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 September 10, 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  x    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 October 17, 2011 the registrant had 22,864,131 outstanding shares of common stock, no par value.

 

 

 

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FORWARD-LOOKING STATEMENTS

The matters discussed in this Quarterly Report on Form 10-Q, in 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,” “intends,” “plans,” “believes,” “estimates,” or 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, or 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 26, 2011 (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

 

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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 affect 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.

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 and the amount and timing of the Company's future repurchases of shares of common stock, if any, 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.

 

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PART I

FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements

SPARTAN STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

		September 10, 2011				March 26, 2011
Assets
Current assets
Cash and cash equivalents		$	62,080			$	43,824
Accounts receivable, net			60,026				56,344
Inventories, net			121,287				103,814
Prepaid expenses and other current assets			10,000				7,408
Deferred taxes on income			3				1,526
Property held for sale			1,708				—
Total current assets			255,104				212,916
Goodwill			240,704				241,244
Property and equipment, net			243,545				241,448
Other, net			56,773				55,788
Total assets		$	796,126			$	751,396
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable		$	129,185			$	100,919
Accrued payroll and benefits			32,384				37,679
Other accrued expenses			14,580				18,343
Current portion of restructuring costs			4,101				4,470
Current maturities of long-term debt and capital lease obligations			4,249				4,205
Total current liabilities			184,499				165,616
Long-term liabilities
Deferred taxes on income			76,585				66,241
Postretirement benefits			14,321				14,222
Other long-term liabilities			17,118				18,269
Restructuring costs			8,908				10,832
Long-term debt and capital lease obligations			173,282				170,711
Total long-term liabilities			290,214				280,275
Commitments and contingencies (Note 5)
Shareholders’ equity
Common stock, voting, no par value; 50,000 shares authorized; 22,863 and 22,619 shares outstanding			164,648				162,086
Preferred stock, no par value, 10,000 shares authorized; no shares outstanding			—				—
Accumulated other comprehensive loss			(12,981	)			(13,016	)
Retained earnings			169,746				156,435
Total shareholders’ equity			321,413				305,505
Total liabilities and shareholders’ equity		$	796,126			$	751,396

See accompanying notes to condensed consolidated financial statements.

 

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SPARTAN STORES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

 

		12 Weeks Ended								24 Weeks Ended
		September 10, 2011				September 11, 2010				September 10, 2011				September 11, 2010
Net sales		$	619,647			$	602,056			$	1,222,211			$	1,179,293
Cost of sales			486,910				466,858				964,137				917,406
Gross margin			132,737				135,198				258,074				261,887
Operating expenses
Selling, general and administrative			112,891				112,926				224,232				223,686
Restructuring, asset impairment and other			(135	)			183				(135	)			2,765
Total operating expenses			112,756				113,109				224,097				226,451
Operating earnings			19,981				22,089				33,977				35,436
Other income and expenses
Interest expense			3,412				3,504				6,654				6,933
Other, net			(42	)			(4	)			(112	)			(54	)
Total other income and expenses			3,370				3,500				6,542				6,879
Earnings before income taxes and discontinued operations			16,611				18,589				27,435				28,557
Income taxes			6,341				7,244				11,030				11,137
Earnings from continuing operations			10,270				11,345				16,405				17,420
Loss from discontinued operations, net of taxes			(18	)			(106	)			(124	)			(194	)
Net earnings		$	10,252			$	11,239			$	16,281			$	17,226
Basic earnings per share:
Earnings from continuing operations		$	0.45			$	0.50			$	0.72			$	0.77
Loss from discontinued operations			—				—				(0.01	)			(0.01	)
Net earnings		$	0.45			$	0.50			$	0.71			$	0.76
Diluted earnings per share:
Earnings from continuing operations		$	0.45			$	0.50			$	0.72			$	0.77
Loss from discontinued operations			—				—				(0.01	)			(0.01	)
Net earnings		$	0.45			$	0.50			$	0.71			$	0.76
Weighted average shares outstanding:
Basic			22,862				22,627				22,777				22,577
Diluted			22,962				22,692				22,872				22,650

See accompanying notes to condensed consolidated financial statements.

