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.
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.
17
At the end of the first 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 offers pharmacy services in 97 of its corporate owned retail stores and operates 37 fuel centers. The retail stores have a “neighborhood market” focus to distinguish them from supercenters and limited assortment stores. 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 First Quarter Highlights
The Company’s top priority for the first quarter of 2020 was the well-being and safety of its family of associates, customers and communities during the COVID-19 pandemic. SpartanNash is incredibly proud of its family of associates for their dedication to serve local customers and communities during this unprecedented time of need and respond to the dramatic increase in demand for food, pharmacy, household and personal care products.
The Company undertook numerous initiatives to protect and serve its associates and customers in response to the pandemic, including the following:
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|
•
|
Installed sneeze guards at key points of customer interaction within retail stores as well as within distribution center receiving areas.
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|
|
•
|
Purchased facemasks and gloves for all frontline associates working in retail stores and distribution centers.
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|
•
|
Promoted social distancing through signs and floor markings throughout retail stores to remind guests and associates to remain six feet apart.
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|
|
•
|
Reserved shopping times twice per week for store guests most at risk of contracting coronavirus, including seniors, pregnant women and immunocompromised individuals.
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|
•
|
Dedicated additional Fast Lane resources to accommodate the significant increase in the number of customers shopping online as well as offered free, same-day home delivery of prescription medications, where available.
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|
•
|
Instructed associates to take their temperature at home before coming onsite to a SpartanNash location, as well as onsite health status screenings for all associates upon arrival.
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•
|
Suspended certain services within retail stores, including self-serve areas, bottle returns, and product returns in accordance with CDC recommendations.
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|
•
|
Increased procedures for sanitizing high-touch surfaces within retail stores, such as shopping carts and baskets, food service counters, checkout lanes, conveyor belts, fuel pump handles, pin pads and touch screens at least every 30 minutes as well as installed sanitation stations. In distribution centers, increased fogging as well as sanitizing high-touch areas including time clocks, headsets and equipment controls at least every 30 minutes.
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|
•
|
Provided more than 16,000 part- and full-time hourly frontline associates with weekly appreciation bonuses, as well as an additional $2 per hour for hours worked during times of significantly increased demand.
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•
|
Increased the associate discount in its company-owned retail stores to 20 percent off for a set period of time.
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•
|
Extended emergency leave benefits to ensure associates who are sick or are displaying symptoms of COVID-19 are able to remain off work until they have fully recovered. SpartanNash's expanded emergency leave time now provides up to an additional 80 hours of paid leave.
|
18
|
|
•
|
The Company continues to provide telemedicine visits, employee assistance programs for mental and physical wellbeing as well as childcare assistance, and prescription drug coverage. Telemedicine visits and COVID-19 testing fees have been waived since the onset of the pandemic.
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•
|
Recruited and onboarded more than 3,000 new hires since the beginning of the pandemic to support current associates and provide career opportunities to displaced workers.
|
Key financial highlights related to the impact of COVID-19 and other actions undertaken by the Company include the following:
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•
|
The Food Distribution segment generated sales growth of 9.5% prior to the impact of the COVID-19 pandemic through growth with existing customers. Sales growth during the pandemic, the last 6 weeks of the quarter, was 29.7% and ended the quarter ahead of the prior year by 17.1%.
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•
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Retail comparable store sales, which exclude fuel, were on track to achieve the Company’s guidance of approximately flat and accelerated to an increase of 42.0% during the pandemic, ending the quarter at 15.6%.
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•
|
The Military segment sales declined 3.2% prior to the impact of the COVID-19 pandemic. Sales growth during the pandemic was 18.1% and ended the quarter ahead of the prior year by 4.9%.
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•
|
The Company continued to pay down debt and improve its leverage ratios through improved profitability and working capital reductions.
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|
|
•
|
As a result of the loss of a significant customer, the Company made the decision to exit the Caito Fresh Cut operations. Wind down of the operations began in March 2020 and was complete as of the end of the first quarter. The Company incurred $10.6 million in asset impairment charges, severance costs and operating losses during the wind down period. The Company is working to sell the related facility and equipment.
