ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q, the information contained under the caption “Forward-Looking Statements,” which appears at the beginning of this report, and the information in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
Overview
SpartanNash, headquartered in Grand Rapids, Michigan, is a leading multi-regional grocery distributor and grocery retailer whose core businesses include distributing grocery products to a diverse group of independent and chain retailers, its corporate owned retail stores, military commissaries and exchanges in the United States, as well as premier fresh produce distribution and fresh food processing. The Company operates three reportable business segments: Food Distribution, Military and Retail. The Company serves customers in all 50 states.
The Company’s Food Distribution segment provides a wide variety of nationally branded and private brand grocery products and perishable food products to approximately 2,100 independent retail locations, the Company’s corporate owned retail stores, food service distributors and other customers. The Food Distribution segment primarily conducts business in the Midwest and Southeast regions of the United States. The Company processes fresh-cut fruits and vegetables and other value-added meal solutions and supplies these products to grocery retailers and food service distributors. Through the Fresh Kitchen facility, the Company processes, cooks and packages fresh protein-based foods and complete meal solutions for a number of different customers.
17
The Company’s Mi
litary segment contracts with manufacturers to distribute a wide variety of grocery products primarily to military commissaries and exchanges located in the United States, the District of Columbia, Europe, Cuba, Puerto Rico,
Honduras,
Bahrain, Djibouti and
Egypt. The Company has over 40 years of experience acting as a distributor to U.S. military commissaries and exchanges. The Company is the exclusive worldwide supplier of private brand products to U.S. military commissaries and is continuing to partner wi
th DeCA in the rollout of private brand products to military commissaries which began during the second quarter of fiscal 2017.
At the end of the first quarter, the Company’s Retail segment operated 159 corporate owned retail stores in the Midwest region primarily under the banners of
Family Fare, Martin’s Super Markets, VG’s Food and Pharmacy, D&W Fresh Markets, Sun Mart
and
Family Fresh Market.
The Company also offers pharmacy services in 99 of its corporate owned retail stores and operates 37 fuel centers. The retail stores have a “neighborhood market” focus to distinguish them from supercenters and limited assortment stores.
All fiscal quarters are 12 weeks, except for the Company’s first quarter, which is 16 weeks and will generally include the Easter holiday. The fourth quarter includes the Thanksgiving and Christmas holidays, and depending on the fiscal year end, may include the New Year’s holiday.
In certain geographic areas, the Company’s sales and operating performance may vary with seasonality. Many stores are dependent on tourism and therefore, are most affected by seasons and weather patterns, including, but not limited to, the amount and timing of snowfall during the winter months and the range of temperature during the summer months.
2019 First Quarter Highlights
During the quarter ended April 20, 2019, the Company made significant progress on its strategic objectives and better positioned itself for long-term growth and profitability. In line with its strategic objective to achieve mid-single digit sales growth, the Company realized an increase in consolidated net sales of 6.6% compared with the quarter ended April 21, 2018. The increase in net sales for the quarter was driven by the acquisition of Martin’s Super Markets, Inc. (“Martin’s”), as well as sales growth in the Food Distribution and Military Distribution segments. The Company remains focused on its other top objectives for the current year, including strengthening its management team, systems and supply chain operations, generating
improvements through its Project One Team initiative, and reducing its debt, working capital and financial leverage ratios, which will all contribute to improved growth in adjusted operating earnings and adjusted EBITDA.
First quarter 2019 operational highlights include:
|
|
•
|
The Food Distribution segment realized sales growth of 1.2% compared to the prior year quarter. Before the impact of the elimination of intercompany sales to Martin’s, sales increased 5.2%, driven largely by sales to existing customers. The Company remains focused on partnering with independent retailers to support their operations and enhance the consumer experience.
|
|
|
•
|
Late in the first quarter, the Company initiated a voluntary product recall for fresh-cut melon products produced at the Caito facility in Indianapolis, Indiana due to potential contamination. In connection with the recall, the Company temporarily suspended production of the recalled products. The Company remains focused on product quality and safety throughout the organization and specifically within its fresh cut fruit and vegetable operations. Testing was performed within the manufacturing environment by third party food safety experts as well as the Food and Drug Administration (“FDA”) and no evidence of contamination was detected, a process which included over 1,000 tests among the various parties. The Company is working to implement additional testing of incoming product to further enhance its food safety protocols.
|
|
|
•
|
The Military segment continued to support DeCA in the expansion of its private brand program, which contributed to sales growth in the quarter. The Company also gained incremental sales with an existing customer which offset the challenges of operating in a commissary environment which continues to experience
negative sales trends.
|
|
|
•
|
The Company made significant improvements in the performance of one distribution center that experienced operational issues in late 2018 and into the beginning of 2019. The Company has made key leadership changes and implemented enhancements to its processes and controls. By the end of the first quarter, the distribution center’s performance was stabilized, and customer service metrics and profitability returned to acceptable levels.