 

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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 26, 2011			22,619			$	162,086			$	(13,016	)		$	156,435			$	305,505
Comprehensive income/loss, net of tax:
Net earnings			—				—				—				16,281				16,281
Change in fair value of interest rate swap, net of taxes of $23			—				—				35				—				35
Total comprehensive income																			16,316
Dividends - $.013 per share			—				—				—				(2,970	)			(2,970	)
Stock-based employee compensation			—				2,681				—				—				2,681
Issuances of common stock and related tax benefits on stock option exercises			48				792				—				—				792
Issuances of restricted stock and related income tax benefits			256				(114	)			—				—				(114	)
Cancellations of restricted stock			(60	)			(797	)			—				—				(797	)
Balance – September 10, 2011			22,863			$	164,648			$	(12,981	)		$	169,746			$	321,413

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)

 

		24 Weeks Ended
		September 10, 2011				September 11, 2010
Cash flows from operating activities
Net earnings		$	16,281			$	17,226
Loss from discontinued operations			124				194
Earnings from continuing operations			16,405				17,420
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash restructuring, asset impairment and other			(135	)			2,477
Non-cash convertible debt interest			1,658				1,594
Depreciation and amortization			16,764				15,950
LIFO income – warehouse consolidation			—				(3,450	)
LIFO expense			1,527				242
Postretirement benefits expense			463				1,819
Deferred taxes on income			11,771				8,560
Stock-based compensation expense			2,680				2,145
Excess tax benefit on stock compensation			(92	)			(171	)
Gain on repurchase of convertible notes			—				(69	)
Other			67				197
Change in operating assets and liabilities:
Accounts receivable			(3,672	)			(325	)
Inventories			(19,000	)			(7,901	)
Prepaid expenses and other assets			(3,400	)			(339	)
Accounts payable			30,129				18,245
Accrued payroll and benefits			(6,268	)			(2,470	)
Postretirement benefits payments			(187	)			(154	)
Other accrued expenses and other liabilities			(6,247	)			(8,311	)
Net cash provided by operating activities			42,463				45,459
Cash flows from investing activities
Purchases of property and equipment			(20,883	)			(14,992	)
Proceeds from the sale of assets			23				62
Other			(579	)			(47	)
Net cash used in investing activities			(21,439	)			(14,977	)
Cash flows from financing activities
Proceeds from revolving credit facility			324				125,473
Payments on revolving credit facility			(196	)			(125,310	)
Repurchase of convertible notes			—				(10,724	)
Repayment of other long-term borrowings			(1,949	)			(2,364	)
Excess tax benefit on stock compensation			92				171
Proceeds from exercise of stock options			750				151
Dividends paid			(1,483	)			(1,130	)
Net cash used in financing activities			(2,462	)			(13,733	)
Cash flows from discontinued operations
Net cash used in operating activities			(306	)			(795	)
Net cash used in discontinued operations			(306	)			(795	)
Net increase in cash and cash equivalents			18,256				15,954
Cash and cash equivalents at beginning of period			43,824				9,170
Cash and cash equivalents at end of period		$	62,080			$	25,124

See accompanying notes to condensed consolidated financial statements.

 

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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 September 10, 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

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

 

 

(In thousands)		Distribution				Retail				Total
24 Weeks Ended September 10, 2011
Restructuring, asset impairment and other		$	(37	)		$	(98	)		$	(135	)
		Distribution				Retail				Total
24 Weeks Ended September 11, 2010
Restructuring, asset impairment and other		$	2,612			$	153			$	2,765

The following table provides the activity of restructuring costs for the 24 weeks ended September 10, 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.

 

 

(In thousands)
Balance at March 26, 2011		$	15,302
Changes in estimates			(224	)
Payments, net of interest accretion			(2,069	)
Balance at September 10, 2011		$	13,009

Included in the liability are lease obligations related to closed stores 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.

 

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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 September 10, 2011, and March 26, 2011, the estimated fair value and the book value of our debt instruments were as follows:

 

(In thousands)		September 10, 2011				March 26, 2011
Book value of debt instruments:
Current maturities of long-term debt and capital lease obligations		$	4,249			$	4,205
Long-term debt and capital lease obligations			173,282				170,711
Equity component of convertible debt			10,972				12,629
Total book value of debt instruments			188,503				187,545
Fair value of debt instruments			176,666				177,112
Excess of book value over fair value		$	11,837			$	10,433

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 September 10, 2011 and March 26, 2011, the fair value of the interest rate swap liability was approximately $1.0 million and $1.1 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.

