as comparable when it is in operation for 14 accounting periods (a period equals four weeks), regardless of remodels, expansions, or relocated stores. Acquired stores are included in the comparable sales calculation 13 periods after the acquisition date. Sales are compared to the same store’s operations from the prior year period for purposes of calculation of comparable store sales, or to the same store’s operations from the period two years ago in the case of a two-year comparison. Fuel is excluded from the comparable sales calculation due to volatility in price. Comparable store sales is a widely used metric among retailers, which is useful to management and investors to assess performance. The Company’s definition of comparable store sales may differ from similarly titled measures at other companies.

Military net sales decreased $18.8 million, or 4.1%, to $433.2 million in the third quarter from $452.0 million in the prior year quarter. Net sales for the year-to-date period decreased $171.8 million, or 10.6%, from $1.62 billion in the prior year-to-date period to $1.45 billion. The third quarter decrease was primarily related to a reduction in export sales as a result of cycling the prior year quarter’s increased consumer demand, coupled with supply chain challenges at international shipping ports in the current year quarter, in addition to the continuation of lower volumes at domestic commissaries. The year-to-date decrease was primarily due to the continuation of lower volumes at domestic commissaries following base access and shopping restrictions implemented in the prior year, in addition to a reduction in export sales as a result of the prior year’s increased consumer demand related to the COVID-19 pandemic, coupled with supply chain challenges at ports in the current year.

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

Gross profit increased $4.7 million, or 1.4%, to $329.5 million in the third quarter from $324.8 million in the prior year quarter. As a percent of net sales, gross profit was 15.9% compared to 15.8% in the prior year quarter. Gross profit for the year-to-date period decreased $5.6 million, or 0.5%, from $1.09 billion in the prior year-to-date period to $1.08 billion in the current year. As a percent of net sales, gross profit for the year-to-date period was 15.8% compared to 15.3% in the prior year-to-date period. The changes in the gross profit rate were driven by inflation within the Food Distribution and Military segments, partially offset by LIFO expense, as well as increases in the proportion of margin accretive Retail and Food Distribution segment sales.

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

SG&A expenses for the third quarter increased $17.8 million, or 6.2%, to $306.8 million from $289.0 million in the prior year quarter, representing 14.8% of net sales in the third quarter compared to 14.0% in the prior year quarter. SG&A expenses for the year-to-date period increased $18.0 million, or 1.8% from $981.1 million in the prior year-to-date period to $999.0 million and increased from 13.8% as a percentage of net sales in the prior year-to-date period to 14.6% in the current year-to-date period. The increases in expenses as a rate of sales were due to a higher rate of supply chain expenses primarily in the Food Distribution segment and increases in corporate administrative costs.

Acquisition and Integration – Acquisition and integration expenses for the third quarter and year-to-date periods ended October 9, 2021 were $0.1 million and $0.3 million, respectively. Acquisition and integration expenses were $0.2 million for both the third quarter and year-to-date periods ended October 3, 2020. Activities in both years are mainly associated with the integration of Martin’s Super Markets.

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Restructuring and Asset Impairment – Third quarter and prior year quarter results included income of $0.2 million and charges of $6.5 million, respectively, of restructuring and asset impairment activity. The year-to-date period and the prior year-to-date period included charges of $3.0 million and $20.5 million, respectively. The current quarter and current year-to-date amounts consist primarily of asset impairment and retail store closing charges, partially offset by gains on the sale of pharmacy customer lists, equipment, and real estate associated with store closings, as well as the termination of a lease within Food Distribution, and the sale of real estate within the Military segment. The prior year quarter and prior year-to-date activity consists primarily of asset impairment charges and severance costs related to the restructuring of the Company’s Fresh Production business, an asset impairment charge related to the decision to abandon a tradename within the Food Distribution segment, as well as retail store closing charges.

Operating Earnings – The following table presents operating earnings (loss) by segment and variances in operating earnings (loss).

Operating earnings decreased $6.3 million, or 21.6% to $22.7 million in the third quarter from $29.0 million in the prior year quarter. Operating earnings for the year-to-date period decreased $6.2 million, or 7.2%, to $78.8 million from $85.0 million in the prior year-to-date period. The decreases were primarily due to higher labor and transportation costs across the supply chain network related to the ongoing tight labor conditions, and higher corporate administrative costs, partly offset by lower asset impairment and restructuring charges and improved margin rates.

