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EX-3.1 - RESTATED ARTICLES OF INCORPORATION - SpartanNash Codex31.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - SpartanNash Codex312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - SpartanNash Codex311.htm
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - SpartanNash Codex321.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended January 1, 2011.

OR

 

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

For the transition period from                      to                     .

Commission File Number: 000-31127

 

 

SPARTAN STORES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Michigan   38-0593940

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

850 76th Street, S.W.

P.O. Box 8700

Grand Rapids, Michigan

  49518
(Address of Principal Executive Offices)   (Zip Code)

(616) 878-2000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x            No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨             No  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act)

Yes  ¨             No  x

As of January 31, 2011 the registrant had 22,638,277 outstanding shares of common stock, no par value.

 

 

 


FORWARD-LOOKING STATEMENTS

The matters discussed in this Quarterly Report on Form 10-Q, in our press releases and in our website-accessible conference calls with analysts and investor presentations include “forward-looking statements” about the plans, strategies, objectives, goals or expectations of Spartan Stores, Inc. (together with its subsidiaries, “Spartan Stores”). These forward-looking statements are identifiable by words or phrases indicating that Spartan Stores or management “expects,” “anticipates,” “plans,” “believes,” or “estimates,” is “confident” that a particular occurrence or event “began,” “will,” “may,” “could,” “should” or “will likely” result or occur, or “appears” to have occurred, or will “continue” in the future, that the “outlook” or “trend” is toward a particular result or occurrence, that a development is an “opportunity,” a “priority,” a “strategy,” or “initiative” or similarly stated expectations. Accounting estimates, such as those described under the heading “Critical Accounting Policies” in Part I, Item 2 of this Form 10-Q, are inherently forward-looking. Our asset impairment, restructuring cost provisions and fair value measurements are estimates and actual costs may be more or less than these estimates and differences may be material. You should not place undue reliance on these forward-looking statements, which speak only as of the date of the Quarterly Report, release, presentation, or statement.

In addition to other risks and uncertainties described in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q, Spartan Stores’ Annual Report on Form 10-K for the year ended March 27, 2010 (in particular, you should refer to the discussion of “Risk Factors” in Item 1A of our Annual Report on Form 10-K) and other periodic reports filed with the Securities and Exchange Commission, there are many important factors that could cause actual results to differ materially. Our ability to maintain and improve our retail-store performance; assimilate acquired stores; maintain or grow sales; respond successfully to competitors or changing consumer behavior; maintain or increase gross margin; anticipate and successfully respond to openings of competitors; maintain and improve customer and supplier relationships; realize expected benefits of new relationships; realize growth opportunities; expand our customer base; reduce operating costs; generate cash; continue to meet the terms of our debt covenants; continue to pay dividends; and implement the other programs, initiatives, plans, priorities, strategies, objectives, goals or expectations described in this Quarterly Report, our other reports or presentations, our press releases and our public comments is not certain and will be affected by changes in economic conditions generally or in the markets and geographic areas that we serve, adverse effects of the changing food and distribution industries and other factors including, but not limited to, those discussed below.

Anticipated future sales are subject to competitive pressures from many sources. Our Distribution and Retail businesses compete with many distributors, supercenters, warehouse discount stores, supermarkets and other retail stores selling food and related products, pharmacies and product manufacturers. Future sales will be dependent on the number of retail stores that we own and operate, our ability to retain and add to the retail stores to whom we distribute, competitive pressures in the retail industry generally and our geographic markets specifically, our ability to implement effective new marketing and merchandising programs and unseasonable weather conditions. Competitive pressures in these and other business segments may result in unexpected reductions in sales volumes, product prices or service fees.

Our operating and administrative expenses, and as a result, our net earnings and cash flows, may be adversely affected by changes in costs associated with, among other factors: difficulties in the operation of our business segments; future business acquisitions; adverse effects on business relationships with independent retail grocery store customers; difficulties in the retention or hiring of employees; labor stoppages or disputes; business and asset divestitures; increased transportation or fuel costs; current or future lawsuits and administrative proceedings; and losses or financial difficulties of customers or suppliers. Our future costs for pension and postretirement benefit costs may be adversely affected by changes in actuarial assumptions and methods, investment return and the composition of the group of employees and retirees covered, changes in our business that result in a withdrawal liability under multi-employer plans, and the actions, contributions and financial condition of other employers who participate in multi-employer plans to which we contribute. Our future income tax expense, and as a result, our net earnings and cash flows, could be adversely affected by changes in tax laws and related interpretations. Our accounting estimates could change and the actual effects of changes in accounting principles could deviate from our estimates due to changes in facts, assumptions, or acceptable methods, and actual results may vary materially from our estimates. Our operating and administrative expenses, net earnings and cash flow could also be adversely affected by changes in our sales mix. Our ongoing cost reduction initiatives and changes in our marketing and merchandising programs may not be as successful as anticipated. Acts of terrorism, war, natural disaster, fire, accident, and severe weather may adverse affect the availability of and our ability to operate our warehouses and other facilities, and may adversely affect consumer buying behavior, fuel costs, shipping and transportation costs, product cost inflation or deflation and its impact on LIFO expense. General economic conditions and unemployment, particularly in Michigan, government assistance programs, health care reform, or other circumstances beyond our control, may adversely consumer buying behavior. A combination of the aforementioned factors, coupled with a prolonged general economic recession, could result in goodwill and other long-lived asset impairment charges.

 

-2-


Our future interest expense and income also may differ from current expectations, depending upon, among other factors: the amount of additional borrowings; changes in our borrowing agreements; changes in the interest rate environment; changes in accounting pronouncements; and changes in the amount of fees received or paid. The availability of our secured loan agreement depends on compliance with the terms of the loan agreement and financial stability of the banking community.

Our 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 in its discretion. The ability of the Board of Directors to continue to declare dividends will depend on a number of factors, including our future financial condition and profitability and compliance with the terms of our credit facilities.

This section is intended to provide meaningful cautionary statements. This should not be construed as a complete list of all economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties not currently known to Spartan Stores or that Spartan Stores currently believes are immaterial also may impair its business, operations, liquidity, financial condition and prospects. We undertake no obligation to update or revise our forward-looking statements to reflect developments that occur or information obtained after the date of this Quarterly Report.