|
|
|
•
|
The Company made significant progress in its execution of strategic investments in the Retail segment in connection with the implementation of the Company’s new retail brand positioning. Subsequent to the end of the first quarter, the Company unveiled the remodel of 18 stores in Michigan. The Company expects to begin realizing the benefit of these investments in the second half of 2019. These investments support the Company’s objectives related to brand repositioning and it expects that they will help improve customer satisfaction and contribute to the achievement of sequential improvement in fiscal 2019 comparable store sales.
|
18
|
|
•
|
The Company
closed on the acquisition of
Martin’s in early 2019. Martin’s is a leading Midwest independent supermarket chain which operates 21 stores in northern Indiana and
southwestern Michigan. The acquisition of Martin’s has contributed to an increase in sales and operating earnings for the Retail segment
and will continue to complement the Company’s existing retail initiatives
.
|
|
|
•
|
The Company continued its partnership with a third-party advisory firm on a company-wide initiative, Project One Team, designed to transform its culture and empower associates at all levels to drive substantial ongoing, sustainable improvements to business processes and results. The Company set an initial goal to realize an annual run rate of at least $15 million in savings over the next 24 months from this initiative. The Company is on its way to exceeding this objective by identifying over $20 million in annual run rate savings opportunities, which the Company will implement over the
next 24 months.
The effect of implementing these opportunities is not currently expected to be material to earnings in 2019.
|
|
|
•
|
During the first quarter, the Company appointed a new Chief Merchandising and Marketing Officer, Chief Information Officer and several other key additions throughout the IT and supply chain operations. Other strategic additions to the management team at various levels are in process as part of a previously announced plan to strengthen the management team, systems and supply chain operations.
|
|
|
•
|
Adjusted for the funding of the Martin’s acquisition, the Company paid down over $20 million in debt in the first quarter of fiscal 2019. The Company also reduced its inventory levels by over 2% from the first quarter of fiscal 2018, without negatively impacting customer service levels, despite continued sales growth. The Company will continue to focus on debt and working capital improvements for the remainder of fiscal 2019.
|
For the remainder of 2019, the Company expects Food Distribution to achieve low- to mid-single digit sales growth driven by existing customers and new business, partially offset by some attrition in the independent retail base. This expectation excludes the impact of the elimination of intercompany sales related to the acquisition of the Martin’s business, estimated to be approximately $150 to $170 million. In the Military segment, the Company expects that new business within the segment, including continued private brand growth, will largely offset the negative DeCA comparable sales trend. Within the Retail segment, the Company expects total sales will increase due to the acquisition of Martin’s and the significant current year implementation of the Company’s brand positioning, partly offset by the impact of store rationalization plans. Martin’s is expected to contribute approximately $475 million to $500 million in Retail segment net sales. From a profitability perspective, the expected net sales increases will be offset by challenges primarily within the supply chain environment, which will require the Company to navigate historically tight labor markets and a higher cost of transportation. The Company also expects less contribution from the fresh kitchen operations than initially anticipated and has engaged outside consultants to work with the SpartanNash team to generate profitability in this business. The unfavorable impact of these operations in the Food Distribution segment and in the Company’s consolidated results has been significant and, as such, the improvement opportunities are key to the Company’s objectives in the current year.
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 20, 2019
|
|
|
April 21, 2018
|
|
|
April 20, 2019
|
|
|
Net sales
|
|
100.0
|
|
|
|
100.0
|
|
|
|
6.6
|
|
|
Gross profit
|
|
14.9
|
|
|
|
14.4
|
|
|
|
10.1
|
|
|
Selling, general and administrative expenses
|
|
14.2
|
|
|
|
13.0
|
|
|
|
16.6
|
|
|
Merger/acquisition and integration
|
|
—
|
|
|
|
0.1
|
|
|
|
(64.6
|
)
|
|
Restructuring (gains) charges and asset impairment
|
|
(0.2
|
)
|
|
|
0.3
|
|
|
|
(191.3
|
)
|
|
Operating earnings
|
|
0.9
|
|
|
|
1.1
|
|
|
|
(13.7
|
)
|
|
Other income and expenses
|
|
0.5
|
|
|
|
0.4
|
|
|
|
41.0
|
|
|
Earnings before income taxes and discontinued operations
|
|
0.4
|
|
|
|
0.7
|
|
|
|
(41.0
|
)
|
|
Income tax expense
|
|
0.1
|
|
|
|
0.2
|
|
|
|
(44.9
|
)
|
|
Earnings from continuing operations
|
|
0.3
|
|
|
|
0.5
|
|
|
|
(39.5
|
)
|
|
Loss from discontinued operations, net of taxes
|
|
—
|
|
|
|
—
|
|
|
**
|
|
|
Net earnings
|
|
0.3
|
|
|
|
0.5
|
|
|
|
(39.5
|
)
|
Note: Certain totals do not sum due to rounding.