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•
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During the first half of the quarter, the Company executed cost saving initiatives, which included a voluntary early retirement program, as well as a reduction-in-force. These actions are expected to result in longer-term cost savings, however resulted in $5.2 million in incremental expense in the quarter.
|
The Company has updated its outlook for the 53-week fiscal year ending January 2, 2021. The Company expects to continue to benefit from higher consumer food at home consumption related to COVID-19, however, the duration and magnitude of the impact are uncertain. As a result, although the Company believes that its sales for fiscal 2020 will materially exceed its initial 2020 guidance, the Company is unable to fully estimate the impact COVID-19 will have on the remainder of 2020. The Company has updated its annual outlook, originally provided on February 19, 2020, to reflect actual financial results experienced to-date, as well as expectations for the remainder of the fiscal year related to earnings trends. Specifically, these updates include incremental adjusted earnings per share from continuing operations for the COVID-19 impact experienced to-date, other first quarter earnings in excess of management’s initial guidance expectations, as well as the benefits associated with cost reduction initiatives and increased sales and earnings trends the Company was experiencing prior to the onset of the pandemic. The Company’s updated outlook for the second half of the year does not include any adjustment for future impacts from the COVID-19 pandemic. However, the Company currently anticipates any incremental costs related to COVID-19 will be more than offset by the improved food at home sales trend.
19
Results of Operations
The following table sets forth items from the condensed consolidated statements of earnings as a percentage of net sales and the year-to-year percentage change in the dollar amounts:
|
|
Percentage of Net Sales
|
|
|
Percentage Change
|
|
|
|
16 Weeks Ended
|
|
|
16 Weeks Ended
|
|
|
|
April 18, 2020
|
|
|
April 20, 2019
|
|
|
April 18, 2020
|
|
|
Net sales
|
|
100.0
|
|
|
|
100.0
|
|
|
|
12.4
|
|
|
Gross profit
|
|
14.8
|
|
|
|
14.9
|
|
|
|
12.1
|
|
|
Selling, general and administrative
|
|
13.7
|
|
|
|
14.2
|
|
|
|
8.6
|
|
|
Merger/acquisition and integration
|
|
—
|
|
|
|
0.0
|
|
|
|
(100.0
|
)
|
|
Restructuring charges (gains) and asset impairment
|
|
0.4
|
|
|
|
(0.2
|
)
|
|
|
280.8
|
|
|
Operating earnings
|
|
0.8
|
|
|
|
0.9
|
|
|
|
(0.8
|
)
|
|
Other expenses and income
|
|
0.2
|
|
|
|
0.5
|
|
|
|
(45.3
|
)
|
|
Earnings before income taxes and discontinued operations
|
|
0.5
|
|
|
|
0.4
|
|
|
|
52.1
|
|
|
Income tax expense
|
|
0.0
|
|
|
|
0.1
|
|
|
|
(98.8
|
)
|
|
Earnings from continuing operations
|
|
0.5
|
|
|
|
0.3
|
|
|
|
104.8
|
|
|
Loss from discontinued operations, net of taxes
|
|
—
|
|
|
|
(0.0
|
)
|
|
|
100.0
|
|
|
Net earnings
|
|
0.5
|
|
|
|
0.3
|
|
|
|
106.2
|
|
Note: Certain totals do not sum due to rounding.
Net Sales – The following table presents net sales by segment and variances in net sales:
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 18, 2020
|
|
|
April 20, 2019
|
|
|
Variance
|
|
|
Food Distribution
|
$
|
|
1,369,495
|
|
|
$
|
|
1,169,238
|
|
|
$
|
|
200,257
|
|
|
Retail
|
|
|
782,568
|
|
|
|
|
701,767
|
|
|
|
|
80,801
|
|
|
Military
|
|
|
704,393
|
|
|
|
|
671,370
|
|
|
|
|
33,023
|
|
|
Total net sales
|
$
|
|
2,856,456
|
|
|
$
|
|
2,542,375
|
|
|
$
|
|
314,081
|
|
Net sales for the quarter ended April 18, 2020 (“first quarter”) increased $314.1 million, or 12.4%, to $2.86 billion from $2.54 billion in the quarter ended April 20, 2019 (“prior year quarter”). The increase was driven primarily by incremental sales related to a shift in consumer behavior associated with the COVID-19 pandemic, particularly for the last 6 weeks of the fiscal quarter, as well as growth with existing customers in the Food Distribution segment.
Food Distribution net sales increased $200.3 million, or 17.1%, to $1.37 billion in the first quarter from $1.17 billion in the prior year quarter due to incremental volume associated with the impact of COVID-19 as well as sales growth with existing customers.