 

-3-


PART I

FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

SPARTAN STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

      January 1,
2011
    March 27,
2010
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 25,267      $ 9,170   

Accounts receivable, net

     48,941        54,529   

Inventories, net

     134,588        117,514   

Prepaid expenses and other current assets

     8,720        9,474   

Deferred taxes on income

     1,688        5,508   
                

Total current assets

     219,204        196,195   

Other assets

    

Goodwill

     247,165        247,916   

Other, net

     58,844        61,409   
                

Total other assets

     306,009        309,325   

Property and equipment, net

     238,285        247,961   
                

Total assets

   $ 763,498      $ 753,481   
                

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 122,377      $ 114,549   

Accrued payroll and benefits

     32,585        31,983   

Other accrued expenses

     16,469        20,838   

Current portion of restructuring costs

     5,556        8,877   

Current maturities of long-term debt and capital lease obligations

     4,161        4,209   
                

Total current liabilities

     181,148        180,456   

Long-term liabilities

    

Deferred income taxes

     62,202        49,996   

Postretirement benefits

     15,532        21,060   

Other long-term liabilities

     19,861        19,937   

Restructuring costs

     17,362        27,061   

Long-term debt and capital lease obligations

     170,886        181,066   
                

Total long-term liabilities

     285,843        299,120   

Commitments and contingencies (Note 5)

    

Shareholders’ equity

    

Common stock, voting, no par value; 50,000 shares authorized; 22,632 and 22,450 shares outstanding

     160,701        158,225   

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

     —          —     

Accumulated other comprehensive loss

     (13,987     (12,973

Retained earnings

     149,793        128,653   
                

Total shareholders’ equity

     296,507        273,905   
                

Total liabilities and shareholders’ equity

   $ 763,498      $ 753,481   
                

See accompanying notes to condensed consolidated financial statements.

 

-4-


SPARTAN STORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

 

     16 Weeks Ended     40 Weeks Ended  
     January 1,
2011
    January 2,
2010
    January 1,
2011
    January 2,
2010
 

Net sales

   $ 782,300      $ 786,930      $ 1,961,593      $ 1,993,179   

Cost of sales

     617,493        621,439        1,534,899        1,560,661   
                                

Gross margin

     164,807        165,491        426,694        432,518   

Operating expenses

        

Selling, general and administrative

     150,643        151,098        374,329        381,394   

Restructuring, asset impairment and other

     (2,425     715        340        1,316   
                                

Total operating expenses

     148,218        151,813        374,669        382,710   

Operating earnings

     16,589        13,678        52,025        49,808   

Other income and expenses

        

Interest expense

     4,666        5,188        11,599        12,578   

Other, net

     1        (43     (53     (96
                                

Total other income and expenses

     4,667        5,145        11,546        12,482   
                                

Earnings before income taxes and discontinued operations

     11,922        8,533        40,479        37,326   

Income taxes

     4,452        3,272        15,589        14,724   
                                

Earnings from continuing operations

     7,470        5,261        24,890        22,602   

Loss from discontinued operations, net of taxes

     (162     (232     (356     (280
                                

Net earnings

   $ 7,308      $ 5,029      $ 24,534      $ 22,322   
                                

Basic earnings per share:

        

Earnings from continuing operations

   $ 0.33      $ 0.23      $ 1.10      $ 1.01   

Loss from discontinued operations

     (0.01     (0.01     (0.01     (0.01
                                

Net earnings

   $ 0.32      $ 0.22      $ 1.09      $ 1.00   
                                

Diluted earnings per share:

        

Earnings from continuing operations

   $ 0.33      $ 0.23      $ 1.10      $ 1.01   

Loss from discontinued operations

     (0.01     (0.01     (0.02 )*      (0.02 )* 
                                

Net earnings

   $ 0.32      $ 0.22      $ 1.08      $ 0.99   
                                

Weighted average shares outstanding:

        

Basic

     22,631        22,436        22,599        22,393   

Diluted

     22,710        22,515        22,674        22,468   

 

* includes rounding

See accompanying notes to condensed consolidated financial statements.

 

-5-


SPARTAN STORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

     Shares
Outstanding
    Common
Stock
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
    Total  

Balance – March 27, 2010

     22,450      $ 158,225      $ (12,973   $ 128,653      $ 273,905   

Comprehensive income/loss, net of tax:

          

Net earnings

     —          —          —          24,534        24,534   

Change in fair value of interest rate swap, net of taxes of $237

     —          —          (374     —          (374

Remeasurement of pension liability, net of taxes of $1,138

     —          —          1,802        —          1,802   

Pension curtailment, net of taxes of $1,543

     —          —          (2,442     —          (2,442
                

Total comprehensive income

             23,520   

Dividends – $.15 per share

     —          —          —          (3,394     (3,394

Repurchase of equity component of convertible debt, net of tax

     —          (388     —          —          (388

Stock-based employee compensation

     —          3,584        —          —          3,584   

Issuances of common stock and related tax benefits on stock option exercises

     27        305        —          —          305   

Issuances of restricted stock and related income tax

     222        (71     —          —          (71

Cancellations of restricted stock

     (67     (954     —          —          (954
                                        

Balance – January 1, 2011

     22,632      $ 160,701      $ (13,987   $ 149,793      $ 296,507   
                                        

See accompanying notes to condensed consolidated financial statements.

 

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SPARTAN STORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     40 Weeks Ended  
     January 1,
2011
    January 2,
2010
 

Cash flows from operating activities

    

Net earnings

   $ 24,534      $ 22,322   

Loss from discontinued operations

     356        280   
                

Earnings from continuing operations

     24,890        22,602   

Adjustments to reconcile net earnings to net cash provided by operating activities:

    

Non-cash restructuring, asset impairment and other

     340        1,316   

Non-cash convertible debt interest

     2,647        2,686   

Depreciation and amortization

     27,044        26,908   

LIFO income – warehouse consolidation

     (3,450     —     

LIFO income

     (453     (104

Postretirement benefits expense

     3,220        2,601   

Deferred taxes on income

     16,364        10,995   

Stock-based compensation expense

     3,576        3,797   

Excess tax benefit on stock compensation

     (168     (328

Gain on repurchase of convertible notes

     (69     —     

Other

     102        126   

Change in operating assets and liabilities:

    

Accounts receivable

     5,617        16   

Inventories

     (13,171     (21,803

Prepaid expenses and other assets

     1,392        978   

Accounts payable

     9,935        16,601   

Accrued payroll and benefits

     (147     (5,181

Postretirement benefits payments

     (6,005     (5,249

Other accrued expenses and other liabilities

     (9,214     (1,631
                

Net cash provided by operating activities

     62,450        54,330   

Cash flows from investing activities

    

Purchases of property and equipment

     (25,418     (37,623

Net proceeds from the sale of assets

     64        108   

Acquisitions

     —          (4,821

Other

     (1,121     (1,372
                

Net cash used in investing activities

     (26,475     (43,708

Cash flows from financing activities

    

Proceeds from revolving credit facility

     142,953        408,019   

Payments on revolving credit facility

     (142,953     (409,523

Repurchase of convertible notes

     (10,724     —     

Repayment of other long-term borrowings

     (3,734     (3,067

Excess tax benefit on stock compensation

     168        328   

Proceeds from exercise of stock options

     248        190   

Dividends paid

     (3,394     (3,367
                

Net cash used in financing activities

     (17,436     (7,420

Cash flows from discontinued operations

    

Net cash used in operating activities

     (2,442     (2,559

Net cash provided by investing activities

     —          18   
                

Net cash used in discontinued operations

     (2,442     (2,541
                

Net increase in cash and cash equivalents

     16,097        661   

Cash and cash equivalents at beginning of period

     9,170        6,519   
                

Cash and cash equivalents at end of period

   $ 25,267      $ 7,180   
                

See accompanying notes to condensed consolidated financial statements.