** Not meaningful
19
Net Sales
–
The following table presents net sales by segment and variances in net sales:
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 20, 2019
|
|
|
April 21, 2018
|
|
|
Variance
|
|
|
Food Distribution
|
$
|
|
1,169,238
|
|
|
$
|
|
1,155,211
|
|
|
$
|
|
14,027
|
|
|
Military
|
|
|
671,370
|
|
|
|
|
663,620
|
|
|
|
|
7,750
|
|
|
Retail
|
|
|
701,767
|
|
|
|
|
566,242
|
|
|
|
|
135,525
|
|
|
Total net sales
|
$
|
|
2,542,375
|
|
|
$
|
|
2,385,073
|
|
|
$
|
|
157,302
|
|
Net sales for the quarter ended April 20, 2019 (“first quarter”) increased $157.3 million, or 6.6%, to $2.54 billion from $2.39 billion in the quarter ended April 21, 2018 (“prior year quarter”). The increases were driven primarily by incremental sales from the Martin’s acquisition and organic growth from existing customers in the Food Distribution and Military segments, which more than offset lower organic sales in the Retail segment.
Food Distribution net sales, after intercompany eliminations, increased $14.0 million, or 1.2%, to $1.17 billion in the first quarter from $1.16 billion in the prior year quarter. Before the impact of the elimination of sales to Martin’s, which became a corporate owned retail store following the acquisition of Martin’s at the beginning of 2019, sales grew 5.2%.
Military net sales increased $7.8 million, or 1.2%, to $671.4 million in the first quarter from $663.6 million in the prior year quarter. The increase was primarily due to incremental volume from new business with an existing customer that commenced late in the fourth quarter of 2018 and growth in DeCA’s private brand program, partially offset by lower comparable sales at DeCA operated locations.
Retail net sales increased $135.5 million, or 23.9%, to $701.8 million in the first quarter from $566.2 million in the prior year quarter. The increase in net sales was primarily attributable to incremental sales from the Martin’s acquisition. Excluding the impact of Martin’s, sales decreased 3.0%, as a result of store closures and a decrease in fuel prices per gallon. Comparable store sales, excluding fuel, decreased 0.3% for the quarter and reflect continued strong competition within the industry. The Company defines a retail store as comparable when it is in operation for 14 accounting periods (a period equals four weeks), regardless of remodels, expansions or relocated stores. The Company’s definition of comparable store sales may differ from similarly titled measures at other companies.
Gross Profit
– Gross profit represents net sales less cost of sales, which for all non-production operations includes purchase costs, in-bound freight, physical inventory adjustments, markdowns and promotional allowances and excludes warehousing costs, depreciation and other administrative expenses. For the Company’s food processing operations, cost of sales includes direct product and production costs, inbound freight, purchasing and receiving costs, utilities, depreciation, and other indirect production costs and excludes out-bound freight and other administrative expenses. The Company’s gross profit definition may not be identical to similarly titled measures reported by other companies. Vendor allowances that relate to the buying and merchandising activities consist primarily of promotional allowances, which are generally allowances on purchased quantities and, to a lesser extent, slotting allowances, which are billed to vendors for the Company’s merchandising costs, such as setting up warehouse infrastructure. Vendor allowances are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms. The distribution segments include shipping and handling costs in the Selling, general and administrative section of operating expenses in the consolidated statements of earnings.
Gross profit increased $34.5 million, or 10.1%, to $377.7 million in the first quarter from $343.2 million in the prior year quarter. As a percent of net sales, gross profit was 14.9% compared to 14.4% in the prior year quarter. As a percent of net sales, the first quarter change in gross margin was primarily due to the acquisition of Martin’s, partially offset by lower margin rates in the Food Distribution and Retail segments..
Selling, General and Administrative Expenses
– Selling, general and administrative (“SG&A”) expenses consist primarily of salaries and wages, employee benefits, warehousing costs, store occupancy costs, shipping and handling, utilities, equipment rental, depreciation (to the extent not included in Cost of sales), out-bound freight and other administrative expenses.
SG&A expenses increased to $360.4 million in the first quarter from $309.1 million in the prior year quarter, representing 14.2% of net sales in the first quarter compared to 13.0% in the prior year quarter. The increase in expenses as a rate of sales compared to the prior year quarter was primarily due to an increase in the mix of Retail segment operations with the acquisition of Martin’s, one-time costs associated with Project One Team, as well as higher supply chain costs in both Military and Food Distribution segments.
Merger/Acquisition and Integration
– First quarter and prior year quarter results included $0.8 million and $2.2 million of merger/acquisition and integration expenses, respectively, mainly associated with the acquisition and integration of Martin’s in the current year quarter and the
integration of Spartan Stores, Inc. and Nash-Finch Company
in the prior year quarter.