Retail net sales increased $80.8 million, or 11.5%, to $782.6 million in the first quarter from $701.8 million in the prior year quarter. The increase in net sales was primarily due to incremental volume associated with the impact of COVID-19, as discussed above. Comparable store sales increased 15.6% for the quarter and were partially offset by the impact of lower fuel prices and 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 increased $33.0 million, or 4.9%, to $704.4 million in the first quarter from $671.4 million in the prior year quarter. The increase from the prior year quarter was due to the increased volume resulting from the impact of the COVID-19 pandemic, partially offset by lower comparable sales at Defense Commissary Agency (“DeCA”) operated locations prior to the onset of the pandemic.
20
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 $45.8 million, or 12.1%, to $423.6 million in the first quarter from $377.7 million in the prior year quarter. As a percent of net sales, gross profit was 14.8% compared to 14.9% in the prior year quarter. The first quarter change in gross margin was primarily driven by the increased sales volume.
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 increased to $391.3 million in the first quarter from $360.4 million in the prior year quarter, representing 13.7% of net sales in the first quarter compared to 14.2% in the prior year quarter. The decrease in expenses as a rate of sales compared to the prior year quarter was primarily due to improved operating leverage related to store labor and other operating expenses, as well as lower healthcare costs and stock compensation expense due to executive turnover and a shift in the timing of a portion of the 2020 stock award into the second quarter, partially offset by incremental incentive compensation expense related to improved overall company performance, incremental pay and bonuses for frontline associates, and severance costs associated with a voluntary early retirement program and a reduction-in-force.
Merger/Acquisition and Integration – Prior year quarter results included $0.8 million associated with the acquisition and integration of Martin’s Supermarkets in the prior year.
Restructuring Charges and Asset Impairment – First quarter results include net charges of $10.2 million and prior year quarter results included net gains of $5.7 million related to restructuring and asset impairment activity. The first quarter activity consists primarily of asset impairment charges and severance costs related to the Company’s Fresh Cut facility, as well as store closing charges. The prior year quarter includes gains on the sale of a previously closed distribution center, partially offset by store and distribution center closing charges.
Operating Earnings (Loss) – The following table presents operating earnings (loss) by segment and variances in operating earnings (loss):
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 18, 2020
|
|
|
April 20, 2019
|
|
|
Variance
|
|
|
Food Distribution
|
$
|
|
11,390
|
|
|
$
|
|
24,592
|
|
|
$
|
|
(13,202
|
)
|
|
Retail
|
|
|
12,645
|
|
|
|
|
(826
|
)
|
|
|
|
13,471
|
|
|
Military
|
|
|
(2,005
|
)
|
|
|
|
(1,557
|
)
|
|
|
|
(448
|
)
|
|
Total operating earnings
|
$
|
|
22,030
|
|
|
$
|
|
22,209
|
|
|
$
|
|
(179
|
)
|
Operating earnings decreased $0.2 million, or 0.8% to $22.0 million in the first quarter from $22.2 million in the prior year quarter. The first quarter decrease was primarily attributable to higher restructuring and asset impairment charges, mostly offset by the impact of increased volume, as well as the compensation related items mentioned above.
Food Distribution operating earnings decreased $13.2 million, or 53.7%, to $11.4 million in the first quarter from $24.6 million in the prior year quarter. The exit of the Caito Fresh Cut business resulted in $11.1 million in asset impairment charges, severance costs, operating losses and other costs during the wind down period. Profitability within the Food Distribution segment benefited from the increase in sales volume and was impacted by the compensation related items mentioned above.
Retail operating earnings increased $13.5 million to $12.6 million in the first quarter from a $0.8 million loss in the prior year quarter. The increase in operating earnings was primarily attributable to the increase in sales volume, improvements in labor rates as a rate of sales and lower healthcare costs, partially offset by the compensation related items mentioned above.
Military operating loss increased $0.4 million to $2.0 million in the first quarter from $1.6 million in the prior year quarter. The first quarter increase was primarily attributable to higher incentive compensation costs, partially offset by the impact of the increase in sales volume.
21
Interest Expense – Interest expense decreased $4.2 million, or 35.7%, to $7.6 million in the first quarter from $11.9 million in the prior year quarter. The decrease in interest expense for the quarter was due to rate decreases executed by the federal reserve during 2019 as well as during the first quarter of fiscal 2020 and, to a lesser extent, a decrease in the average debt balance.