 

-7-


SPARTAN STORES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1

Basis of Presentation and Significant Accounting Policies

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Spartan Stores, Inc. and its subsidiaries (“Spartan Stores”). All significant intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying condensed consolidated financial statements, taken as a whole, contain all adjustments, which are of a normal recurring nature, necessary to present fairly the financial position of Spartan Stores as of January 1, 2011 and the results of its operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

Note 2

Restructuring, Asset Impairment and Other

The quarter’s $2.4 million of income is comprised of pension curtailment income of $4.0 million related to the freezing of Spartan’s cash balance pension plan (see Note 6) and a net benefit of $5.9 million related to favorable lease terminations which caused a reduction in the closed store reserve. This income was partially offset by restructuring and asset impairment charges of $7.4 million. Year-to-date restructuring and asset impairment also includes charges related to the closing of the distribution segment’s Plymouth warehouse facility.

Restructuring, asset impairment and other included in the Consolidated Statements of Earnings consisted of the following:

 

 

(In thousands)    Distribution     Retail     Total  

16 Weeks Ended January 1, 2011

      

Restructuring and asset impairment

   $ 103      $ 7,345      $ 7,448   

Lease termination income, net

     —          (5,888     (5,888

Pension curtailment income

     (2,281     (1,704     (3,985
                        
     (2,178     (247     (2,425

16 Weeks Ended January 2, 2010

      

Restructuring and asset impairment

   $ —        $ 715      $ 715   

40 Weeks Ended January 1, 2011

      

Restructuring and asset impairment

   $ 2,715      $ 7,498      $ 10,213   

Lease termination income, net

     —          (5,888     (5,888

Pension curtailment income

     (2,281     (1,704     (3,985
                        
     434        (94     340   

40 Weeks Ended January 2, 2010

      

Restructuring and asset impairment

   $ —        $ 1,316      $ 1,316   

The following table provides the activity of restructuring costs for the 40 weeks ended January 1, 2011. Restructuring costs recorded in the Consolidated Balance Sheets are included in “Current portion of restructuring costs” in Current liabilities and “Restructuring costs” in Long-term liabilities based on when the obligations are expected to be paid.

 

-8-


(In thousands)       

Balance at March 27, 2010

   $ 35,938   

Charges

     2,373   

Reversal of reserve related to lease terminations

     (6,929

Changes in estimates

     (442

Payments, net of interest accretion

     (8,022
        

Balance at January 1, 2011

   $ 22,918   
        

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

Note 3

Fair Value Measurements

Financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, accounts and notes receivable, and accounts payable approximate fair value because of the short-term nature of these financial instruments. At January 1, 2011 and March 27, 2010 the estimated fair value and the book value of our debt instruments were as follows:

 

(In thousands)    January 1,
2011
     March 27,
2010
 

Book value of debt instruments:

     

Current maturities of long-term debt and capital lease obligations

   $ 4,161       $ 4,209   

Long-term debt and capital lease obligations

     170,886         181,066   

Equity component of convertible debt

     13,445         18,038   
                 

Total book value of debt instruments

     188,492         203,313   

Fair value of debt instruments

     177,975         185,118   
                 

Excess of book value over fair value

   $ 10,517       $ 18,195   
                 

The estimated fair value of debt is based on market quotes for instruments with similar terms and remaining maturities.

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

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

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

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

At January 1, 2011 and March 27, 2010, the fair value of the interest rate swap liability was approximately $1.3 million and $0.7 million, respectively, and is included in other long-term liabilities in the accompanying consolidated balance sheets. The fair value measurements are classified within Level 2 of the hierarchy as significant observable market inputs are readily available as the basis of the fair value measurements.

 

-9-


Note 4

Derivative Instruments

Spartan Stores has limited involvement with derivative financial instruments and uses them only to manage well-defined interest rate risk exposure when appropriate, based on market conditions. Spartan Stores’ objective in managing exposure to changes in interest rates is to reduce fluctuations in earnings and cash flows, and consequently, from time to time Spartan Stores uses interest rate swap agreements to manage this risk. Spartan Stores does not use financial instruments or derivatives for any trading or other speculative purposes.

On January 2, 2009, Spartan Stores entered into an interest rate swap agreement. The interest rate swap has been designated as a cash flow hedge of interest payments on $45.0 million of borrowings under Spartan Stores’ senior secured revolving credit facility by effectively converting a portion of the variable rate debt to a fixed rate basis. Under the terms of the agreement, Spartan Stores has agreed to pay the counterparty a fixed interest rate of 3.33% and the counterparty has agreed to pay Spartan Stores a floating interest rate based upon the 1-month LIBOR plus 1.25% (1.51% at January 1, 2011) on a notional amount of $45 million. The interest rate swap agreement expires concurrently with the senior secured revolving credit facility on December 24, 2012.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current earnings.

The following table provides a summary of the fair value and balance sheet classification of the derivative financial instrument designated as an interest rate cash flow hedge:

 

 

(In thousands)

Balance Sheet Classification

   January 1,
2011
     March 27,
2010
 

Other long-term liabilities

   $ 1,264       $ 653   

The following table provides a summary of the financial statement effect of the derivative financial instrument designated as an interest rate cash flow hedge for the quarter and year-to-date period ended January 1, 2011:

 

 

(In thousands)   

Location in Consolidated
Financial Statements

   16 Weeks
Ended
January 1,
2011
    40 Weeks
Ended
January 1,
2011
 

(Gain) loss, net of taxes, recognized in other comprehensive income

   Accumulated Other Comprehensive Income    $ (90   $ 374   

Pre-tax (gain) loss reclassified from accumulated other comprehensive loss

   Interest expense      255        629   

Note 5

Commitments and Contingencies

Various lawsuits and claims, arising in the ordinary course of business, are pending or have been asserted against Spartan Stores. While the ultimate effect of such actions cannot be predicted with certainty, management believes that their outcome will not result in a material adverse effect on the consolidated financial position, operating results or liquidity of Spartan Stores.

 

-10-


Spartan Stores contributes to the Central States multi-employer pension plan based on obligations arising from its collective bargaining agreement covering its warehouse union associates. This plan provides retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed by employers and unions; however, Spartan Stores is not a trustee. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plan

Based on the most recent information available to Spartan Stores, we believe that the present value of actuarial accrued liabilities in this multi-employer plan exceeds the value of the assets held in trust to pay benefits. Because we are one of a number of employers contributing to this plan, it is difficult to ascertain what our share of the underfunding would be, although we anticipate that our contributions to this plan will increase each year. Spartan Stores believes that funding levels have not changed significantly since year end. To reduce this underfunding we expect meaningful increases in expense as a result of required incremental multi-employer pension plan contributions over the years. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined.