20
Restructuring
(Gains)
Charges and Asset Impairment –
First
quarter
results included
gains of $5.7 million and prior year quarter results included
charges
of
$
6
.2 million
of
net restructuring and asset impairment
.
The current year amount consists primarily of gains on the sale of a previously closed distribution center, partially offset by store and distribution center closing charges and t
h
e prior year
amount include
s
charges
associated with the Company’s retail store rationalization plans
as well as the impairment of certain warehouse equipment
.
Operating Earnings (Loss)
–
The following table presents operating earnings (loss) by segment and variances in operating earnings (loss):
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 20, 2019
|
|
|
April 21, 2018
|
|
|
Variance
|
|
|
Food Distribution
|
$
|
|
24,592
|
|
|
$
|
|
24,521
|
|
|
$
|
|
71
|
|
|
Military
|
|
|
(1,557
|
)
|
|
|
|
1,513
|
|
|
|
|
(3,070
|
)
|
|
Retail
|
|
|
(826
|
)
|
|
|
|
(286
|
)
|
|
|
|
(540
|
)
|
|
Total operating earnings
|
$
|
|
22,209
|
|
|
$
|
|
25,748
|
|
|
$
|
|
(3,539
|
)
|
Operating earnings decreased $3.5 million to $22.2 million in the first quarter from $25.7 million in the prior year quarter. The decrease was primarily attributable to lower Food Distribution and Retail margin rates, higher supply chain costs and one-time expenses associated with the Project One Team initiative, partially offset by favorable restructuring gains and the incremental earnings from the Martin’s business.
Food Distribution operating earnings increased $0.1 million, or 0.3%, to $24.6 million in the first quarter from $24.5 million in the prior year quarter. The increase in reported operating earnings was primarily attributable to higher sales volumes and the gain on the sale of real property for a previously closed site, offset by lower margin rates and higher supply chain costs, one-time costs associated with Project One Team as well as severance and organizational realignment costs.
Military operating earnings decreased $3.1 million, or 202.9%, to a $1.6 million operating loss in the first quarter from $1.5 million in operating earnings in the prior year quarter. The decrease for the quarter was primarily attributable to operational issues at one distribution center and increases in other transportation and warehousing costs as well as one-time costs associated with Project One Team and organizational realignment costs. The decrease was partially offset by improvement in gross margin.
Retail operating loss increased $0.5 million to $0.8 million in the first quarter from $0.3 million in the prior year quarter. The decrease in operating earnings was primarily attributable to lower supermarket margin rates, the allocation of one-time costs associated with Project One Team, higher healthcare costs, merger/acquisition and integration expenses related to the Martin’s acquisition and higher fees paid to pharmacy benefit managers. Offsetting these items were the contribution of the acquired Martin’s stores, lower rent expense due to the adoption of the new lease accounting standard and the favorable impact of closing underperforming stores.
Interest Expense
– Interest expense increased $3.1 million, or 35.3%, to $11.9 million in the first quarter from $8.8 million in the prior year quarter.
The increase in interest expense was primarily due to an increase in interest rates compared to the prior year and incremental borrowings to fund the Martin’s acquisition.
Income Taxes
– The effective income tax rate was 25.9% and 27.7% for the first quarter and prior year quarter, respectively. The difference from the federal statutory rate in both years is primarily due to state taxes and stock-based compensation. The tax impacts of stock-based compensation are primarily realized in the first quarter due to the timing of awards and vesting schedules.
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with GAAP, the Company also provides information regarding adjusted operating earnings, adjusted earnings from continuing operations, and Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“adjusted EBITDA”). These are non-GAAP financial measures, as defined below, and are used by management to allocate resources, assess performance against its peers and evaluate overall performance. The Company believes these measures provide useful information for both management and its investors. The Company believes these non-GAAP measures are useful to investors because they provide additional understanding of the trends and special circumstances that affect its business. These measures provide useful supplemental information that helps investors to establish a basis for expected performance and the ability to evaluate actual results against that expectation. The measures, when considered in connection with GAAP results, can be used to assess the overall performance of the Company as well as assess the Company’s performance against its peers. These measures are also used as a basis for certain compensation programs sponsored by the Company. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its financial results in these adjusted formats.
21
Current year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA ex
clude 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 dri
ve growth while increasing efficiency and reducing costs
. These items are considered “non-operational” or “non-core” in nature.
Prior
year adjusted operating earnings, adjusted earnings from continuing operations, and adjusted EBITDA exclude start-up costs
associated with the Fresh Kitchen operation, which concluded during the first quarter
of 2018
. The Fresh Kitchen
represented a new line of business for the Company, and
provides the Company with the ability to process, cook, and package fresh protein-based foods and complete meal solutions.
Adjusted Operating Earnings
Adjusted operating earnings is a non-GAAP operating financial measure that the Company defines as operating earnings plus or minus adjustments for items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations.
