Published: 2020-11-12 16:01:47 ET

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended October 3, 2020.

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 10, 2020, the registrant had 35,863,253 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 December 28, 2019 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 December 28, 2019 and this Quarterly Report on Form 10-Q, 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 28, 2019 and in Item 1A “Risk Factors” and 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 OPERATIONS

(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 December 28, 2019.

 

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 3, 2020, 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, including but not limited to the potential impacts arising from the COVID-19 pandemic. Due to the uncertainty of the magnitude and duration of the impacts of the COVID-19 pandemic, these estimates are inherently subject to judgment and actual results could differ from those estimates. 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 2020 and 2019 include the results of operations of the Company for the 12- and 40-week periods ended October 3, 2020 and October 5, 2019, 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 the 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 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. Changes in the balance of the allowance for doubtful accounts were as follows:

				Allowance for Doubtful Accounts
				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

The Company has evaluated the effects of the COVID-19 pandemic in performing its quarterly evaluations of the adequacy of the allowance for doubtful accounts. While the duration and impact of these affects is uncertain, the Company did not deem it necessary to record incremental allowances for doubtful accounts as no additional credit exposures were identified.

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” The amendments in this ASU remove disclosures that are no longer considered to be cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in ASU 2018-14 are effective for fiscal years ending after December 15, 2020 and will be applied on a retrospective basis to all periods presented. The adoption of this guidance is not expected to have a significant effect on the Company’s financial statements.

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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 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
	12 Weeks Ended October 5, 2019																				40 Weeks Ended October 5, 2019
(In thousands)	Food Distribution					Retail					Military					Total					Food Distribution					Retail					Military					Total
Type of products:
Center store (a)	$		280,762			$		220,879			$		240,531			$		742,172			$		904,532			$		711,405			$		776,972			$		2,392,909
Fresh (b)			339,932					212,923					143,339					696,194					1,112,553					694,812					486,562					2,293,927
Non-food (c)			299,480					91,116					113,666					504,262					965,517					310,129					392,296					1,667,942
Fuel			—					36,362					—					36,362					—					115,947					—					115,947
Other			18,873					325					1,620					20,818					61,066					1,054					5,267					67,387
Total	$		939,047			$		561,605			$		499,156			$		1,999,808			$		3,043,668			$		1,833,347			$		1,661,097			$		6,538,112
Type of customers:
Individuals	$		—			$		561,430			$		—			$		561,430			$		—			$		1,832,704			$		—			$		1,832,704
Manufacturers, brokers and distributors			40,878					—					473,388					514,266					142,785					—					1,584,266					1,727,051
Retailers			882,904					—					24,148					907,052					2,852,064					—					71,564					2,923,628
Other			15,265					175					1,620					17,060					48,819					643					5,267					54,729
Total	$		939,047			$		561,605			$		499,156			$		1,999,808			$		3,043,668			$		1,833,347			$		1,661,097			$		6,538,112
(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, fuel, and pharmacy.

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Contract Assets and Liabilities

In the ordinary course of business, the Company may advance funds to certain independent retailers which are earned by the retailers primarily through achieving specified purchase volume requirements, as outlined in their supply agreements with the Company, or in limited instances, for remaining a SpartanNash customer for a specified time period. These advances must be repaid if the purchase volume requirements are not met or if the retailer no longer remains a customer for the specified time period. For volume-based arrangements, the Company estimates the amount of the advanced funds earned by the retailers based on the expected volume of purchases by the retailer and amortizes the advances as a reduction of the transaction price and revenue earned. Realizability of the advances, or collectability in event of default, is not assured and is dependent on the financial condition of the customer, economic and industry factors and the quality of the underlying collateral. No reserves related to the realizability or collectability of customer advances were necessary as of October 3, 2020. 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 “Prepaid expenses and other current assets” or “Other assets, net” on the Company’s balance sheets.

When the Company transfers goods or services to a customer, payment is due - subject to normal terms - and is not conditional on anything other than the passage of time. Typical payment terms range from due upon receipt to 30 days, depending on the type of customer and relationship. At contract inception, the Company expects that the period of time between the transfer of goods to the customer and when the customer pays for those goods will be less than one year, which is consistent with the Company’s standard payment terms. Accordingly, the Company has elected the practical expedient under ASC 606 to not adjust for the effects of a significant financing component. As such, these amounts are recorded as receivables and not contract assets. The Company had no contract assets for any period presented.