Income Taxes – The effective income tax rates were 0.2% and 25.9% for the first quarter and prior year quarter, respectively. The difference from the federal statutory rate in the current year was primarily as a result of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and federal tax credits, partially offset by state taxes and stock-based compensation. In the prior year, the difference from the federal statutory rate was primarily due to state taxes and stock-based compensation, partially offset by federal 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 initial analysis of the impact of the CARES Act, the Company recorded a net discrete income tax benefit of $4.3 million during the first quarter, 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, where 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 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 costs associated with the organizational realignment, which include significant changes to the Company’s management team. Also excluded are the fees paid to a third-party advisory firm associated with Project One Team, the Company’s initiative to drive growth while increasing efficiency and reducing costs. Pension termination costs, primarily related to non-operating settlement expense associated with the distribution of pension assets, are excluded from adjusted earnings from continuing operations, and to a lesser extent adjusted operating earnings.
Adjusted Operating Earnings
Adjusted operating earnings is a non-GAAP operating financial measure that the Company defines as operating earnings plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.
The Company believes that adjusted operating earnings provide a meaningful representation of its operating performance for the Company as a whole and for its operating segments. The Company considers adjusted operating earnings as an additional way to measure operating performance on an ongoing basis. Adjusted operating earnings is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature and also excludes the contributions of activities classified as discontinued operations. Because adjusted operating earnings and adjusted operating earnings by segment are performance measures that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in adjusted operating earnings format.
Adjusted operating earnings is not a measure of performance under accounting principles generally accepted in the United States of America (“GAAP”) and should not be considered as a substitute for operating earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definition of adjusted operating earnings may not be identical to similarly titled measures reported by other companies.
22
Following is a reconciliation of operating earnings (loss) to adjusted operating earnings (loss) for the 16 weeks ended April 18, 2020 and April 20, 2019.
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 18, 2020
|
|
|
April 20, 2019
|
|
|
Operating earnings
|
$
|
|
22,030
|
|
|
$
|
|
22,209
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Merger/acquisition and integration
|
|
|
—
|
|
|
|
|
782
|
|
|
Restructuring, asset impairment and other charges (gains)
|
|
|
10,237
|
|
|
|
|
(5,662
|
)
|
|
Fresh Cut operating losses
|
|
|
2,262
|
|
|
|
|
—
|
|
|
Costs associated with Project One Team
|
|
|
493
|
|
|
|
|
4,618
|
|
|
Organizational realignment costs
|
|
|
—
|
|
|
|
|
858
|
|
|
Severance associated with cost reduction initiatives
|
|
|
5,156
|
|
|
|
|
362
|
|
|
Adjusted operating earnings
|
$
|
|
40,178
|
|
|
$
|
|
23,167
|
|
|
Reconciliation of operating earnings (loss) to adjusted operating earnings (loss) by segment:
|
|
|
Food Distribution:
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
$
|
|
11,390
|
|
|
$
|
|
24,592
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Merger/acquisition and integration
|
|
|
—
|
|
|
|
|
(130
|
)
|
|
Restructuring, asset impairment and other charges (gains)
|
|
|
9,222
|
|
|
|
|
(6,343
|
)
|
|
Fresh Cut operating losses
|
|
|
2,262
|
|
|
|
|
—
|
|
|
Costs associated with Project One Team
|
|
|
265
|
|
|
|
|
2,448
|
|
|
Organizational realignment costs
|
|
|
—
|
|
|
|
|
455
|
|
|
Severance associated with cost reduction initiatives
|
|
|
3,180
|
|
|
|
|
324
|
|
|
Adjusted operating earnings
|
$
|
|
26,319
|
|
|
$
|
|
21,346
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
$
|
|
12,645
|
|
|
$
|
|
(826
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Merger/acquisition and integration
|
|
|
—
|
|
|
|
|
912
|
|
|
Restructuring charges and asset impairment
|
|
|
1,015
|
|
|
|
|
681
|
|
|
Costs associated with Project One Team
|
|
|
164
|
|
|
|
|
1,570
|
|
|
Organizational realignment costs
|
|
|
—
|
|
|
|
|
292
|
|
|
Severance associated with cost reduction initiatives
|
|
|
1,451
|
|
|
|
|
29
|
|
|
Adjusted operating earnings
|
$
|
|
15,275
|
|
|
$
|
|
2,658
|
|
|
Military:
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
$
|
|
(2,005
|
)
|
|
$
|
|
(1,557
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Costs associated with Project One Team
|
|
|
64
|
|
|
|
|
600
|
|
|
Organizational realignment costs
|
|
|
—
|
|
|
|
|
111
|
|
|
Severance associated with cost reduction initiatives
|
|
|
525
|
|
|
|
|
9
|
|
|
Adjusted operating loss
|
$
|
|
(1,416
|
)
|
|
$
|
|
(837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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.