The Company believes that adjusted operating earnings provide a meaningful representation of its operating performance for the Company as a whole and for its operating segments. The Company considers adjusted operating earnings as an additional way to measure operating performance on an ongoing basis. Adjusted operating earnings is meant to reflect the ongoing operating performance of all of its distribution and retail operations; consequently, it excludes the impact of items that could be considered “non-operating” or “non-core” in nature and also excludes the contributions of activities classified as discontinued operations. Because adjusted operating earnings and adjusted operating earnings by segment are performance measures that management uses to allocate resources, assess performance against its peers and evaluate overall performance, the Company believes it provides useful information for both management and its investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with the Company request its operating financial results in adjusted operating earnings format.
Adjusted operating earnings is not a measure of performance under accounting principles generally accepted in the United States of America (“GAAP”) and should not be considered as a substitute for operating earnings, cash flows from operating activities and other income or cash flow statement data. The Company’s definition of adjusted operating earnings may not be identical to similarly titled measures reported by other companies.
22
Following is a reconcilia
tion of operating earnings to adjusted operating earnings for the 1
6
weeks ended
April 20
, 201
9
and
April 21
, 201
8
.
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 20, 2019
|
|
|
April 21, 2018
|
|
|
Operating earnings
|
$
|
|
22,209
|
|
|
$
|
|
25,748
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Merger/acquisition and integration
|
|
|
782
|
|
|
|
|
2,206
|
|
|
Restructuring (gains) charges and asset impairment
|
|
|
(5,662
|
)
|
|
|
|
6,202
|
|
|
Fresh Kitchen start-up costs
|
|
|
—
|
|
|
|
|
1,366
|
|
|
Costs associated with Project One Team
|
|
|
4,618
|
|
|
|
|
—
|
|
|
Organizational realignment costs
|
|
|
858
|
|
|
|
|
—
|
|
|
Severance associated with cost reduction initiatives
|
|
|
362
|
|
|
|
|
274
|
|
|
Adjusted operating earnings
|
$
|
|
23,167
|
|
|
$
|
|
35,796
|
|
|
Reconciliation of operating earnings (loss) to adjusted operating earnings (loss) by segment:
|
|
|
Food Distribution:
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
$
|
|
24,592
|
|
|
$
|
|
24,521
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Merger/acquisition and integration
|
|
|
(130
|
)
|
|
|
|
2,195
|
|
|
Restructuring (gains) charges and asset impairment
|
|
|
(6,343
|
)
|
|
|
|
1,260
|
|
|
Fresh Kitchen start-up costs
|
|
|
—
|
|
|
|
|
1,366
|
|
|
Costs associated with Project One Team
|
|
|
2,448
|
|
|
|
|
—
|
|
|
Organizational realignment costs
|
|
|
455
|
|
|
|
|
—
|
|
|
Severance associated with cost reduction initiatives
|
|
|
324
|
|
|
|
|
193
|
|
|
Adjusted operating earnings
|
$
|
|
21,346
|
|
|
$
|
|
29,535
|
|
|
Military:
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings
|
$
|
|
(1,557
|
)
|
|
$
|
|
1,513
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Merger/acquisition and integration
|
|
|
—
|
|
|
|
|
4
|
|
|
Costs associated with Project One Team
|
|
|
600
|
|
|
|
|
—
|
|
|
Organizational realignment costs
|
|
|
111
|
|
|
|
|
—
|
|
|
Severance associated with cost reduction initiatives
|
|
|
9
|
|
|
|
|
52
|
|
|
Adjusted operating (loss) earnings
|
$
|
|
(837
|
)
|
|
$
|
|
1,569
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
$
|
|
(826
|
)
|
|
$
|
|
(286
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Merger/acquisition and integration
|
|
|
912
|
|
|
|
|
7
|
|
|
Restructuring charges and asset impairment
|
|
|
681
|
|
|
|
|
4,942
|
|
|
Costs associated with Project One Team
|
|
|
1,570
|
|
|
|
|
—
|
|
|
Organizational realignment costs
|
|
|
292
|
|
|
|
|
—
|
|
|
Severance associated with cost reduction initiatives
|
|
|
29
|
|
|
|
|
29
|
|
|
Adjusted operating earnings
|
$
|
|
2,658
|
|
|
$
|
|
4,692
|
|
|
|
|
|
|
|
|
|
|
|
|
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 performa
nce 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 measur
es 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 20, 2019 and April 21, 2018.