Food Distribution operating earnings increased $0.8 million, or 8.5%, to $10.0 million in the third quarter from $9.2 million in the prior year quarter. Operating earnings for the year-to-date period increased $12.8 million, or 36.6%, to $47.8 million from $35.0 million in the prior year-to-date period. During the prior year quarter, the Company made the decision to abandon a tradename within this segment, resulting in an impairment of $7.0 million of the associated indefinite-lived tradename asset. The increase in the third quarter operating earnings for Food Distribution was due to cycling this asset impairment charge, as well as increased earnings due to the growth in net sales and gross profit rate, mostly offset by increases in supply chain expenses. The growth in the gross profit rate was driven primarily by an increase in average sales price due to inflation, partially offset by an increase in LIFO expense. The increase in the year-to-date period was due to favorable margin rates and lower asset impairment and restructuring charges, partially offset by a higher rate of supply chain expenses and lower sales volume.

Retail operating earnings decreased $5.5 million, or 24.7% to $16.8 million in the third quarter from $22.3 million in the prior year quarter. Operating earnings for the year-to-date period decreased $15.7 million, or 26.4%, to $43.7 million from $59.4 million in the prior year-to-date period. The decrease in the third quarter operating earnings was due to lower gross margin rates driven by lower fuel margins, cycling favorable prior year inventory shrink, and reduced vendor promotional activity in the current quarter, partially offset by the increase in net sales. The decrease in year-to-date operating earnings was primarily attributable to reduced margin rates and a decrease in sales volume.

Military operating loss increased $1.5 million, or 60.9% to $4.0 million in the third quarter from $2.5 million in the prior year quarter. Operating loss for the year-to-date period increased $3.2 million, or 34.5%, to $12.7 million from $9.4 million in the prior year-to-date period. The third quarter increase in operating loss were due to decreases in net sales and a higher rate of supply chain expense, partially offset by improvements in gross margin rates. The year-to-date increase was primarily attributable to a decrease in net sales, a higher rate of supply chain expense, partially offset by improvements in gross margin rates.

Interest Expense – Interest expense decreased $0.5 million, or 14.3%, to $3.0 million in the third quarter from $3.5 million in the prior year quarter. Interest expense for the year-to-date period decreased $3.9 million, or 26.6% from $14.8 million in the prior year-to-date period to $10.9 million. The third quarter decrease in interest expense was due to significant decreases in the average debt balance. The year-to-date decrease in interest expense was due to rate cuts implemented by the Federal Reserve during the prior year, as well as significant decreases in the average debt balance.

Income Taxes – The effective income tax rates were 23.1% and 21.8% for the third quarter and prior year quarter, respectively. For the year-to-date period and prior year-to-date period, the effective income tax rates were 24.5% and 10.5%, respectively. The differences from the federal statutory rate in the current year were primarily due to state taxes and the limitations on the deductibility of executive compensation, partially offset by federal tax credits. In the prior year, the differences from the federal statutory rate were primarily as a result of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and related tax planning in the 40- week period, as well as federal tax credits, partially offset by state taxes, limitations on the deductibility of executive compensation, and the impacts of stock-based compensation in both the 12- and 40- week periods.

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On March 27, 2020, the U.S. government enacted tax legislation to provide economic stimulus and support businesses and individuals during the COVID-19 pandemic, referred to as the CARES Act. In connection with the CARES Act, the Company recorded a net discrete income tax benefit of $9.3 million in 2020, associated with the additional deductibility of certain expenses combined with provisions which enable companies to carry back tax losses to years prior to the enactment of the Tax Cuts and Jobs Act, when the federal statutory income tax rate was 35%. In the first quarter of 2021, the Company received tax refunds totaling $25.7 million related to the amended prior year returns.

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with GAAP, the Company also provides information regarding adjusted operating earnings, adjusted earnings from continuing operations, and adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”). These are non-GAAP financial measures, as defined below, and are used by management to allocate resources, assess performance against its peers and evaluate overall performance. The Company believes these measures provide useful information for both management and its investors. The Company believes these non-GAAP measures are useful to investors because they provide additional understanding of the trends and special circumstances that affect its business. These measures provide useful supplemental information that helps investors to establish a basis for expected performance and the ability to evaluate actual results against that expectation. The measures, when considered in connection with GAAP results, can be used to assess the overall performance of the Company as well as assess the Company’s performance against its peers. These measures are also used as a basis for certain compensation programs sponsored by the Company. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its financial results in these adjusted formats.