23
Adjusted earnings from continuing operations is not a measure of performance under accounting principles generally accepted in the United States of America and should not be considered as a substitute for net earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definition of adjusted earnings from continuing operations may not be identical to similarly titled measures reported by other companies.
Following is a reconciliation of earnings from continuing operations to adjusted earnings from continuing operations for the 16 weeks ended April 18, 2020 and April 20, 2019.
|
|
16 Weeks Ended
|
|
|
|
|
April 18, 2020
|
|
|
April 20, 2019
|
|
|
|
|
|
|
|
per diluted
|
|
|
|
|
|
per diluted
|
|
|
|
(In thousands, except per share amounts)
|
Earnings
|
|
|
share
|
|
|
Earnings
|
|
|
share
|
|
|
|
Earnings from continuing operations
|
$
|
|
15,402
|
|
|
$
|
|
0.43
|
|
|
$
|
|
7,521
|
|
|
$
|
|
0.21
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger/acquisition and integration
|
|
|
—
|
|
|
|
|
|
|
|
|
|
782
|
|
|
|
|
|
|
|
|
Restructuring, asset impairment and other charges (gains)
|
|
|
10,237
|
|
|
|
|
|
|
|
|
|
(5,662
|
)
|
|
|
|
|
|
|
|
Fresh Cut operating losses
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Costs associated with Project One Team
|
|
|
493
|
|
|
|
|
|
|
|
|
|
4,618
|
|
|
|
|
|
|
|
|
Organizational realignment costs
|
|
|
—
|
|
|
|
|
|
|
|
|
|
858
|
|
|
|
|
|
|
|
|
Severance associated with cost reduction initiatives
|
|
|
5,156
|
|
|
|
|
|
|
|
|
|
362
|
|
|
|
|
|
|
|
|
Pension termination
|
|
|
(1,004
|
)
|
|
|
|
|
|
|
|
|
353
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
17,144
|
|
|
|
|
|
|
|
|
|
1,311
|
|
|
|
|
|
|
|
|
Income tax effect on adjustments (a)
|
|
|
(4,095
|
)
|
|
|
|
|
|
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
Impact of CARES Act (b)
|
|
|
(4,345
|
)
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Total adjustments, net of taxes
|
|
|
8,704
|
|
|
|
|
0.24
|
|
|
|
|
1,007
|
|
|
|
|
0.03
|
|
|
|
Adjusted earnings from continuing operations
|
$
|
|
24,106
|
|
|
$
|
|
0.67
|
|
|
$
|
|
8,528
|
|
|
$
|
|
0.24
|
|
|
|
|
(a)
|
The income tax effect on adjustments is computed by applying the effective tax rate, before discrete tax items, to the total adjustments for the period.
|
|
|
(b)
|
Represents tax impacts attributable to the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, primarily related to additional deductions and the utilization of net operating loss carryback.
|
24
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 to adjusted EBITDA for the 16 weeks ended April 18, 2020 and April 20, 2019.