Note 6

Associate Retirement Plans

The following table provides the components of net periodic pension and postretirement benefit costs for the third quarter and year-to-date periods ended January 1, 2011 and January 2, 2010:

 

 

(In thousands)

16 Weeks Ended

   Pension Benefits     SERP Benefits      Postretirement Benefits  
     Jan. 1,
2011
    Jan. 2,
2010
    Jan. 1,
2011
     Jan. 2,
2010
     Jan. 1,
2011
    Jan. 2,
2010
 

Service cost

   $ 1,075      $ 908      $ 18       $ 25       $ 60      $ 41   

Interest cost

     965        1,109        16         18         129        135   

Expected return on plan assets

     (1,331     (1,252     —           —           —          —     

Amortization of prior service cost

     (196     (196     —           —           (17     (16

Recognized actuarial net loss

     461        202        13         13         38        6   
                                                  

Net periodic benefit cost

   $ 974      $ 771      $ 47       $ 56       $ 210      $ 166   
                                                  

(In thousands)

40 Weeks Ended

   Pension Benefits     SERP Benefits      Postretirement Benefits  
     Jan. 1,
2011
    Jan. 2,
2010
    Jan. 1,
2011
     Jan. 2,
2010
     Jan. 1,
2011
    Jan. 2,
2010
 

Service cost

   $ 2,689      $ 2,269      $ 46       $ 63       $ 149      $ 102   

Interest cost

     2,411        2,773        41         44         323        338   

Expected return on plan assets

     (3,327     (3,130     —           —           —          —     

Amortization of prior service cost

     (490     (490     —           —           (41     (41

Recognized actuarial net loss

     1,151        506        32         33         94        16   
                                                  

Net periodic benefit cost

   $ 2,434      $ 1,928      $ 119       $ 140       $ 525      $ 415   
                                                  

Spartan Stores made a contribution of $5.7 million in the third quarter to move the cash balance pension plan closer to a fully funded status and reduce future pension expense. Funding credit carry forward balances will likely be used to fund future quarterly contribution requirements until December 2011 when a contribution will likely be made to continue to move funding closer to a fully funded status.

Effective January 1, 2011, the Cash Balance Pension Plan was frozen and, as a result, additional service credits will no longer be added to each Associate’s account, however, interest credits will continue to accrue. Effective the same date, Company matching contributions to the Savings Plus 401k Plan were reinstated at a rate of 50% of pay deferral contributions up to 6% of each Associate’s qualified compensation. Additionally, a provision allowing for a discretionary annual profit sharing contribution was added to the Company’s 401k Plan.

 

-11-


In conjunction with this change to the Cash Balance Pension Plan, pretax curtailment income of $4.0 million was recognized and is included in Restructuring, asset impairment and other on the Consolidated Statements of Earnings.

Our actuaries also performed a required remeasurement of the pension liability as of December 31, 2010, which resulted in a decrease in the pension liability in the amount of $2.9 million and a corresponding adjustment to Accumulated Other Comprehensive Income and Deferred income taxes.

See Note 5 for information regarding Spartan’s participation in the Central States multi-employer pension plan.

Note 7

Taxes on Income

There were no material changes to the amount of unrecognized tax benefits during the third quarter of fiscal 2011.

The effective income tax rate differs from the statutory Federal income tax rate primarily due to state income taxes.

Note 8

Stock-Based Compensation

Spartan Stores has two shareholder-approved stock incentive plans that provide for the granting of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, and other stock-based awards to directors, officers and other key associates.

Spartan Stores accounts for stock-based compensation awards in accordance with the provisions of ASC Topic 718 which requires that share-based payment transactions be accounted for using a fair value method and the related compensation cost recognized in the consolidated financial statements over the period that an employee is required to provide services in exchange for the award. Spartan Stores recognized stock-based compensation expense (net of tax) of $0.8 million ($0.04 per diluted share) and $0.9 million ($0.04 per diluted share) in the third quarter of fiscal 2011 and 2010, respectively, as a component of Operating expenses and Income taxes in the Consolidated Statements of Earnings. Stock-based compensation expense (net of tax) was $2.2 million ($0.10 per diluted share) and $2.3 million ($0.10 per diluted share) for the year-to-date period ended January 1, 2011 and January 2, 2010, respectively.

The following table summarizes activity in the share-based compensation plans for the year-to-date ended January 1, 2011:

 

     Shares
Under
Options
    Weighted
Average
Exercise Price
     Restricted
Stock
Awards
    Weighted
Average
Grant-Date
Fair Value
 

Outstanding at March 27, 2010

     831,849      $ 17.39         618,722      $ 18.28   

Granted

     —          —           216,890        15.37   

Exercised/Vested

     (21,003     8.05         (206,277     17.41   

Cancelled/Forfeited

     —          —           (5,472     16.48   
                                 

Outstanding at January 1, 2011

     810,846      $ 17.63         623,863      $ 17.36   
                                 

Vested and expected to vest in the future at January 1, 2011

     798,774      $ 17.61        
                     

Exercisable at January 1, 2011

     525,858      $ 16.83        
                     

 

-12-


There were no stock options granted to date during fiscal 2011. In addition, no stock options were granted during the prior-year third quarter ended January 2, 2010. The weighted average grant-date fair value of stock options granted during the year-to-date period ended January 2, 2010 was $5.26. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted average assumptions were used to estimate the fair value of stock options at the date of grant using the Black-Scholes option-pricing model:

 

     40 Weeks Ended
Jan. 2, 2010

Dividend yield

   1.43%

Expected volatility

   41.50% - 42.30%

Risk-free interest rate

   2.28% - 2.92%

Expected life of option

   6.25 years

Due to certain events that are considered unusual and/or infrequent in nature, and that resulted in significant business changes during the limited historical exercise period, management does not believe that Spartan Stores’ historical exercise data will provide a reasonable basis upon which to estimate the expected term of stock options. Therefore, the expected term of stock options granted is determined using the “simplified” method as described in SEC Staff Accounting Bulletins that uses the following formula: ((vesting term + original contract term)/2).

As of January 1, 2011, total unrecognized compensation cost related to nonvested share-based awards granted under our stock incentive plans was $1.0 million for stock options and $8.2 million for restricted stock. The remaining compensation costs not yet recognized are expected to be recognized over a weighted average period of 1.6 years for stock options and 3.0 years for restricted stock.

Note 9

Discontinued Operations

Results of the discontinued operations are excluded from the accompanying notes to the consolidated financial statements for all periods presented, unless otherwise noted.

The following table details the results of discontinued operations reported on the Consolidated Statements of Earnings:

 

(In thousands)    16 Weeks Ended  
     January 1,
2011
    January 2,
2010
 

Loss from discontinued operations (net of taxes of ($97) and ($158))

   $ (162   $ (232
                
(In thousands)    40 Weeks Ended  
     January 1,
2011
    January 2,
2010
 

Loss from discontinued operations (net of taxes of ($223) and ($195))

   $ (356   $ (280
                

Note 10

Supplemental Cash Flow Information

Non-cash financing activities include the issuance of restricted stock/units to employees and directors of $3.3 million and $4.6 million for the year-to-date periods ended January 1, 2011 and January 2, 2010, respectively. Non-cash investing activities include capital expenditures included in current liabilities of $0.5 million and $2.0 million for the year-to-date periods ended January 1, 2011 and January 2, 2010, respectively.