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

Note 4 – Acquisitions

On December 31, 2018, the Company acquired all of the outstanding shares of Martin’s Super Markets, Inc. (“Martin’s”) for $86.7 million, net of $7.8 million of cash acquired. Acquired assets consist primarily of property and equipment of $55.0 million, intangible assets of $23.9 million, and working capital. Intangible assets are primarily composed of an indefinite-lived trade name of $20.6 million and pharmacy customer prescription lists of $3.1 million which are amortized over seven years. The acquired assets and assumed liabilities were recorded at their estimated fair values as of the acquisition date based on preliminary estimates, which were subsequently finalized during the fourth quarter of 2019. No goodwill was recorded related to the acquisition. The Company incurred $0.2 million and $1.2 million of merger/acquisition and integration costs related to the acquisition in the current and prior year-to-date periods, respectively. The acquisition was funded with proceeds from the Company’s Credit Agreement.

Martin’s operates supermarkets in Northern Indiana and Southwest Michigan. Martin’s was an independent retailer and customer of the Company’s Food Distribution segment prior to the acquisition.

Note 5 – 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 3, 2020 and December 28, 2019.

 

The Company reviews goodwill and other indefinite-lived intangible assets for impairment annually, during the fourth quarter of each year, and more frequently if circumstances indicate a risk of impairment. Testing goodwill and other indefinite-lived intangible assets for impairment requires management to make significant estimates about the Company’s future performance, cash flows, and other assumptions that can be affected by potential changes in economic, industry or market conditions, business operations, competition, or the Company’s stock price and market capitalization.

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. 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. Changes in the carrying amount of indefinite-lived intangible assets were as follows:

(In thousands)	Indefinite-lived Intangible Assets
Balance at December 28, 2019	$		76,256
Impairment (Note 6)			(6,970	)
Balance at October 3, 2020	$		69,286

 

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Note 6 – Restructuring Charges and Asset Impairment

The following table provides the activity of reserves for closed properties for the 40-week period ended October 3, 2020. 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 December 28, 2019				$		4,971			$		17			$		4,988
Provision for closing charges						325					—					325
Provision for severance						—					2,205					2,205
Changes in estimates						89					(193	)				(104	)
Accretion expense						95					—					95
Payments						(1,675	)				(1,760	)				(3,435	)
Balance at October 3, 2020				$		3,805			$		269			$		4,074

Restructuring and asset impairment activity included in the condensed consolidated statements of operations consisted of the following:

	12 Weeks Ended										40 Weeks Ended
	October 3,					October 5,					October 3,					October 5,
(In thousands)	2020					2019					2020					2019
Asset impairment charges (a)	$		6,767			$		1,447			$		16,411			$		15,512
Charge on customer advance (b)			—					—					—					1,941
Provision for closing charges			—					86					325					629
Loss (gain) on sales of assets related to closed facilities (c)			—					72					(31	)				(6,831	)
Provision for severance (d)			—					198					2,205					347
Other costs associated with site closures (e)			2					330					1,649					1,307
Changes in estimates (f)			(226	)				(539	)				(104	)				(750	)
Lease termination adjustments			—					(298	)				—					(1,940	)
	$		6,543			$		1,296			$		20,455			$		10,215

(a)  Asset impairment charges in the current year were incurred primarily in the Food Distribution segment and relate to the evaluation of the expected net proceeds from the Fresh Kitchen facility which is currently held-for-sale, 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 the decision to abandon a tradename within the Food Distribution segment to better integrate with the Company’s overall transportation operations, an impairment charge of $7.0 million was recognized. In the prior year, charges primarily relate to the Fresh Production operations within the Food Distribution segment.

(b)  The charge on the customer advance relates to an advance to an independent retailer customer which was not fully recoverable.

(c)  Gain on sales of assets in the prior year primarily relates to the sale of a previously closed distribution center in the Food Distribution segment.

(d)  Severance in the current year was related to the exit of the Fresh Cut business.

(e)  Other costs primarily relate to the Fresh Cut and store closings in the current year, and a Food Distribution warehouse and store closings in the prior year.

(f)  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, as well as reductions in the amount of estimated severance benefits.   

Long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs. In connection primarily with the Company’s exit of the Fresh Cut operations and planned sales of certain Fresh Kitchen equipment assets in the current year, long-lived assets and definite-lived intangible assets were tested for recoverability. 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 in 2020. Long-lived assets with a book value of $5.9 million were measured at a fair value of $4.4 million, resulting in impairment charges of $1.5 million in 2019. 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.