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 18, 2020
|
|
|
April 20, 2019
|
|
|
Net earnings
|
$
|
|
15,402
|
|
|
$
|
|
7,469
|
|
|
Loss from discontinued operations, net of tax
|
|
|
—
|
|
|
|
|
52
|
|
|
Income tax expense
|
|
|
31
|
|
|
|
|
2,624
|
|
|
Other expenses, net
|
|
|
6,597
|
|
|
|
|
12,064
|
|
|
Operating earnings
|
|
|
22,030
|
|
|
|
|
22,209
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
1,583
|
|
|
|
|
1,425
|
|
|
Depreciation and amortization
|
|
|
27,656
|
|
|
|
|
26,632
|
|
|
Merger/acquisition and integration
|
|
|
—
|
|
|
|
|
782
|
|
|
Restructuring, asset impairment and other charges (gains)
|
|
|
10,237
|
|
|
|
|
(5,662
|
)
|
|
Fresh Cut operating losses
|
|
|
2,262
|
|
|
|
|
—
|
|
|
Stock-based compensation
|
|
|
2,243
|
|
|
|
|
5,383
|
|
|
Non-cash rent
|
|
|
(1,594
|
)
|
|
|
|
(1,918
|
)
|
|
Costs associated with Project One Team
|
|
|
493
|
|
|
|
|
4,618
|
|
|
Organizational realignment costs
|
|
|
—
|
|
|
|
|
858
|
|
|
Severance associated with cost reduction initiatives
|
|
|
5,156
|
|
|
|
|
362
|
|
|
Loss (gain) on disposal of assets
|
|
|
3,911
|
|
|
|
|
(3
|
)
|
|
Other non-cash charges (gains)
|
|
|
1
|
|
|
|
|
(17
|
)
|
|
Adjusted EBITDA
|
$
|
|
73,978
|
|
|
$
|
|
54,669
|
|
25
Following is a reconciliation of operating earnings (loss) to adjusted EBITDA by segment for the 16 weeks ended April 18, 2020 and April 20, 2019.
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 18, 2020
|
|
|
April 20, 2019
|
|
|
Food Distribution:
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
$
|
|
11,390
|
|
|
$
|
|
24,592
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
794
|
|
|
|
|
703
|
|
|
Depreciation and amortization
|
|
|
10,183
|
|
|
|
|
10,233
|
|
|
Merger/acquisition and integration
|
|
|
—
|
|
|
|
|
(130
|
)
|
|
Restructuring, asset impairment and other charges (gains)
|
|
|
9,222
|
|
|
|
|
(6,343
|
)
|
|
Fresh Cut operating losses
|
|
|
2,262
|
|
|
|
|
—
|
|
|
Stock-based compensation
|
|
|
1,005
|
|
|
|
|
2,676
|
|
|
Non-cash rent
|
|
|
58
|
|
|
|
|
57
|
|
|
Costs associated with Project One Team
|
|
|
265
|
|
|
|
|
2,448
|
|
|
Organizational realignment costs
|
|
|
—
|
|
|
|
|
455
|
|
|
Severance associated with cost reduction initiatives
|
|
|
3,180
|
|
|
|
|
324
|
|
|
Loss (gain) on disposal of assets
|
|
|
2,140
|
|
|
|
|
(5
|
)
|
|
Other non-cash gains
|
|
|
(1
|
)
|
|
|
|
—
|
|
|
Adjusted EBITDA
|
$
|
|
40,498
|
|
|
$
|
|
35,010
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
$
|
|
12,645
|
|
|
$
|
|
(826
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
343
|
|
|
|
|
344
|
|
|
Depreciation and amortization
|
|
|
13,756
|
|
|
|
|
12,802
|
|
|
Merger/acquisition and integration
|
|
|
—
|
|
|
|
|
912
|
|
|
Restructuring charges and asset impairment
|
|
|
1,015
|
|
|
|
|
681
|
|
|
Stock-based compensation
|
|
|
750
|
|
|
|
|
1,853
|
|
|
Non-cash rent
|
|
|
(1,534
|
)
|
|
|
|
(1,853
|
)
|
|
Costs associated with Project One Team
|
|
|
164
|
|
|
|
|
1,570
|
|
|
Organizational realignment costs
|
|
|
—
|
|
|
|
|
292
|
|
|
Severance associated with cost reduction initiatives
|
|
|
1,451
|
|
|
|
|
29
|
|
|
Loss on disposal of assets
|
|
|
1,805
|
|
|
|
|
36
|
|
|
Other non-cash gains
|
|
|
—
|
|
|
|
|
(22
|
)
|
|
Adjusted EBITDA
|
$
|
|
30,395
|
|
|
$
|
|
15,818
|
|
|
Military:
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
$
|
|
(2,005
|
)
|
|
$
|
|
(1,557
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
446
|
|
|
|
|
378
|
|
|
Depreciation and amortization
|
|
|
3,717
|
|
|
|
|
3,597
|
|
|
Stock-based compensation
|
|
|
488
|
|
|
|
|
854
|
|
|
Non-cash rent
|
|
|
(118
|
)
|
|
|
|
(122
|
)
|
|
Costs associated with Project One Team
|
|
|
64
|
|
|
|
|
600
|
|
|
Organizational realignment costs
|
|
|
—
|
|
|
|
|
111
|
|
|
Severance associated with cost reduction initiatives
|
|
|
525
|
|
|
|
|
9
|
|
|
Gain on disposal of assets
|
|
|
(34
|
)
|
|
|
|
(34
|
)
|
|
Other non-cash charges
|
|
|
2
|
|
|
|
|
5
|
|
|
Adjusted EBITDA
|
$
|
|
3,085
|
|
|
$
|
|
3,841
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Liquidity and Capital Resources
Cash Flow Information
The following table summarizes the Company’s consolidated statements of cash flows:
|
|
|
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
|
|
|
April 18, 2020
|
|
|
April 20, 2019
|
|
|
Cash flow activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