 

-13-


Note 11

Operating Segment Information

The following tables set forth information about Spartan Stores by operating segment:

 

(In thousands)    Distribution      Retail      Total  

16 Weeks Ended January 1, 2011

        

Net sales

   $ 346,890       $ 435,410       $ 782,300   

Inter-segment sales

     210,724         —           210,724   

Depreciation and amortization

     2,602         8,442         11,044   

Operating earnings

     15,411         1,178         16,589   

Capital expenditures

     2,406         8,020         10,426   

16 Weeks Ended January 2, 2010

        

Net sales

   $ 343,554       $ 443,376       $ 786,930   

Inter-segment sales

     215,264         —           215,264   

Depreciation and amortization

     2,506         8,022         10,528   

Operating earnings

     11,745         1,933         13,678   

Capital expenditures

     2,447         12,469         14,916   

40 Weeks Ended January 1, 2011

        

Net sales

   $ 840,769       $ 1,120,824       $ 1,961,593   

Inter-segment sales

     518,192         —           518,192   

Depreciation and amortization

     6,416         20,534         26,950   

Operating earnings

     34,119         17,906         52,025   

Capital expenditures

     6,836         18,582         25,418   

40 Weeks Ended January 2, 2010

        

Net sales

   $ 846,948       $ 1,146,231       $ 1,993,179   

Inter-segment sales

     542,310         —           542,310   

Depreciation and amortization

     6,710         19,968         26,678   

Operating earnings

     30,122         19,686         49,808   

Capital expenditures

     6,558         31,065         37,623   

 

     January 1,
2011
     March 27,
2010
 

Total assets

     

Distribution

   $ 255,089       $ 237,480   

Retail

     502,904         510,486   

Discontinued operations

     5,505         5,515   
                 

Total

   $ 763,498       $ 753,481   
                 

 

-14-


The following table presents sales by type of similar product and services:

 

     16 Weeks Ended     40 Weeks Ended  
(Dollars in thousands)    January 1,
2011
    January 2,
2010
    January 1,
2011
    January 2,
2010
 

Non-perishables (1)

   $ 406,834         52   $ 429,211         54   $ 1,009,761         51   $ 1,072,783         54

Perishables (2)

     273,975         35        266,443         34        704,919         36        700,732         35   

Pharmacy

     64,402         8        60,510         8        155,637         8        148,679         7   

Fuel

     37,089         5        30,766         4        91,276         5        70,985         4   
                                

Consolidated net sales

   $ 782,300         100   $ 786,930         100   $ 1,961,593         100   $ 1,993,179         100
                                

 

(1)

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

(2)

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

Note 12

Convertible Note Repurchase

During the first quarter of fiscal 2011 the Company repurchased $12.3 million in principal amount of its outstanding convertible senior notes for approximately $10.7 million and recognized a resultant gain of $0.1 million. No additional repurchases were made in the second or third quarter of fiscal 2011.

 

-15-


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

Executive Overview

Spartan Stores is a leading regional grocery distributor and grocery retailer, operating principally in Michigan and Indiana.

We operate two reportable business segments: Distribution and Retail. Our Distribution segment provides a full line of grocery, general merchandise, health and beauty care, frozen and perishable items to approximately 370 independently owned grocery stores and our 97 corporate owned stores. Our Retail segment operates 97 retail supermarkets in Michigan under the banners Glen’s Markets, Family Fare Supermarkets, D&W Fresh Markets and VG’s Food and Pharmacy and 25 fuel centers/convenience stores, adjacent to our supermarket locations, under the banners Glen’s Quick Stop, Family Fare Quick Stop, D&W Fresh Markets Quick Stop and VG’s Quick Stop. Our retail supermarkets have a “neighborhood market” focus to distinguish them from supercenters and limited assortment stores.

Our sales and operating performance vary with seasonality. Our first and fourth quarters are typically our lowest sales quarters and therefore operating results are generally lower during these two quarters. Additionally, these two quarters can be affected by the timing of the Easter holiday, which results in a strong sales week. Many northern Michigan stores are dependent on tourism, which is affected by the economic environment and seasonal 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. All quarters are 12 weeks, except for our third quarter, which is 16 weeks and includes the Thanksgiving and Christmas holidays.

At the beginning of the fourth quarter of fiscal 2010, we began implementing the conclusions of a comprehensive, multi-year supply chain optimization study. This was another important step in our ongoing strategy of maintaining a low cost grocery distribution operation. We reached an agreement with the Teamsters Local 337 to transition our Plymouth, Michigan dry grocery distribution operation to our Grand Rapids, Michigan facility. The transition was substantially complete at the end of the fourth quarter of fiscal 2010. During the past several years, we have prudently invested capital to upgrade our distribution system technology, expand our produce ripening operations, upgrade our entire fleet of trucks, and complete a major warehouse re-racking project at our Grand Rapids grocery distribution center that significantly increased warehouse capacity and improved space utilization. In addition to improved customer service through a centralized Grand Rapids facility, this decision, along with our other cost reduction initiatives is intended to create better alignment between the current level of business activity and our cost structure. In conjunction with the warehouse optimization, we implemented another administrative cost reduction initiative by eliminating certain positions. As a result of the closing of the warehouse facility and elimination of certain administrative positions, we incurred charges of $4.2 million for severance, asset impairment and other related one-time costs in the fourth quarter of fiscal 2010. In addition, in year-to-date fiscal 2011 the Company incurred additional charges/adjustments related to its warehouse consolidation initiative. These charges consisted of warehouse closing expenses for lease payments and other related expenses, which were offset by a LIFO credit due to reduced inventory levels resulting in a year-to-date net $0.6 million after tax benefit.

We implemented a customer loyalty card program in our retail segment’s Glen’s Markets banner late in the first quarter of fiscal 2010. This program is beginning to provide us with more sophisticated information to better understand our customers’ purchasing behavior, which we are using to improve the effectiveness of our promotions, marketing and merchandising programs. We introduced the loyalty card program to our VG’s banner early in the fourth quarter of this fiscal year. We expect these programs will help solidify our long-term customer loyalty, improve our sales growth opportunities and further strengthen our market position as we continue to enhance the program to improve our consumer offers. Our award-winning Michigan’s Best initiative, which clearly identifies and promotes 2,400 products grown, made or processed in Michigan was launched in 2nd quarter of 2010 and was expanded to 3,000 products early in the third quarter of 2011. As part of our emphasis on consumer health and wellness, we began a major nutrition guide program in our D&W Fresh Markets and Family Fare Supermarkets retail stores early in the third quarter of fiscal 2010. The nutrition guide program offers shelf tags which provide consumers a simplistic identification of six key product attributes. The tags are color coded, and health and nutrition attributes are identified using FDA guidelines to assist consumers in making more informed choices in the foods they buy. We also implemented a continuous customer satisfaction monitoring system in the second quarter of fiscal 2010. This program allows randomly selected customers to rate individual stores on multiple dimensions of shopping satisfaction and helps us refine our offers to enhance customer satisfaction.