Current year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude organizational realignment and severance associated with cost reduction initiatives. Organizational realignment includes benefits for associates terminated as part of a leadership transition plan which do not meet the definition of a reduction-in-force. Prior year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude “Fresh Cut operating losses” subsequent to the decision to exit these operations, severance associated with cost reduction initiatives, and fees paid to a third-party advisory firm associated with Project One Team, the Company’s initiative to drive growth while increasing efficiency and reducing costs. Pension termination income related to a refund from the annuity provider associated with the final reconciliation of participant data is excluded from adjusted earnings from continuing operations. Each of these items are 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 an adjusted operating earnings format.

Adjusted operating earnings is not a measure of performance under GAAP and should not be considered as a substitute for operating earnings, and other income statement data. The Company’s definition of adjusted operating earnings may not be identical to similarly titled measures reported by other companies.

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Following is a reconciliation of operating earnings to adjusted operating earnings for the 12 and 40 weeks ended October 9, 2021 and October 3, 2020.

 

Following is a reconciliation of operating earnings (loss) by segment for the 12 and 40 weeks ended October 9, 2021 and October 3, 2020.

 

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Adjusted Earnings from Continuing Operations

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

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

Following is a reconciliation of net earnings to adjusted earnings from continuing operations for the 12 and 40 weeks ended October 9, 2021 and October 3, 2020.

 

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Adjusted EBITDA

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“adjusted EBITDA”) is a non-GAAP operating financial measure that the Company defines as net earnings plus interest, discontinued operations, depreciation and amortization, and other non-cash items including share-based payments (equity awards measured in accordance with ASC 718, Stock Compensation, which include both stock-based compensation to employees and stock warrants issued to non-employees) and the LIFO provision, as well as adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.

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

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

Following is a reconciliation of net earnings to adjusted EBITDA for the 12 and 40 weeks ended October 9, 2021 and October 3, 2020.

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Following is a reconciliation of operating earnings (loss) to adjusted EBITDA by segment for the 12- and 40- weeks ended October 9, 2021 and October 3, 2020.

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Liquidity and Capital Resources

Cash Flow Information

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

Net cash provided by operating activities. Net cash provided by operating activities decreased $79.9 million in the current year-to-date period compared to the prior year-to-date period. In the prior year, significant increases in sales volume related to the COVID-19 pandemic resulted in incremental earnings, as well as a net reduction in working capital, which benefited operating cash flows.

Net cash used in investing activities. Net cash used in investing activities decreased $11.5 million in the current year compared to the prior year primarily due to significant proceeds from the sale of fixed assets in the current year, partially offset by an increase in capital expenditures in the current year.

Capital expenditures were $55.0 million in the current year and cloud computing application development spend, which is included in operating activities, was $7.0 million, compared to capital expenditures of $45.9 million and cloud computing application development spend of $7.7 million in the prior year. The Company expects fiscal year 2021 capital expenditures and cloud computing application development spend to range from $80.0 million to $90.0 million. The Food Distribution, Retail and Military segments utilized 40.6%, 41.2% and 18.2% of capital expenditures, respectively, in the current year.

Net cash used in financing activities. Net cash used in financing activities decreased $70.4 million in the current year compared to the prior year, primarily due to higher net payments on the senior credit facility in the prior year.

Debt Management

Total debt, including finance lease liabilities, was $404.1 million and $486.4 million as of October 9, 2021 and January 2, 2021, respectively. The decrease in total debt was due to payments on the senior credit facility from cash provided by operating activities.

Liquidity

The Company’s principal sources of liquidity are cash flows generated from operations and its senior secured credit facility. As of October 9, 2021, the senior secured credit facility had outstanding borrowings of $358.7 million. Additional available borrowings under the Company’s credit facility are based on stipulated advance rates on eligible assets, as defined in the Credit Agreement. The Credit Agreement requires that the Company maintain excess availability of 10% of the borrowing base, as such term is defined in the Credit Agreement. The Company had excess availability after the 10% covenant of $486.4 million at October 9, 2021. 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 $16.1 million were outstanding as of October 9, 2021. The credit facility matures December 18, 2023 and is secured by substantially all of the Company’s assets.