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In the second quarter of 2019 the Company announced a plan to reposition the Caito Fresh Production operations and to close the Fresh Kitchen. As a result of this plan, the Company evaluated the Caito indefinite-lived trade names and long-lived assets for potential impairment. The indefinite-lived trade names with a book value of $35.5 million were measured at a fair value of $21.5 million, resulting in an impairment charge of $14.0 million related to the Caito tradename. During this test, the Company concluded the long-lived assets were not impaired. In 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, which resulted in a charge of $7.0 million. Indefinite lived intangible assets are tested for impairment at least annually, and as needed if an indicator of potential impairment exists. Indefinite lived intangible assets are measured at fair value using Level 3 inputs under the fair value hierarchy, as further described in Note 7 – Fair Value Measurements. Fair value of indefinite-lived assets is determined by estimating the amount and timing of net future cash flows, discounted using a risk-adjusted rate of interest. The Company estimates future cash flows based on historical results of operations, external factors expected to impact future performance and, in the case of indefinite-lived trade name assets, estimated royalty rates. The Company has evaluated assets held for sale as of October 3, 2020 and concluded that the Fresh Kitchen facility meets the requirements for held for sale classification. Assets classified as held for sale in the consolidated balance sheet are valued at the expected net proceeds and are evaluated each quarter.

Note 7 – Fair Value Measurements

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

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

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

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

Financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, accounts and notes receivable, and accounts payable approximate fair value because of the short-term maturities of these financial instruments. See Note 6 for discussion of the fair value measurements related to long- or indefinite-lived asset impairment charges. At October 3, 2020 and December 28, 2019 the book value and estimated fair value of the Company’s debt instruments, excluding debt financing costs, were as follows:

	October 3,					December 28,
(In thousands)	2020					2019
Book value of debt instruments, excluding debt financing costs:
Current maturities of long-term debt and finance lease liabilities	$		5,338			$		6,349
Long-term debt and finance lease liabilities			545,292					687,659
Total book value of debt instruments			550,630					694,008
Fair value of debt instruments, excluding debt financing costs			556,307					700,631
Excess of fair value over book value	$		5,677			$		6,623

 

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 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. 

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The Company contributes to the Central States Southeast and Southwest Pension Fund (“Central States Plan” or “the Plan”), a multi-employer pension plan, based on obligations arising from its collective bargaining agreements (“CBAs”) in Bellefontaine, Ohio, Lima, Ohio, and Grand Rapids, Michigan covering its supply chain associates at those locations. This Plan provides retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed by contributing employers and unions; however, SpartanNash is not a trustee. The trustees typically are responsible for determining the level of benefits to be provided to participants, as well as for such matters as the investment of the assets and the administration of the plan. The Company currently contributes to the Central States Plan under the terms outlined in the “Primary Schedule” of Central States’ Rehabilitation Plan or those outlined in the “Default Schedule.” Both the Primary and Default schedules require varying increases in employer contributions over the previous year’s contribution. Increases are set within the CBAs and vary by location. The Plan continues to be in red zone status, and according to the Pension Protection Act (“PPA”), is considered to be in “critical and declining” zone status. Among other factors, plans in the “critical and declining” zone are generally less than 65% funded and are projected to become insolvent within the next 15 years (or 20 years depending on the ratio of active-to-inactive participants). Based on the most recent information available to the Company, management believes that the present value of actuarial accrued liabilities in this multi-employer plan significantly exceeds the value of the assets held in trust to pay benefits. Because SpartanNash is one of a number of employers contributing to this plan, it is difficult to ascertain what the exact amount of the underfunding would be. Management is not aware of any significant change in funding levels since December 28, 2019. To reduce this underfunding, management expects increases in expense as a result of required incremental multi-employer pension plan contributions in future years. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined.

Note 9 – Associate Retirement Plans

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 SpartanNash Retiree Medical Plan (“Retiree Medical Plan”). The Company also realized a gain of $1.0 million in the 40-week period ended October 3, 2020 related to a refund from the annuity provider associated with the final reconciliation of participant data of the terminated SpartanNash Company Pension Plan (“Pension Plan”). In addition to the other remaining assets in the pension trust, these funds will be used to satisfy obligations associated with other qualified retirement programs. During the 12- and 40-week periods ended October 5, 2019, the Company recognized net periodic pension expense of $10.1 million and $19.3 million, respectively, related to the Pension Plan and net periodic postretirement benefit costs of $0.1 million and $0.3 million, respectively, for the Retiree Medical Plan. Substantially all of these amounts are included in Postretirement benefit expense (income) in the condensed consolidated statements of operations.

The Company expects to make total contributions of approximately $0.5 million in 2020 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 3, 2020 and October 5, 2019 were $2.5 million and $2.4 million, respectively. The Company’s contributions during the 40-week periods ended October 3, 2020 and October 5, 2019 were $10.6 million in both years. See Note 8 for further information regarding contingencies related to the Company’s participation in the Central States Plan.