 

-16-


Results of Operations

The following table sets forth items from our Consolidated Statements of Earnings as a percentage of net sales and the year-to-year percentage change in dollar amounts:

 

(Unaudited)    Percentage of Net Sales     Percentage Change  
     16 Weeks Ended     40 Weeks Ended     16 Weeks
Ended
    40 Weeks
Ended
 
     Jan. 1,
2011
    Jan. 2,
2010
    Jan. 1,
2011
    Jan. 2,
2010
    Jan. 1,
2011
    Jan. 2,
2010
 

Net sales

     100.0        100.0        100.0        100.0        (0.6     (1.6

Gross margin

     21.1        21.0        21.8        21.7        (0.4     (1.3

Selling, general and administrative expenses

     19.3        19.2        19.1        19.1        (0.3     (1.9

Restructuring, asset impairment and other

     (0.3     0.1        0.0        0.1        *        *   
                                    

Operating earnings

     2.1        1.7        2.7        2.5        21.3        4.5   

Other income and expenses

     0.6        0.7        0.6        0.6        (9.3     (7.5
                                    

Earnings before income taxes and discontinued operations

     1.5        1.0        2.1        1.9        39.7        8.4   

Income taxes

     0.6        0.4        0.8        0.8 **      36.1        5.9   
                                    

Earnings from continuing operations

     0.9 **      0.6        1.3        1.1        42.0        10.1   

Loss from discontinued operations, net of taxes

     (0.0     (0.0     (0.0     (0.0     30.2        (27.1
                                    

Net earnings

     0.9        0.6        1.3        1.1        45.3        9.9   
                                    

 

* Percentage change is not meaningful
** Difference due to rounding

Net Sales – Net sales for the quarter ended January 1, 2011 (“third quarter”) decreased $4.6 million, or 0.6%, from $786.9 million in the quarter ended January 2, 2010 (“prior year third quarter”) to $782.3 million. Net sales for the year-to-date period ended January 1, 2011 (“current year-to-date”) decreased $31.6 million, or 1.6%, from $1,993.2 million in the prior year-to-date period ended January 2, 2010 (“prior year-to-date”) to $1,961.6 million.

Net sales for the third quarter in our Retail segment decreased $8.0 million, or 1.8%, from $443.4 million in the prior year third quarter to $435.4 million. Net sales for the year-to-date period decreased $25.4 million, or 2.2%, from $1,146.2 million in the prior year-to-date period to $1,120.8 million. The third quarter decrease was primarily due to a comparable store sales decrease of 4.4% and $0.8 million of lost sales from closed/sold stores, partially offset by an increase in fuel center sales of $6.5 million and sales of $4.0 million related to new/replacement stores. The year-to-date decrease was primarily due to a comparable store sales decrease of 5.0% and $13.0 million of lost sales from closed/sold stores, partially offset by an increase in fuel center sales of $21.6 million and sales of $18.9 million related to new/replacement stores.

The majority of the comparable store sales decrease was a result of cautious consumer spending due to Michigan’s current economic state and competitive activity. We define a retail store as comparable when it is in operation for 14 periods (a period equals four weeks), and we include remodeled, expanded and relocated stores in comparable stores.

 

-17-


Net sales for the third quarter in our Distribution segment increased $3.3 million, or 1.0%, from $343.6 million in the prior year third quarter to $346.9 million. Net sales for the current year-to-date period decreased $6.2 million, or 0.7%, from $847.0 million in the prior year-to-date period to $840.8 million. The year-to-date decrease was due to a comparable sales decrease of 0.6% to existing independent customers and a decrease in equipment sales of $1.2 million.

During the remainder of the fiscal year, we expect retail comparable store sales (excluding fuel centers) to improve modestly relative to the third-quarter results, with distribution sales approximating the last year’s levels.

Gross Margin – Gross margin represents sales less cost of sales, which include purchase costs and promotional allowances. Vendor allowances that relate to our 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 our merchandising costs, such as setting up warehouse infrastructure. Vendor allowances associated with product cost are recognized as a reduction in cost of sales when the product is sold. Lump sum payments received for multi-year contracts are amortized over the life of the contracts based on contractual terms.

Gross margin for the third quarter decreased $0.7 million, or 0.4%, from $165.5 million in the prior year third quarter to $164.8 million. As a percent of net sales, gross margin for the third quarter increased to 21.1% from 21.0%. The increase was due primarily to improved retail margins partially offset by a higher mix of distribution and fuel center sales. Gross margin for the year-to-date period decreased $5.8 million, or 1.3%, from $432.5 million in the prior year-to-date period to $426.7 million. As a percent of net sales, gross margin for the year-to-date period increased to 21.8% from 21.7%. The year-to-date increase was due to improved retail margins and a $3.5 million pretax LIFO inventory valuation credit from the lower inventory levels related to the Company’s warehouse consolidation initiative, partially offset by a higher mix of distribution and fuel center sales.

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, utilities, equipment rental, depreciation and other administrative costs.

SG&A expenses for the third quarter decreased $0.5 million, or 0.3%, from $151.1 million in the prior year third quarter to $150.6 million. As a percent of net sales, SG&A expenses were 19.3% for the third quarter compared to 19.2% in the prior year third quarter. SG&A expenses for the year-to-date period decreased $7.1 million, or 1.9%, from $381.4 million in the prior year-to-date period to $374.3 million. As a percent of net sales, SG&A expenses were 19.1% for both the current year-to-date period and the prior year-to-date period.

The net decrease in third quarter SG&A expenses was primarily due to the following:

 

   

Decreased warehousing expenses of $0.9 million primarily due to our warehouse consolidation efforts.

 

   

Increases in incentive compensation of $0.6 million.

 

   

Increases in various other general expenses including health care, transportation fuel and debit/credit card fees.

The net decrease in year-to-date SG&A expenses was primarily due to the following:

 

   

Decreased compensation and benefits of $4.6 million due to reductions in store labor.

 

   

Decreased warehousing expenses of $2.3 million primarily due to our warehouse consolidation efforts.

 

   

Decreased supplies of $1.8 million.

 

   

Decreases in various other general expenses including occupancy, rent and advertising.

 

   

Increases in incentive compensation of $3.7 million.

 

   

Increases in various other general expenses including health care, transportation fuel and debit/credit card fees.

 

-18-


Restructuring, Asset Impairment and Other – Restructuring, asset impairment and other for the third quarter improved $3.1 million from $0.7 million of expense in the prior year third quarter to $2.4 million of income. This included the previously discussed pension curtailment income of $4.0 million, a lease termination adjustment of $5.9 million offset by $7.4 million in asset impairment charges. In the prior year third quarter costs of $0.7 million were incurred related to two closed stores.

Restructuring, asset impairment and other for the year-to-date period decreased $1.0 million from $1.3 million in the prior year-to-date period to $0.3 million. In addition to the previously mentioned third quarter income/charges the year-to-date total included charges related to the Plymouth warehouse facility closure of $1.8 million, severance costs of $0.5 million, warehouse closing costs of $0.3 million and an asset impairment charge of $0.2 million. In the prior year-to-date asset impairment and restructuring costs of $1.3 million were incurred related to three stores.