|
|
16 Weeks Ended
|
|
|
|
|
April 20, 2019
|
|
|
April 21, 2018
|
|
|
|
|
|
|
|
per diluted
|
|
|
|
|
|
per diluted
|
|
|
|
(In thousands, except per share amounts)
|
Earnings
|
|
|
share
|
|
|
Earnings
|
|
|
share
|
|
|
|
Earnings from continuing operations
|
$
|
|
7,521
|
|
|
$
|
|
0.21
|
|
|
$
|
|
12,435
|
|
|
$
|
|
0.34
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger/acquisition and integration
|
|
|
782
|
|
|
|
|
|
|
|
|
|
2,206
|
|
|
|
|
|
|
|
|
Restructuring (gains) charges and asset impairment
|
|
|
(5,662
|
)
|
|
|
|
|
|
|
|
|
6,202
|
|
|
|
|
|
|
|
|
Fresh Kitchen start-up costs
|
|
|
—
|
|
|
|
|
|
|
|
|
|
1,366
|
|
|
|
|
|
|
|
|
Costs associated with Project One Team
|
|
|
4,618
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Organizational realignment costs
|
|
|
858
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Severance associated with cost reduction initiatives
|
|
|
362
|
|
|
|
|
|
|
|
|
|
274
|
|
|
|
|
|
|
|
|
Pension termination
|
|
|
353
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
1,311
|
|
|
|
|
|
|
|
|
|
10,048
|
|
|
|
|
|
|
|
|
Income tax effect on adjustments (a)
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
(2,437
|
)
|
|
|
|
|
|
|
|
Total adjustments, net of taxes
|
|
|
1,007
|
|
|
|
|
0.03
|
|
|
|
|
7,611
|
|
|
|
|
0.21
|
|
|
|
Adjusted earnings from continuing operations
|
$
|
|
8,528
|
|
|
$
|
|
0.24
|
|
|
$
|
|
20,046
|
|
|
$
|
|
0.55
|
|
|
(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.
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 20, 2019 and April 21, 2018.
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 20, 2019
|
|
|
April 21, 2018
|
|
|
Net earnings
|
$
|
|
7,469
|
|
|
$
|
|
12,343
|
|
|
Loss from discontinued operations, net of tax
|
|
|
52
|
|
|
|
|
92
|
|
|
Income tax expense
|
|
|
2,624
|
|
|
|
|
4,760
|
|
|
Other expenses, net
|
|
|
12,064
|
|
|
|
|
8,553
|
|
|
Operating earnings
|
|
|
22,209
|
|
|
|
|
25,748
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
1,425
|
|
|
|
|
1,540
|
|
|
Depreciation and amortization
|
|
|
26,632
|
|
|
|
|
25,018
|
|
|
Merger/acquisition and integration
|
|
|
782
|
|
|
|
|
2,206
|
|
|
Restructuring (gains) charges and asset impairment
|
|
|
(5,662
|
)
|
|
|
|
6,202
|
|
|
Fresh Kitchen start-up costs
|
|
|
—
|
|
|
|
|
1,366
|
|
|
Stock-based compensation
|
|
|
5,383
|
|
|
|
|
5,290
|
|
|
Non-cash rent
|
|
|
(1,918
|
)
|
|
|
|
(77
|
)
|
|
Costs associated with Project One Team
|
|
|
4,618
|
|
|
|
|
—
|
|
|
Organizational realignment costs
|
|
|
858
|
|
|
|
|
—
|
|
|
Other non-cash charges (gains)
|
|
|
342
|
|
|
|
|
(122
|
)
|
|
Adjusted EBITDA
|
$
|
|
54,669
|
|
|
$
|
|
67,171
|
|
25
Following is a reconciliation of operating earnings (loss) to adjusted EBITDA by segment for the 16 weeks ended April 20, 2019 and April 21, 2018.