Note 10 – Income Taxes

The effective income tax rate was 21.8% and 84.2% for the 12 weeks ended October 3, 2020 and October 5, 2019, respectively. The effective income tax rate was 10.5% and 129.0% for the 40 weeks ended October 3, 2020 and October 5, 2019, respectively. The differences from the federal statutory rate in the current year were 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. In the prior year, the difference from the federal statutory rate was primarily due to state tax benefits as well as tax credits.

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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 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”), where the federal statutory income tax rate was 35%. 

Note 11 – Stock-Based Compensation

The Company previously sponsored a shareholder-approved stock incentive plan (the “2015 Plan”) that provided 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. On May 20, 2020, the Company’s shareholders approved a new stock incentive plan (“the 2020 Plan”). The 2020 Plan provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance share units, dividend equivalent rights, and other stock-based and stock-related awards to directors, employees, or contractors of the Company, as determined by the Compensation Committee of the Board of Directors. The 2020 Plan provides for 1,635,000 newly reserved shares plus the 736,578 shares previously available for grant under the 2015 Plan.

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

	12 Weeks Ended										40 Weeks Ended
(In thousands)	October 3, 2020					October 5, 2019					October 3, 2020					October 5, 2019
Restricted stock	$		1,033			$		637			$		5,279			$		6,735
Income tax benefit			(289	)				(163	)				(564	)				(1,148	)
Stock-based compensation expense, net of tax	$		744			$		474			$		4,715			$		5,587

The following table summarizes activity in the Plans for the 40 weeks ended October 3, 2020:

						Weighted
		Restricted				Average
		Stock				Grant-Date
		Awards				Fair Value
Outstanding at December 28, 2019	$		928,733			$		20.28
Granted			501,934					15.90
Vested			(366,746	)				21.85
Cancelled/Forfeited			(45,512	)				16.39
Outstanding at October 3, 2020	$		1,018,409			$		17.73

As of October 3, 2020, total unrecognized compensation cost related to non-vested restricted stock awards granted under the Company’s stock incentive plan is $7.0 million and is expected to be recognized over a weighted average period of 2.6 years.

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Note 12 – Earnings (Loss) Per Share

Outstanding nonvested restricted stock awards under the 2015 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 Plan do not contain nonforfeitable rights to dividends or dividend equivalents and are therefore not classified as participating securities. The dilutive impact of these awards is presented below, as applicable. Weighted average restricted stock awards that were not included in the EPS calculations because they were anti-dilutive were 87,111 and 42,139 for the 12- and 40-week periods ended October 3, 2020, respectively. There were no anti-dilutive awards in 2019. The following table sets forth the computation of basic and diluted earnings per share from continuing operations:

	12 Weeks Ended										40 Weeks Ended
(In thousands, except per share amounts)	October 3, 2020					October 5, 2019					October 3, 2020					October 5, 2019
Numerator:
Earnings (loss) from continuing operations	$		19,952			$		(310	)		$		63,821			$		444
Adjustment for (earnings) loss attributable to participating securities			(494	)				8					(1,577	)				(11	)
Earnings (loss) from continuing operations used in calculating earnings per share	$		19,458			$		(302	)		$		62,244			$		433
Denominator:
Weighted average shares outstanding, including participating securities			35,730					36,340					35,900					36,248
Adjustment for participating securities			(884	)				(929	)				(887	)				(906	)
Shares used in calculating basic earnings per share			34,846					35,411					35,013					35,342
Effect of dilutive restricted stock awards			1					—					—					—
Shares used in calculating diluted earnings per share			34,847					35,411					35,013					35,342
Basic earnings (loss) per share from continuing operations	$		0.56			$		(0.01	)		$		1.78			$		0.01
Diluted earnings (loss) per share from continuing operations	$		0.56			$		(0.01	)		$		1.78			$		0.01

 

Note 13 – Supplemental Cash Flow Information

Supplemental cash flow information is as follows:

	40 Weeks Ended
(In thousands)	October 3, 2020					October 5, 2019
Non-cash financing activities:
Recognition of operating lease liabilities	$		22,805			$		22,191
Recognition of finance lease liabilities			3,026					900
Non-cash investing activities:
Capital expenditures included in accounts payable			2,604					4,746
Operating lease asset additions			22,805					22,191
Finance lease asset additions			3,026					900
Non-cash financing activities:
Dividends declared but unpaid			65					—
Other supplemental cash flow information:
Cash paid for interest			15,148					28,401

 