Interest Expense – Interest expense decreased $0.5 million, or 10.1%, from $5.2 million in the prior year third quarter to $4.7 million. The decrease in interest expense was due primarily to lower net borrowings. For fiscal year 2011, we expect interest expense to be reduced by $0.7 million as a result of the previously mentioned convertible note repurchases.

Income Taxes – The effective tax rate is 37.3% and 38.3% for the third quarter and prior year third quarter, respectively. The year-to-date effective tax rate is 38.5% and 39.4% for the current year and prior year, respectively. The difference from the statutory rate is primarily due to State of Michigan income taxes.

Discontinued Operations

Certain of our retail and grocery distribution operations have been recorded as discontinued operations. Results of the discontinued operations are excluded from the accompanying notes to the condensed consolidated financial statements for all periods presented, unless otherwise noted.

Liquidity and Capital Resources

The following table summarizes our consolidated statements of cash flows for the year-to-date and prior year-to-date periods:

 

(In thousands)    January 1,
2011
    January 2,
2010
 

Net cash provided by operating activities

   $ 62,450      $ 54,330   

Net cash used in investing activities

     (26,475     (43,708

Net cash used in financing activities

     (17,436     (7,420

Net cash used in discontinued operations

     (2,442     (2,541
                

Net increase in cash and cash equivalents

     16,097        661   

Cash and cash equivalents at beginning of year

     9,170        6,519   
                

Cash and cash equivalents at end of period

   $ 25,267      $ 7,180   
                

Net cash provided by operating activities increased from the prior year-to-date period primarily due to favorable working capital trends.

Net cash used in investing activities decreased during the current year-to-date period primarily due to capital expenditures which decreased $12.2 million to $25.4 million. Of this amount our Retail and Distribution segments utilized 73.1% and 26.9%, respectively. Expenditures during the current fiscal year were primarily related to one new store, one replacement store and six store remodels. The terms of our senior secured revolving credit facility contain certain covenants which could restrict our capital expenditures if we fail to achieve the required ratios. Our current available borrowings are approximately $120.4 million above these limits as of January 1, 2011 and we do not expect to fall below the restricted levels. We expect capital and real estate development expenditures to range from $34.0 million to $35.0 million for fiscal 2011.

 

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Net cash used in financing activities includes cash paid and received related to our long-term borrowings, dividends paid, tax benefits of stock compensation and proceeds from the issuance of common stock. Payments on long-term borrowings were $3.7 million and $4.6 million for the current year-to-date period and prior year-to-date period, respectively. Cash dividends of $3.4 million were paid in each year-to-date period. Although we expect 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 our future financial condition and profitability and compliance with the terms of our credit facilities. Our current maturities of long-term debt and capital lease obligations at January 1, 2011 are $4.2 million. Our ability to borrow additional funds is governed by the terms of our credit facilities.

Net cash used in discontinued operations includes the net cash flows of our discontinued operations and consists primarily of the payment of store asset impairment costs, insurance run-off claims and other liabilities offset by the proceeds from the sale of assets and sublease income.

Our principal sources of liquidity are cash flows generated from operations and our senior secured revolving credit facility. Interest on our convertible senior notes is payable on May 15 and November 15 of each year. The revolving credit facility matures December 2012, and is secured by substantially all of our assets. As of January 1, 2011, our senior secured revolving credit facility had outstanding borrowings of $45.0 million and additional available borrowings of $140.4 million, which exceeds the minimum excess availability levels, as defined in the credit agreement. We believe 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 Spartan Stores’ business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our credit facility.

Our current ratio increased to 1.21:1.00 at January 1, 2011 from 1.09:1.00 at March 27, 2010 and our investment in working capital seasonally increased to $38.1 million at January 1, 2011 from $15.7 million at March 27, 2010. Our total net long-term debt (including current maturities and capital lease obligations net of cash and cash equivalents) to total capital ratio at January 1, 2011 was 0.34:1.00 versus 0.39:1.00 at March 27, 2010.

Consolidated Adjusted EBITDA is a non-GAAP financial measure that is defined under the terms of our credit facility as net earnings from continuing operations plus depreciation and amortization, and other non-cash charges including imputed interest, deferred (stock) compensation, LIFO expense and costs associated with the closing of operational locations, plus interest expense, the provision for income taxes to the extent deducted in the computation of net earnings.

Adjusted EBITDA 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 adjusted EBITDA information has been included as one measure of our operating performance and historical ability to service debt. The Company believes that investors find the information useful because it reflects the resources available for strategic investments including, for example, capital needs of the business, strategic acquisitions and debt service. Our definition of Adjusted EBITDA may not be identical to similarly titled measures reported by other companies.

 

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Following is a reconciliation of net earnings to adjusted EBITDA for quarters ended January 1, 2011 and January 2, 2010.

 

     Third Quarter     Year-to-Date  
(In thousands)    Jan. 1,
2011
    Jan. 2,
2010
    Jan. 1,
2011
    Jan. 2,
2010
 

Net earnings

   $ 7,308      $ 5,029      $ 24,534      $ 22,322   

Add:

        

Discontinued operations

     162        232        356        280   

Income taxes

     4,452        3,272        15,589        14,724   

Interest expense

     4,666        5,188        11,599        12,578   

Non-operating expense

     1        (43     (53     (96
                                

Operating earnings

     16,589        13,678        52,025        49,808   

Add (Subtract):

        

Depreciation and amortization

     11,044        10,528        26,950        26,678   

LIFO income

     (695     (23     (3,903     (104

Restructuring, asset impairment and other

     (2,425     715        340        1,316   

Non-cash stock compensation and other

     1,204        1,098        3,327        3,232   
                                

Adjusted EBITDA

   $ 25,717      $ 25,996      $ 78,739      $ 80,930   
                                

Reconciliation of operating earnings to adjusted EBITDA by segment:

        

Retail:

        

Operating earnings

   $ 1,178      $ 1,933      $ 17,906      $ 19,686   

Add (Subtract):

        

Depreciation and amortization

     8,442        8,022        20,534        19,968   

LIFO expense

     465        137        665        356   

Restructuring, asset impairment and other

     (247     715        (94     1,316   

Non-cash stock compensation and other

     (33     (104     93        (246
                                

Adjusted EBITDA

   $ 9,805      $ 10,703      $ 39,104      $ 41,080   
                                

Distribution:

        

Operating earnings

   $ 15,411      $ 11,745      $ 34,119      $ 30,122   

Add (Subtract):

        

Depreciation and amortization

     2,602        2,506        6,416        6,710   

LIFO income

     (1,160     (160     (4,568     (460

Restructuring, asset impairment and other

     (2,178     —          434        —     

Non-cash stock compensation and other

     1,237        1,202        3,234        3,478   
                                

Adjusted EBITDA

   $ 15,912      $ 15,293      $ 39,635      $ 39,850   
                                

For information on contractual obligations, see our Annual Report on Form 10-K for the fiscal year ended March 27, 2010. At January 1, 2011, there have been no material changes to our significant contractual obligations outside the ordinary course of business.