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% (1.47% at September 10, 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.

 

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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		September 10, 2011				March 26, 2011
Other long-term liabilities		$	1,028			$	1,085

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 September 10, 2011:

 

(In thousands)
		Location in Consolidated Financial Statements		12 Weeks Ended September 10, 2011				24 Weeks Ended September 10, 2011
Loss, net of taxes, recognized in other comprehensive income		Accumulated Other Comprehensive Income		$	(103	)		$	(35	)
Pre-tax loss reclassified from accumulated other comprehensive loss		Interest expense			217				358

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.

Spartan Stores contributes to the underfunded 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 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.

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. 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 a withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined. See Note 6 for further details.

 

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Note 6 Associate Retirement Plans

The following table provides the components of net periodic pension and postretirement benefit costs for the second quarter and year-to-date periods ended September 10, 2011 and September 11, 2010:

(In thousands)

12 Weeks Ended

 

		Pension Benefits								SERP Benefits								Postretirement Benefits
		Sept. 10, 2011				Sept. 11, 2010				Sept. 10, 2011				Sept. 11, 2010				Sept. 10, 2011				Sept. 11, 2010
Service cost		$	—			$	807			$	—			$	14			$	44			$	45
Interest cost			668				723				12				12				98				97
Expected return on plan assets			(942	)			(998	)			—				—				—				—
Amortization of prior service cost			—				(147	)			—				—				(12	)			(12	)
Recognized actuarial net loss			382				345				9				10				28				28
Net periodic benefit cost		$	108			$	730			$	21			$	36			$	160			$	158

(In thousands)

24 Weeks Ended

 

		Pension Benefits								SERP Benefits								Postretirement Benefits
		Sept. 10, 2011				Sept. 11, 2010				Sept. 10, 2011				Sept. 11, 2010				Sept. 10, 2011				Sept. 11, 2010
Service cost		$	—			$	1,613			$	—			$	28			$	88			$	89
Interest cost			1,336				1,446				24				24				196				194
Expected return on plan assets			(1,884	)			(1,996	)			—				—				—				—
Amortization of prior service cost			—				(294	)			—				—				(25	)			(25	)
Recognized actuarial net loss			764				691				18				19				61				57
Net periodic benefit cost		$	216			$	1,460			$	42			$	71			$	320			$	315

No contribution payments are required to be made in fiscal 2012 to meet the minimum pension funding requirements until the accumulated funding standard carryover balance of $0.2 million (as of April 1, 2011) and the prefunding balance of $7.0 million (as of April 1, 2011) are fully utilized. As of September 10, 2011, no contributions have been made to the plan. Spartan Stores will assess the prudence of making an additional voluntary contribution to the plan during the third quarter of fiscal 2012.

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.

As previously stated in Note 5, Spartan Stores contributes to the Central States, Southeast and Southwest Areas Pension Fund (“Fund”) (EIN 7456500) at a pro rata fraction of 1% of total contributions. Spartan Store’s employer contributions during the last plan year totaled $7.1 million, which Fund administrators represents as less than 5% of total employer contributions to the Fund.

Pursuant to a report issued by Fund administrators under the Pension Protection Act of 2006, the most recent certified zone status in the report states that “The Central States, Southeast and Southwest Areas Pension Fund was in critical status in the Plan Year ending December 31, 2010 because the plan’s actuaries determined that: (1) the Plan had an accumulated funding deficiency for the Plan Year and over the next three plan years, the Plan is projected to have an accumulated funding deficiency for the 2011 through 2013 plan years; (2) the funded percentage of the Plan is less than 65% and over the next four plan years, the Plan is projected to have an accumulated funding deficiency for the 2011 through 2014 plan years; (3) the sum of the Plan’s normal cost and interest on the unfunded benefits for the Plan year exceeds the present value of all expected contributions for the year; the present value of vested benefits of inactive participants is greater that the present value of vested benefits of active participants; the Plan has an accumulated funding deficiency for the Plan Year, and over the next four plan years, the Plan is projected to have an accumulated funding deficiency for the 2011 through 2014 plan years; and (4) the Plan was in critical status last year, and over the next 9 years, the Plan is projected to have an accumulated funding deficiency for the 2011 through 2019 plan years.”