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Note 14 – 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 3, 2020
Net sales to external customers	$		1,012,204			$		596,659			$		451,953			$		2,060,816
Inter-segment sales			247,968					—					—					247,968
Restructuring charges 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
12 Weeks Ended October 5, 2019
Net sales to external customers	$		939,047			$		561,605			$		499,156			$		1,999,808
Inter-segment sales			227,633					—					—					227,633
Restructuring charges and asset impairment			1,043					253					—					1,296
Depreciation and amortization			7,793					10,197					2,764					20,754
Operating earnings (loss)			11,699					6,726					(2,646	)				15,779
Capital expenditures			8,623					4,872					1,639					15,134
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
Restructuring charges 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
40 Weeks Ended October 5, 2019
Net sales to external customers	$		3,043,668			$		1,833,347			$		1,661,097			$		6,538,112
Inter-segment sales			742,677					—					—					742,677
Merger/acquisition and integration			(130	)				1,494					—					1,364
Restructuring charges (gains) and asset impairment			10,724					(509	)				—					10,215
Depreciation and amortization			25,770					33,048					9,097					67,915
Operating earnings (loss)			36,564					14,600					(5,806	)				45,358
Capital expenditures			16,061					26,792					4,052					46,905

 

							October 3,					December 28,
(In thousands)							2020					2019
Total Assets
Food Distribution							$		1,163,402			$		1,087,307
Retail									755,235					794,413
Military									402,922					390,799
Discontinued operations									—					3,090
Total							$		2,321,559			$		2,275,609

 

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Note 15 – Subsequent Event

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, warrants to acquire up to an aggregate of 5,437,272 shares of the Company’s common stock (the “Warrant”), subject to certain vesting conditions. Warrants 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. Warrants equivalent to up to 10.0% of the Company’s outstanding and issuable shares, or 4,349,817 shares, may vest in connection with the conditions defined by the terms of the Warrant. 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.

 

ITEM 1A. Risk Factors

There have been no material changes in the Company's risk factors from those set forth in the Company's Annual Report on Form 10-K for the year ended December 28, 2019, except for the following risk factor which should be considered in conjunction with those previously disclosed:

Disease outbreaks, such as the COVID-19 pandemic, could have an adverse impact on the Company's operations and financial results.

On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic, and on March 13, 2020 the President of the United States declared a national emergency relating to the disease. In addition to the President’s declaration, state and local authorities recommended social distancing and imposed quarantine and isolation measures on large portions of the population, including mandatory business closures. While these measures were designed to protect the overall public health, they had material adverse impacts on domestic and foreign economies and has resulted in the United States entering a period of recession.

While the Company is an essential business and has seen significant increases in sales volume during the pandemic, its business may be negatively impacted by the several factors associated with the disease outbreak and the related effects on the retail grocery and wholesale distribution industries. These impacts may include:

Any of the foregoing factors, or other effects of the pandemic that are not currently foreseeable, may materially increase costs, negatively impact sales and damage the Company’s financial condition, results of operations, cash flows and its liquidity position. The significance and duration of any such impacts are not possible to predict due to the overall uncertainty associated with the COVID-19 pandemic.

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 28, 2019.

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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 155 corporate owned retail stores in the Midwest region primarily under the banners of Family Fare, Martin’s Super Markets, VG’s Grocery, D&W Fresh Market and Dan’s Supermarket. The Company also offered pharmacy services in 97 of its corporate owned retail stores and operated 37 fuel centers. The retail stores have a “neighborhood market” focus to distinguish them from supercenters and limited assortment stores. The Company’s Customer First 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, Bahrain, Djibouti and Egypt. 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 and is continuing to partner with DeCA in the rollout of private brand products to military commissaries, which began during the second quarter of fiscal 2017.

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 will contain 53 weeks; therefore, the fourth quarter of fiscal 2020 will contain 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.

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. Travel restrictions and other effects of the COVID-19 pandemic may also impact the performance of these stores.

2020 Third Quarter and Year-to-Date Highlights

The Company’s top priority continues to be the well-being and safety of its family of associates, customers and communities during the COVID-19 pandemic. SpartanNash continues to recognize its family of associates for their dedication to serve customers and support local communities during this unprecedented time of need. Collaboration across the organization and the strength and resiliency of its people drives execution in a dynamic operating environment as SpartanNash supports consumer demand related to the COVID-19 pandemic.

Key financial and operational highlights for the quarter and fiscal year-to-date include the following:

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For the 53-week fiscal year ending January 2, 2021, the Company continues to expect to benefit from higher consumer food-at-home consumption related to the effects of COVID-19. While the Company is not providing updated net sales guidance due to uncertainty of the duration and magnitude of the impact of COVID-19, it believes sales will materially exceed its initial 2020 guidance. The Company is updating its annual outlook, from what was previously provided on August 12, 2020, to reflect actual year-to-date financial results, its expectations for the remainder of the fiscal year related to earnings trends and the forecasted impact of the stock warrants granted early in the fourth quarter.