 

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Indebtedness and Liabilities of Subsidiaries

On May 30, 2007, the Company sold $110 million aggregate principal amount of 3.375% Convertible Senior Notes due 2027 (the “Notes”). The Notes are general unsecured obligations and rank equally in right of payment with all of the Company’s other existing and future obligations that are unsecured and unsubordinated. Because the Notes are unsecured, they are structurally subordinated to our subsidiaries’ existing and future indebtedness and other liabilities and any preferred equity issued by our subsidiaries. We rely in part on distributions and advances from our subsidiaries in order to meet our payment obligations under the notes and our other obligations. The Notes are not guaranteed by our subsidiaries. Many of our subsidiaries serve as guarantors with respect to our existing credit facility. Creditors of each of our subsidiaries, including trade creditors, and preferred equity holders, generally have priority with respect to the assets and earnings of the subsidiary over the claims of our creditors, including holders of the Notes. The Notes, therefore, are effectively subordinated to the claims of creditors, including trade creditors, judgment creditors and equity holders of our subsidiaries. In addition, our rights and the rights of our creditors, including the holders of the notes, to participate in the assets of a subsidiary during its liquidation or reorganization are effectively subordinated to all existing and future liabilities and preferred equity of that subsidiary. The Notes are effectively subordinated to our existing and future secured indebtedness to the extent of the assets securing such indebtedness and to existing and future indebtedness and other liabilities of our subsidiaries (including subsidiary guarantees of our senior credit facility).

The following table shows the indebtedness and other liabilities of our subsidiaries as of January 1, 2011:

Spartan Stores Subsidiaries Only

(In thousands)

 

     January 1,
2011
 

Current Liabilities

  

Accounts payable

   $ 122,303   

Accrued payroll and benefits

     30,637   

Other accrued expenses

     18,795   

Current portion of restructuring costs

     5,556   

Current maturities of long-term debt and capital lease obligations

     4,161   
        

Total current liabilities

     181,452   

Long-term Liabilities

  

Postretirement benefits

     14,542   

Other long-term liabilities

     17,043   

Restructuring costs

     17,362   

Long-term debt and capital lease obligations

     41,591   
        

Total long-term liabilities

     90,538   
        

Total Subsidiary Liabilities

     271,990   

Operating Leases

     130,900   
        

Total Subsidiary Liabilities and Operating Leases

   $ 402,890   
        

Ratio of Earnings to Fixed Charges

Our ratio of earnings to fixed charges was 2.45:1.00 and 1.96:1.00 for the third quarter and prior year third quarter, respectively, and 2.97:1.00 and 2.71:1.00 for the year-to-date and prior year-to-date periods. For purposes of calculating the ratio of earnings to fixed charges, earnings consist of pretax earnings from continuing operations plus fixed charges (excluding capitalized interest). Fixed charges consist of interest costs, whether expensed or capitalized, the interest component of rental expense and amortization of debt issue costs, whether expensed or capitalized.

Off-Balance Sheet Arrangements

We had letters of credit totaling $0.5 million outstanding and unused at January 1, 2011. The letters of credit are maintained primarily to support payment or deposit obligations. We pay a commission of approximately 2% on the face amount of the letters of credit.

 

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Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, assets held for sale, long-lived assets, income taxes, self-insurance reserves, restructuring and asset impairment costs, retirement benefits, stock-based compensation and contingencies and litigation. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. Based on our ongoing review, we make adjustments we consider appropriate under the facts and circumstances. We have discussed the development, selection and disclosure of these estimates with the Audit Committee. The accompanying condensed consolidated financial statements are prepared using the same critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended March 27, 2010.

 

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes in market risk of Spartan Stores from the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosure About Market Risk”, of the Company’s Annual Report on Form 10-K for the fiscal year ended March 27, 2010.

 

ITEM 4. Controls and Procedures

An evaluation of the effectiveness of the design and operation of Spartan Stores’ disclosure controls and procedures (as currently defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was performed as of January 1, 2011 (the “Evaluation Date”). This evaluation was performed under the supervision and with the participation of Spartan Stores’ management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Spartan Stores’ management, including the CEO and CFO, concluded that Spartan Stores’ disclosure controls and procedures were effective as of the Evaluation Date to ensure that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including our principal executive and principal financial officers as appropriate to allow for timely decisions regarding required disclosure. During the last fiscal quarter there was no change in Spartan Stores’ internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Spartan Stores’ internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

ITEM 5. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information regarding the Company’s purchases of its own common stock during the third quarter. The Company has no public stock repurchase plans or programs. All transactions reported are with associates under stock compensation plans. These include: (1) shares of Spartan Stores, Inc. stock delivered in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options, and (2) shares submitted for cancellation to satisfy tax withholding obligations that occur upon the vesting of the restricted shares. The value of the shares delivered or withheld is determined by the applicable stock compensation plan.

Spartan Stores, Inc. Purchases of Equity Securities

 

Period

   Total Number
of Shares
Purchased
     Average
Price Paid
per Share
 

September 12 – October 9, 2010

     

Employee Transactions

     1,079       $ 14.24   

October 10 – November 6, 2010

     

Employee Transactions

     16       $ 15.92   

November 7 – December 4, 2010

     

Employee Transactions

     —         $ —     

December 5 – January 1, 2011

     

Employee Transactions

     —         $ —     
                 

Total for Third Quarter ended January 1, 2011

     1,095       $ 14.26   
                 

 

-24-


ITEM 6. Exhibits

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

 

Exhibit
Number

  

Document

  3.1    Restated Articles of Incorporation of Spartan Stores, Inc.
  3.2    Bylaws of Spartan Stores, Inc., as amended. Previously filed as an exhibit to Spartan Stores’ Quarterly Report on Form 10-Q for the period ended September 11, 2010. Here incorporated by reference.
10.1    Amendment No. 9 to Loan and Security Agreement dated September 30, 2010 between Spartan Stores, Inc. and its subsidiaries and Wells Fargo Capital Finance, LLC, Key Bank National Association, Bank of America, N.A., PNC Bank N.A., General Electric Capital Corporation, and Fifth Third Bank.. Previously filed as an exhibit to Spartan Stores’ Current Report on Form 8-K on October 5, 2010. Here incorporated by reference.
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

-25-


SIGNATURES

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

 

   

SPARTAN STORES, INC.

(Registrant)

Date: February 3, 2011     By   /S/    DAVID M. STAPLES        
       

David M. Staples

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and duly

authorized signatory for Registrant)

 

-26-


EXHIBIT INDEX

 

Exhibit
Number

  

Document

  3.1    Restated Articles of Incorporation of Spartan Stores, Inc.
  3.2    Bylaws of Spartan Stores, Inc., as amended. Previously filed as an exhibit to Spartan Stores’ Quarterly Report on Form 10-Q for the period ended September 11, 2010. Here incorporated by reference.
10.1    Amendment No. 9 to Loan and Security Agreement dated September 30, 2010 between Spartan Stores, Inc. and its subsidiaries and Wells Fargo Capital Finance, LLC, Key Bank National Association, Bank of America, N.A., PNC Bank N.A., General Electric Capital Corporation, and Fifth Third Bank. Previously filed as an exhibit to Spartan Stores’ Current Report on Form 8-K on October 5, 2010. Here incorporated by reference.
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.