 

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Note 7 Taxes on Income

During the first quarter of fiscal 2012, the Michigan state legislature enacted the Corporate Income Tax (CIT) effective January 1, 2012. The new CIT will replace the current Michigan Business Tax that is in effect through December 31, 2011. As a result, Spartan Stores recorded a one-time, non-cash income tax charge relating to the write-off of net deferred tax assets and liabilities that will no longer be realized under the CIT of approximately $0.5 million in Income Taxes in the first quarter and a corresponding change in Deferred Taxes on Income. As a result of this charge and the state tax provision in the first quarter of fiscal 2012, the effective income tax rate was 43.3% versus the Federal statutory income tax rate of 35.0%. The effective tax rate without this charge was 38.5%. For the year-to-date period the effective income tax rate was 40.2%. The year-to-date effective tax rate without this charge was 38.3%

There were no material changes to the amount of unrecognized tax benefits during the second quarter of fiscal 2012.

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 $0.6 million ($0.03 per diluted share) and $0.6 million ($0.03 per diluted share) in the second quarter of fiscal 2012 and 2011, respectively, as a component of Operating expenses in the Consolidated Statements of Earnings. Stock-based compensation expense (net of tax) was $1.3 million ($0.06 per diluted share) and $1.3 million ($0.06 per diluted share) for the year-to-date period ended September 10, 2011 and September 11, 2010, respectively.

 

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The following table summarizes activity in the share-based compensation plans for the year-to-date period ended September 10, 2011:

 

		Shares Under Options				Weighted Average Exercise Price				Restricted Stock Awards				Weighted Average Grant-Date Fair Value
Outstanding at March 26, 2011			804,721			$	17.71				547,771			$	16.99
Granted			—				—				222,848				16.06
Exercised/Vested			(45,748	)			15.00				(171,776	)			17.62
Cancelled/Forfeited			(9,059	)			16.11				(9,630	)			15.40
Outstanding at September 10, 2011			749,914			$	17.89				589,213			$	16.48
Vested and expected to vest in the future at September 10, 2011			743,696			$	17.90
Exercisable at September 10, 2011			604,572			$	17.92

There were no stock options granted during the year-to-date periods ended September 10, 2011 and September 11, 2010.

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 September 10, 2011, total unrecognized compensation cost related to nonvested share-based awards granted under our stock incentive plans was $0.5 million for stock options and $8.0 million for restricted stock. The remaining compensation costs not yet recognized are expected to be recognized over a weighted average period of 1.1 years for stock options and 2.9 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)

 

		12 Weeks Ended
		September 10, 2011				September 11, 2010
Loss from discontinued operations (net of taxes of ($11) and ($68))		$	(18	)		$	(106	)

(In thousands)

 

		24 Weeks Ended
		September 10, 2011				September 11, 2010
Loss from discontinued operations (net of taxes of ($83) and ($124))		$	(124	)		$	(194	)

 

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Note 10 Supplemental Cash Flow Information

Non-cash financing activities include the issuance of restricted stock/units to employees and directors of $3.6 million and $3.3 million for the year-to-date periods ended September 10, 2011 and September 11, 2010, respectively. Non-cash investing activities include capital expenditures included in current liabilities of $1.1 million and $0.9 million for the year-to-date periods ended September 10, 2011 and September 11, 2010, respectively. In addition, in the second quarter of fiscal 2012 the Company entered into a $2.8 million capital lease.

Note 11 Operating Segment Information

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

 

 

(In thousands)
		Distribution				Retail				Total
12 Weeks Ended September 10, 2011
Net sales		$	256,226			$	363,421			$	619,647
Inter-segment sales			153,618				—				153,618
Depreciation and amortization			1,976				6,432				8,408
Operating earnings			8,764				11,217				19,981
Capital expenditures			1,056				10,159				11,215
12 Weeks Ended September 11, 2010
Net sales		$	248,604			$	353,452			$	602,056
Inter-segment sales			158,336				—				158,336
Depreciation and amortization			1,943				6,128				8,071
Operating earnings			10,723				11,366				22,089
Capital expenditures			2,645				6,031				8,676
24 Weeks Ended September 10, 2011
Net sales		$	513,355			$	708,856			$	1,222,211
Inter-segment sales			304,055				—				304,055
Depreciation and amortization			3,889				12,886				16,775
Operating earnings			16,166				17,811				33,977
Capital expenditures			2,962				17,921				20,883
24 Weeks Ended September 11, 2010
Net sales		$	493,879			$	685,414			$	1,179,293
Inter-segment sales			307,468				—				307,468
Depreciation and amortization			3,814				12,092				15,906
Operating earnings			18,708				16,728				35,436
Capital expenditures			4,430				10,562				14,992