|
|
16 Weeks Ended
|
|
|
(In thousands)
|
April 20, 2019
|
|
|
April 21, 2018
|
|
|
Food Distribution:
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
$
|
|
24,592
|
|
|
$
|
|
24,521
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
703
|
|
|
|
|
766
|
|
|
Depreciation and amortization
|
|
|
10,233
|
|
|
|
|
9,321
|
|
|
Merger/acquisition and integration
|
|
|
(130
|
)
|
|
|
|
2,195
|
|
|
Restructuring (gains) charges and asset impairment
|
|
|
(6,343
|
)
|
|
|
|
1,260
|
|
|
Fresh Kitchen start-up costs
|
|
|
—
|
|
|
|
|
1,366
|
|
|
Stock-based compensation
|
|
|
2,676
|
|
|
|
|
2,526
|
|
|
Non-cash rent
|
|
|
57
|
|
|
|
|
(22
|
)
|
|
Costs associated with Project One Team
|
|
|
2,448
|
|
|
|
|
—
|
|
|
Organizational realignment costs
|
|
|
455
|
|
|
|
|
—
|
|
|
Other non-cash charges
|
|
|
319
|
|
|
|
|
237
|
|
|
Adjusted EBITDA
|
$
|
|
35,010
|
|
|
$
|
|
42,170
|
|
|
Military:
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) earnings
|
$
|
|
(1,557
|
)
|
|
$
|
|
1,513
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
378
|
|
|
|
|
424
|
|
|
Depreciation and amortization
|
|
|
3,597
|
|
|
|
|
3,678
|
|
|
Merger/acquisition and integration
|
|
|
—
|
|
|
|
|
4
|
|
|
Stock-based compensation
|
|
|
854
|
|
|
|
|
805
|
|
|
Non-cash rent
|
|
|
(122
|
)
|
|
|
|
(1
|
)
|
|
Costs associated with Project One Team
|
|
|
600
|
|
|
|
|
—
|
|
|
Organizational realignment costs
|
|
|
111
|
|
|
|
|
—
|
|
|
Other non-cash gains
|
|
|
(20
|
)
|
|
|
|
(70
|
)
|
|
Adjusted EBITDA
|
$
|
|
3,841
|
|
|
$
|
|
6,353
|
|
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
$
|
|
(826
|
)
|
|
$
|
|
(286
|
)
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
LIFO expense
|
|
|
344
|
|
|
|
|
350
|
|
|
Depreciation and amortization
|
|
|
12,802
|
|
|
|
|
12,019
|
|
|
Merger/acquisition and integration
|
|
|
912
|
|
|
|
|
7
|
|
|
Restructuring charges and asset impairment
|
|
|
681
|
|
|
|
|
4,942
|
|
|
Stock-based compensation
|
|
|
1,853
|
|
|
|
|
1,959
|
|
|
Non-cash rent
|
|
|
(1,853
|
)
|
|
|
|
(54
|
)
|
|
Costs associated with Project One Team
|
|
|
1,570
|
|
|
|
|
—
|
|
|
Organizational realignment costs
|
|
|
292
|
|
|
|
|
—
|
|
|
Other non-cash charges (gains)
|
|
|
43
|
|
|
|
|
(289
|
)
|
|
Adjusted EBITDA
|
$
|
|
15,818
|
|
|
$
|
|
18,648
|
|
|
|
|
|
|
|
|
|
|
|
|
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 20, 2019
|
|
|
April 21, 2018
|
|
|
Cash flow activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
$
|
|
13,519
|
|
|
$
|
|
60,381
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
(87,225
|
)
|
|
|
|
(20,933
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
|
|
|
76,567
|
|
|
|
|
(37,863
|
)
|
|
Net cash used in discontinued operations
|
|
|
|
|
|
(86
|
)
|
|
|
|
(85
|
)
|
|
Net increase in cash and cash equivalents
|
|
|
|
|
|
2,775
|
|
|
|
|
1,500
|
|
|
Cash and cash equivalents at beginning of the period
|
|
|
|
|
|
18,585
|
|
|
|
|
15,667
|
|
|
Cash and cash equivalents at end of the period
|
|
|
|
$
|
|
21,360
|
|
|
$
|
|
17,167
|
|
Net cash provided by operating activities.
Net cash provided by operating activities decreased during the current year-to-date period from the prior year-to-date period by approximately $46.9 million and was primarily
due to the timing of working capital requirements, particularly due to increases in accounts receivable and inventory balances driven by increases in sales volumes, which were partially offset by improvements in accounts payable compared to the prior year.
Net cash used in investing activities.
Net cash used in investing activities increased $66.3 million in the current year compared to the prior year primarily due to the Martin’s acquisition made in the current year quarter, partially offset by proceeds from the sale of real property for a previously closed site and fewer capital expenditures than in the prior year.
The Food Distribution, Military and Retail segments utilized 26.5%, 7.1% and 66.4% of capital expenditures, respectively, in the current year.
Net cash provided by (used in) financing activities.
Net cash provided by financing activities increased $114.4 million in the current year compared to the prior year use of cash primarily due to borrowings on the revolving credit facility to fund the Martin’s acquisition and working capital.
Net cash used in discontinued operations.
Net cash used in discontinued operations contains the net cash flows of the Company’s Retail and Food Distribution discontinued operations and is primarily composed of facility maintenance expenditures.
Debt Management
Total debt, including finance lease liabilities, was $771.1 million and $698.1 million as of April 20, 2019 and December 29, 2018, respectively. The increase in total debt was driven by the current year acquisition of Martin’s, partially offset by payments.
Liquidity
The Company’s principal sources of liquidity are cash flows generated from operations and its senior secured credit facility which has maximum available credit of $1.1 billion. As of April 20, 2019, the senior secured credit facility had outstanding borrowings of $727.7 million. Additional available borrowings under the Company’s $1.1 billion credit facility are based on stipulated advance rates on eligible assets, as defined in the Credit Agreement. The Credit Agreement requires that the Company maintain excess availability of 10% of the borrowing base, as such term is defined in the Credit Agreement. The Company had excess availability after the 10% covenant of $204.7 million at April 20, 2019. Payment of dividends and repurchases of outstanding shares are permitted, provided that certain levels of excess availability are maintained. The credit facility provides for the issuance of letters of credit, of which $13.1 million were outstanding as of April 20, 2019. The revolving credit facility matures December 18, 2023 and is secured by substantially all of the Company’s assets.