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

The Company’s current ratio (current assets to current liabilities) was 1.43-to-1 at October 9, 2021 compared to 1.47-to-1 at January 2, 2021, and its investment in working capital was $305.2 million at October 9, 2021 compared to $325.2 million at January 2, 2021. The net long-term debt to total capital ratio was 0.33-to-1 at October 9, 2021 compared to 0.39-to-1 at January 2, 2021.

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Net long-term debt is a non-GAAP financial measure that is defined as long-term debt and finance lease liabilities, plus current portion of long-term debt and finance lease liabilities, less cash and cash equivalents. The ratio of net debt to capital is a non-GAAP financial measure that is calculated by dividing net long-term debt, as defined previously, by total capital (net long-term 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 long-term debt is not a substitute for GAAP financial measures and may differ from similarly titled measures of other companies.

Following is a reconciliation of “Long-term debt and finance lease liabilities” to Net long-term debt as of October 9, 2021 and January 2, 2021.

For information on contractual obligations, see the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2021. At October 9, 2021, there have been no material changes to the Company’s significant contractual obligations outside the ordinary course of business.

Cash Dividends

During the quarter ended October 9, 2021, the Company declared $7.3 million in dividends. A 3.9% increase in the quarterly dividend rate from $0.1925 per share to $0.20 per share was approved by the Board of Directors and announced on March 5, 2021. Although the Company expects to continue to pay a quarterly cash dividend, adoption of a dividend policy does not commit the Board of Directors to declare future dividends. Each future dividend will be considered and declared by the Board of Directors at its discretion. Whether the Board of Directors continues to declare dividends depends on a number of factors, including the Company’s future financial condition, anticipated profitability and cash flows and compliance with the terms of its credit facilities.

Under the senior revolving credit facility, the Company is generally permitted to pay dividends in any fiscal year up to an amount such that all cash dividends, together with any cash distributions and share repurchases, do not exceed $35.0 million. Additionally, the Company is generally permitted to pay cash dividends and repurchase shares in excess of $35.0 million in any fiscal year so long as its Excess Availability, as defined in the senior revolving credit facility, is in excess of 10% of the Total Borrowing Base, as defined in the senior revolving credit facility, before and after giving effect to the repurchases and dividends.

Off-Balance Sheet Arrangements

The Company has also made certain commercial commitments that extend beyond October 9, 2021. These commitments consist primarily of purchase commitments (as disclosed in the Company’s Annual Report on Form 10-K for the year ended January 2, 2021), standby letters of credit of $16.1 million as of October 9, 2021, and interest on long-term debt and finance lease liabilities.

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. 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 7 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2021 should be reviewed as they are integral to 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 January 2, 2021.

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Recently Issued Accounting Standards

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

ITEM 3. Quantitative and Qualitative Disclosure about Market Risk

There have been no material changes in market risk of SpartanNash from the information provided in Part II, Item 7A, “Quantitative and Qualitative Disclosure About Market Risk,” of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2021.

ITEM 4. Controls and Procedures

An evaluation of the effectiveness of the design and operation of SpartanNash Company’s disclosure controls and procedures (as currently defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was performed as of October 9, 2021 (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”) and Chief Financial Officer (“CFO”). As of the Evaluation Date, SpartanNash Company’s management, including the CEO and CFO, 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 officer, as appropriate, to allow for timely decisions regarding required disclosure. During the third quarter of 2021 there were no changes in SpartanNash’s internal control over financial reporting that materially affected, or were reasonably likely to materially affect, SpartanNash’s internal control over financial reporting.

 

 

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PART II

OTHER INFORMATION

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

During the fourth quarter of 2017, the Board authorized a publicly announced $50 million share repurchase program, expiring in 2022. There were not any common stock share repurchases made under this program during the third quarter of 2021. At October 9, 2021, $29.7 million remains available under the program. Repurchases of common stock 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.

 

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ITEM 6. Exhibits

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

 

 

 

 

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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.

 

 

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