 

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		September 10, 2011				March 26, 2011
Total assets
Distribution		$	292,412			$	261,028
Retail			498,157				484,839
Discontinued operations			5,557				5,529
Total		$	796,126			$	751,396

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

 

		12 Weeks Ended																24 Weeks Ended
(Dollars in thousands)		September 10, 2011								September 11, 2010								September 10, 2011								September 11, 2010
Non-perishables (1)		$	305,365				49	%		$	308,392				51	%		$	598,342				49	%		$	602,927				51	%
Perishables (2)			224,588				36				219,213				36				442,793				36				430,944				36
Pharmacy			48,397				8				47,151				8				98,107				8				91,235				8
Fuel			41,297				7				27,300				5				82,969				7				54,187				5
Consolidated net sales		$	619,647				100	%		$	602,056				100	%		$	1,222,211				100	%		$	1,179,293				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 a resultant gain of $0.1 million.

Note 13 Company-Owned Life Insurance

During the first quarter of fiscal 2011 the Company purchased variable universal life insurance policies on certain key associates. The company-owned policies have annual premium payments of $0.8 million recorded in the first quarter of fiscal 2012 and fiscal 2011 and currently have a net cash surrender value of $1.6 million, which is recorded on the balance sheet in Other Assets. These company-owned policies have an aggregate amount of life insurance coverage of approximately $15 million.

Note 14 Subsequent Events

On September 15, 2011 Spartan Stores agreed to extend the terms of its existing contract with General Teamsters Union Local 406 until October 18, 2012 and to continue contributions to the Central States Fund under the terms outlined in the “Primary Schedule” of Central States’ Rehabilitation Plan. This schedule requires an increase in employer contributions of 6% over the previous year’s contribution.

 

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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 375 independently owned grocery stores and our 97 corporate owned stores. Our Retail segment operates 97 retail supermarkets in Michigan under banners including D&W Fresh Markets, Family Fare Supermarkets, Glen’s Markets and VG’s Food and Pharmacy and 26 fuel centers/convenience stores, adjacent to our supermarket locations, under the banners D&W Fresh Markets Quick Stop, Family Fare Quick Stop, Glen’s 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 period. 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. Typically all quarters are 12 weeks, except for our third quarter, which is 16 weeks and includes the Thanksgiving and Christmas holidays. Fiscal year 2012 will include a 53^rd week.

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 General Teamsters Union 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. The prior year second quarter and prior year-to-date after tax benefits related to the warehouse optimization were $0.8 million and $0.5 million, respectively. For the full year fiscal 2011, we incurred an after tax net benefit of $0.6 million as a result of a favorable LIFO inventory benefit due to inventory reductions, partially offset by a lease termination and additional distribution center closing costs.

 

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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
		12 Weeks Ended								24 Weeks Ended								12 Weeks Ended				24 Weeks Ended
		Sept. 10, 2011				Sept. 11, 2010				Sept. 10, 2011				Sept. 11, 2010				Sept. 10, 2011				Sept. 10, 2011
Net sales			100.0				100.0				100.0				100.0				2.9				3.6
Gross margin*			21.4				22.5				21.1				22.2				(1.8	)			(1.5	)
Selling, general and administrative expenses			18.2				18.8				18.3				19.0				0.0				0.2
Restructuring and asset impairments costs			—				—				—				0.2					**				**
Operating earnings			3.2				3.7				2.8				3.0				(9.5	)			(4.1	)
Other income and expenses			0.5				0.6				0.5	***			0.6				(3.7	)			(4.9	)
Earnings before income taxes and discontinued operations			2.7				3.1				2.2				2.4				(10.6	)			(3.9	)
Income taxes			1.0				1.2				0.9				0.9				(12.5	)			(1.0	)
Earnings from continuing operations			1.7				1.9				1.3				1.5				(9.5	)			(5.8	)
(Loss) earnings from discontinued operations, net of taxes			(0.0	)			(0.0	)			(0.0	)			(0.0	)				**				**
Net earnings			1.7				1.9				1.3				1.5				(8.8	)			(5.5	)

*Prior year includes LIFO income related to the warehouse consolidation initiative.