Results of Operations

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

Note: Certain totals do not sum due to rounding.

** Not meaningful

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

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Net sales for the quarter ended October 3, 2020 (the “third quarter”) increased $61.0 million, or 3.1%, to $2.06 billion from $2.00 billion in the quarter ended October 5, 2019 (the “prior year quarter”). Net sales for the year-to-date period ended October 3, 2020 (the “year-to-date period”) increased $563.3 million, or 8.6%, to $7.10 billion from $6.54 billion in the year-to-date period ended October 5, 2019 (the “prior year-to-date period”). The increases were driven primarily by increased consumer demand related to COVID-19 in the Retail and Food Distribution segments, as well as continued growth with existing Food Distribution customers, partially offset by lower comparable sales for the Military segment at Defense Commissary Agency (“DeCA”) operated locations prior to the pandemic and the impact of domestic base access and commissary shopping restrictions associated with COVID-19 in the second and third quarters.

Food Distribution net sales increased $73.2 million, or 7.8%, to $1.01 billion in the third quarter from $0.94 billion in the prior year quarter. Net sales for the year-to-date period increased $427.9 million, or 14.1%, to $3.47 billion in the year-to-date period from $3.04 billion in the prior year-to-date period. The increases were due to sales growth with existing customers, as well as incremental volume associated with increased consumer demand related to COVID-19, partially offset by the impact of the Company’s decision to exit Fresh Production operations, which accounted for a $29.1 million, or 3.1%, decline in segment revenues in the quarter and $78.8 million, or 2.6%, for the year-to-date period.

Retail net sales increased $35.1 million, or 6.2%, to $596.7 million in the third quarter from $561.6 million in the prior year quarter. Net sales for the year-to-date period increased $177.1 million, or 9.7%, from $1.83 billion in the prior year-to-date period to $2.01 billion. The increases in net sales were primarily due to incremental sales volume associated with increased consumer demand related to COVID-19. Comparable store sales were 10.6% for the quarter and 14.5% for the year-to-date period and were partially offset by the impact of lower fuel prices and gallons sold, as well as store closures. 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. 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 $47.2 million, or 9.5%, to $452.0 million in the third quarter from $499.2 million in the prior year quarter. Net sales for the year-to-date period decreased $41.8 million, or 2.5%, from $1.66 billion in the prior year-to-date period to $1.62 billion. For the quarter, growth in private label and export sales was more than offset by the impact of domestic base access and commissary shopping restrictions associated with COVID-19. The decrease for the year-to-date period was due to the impact of lower comparable sales at Defense Commissary Agency (“DeCA”) operated locations prior to the onset of the pandemic as well as commissary shopping restrictions and base closures during the second and third quarters, partially offset by increased volume resulting from the impact of the COVID-19 pandemic during the first quarter prior to the onset of these restrictions.

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 operations.

Gross profit increased $34.5 million, or 11.9%, to $324.8 million in the third quarter from $290.4 million in the prior year quarter. As a percent of net sales, gross profit was 15.8% compared to 14.5% in the prior year quarter. Gross profit for the year-to-date period increased $129.7 million, or 13.5%, from $957.1 million in the prior year-to-date period to $1,086.8 million in the current year. As a percent of net sales, gross profit for the year-to-date period was 15.3% compared to 14.6% in the prior year-to-date period. The third quarter and year-to-date changes in the gross profit rate were driven by improvements in margin rates at all three segments, as well as increases in the proportion of Retail and Food Distribution segment sales, which generate higher margin rates than the Military segment.

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.

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SG&A expenses for the third quarter increased $15.8 million, or 5.8%, to $289.0 million in the third quarter from $273.3 million in the prior year quarter, representing 14.0% of net sales in the third quarter compared to 13.7% in the prior year quarter. SG&A expenses for the year-to-date period increased $80.9 million, or 9.0%, from $900.2 million in the prior year-to-date period to $981.1 million, and was 13.8% as a percentage of net sales in both year-to-date periods. The increase in expenses as a rate of sales compared to the prior year quarter was due to increases in incentive compensation due to improved overall Company performance, a greater proportion of Retail segment sales which drive a higher rate of expense, and increases in supply chain expenses, partially offset by the increased leverage of expenses from higher sales volume, particularly related to retail store labor and certain fixed costs. Expenses as a rate of sales for the year-to-date period were in line with the prior year as a greater rate of expenses for the items mentioned previously were offset by improved operating leverage related to retail store labor and other operating expenses as well as lower healthcare costs.