The Company believes that cash generated from operating activities and available borrowings under the credit facility will be sufficient to meet anticipated requirements for working capital, capital expenditures, dividend payments, and debt service obligations for the foreseeable future. However, there can be no assurance that the business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the Credit Agreement.
The Company’s current ratio (current assets to current liabilities) was 1.90-to-1 at April 20, 2019 compared to 2.10-to-1 at December 29, 2018, and its investment in working capital was $497.7 million at April 20, 2019 compared to $524.6 million at December 29, 2018. Net debt to total capital ratio was 0.52-to-1 at April 20, 2019 compared to 0.49-to-1 at December 29, 2018. The current year ratios include the impact of the adoption of the new lease standard (ASU 2016-02) and therefore lack comparability to the prior year ratios.
27
Total net debt is a non-GAAP financial measure that is defined as long-term debt and
finance
lease
liabilities
, plus current maturities of long-term debt and
finance
lease
liabilities
, less cash and cash equivalents. The ratio of net debt to capital is a non-GAAP financial measure that is calculated by dividing net debt, as defined previously, by total capital (net debt plus total shareholders’ equity). The Company believes both manage
ment and its investors find the information useful because it reflects the amount of long-term debt obligations that are not covered by available cash and temporary investments. Total net debt is not a substitute for GAAP financial measures and may differ
from similarly titled measures of other companies.
Following is a reconciliation of long-term debt and finance lease liabilities to total net long-term debt and finance lease liabilities as of April 20, 2019 and December 29, 2018.
|
|
April 20,
|
|
|
December 29,
|
|
|
(In thousands)
|
2019
|
|
|
2018
|
|
|
Current portion of long-term debt and finance lease liabilities
|
$
|
|
18,006
|
|
|
$
|
|
18,263
|
|
|
Long-term debt and finance lease liabilities
|
|
|
753,118
|
|
|
|
|
679,797
|
|
|
Total debt
|
|
|
771,124
|
|
|
|
|
698,060
|
|
|
Cash and cash equivalents
|
|
|
(21,360
|
)
|
|
|
|
(18,585
|
)
|
|
Total net long-term debt
|
$
|
|
749,764
|
|
|
$
|
|
679,475
|
|
For information on contractual obligations, see the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018. At April 20, 2019, there have been no material changes to the Company’s significant contractual obligations outside the ordinary course of business.
Cash Dividends
During the quarter ended April 20, 2019, the Company returned $6.9 million to shareholders from dividend payments. A 5.6% increase in the quarterly dividend rate from $0.18 per share to $0.19 per share was approved by the Board of Directors and announced on February 28, 2019. Although the Company expects to continue to pay a quarterly cash dividend, adoption of a dividend policy does not commit the Board of Directors to declare future dividends. Each future dividend will be considered and declared by the Board of Directors at its discretion. Whether the Board of Directors continues to declare dividends depends on a number of factors, including the Company’s future financial condition, anticipated profitability and cash flows and compliance with the terms of its credit facilities.
Under the senior revolving credit facility, the Company is generally permitted to pay dividends in any fiscal year up to an amount such that all cash dividends, together with any cash distributions and share repurchases, do not exceed $35.0 million. Additionally, the Company is generally permitted to pay cash dividends and repurchase shares in excess of $35.0 million in any fiscal year so long as its Excess Availability, as defined in the senior revolving credit facility, is in excess of 10% of the Total Borrowing Base, as defined in the senior revolving credit facility, before and after giving effect to the repurchases and dividends.
Off-Balance Sheet Arrangements
The Company has also made certain commercial commitments that extend beyond April 20, 2019. These commitments consist primarily of purchase commitments (as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 29, 2018), standby letters of credit of $13.1 million as of April 20, 2019, 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. On an ongoing basis, the Company evaluates its estimates, including those related to bad debts, inventories, intangible assets, assets held for sale, long-lived assets, income taxes, self-insurance reserves, restructuring costs, retirement benefits, stock-based compensation, contingencies and litigation. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Based on the Company’s ongoing review, the Company makes adjustments it considers appropriate under the facts and circumstances. This discussion and analysis of the Company’s financial condition and results of operations is based upon the Company’s consolidated financial statements. The Company believes these accounting policies and others set forth in Item 8, Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018 should be reviewed as they are integral to the understanding the Company’s financial condition and results of operations. The Company has discussed the development, selection and disclosure of these accounting policies with the Audit Committee of the Board of Directors. The accompanying financial statements are prepared using the same critical accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
28
Recently Issued Accounting Standards
Refer to Note 2 in the notes to the condensed consolidated financial statements for further information.