** Percentage change is not meaningful

*** Difference due to rounding

Net Sales – Net sales for the quarter ended September 10, 2011 (“second quarter”) increased $17.6 million, or 2.9%, from $602.1 million in the quarter ended September 11, 2010 (“prior year second quarter”) to $619.6 million. Net sales for the year-to-date period ended September 10, 2011 (“current year-to-date”) increased $42.9 million, or 3.6%, from $1,179.3 million in the prior year-to-date period ended September 11, 2010 (“prior year-to-date”) to $1,222.2 million.

Net sales for the second quarter in our Retail segment increased $9.9 million, or 2.8%, from $353.5 million in the prior year second quarter to $363.4 million. Net sales for the year-to-date period increased $23.5 million, or 3.4%, from $685.4 million in the prior year-to-date period to $708.9 million. The second quarter increase was primarily due to an increase in fuel center sales of $14.4 million partially offset by a comparable sales decrease of 1.3%. The year-to-date increase was primarily due to an increase in fuel center sales of $29.3 million partially offset by a comparable sales decrease of 1.1%.

The decrease in comparable store sales was due to a shift in the timing of food stamp distributions by the State of Michigan to the third quarter from the second quarter of fiscal 2012 and weaker comparable store sales over the Labor Day holiday selling period due to unfavorable weather conditions and a more cautious consumer. 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.

Net sales for the second quarter in our Distribution segment increased $7.6 million, or 3.1%, from $248.6 million in the prior year second quarter to $256.2. Net sales for the current year-to-date period increased $19.5 million, or 3.9%, from $493.9 million in the prior year-to-date period to $513.4 million. The second quarter increase was due to new warehouse business of $5.6 million and comparable sales increase of 0.4% to existing independent customers. The year-to-date increase was due to new warehouse business of $10.0 million, an increase in net pharmacy sales of $6.3 million, and comparable sales increase of 0.6% to existing independent customers.

 

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The Company expects earnings from continuing operations for the second half of the year, excluding the 53^rd week and the prior year unusual items, will approximate last year while Adjusted EBITDA will exceed the prior year’s levels. However, the third quarter will face several significant headwinds, which will cause it to be less profitable than a year ago. The first of these headwinds is a significant increase in the LIFO expense of $1.7 million which is a result of the current year’s inflation. Second, the launch of the Yes loyalty card in the quarter is expected to negatively impact gross margins, marketing expense and store labor by an incremental $1.2 million. Finally, incentive compensation is expected to exceed the prior year by $1.0 million due to the timing of the prior year’s provision. These headwinds are expected to be partially offset by the continued impact of inflation and improved sales as comparable store sales become flat to slightly positive and distribution sales continue to grow versus last year, but at a lower rate. As a result of the net impact of these events the Company expects to report earnings per share in the range of $0.20 to $0.23 for the third quarter.

The Company anticipates that the fourth quarter of fiscal 2012’s financial performance will rebound and offset most if not all of the third quarter shortfall to the prior year as the incremental LIFO expense is expected to be lower than the third quarter. Additionally, in the fourth quarter of fiscal 2012 the Company expects it will continue to benefit from the Yes program without the incremental start-up costs and will incur substantially lower incentive compensation expense than the prior year due to the timing of the prior year provision and the cycling of a significant retirement payment.