Merger/Acquisition and Integration – Merger/acquisition and integration expenses for the third quarter were $0.2 million. Merger/acquisition and integration expenses for the year-to-date period were $1.4 million in the prior year-to-date period and $0.2 million in the current year-to-date period. The expenses in both years are mainly associated with the acquisition and integration of Martin’s Super Markets (“Martin’s”).

Restructuring Charges and Asset Impairment – Third quarter and prior year quarter results included charges of $6.5 million and $1.3 million, respectively, of restructuring and asset impairment activity. The year-to-date period and the prior year-to-date period included charges of $20.5 million and $10.2 million, respectively, of restructuring and asset impairment activity. The current quarter and year-to-date activity consists primarily of asset impairment charges and severance costs related to the restructuring of the Company’s Fresh Production business, and an asset impairment charge related to the decision to abandon a tradename within the Food Distribution segment, as well as store closing charges. The prior year quarter amount consists primarily of asset impairment charges to adjust non-operating real estate to its fair value, which was classified as held-for-sale. The prior year-to-date period included asset impairment charges associated with the decision to reposition Fresh Production operations, which was partially offset by gains on the sale of a previously closed distribution center.

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

Operating earnings increased $13.2 million, or 83.8% to $29.0 million in the third quarter from $15.8 million in the prior year quarter. Operating earnings for the year-to-date period increased $39.6 million, or 87.4%, to $85.0 million from $45.4 million in the prior year-to-date period. The third quarter and year-to-date increases were attributable to increased sales volume and improved margin rates, partially offset by an increase in incentive compensation due to improved overall Company performance, restructuring and asset impairment charges, and supply chain expenses.

Food Distribution operating earnings decreased $2.5 million, or 21.4%, to $9.2 million in the third quarter from $11.7 million in the prior year quarter. Operating earnings for the year-to-date period decreased $1.6 million, or 4.3%, to $35.0 million from $36.6 million in the prior year-to-date period. During the third quarter, the Company made the decision to abandon a tradename within the Food Distribution segment to better integrate with the Company’s overall transportation operations, which resulted in a charge of $7.0 million. The decrease in operating earnings for Food Distribution was due to this asset impairment charge, as well as an increase in the rate of warehousing expenses and higher corporate administrative expenses, partially offset by higher earnings due to the increase in sales volume. For the year-to-date period higher incentive compensation, warehousing, and asset impairment charges were partially offset by an increase in sales volume and cycling of prior year operational losses in the Fresh Production business.

Retail operating earnings increased $15.6 million, or 231.8% to $22.3 million in the third quarter from $6.7 million in the prior year quarter. Operating earnings for the year-to-date period increased $44.8 million, or 307.0%, to $59.4 million from $14.6 million in the prior year-to-date period. The increases in operating earnings were primarily attributable to the increase in sales volume, improvements in margin rates, including inventory shrink, and labor rates. These favorable variances were partially offset by higher incentive compensation due to improved segment performance.

Military operating loss decreased $0.1 million, or 5.1% to $2.5 million in the third quarter from $2.6 million in the prior year quarter. Operating loss for the year-to-date period increased $3.6 million, or 62.0%, to $9.4 million from $5.8 million in the prior year-to-date period. The improvement for the quarter was driven by improved margin rates, partially offset by the allocation of corporate administrative expenses, the impact of lower sales volumes and, to a lesser extent, increases in the rate of warehousing expenses. The year-to-date increase was primarily attributable to increases in the rate of supply chain expenses, including additional compensation for frontline workers and additional sanitation measures, partially offset by improved margin rates.

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Interest Expense – Interest expense decreased $3.9 million, or 52.3%, to $3.5 million in the third quarter from $7.4 million in the prior year quarter. Interest expense for the year-to-date period decreased $13.1 million, or 47.0% from $28.0 million in the prior year-to-date period to $14.8 million in the year-to-date period. The decreases in interest expense were due to rate decreases executed by the Federal Reserve during 2019 and the first quarter of fiscal 2020, as well as significant decreases in the average debt balance.

Income Taxes – The effective income tax rates were 21.8% and 84.2% 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 10.5% and 129.0%, respectively. The differences from the federal statutory rate in the current year were 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. In the prior year, the difference from the federal statutory rate was primarily due to state tax benefits resulting from losses in certain tax jurisdictions as well as tax credits.

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%.

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 “Fresh Cut operating losses” subsequent to the decision to exit these operations during the first quarter, 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. These items are considered “non-operational” or “non-core” in nature. Prior year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude “Fresh Kitchen operating losses” subsequent to the decision to exit these operations at the beginning of the third quarter, costs associated with organizational realignment, which include significant changes to the Company’s management team, 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 costs, primarily related to non-operating settlement expense associated with the distribution of pension assets, are excluded from adjusted earnings from continuing operations, and to a lesser extent adjusted operating earnings.