$
|
|
129,296
|
|
|
$
|
|
13,519
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
(13,951
|
)
|
|
|
|
(87,225
|
)
|
|
Net cash (used in) provided by financing activities
|
|
|
|
|
|
(118,262
|
)
|
|
|
|
76,567
|
|
|
Net cash used in discontinued operations
|
|
|
|
|
|
—
|
|
|
|
|
(86
|
)
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
|
|
|
(2,917
|
)
|
|
|
|
2,775
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
|
|
|
24,172
|
|
|
|
|
18,585
|
|
|
Cash and cash equivalents at end of the period
|
|
|
|
$
|
|
21,255
|
|
|
$
|
|
21,360
|
|
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 $115.8 million and was primarily due to an increase in cash generated from earnings and changes in working capital largely associated with the COVID-19 pandemic.
Net cash used in investing activities. Net cash used in investing activities decreased $73.3 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 $17.9 in the current year compared to $16.0 million in the prior year. The Company expects full fiscal year 2020 capital expenditures to range from $80.0 million to $90.0 million. The Food Distribution, Retail and Military segments utilized 39.2%, 53.6% and 7.2% of capital expenditures, respectively, in the current year.
Net cash used in financing activities. Net cash used in financing activities increased $194.8 million in the current year compared to the prior year primarily due to payment of debt balances in the current year, which were funded from cash provided by operating activities, and borrowings to fund the Martin’s acquisition in the prior year.
Debt Management
Total debt, including finance lease liabilities, was $597.3 million and $688.6 million as of April 18, 2020 and December 28, 2019, respectively. The decrease in total debt was due to increased payments 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 April 18, 2020, the senior secured credit facility had outstanding borrowings of $549.4 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 $317.2 million at April 18, 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 $11.7 million were outstanding as of April 18, 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 1.54-to-1 at April 18, 2020 compared to 1.76-to-1 at December 28, 2019, and its investment in working capital was $368.9 million at April 18, 2020 compared to $431.5 million at December 28, 2019. Net debt to total capital ratio was 0.46-to-1 at April 18, 2020 compared to 0.49-to-1 at December 28, 2019.
27
Net long-term debt is a non-GAAP financial measure that is defined as long-term debt and finance lease liabilities, plus current maturities of long-term debt and finance lease liabilities, less cash and cash equivalents. The ratio of net debt to capital is a non-GAAP financial measure that is calculated by dividing net debt, as defined previously, by total capital (net debt plus total shareholders’ equity). The Company believes both management and its investors find the information useful because it reflects the amount of long-term debt obligations that are not covered by available cash and temporary investments. Total net debt is not a substitute for GAAP financial measures and may differ from similarly titled measures of other companies.
Following is a reconciliation of “Long-term debt and finance lease liabilities” to Net long-term debt as of April 18, 2020 and December 28, 2019.
|
|
April 18,
|
|
|
December 28,
|
|
|
(In thousands)
|
2020
|
|
|
2019
|
|
|
Current portion of long-term debt and finance lease liabilities
|
$
|
|
6,157
|
|
|
$
|
|
6,349
|
|
|
Long-term debt and finance lease liabilities
|
|
|
591,097
|
|
|
|
|
682,204
|
|
|
Total debt
|
|
|
597,254
|
|
|
|
|
688,553
|
|
|
Cash and cash equivalents
|
|
|
(21,255
|
)
|
|
|
|
(24,172
|
)
|
|
Net long-term debt
|
$
|
|
575,999
|
|
|
$
|
|
664,381
|
|
For information on contractual obligations, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2019. At April 18, 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 April 18, 2020, the Company declared $7.0 million quarterly dividends and returned $10.0 million to shareholders in the form of share repurchases. 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 April 18, 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 $11.7 million as of April 18, 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.