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.

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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.

Following is a reconciliation of operating earnings (loss) to adjusted operating earnings (loss) for the 12 and 40 weeks ended October 3, 2020 and October 5, 2019.

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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 earnings from continuing operations plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.

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

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

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Following is a reconciliation of earnings (loss) from continuing operations to adjusted earnings from continuing operations for the 12 and 40 weeks ended October 3, 2020 and October 5, 2019.

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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 deferred (stock) compensation, the LIFO provision, as well as adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.

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

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

Following is a reconciliation of net earnings (loss) to adjusted EBITDA for the 12 and 40 weeks ended October 3, 2020 and October 5, 2019.

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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 3, 2020 and October 5, 2019.

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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 increased during the current year-to-date period from the prior year-to-date period by approximately $83.8 million primarily due to improved profitability and changes in operating asset and liability balances primarily related to the deferral of payroll taxes in connection with the CARES Act, improvements in working capital, and increases in accrued compensation.

Net cash used in investing activities. Net cash used in investing activities decreased $82.1 million in the current year compared to the prior year primarily due to the acquisition of Martin’s in the prior year.

Capital expenditures were $45.9 million in the current year and cloud computing application development spend, which is included in operating activities, was $7.7 million, compared to capital expenditures of $46.9 million in the prior year. The Company expects full fiscal year 2020 capital expenditures and cloud computing application development spend to range from $80.0 million to $85.0 million. The Food Distribution, Retail and Military segments utilized 36.2%, 53.4% and 10.4% of capital expenditures, respectively, in the current year.

Net cash used in financing activities. Net cash used in financing activities increased $168.2 million in the current year compared to the prior year primarily due to payment of debt balances in the current year, funded by cash provided by operating activities, as well as borrowings to fund the Martin’s acquisition in the prior year.

Debt Management

Total debt, including finance lease liabilities, was $546.3 million and $688.6 million as of October 3, 2020 and December 28, 2019, respectively. The decrease in total debt was due to increased payments using 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 3, 2020, the senior secured credit facility had outstanding borrowings of $511.1 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 $346.9 million at October 3, 2020. 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 $15.6 million were outstanding as of October 3, 2020. 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 1.58-to-1 at October 3, 2020 compared to 1.76-to-1 at December 28, 2019, and its investment in working capital was $400.9 million at October 3, 2020 compared to $431.5 million at December 28, 2019. Net long-term debt to total capital ratio was 0.42-to-1 at October 3, 2020 compared to 0.49-to-1 at December 28, 2019.

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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 3, 2020 and December 28, 2019.

For information on contractual obligations, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019. At October 3, 2020, 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 3, 2020, the Company declared $6.9 million in dividends and declared $20.8 million for the year-to-date period. A 1.3% increase in the quarterly dividend rate from $0.19 per share to $0.1925 per share was approved by the Board of Directors and announced on February 27, 2020. 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 3, 2020. These commitments consist primarily of purchase commitments (as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 28, 2019), standby letters of credit of $15.6 million as of October 3, 2020, 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 December 28, 2019 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 28, 2019.

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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 December 28, 2019.

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 3, 2020 (the “Evaluation Date”). This evaluation was performed under the supervision and with the participation of SpartanNash Company’s management, including its Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”). As of the Evaluation Date, SpartanNash Company’s management, including the CEO, CFO and CAO, concluded that SpartanNash’s disclosure controls and procedures were effective as of the Evaluation Date to ensure that material information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including its principal executive and principal financial officers as appropriate to allow for timely decisions regarding required disclosure. During the third quarter of 2020 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. In response to the COVID-19 pandemic, many of the Company’s associates began working from home during the first quarter of 2020. Management has taken measures to ensure that the Company’s internal controls over financial reporting remain effective and were not materially affected.

 

 

 

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PART II

OTHER INFORMATION

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

The following table provides information regarding SpartanNash’s purchases of its own common stock during the 12-week period ended October 3, 2020. These may include: (1) shares of SpartanNash common stock delivered in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options, and (2) shares submitted for cancellation to satisfy tax withholding obligations that occur upon the vesting of the restricted shares. The value of the shares delivered or withheld is determined by the applicable stock compensation plan. For the third quarter of 2020, all employee transactions related to shares submitted for cancellation to satisfy tax withholding obligations that occur upon the vesting of the restricted shares.

During the fourth quarter of 2017, the Board authorized a publicly announced $50 million share repurchase program, expiring in 2022. There were $10.0 million of share repurchases made under this program during the first quarter of 2020. At October 3, 2020, $35.0 million remains available under the program.

 

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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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