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 second quarter decreased $2.5 million, or 1.8%, from $135.2 million in the prior year second quarter to $132.7 million. As a percent of net sales, gross margin for the second quarter decreased to 21.4% from 22.5%. The decrease in gross margin rate was due primarily to a shift in mix of sales to distribution and fuel and a decline in distribution margins driven by LIFO income of $1.5 million that was recognized in the prior year related to the Company’s reduced inventory levels resulting from the warehouse consolidation initiative. LIFO expense for second quarter fiscal 2012 was $0.9 million versus $0.1 million in the prior year second quarter, excluding the impact of the LIFO income mentioned above, due to higher inflation in this year’s second quarter. Gross margin for the year-to-date period decreased $3.8 million, or 1.5%, from $261.9 million in the prior year-to-date period to $258.1 million. As a percent of net sales, gross margin for the year-to-date period decreased to 21.1% from 22.2%. This decrease was due to a decline in distribution margins driven by LIFO income of $3.5 million that was recognized in the prior year related to the Company’s reduced inventory levels resulting from the warehouse consolidation. Excluding this impact, LIFO expense for year-to-date fiscal 2012 was $1.5 million versus $0.2 million in the prior year.

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 and other administrative costs.

SG&A expenses for the second quarter (excluding restructuring) were comparable to the prior year second quarter at $112.9 million. As a percent of net sales, SG&A expenses (excluding restructuring) were 18.2% for the second quarter compared to 18.8% in the prior year second quarter. SG&A expenses (excluding restructuring) for the year-to-date period increased $0.5 million, or 0.2%, from $223.7 million in the prior year-to-date period to $224.2 million. As a percent of net sales, operating expenses (excluding restructuring) were 18.3% for the current year-to-date period compared to 19.0% in the prior year-to-date period.

 

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The second quarter SG&A expenses were comparable to prior year primarily due to the following:

 

•

Decreases in store labor of $1.2 million primarily due to favorable health benefits as a result of lower claims activity.

 

•

Decreases in our Retail segment primarily due to lower occupancy costs of $0.6 million.

 

•

Decreases in service income of $0.5 million in our Distribution segment.

 

•

Decreases in warehousing expenses of $0.4 million due to the prior year warehouse consolidation initiative.

 

•

Decreases in various other expenses including advertising, insurance, and vehicle operations due to continuing focus on containing costs.

 

•

Improved vendor reimbursements of $0.7 million offset by increased unusual corporate professional fees of $1.2 million, increased shipping and handling costs of $0.5 million, increased service costs of $0.5 million, and increased compensation and benefits of $0.3 million in our Distribution segment.

 

•

Increased depreciation and amortization of $0.3 million.

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

 

•

Decreases in store labor of $1.8 million primarily due to favorable health benefits as a result of lower claims activity.

 

•

Decreases in our Retail segment primarily due to lower occupancy costs of $1.4 million.

 

•

Decreases in warehousing expenses of $0.5 million due principally to the prior year warehouse consolidation initiative.

 

•

Decreases in various other expenses including advertising, supplies, and vehicle operations due to continuing focus on containing costs.

 

•

Improved vendor reimbursements of $1.3 million offset by increased unusual corporate professional fees of $1.2 million, increased compensation and benefit expenses of $1.0 million, and shipping and handling costs of $1.0 million in our Distribution segment.

 

•

Increased depreciation and amortization of $0.9 million.

Restructuring, Asset Impairment and Other – The second quarter restructuring benefit of $0.1 million related primarily to change in estimates made related to final settlements of expired leases and expenses related to two closed retail stores. The prior year second quarter charges of $0.2 million, and prior year-to-date charges of $2.8 million, consisted primarily of charges/adjustments related to the Company’s warehouse consolidation initiative, which began in fiscal 2010.

Interest Expense – Interest expense decreased $0.1 million, or 3.7%, from $3.5 million in the prior year first quarter to $3.4 million. For the year-to-date period, interest expense decreased $0.4 million, or 4.9%, from $6.9 million to $6.5 million. The decrease in interest expense was due primarily to lower net borrowings.

Income Taxes – In the first quarter of fiscal 2012, the Michigan state legislature enacted the Corporate Income Tax (CIT) effective January 1, 2012. The new CIT will replace the current Michigan Business Tax that is in effect through December 31, 2011. As a result, Spartan Stores recorded a one-time, non-cash income tax charge relating to the write-off of net deferred tax assets and liabilities that will no longer be realized under the CIT of approximately $0.5 million in Income Taxes in the first quarter and a corresponding change in Deferred Taxes on Income.

The effective tax rate is 38.2% and 39.0% for the second quarter and prior year second quarter, respectively. The year-to-date effective tax rate is 40.2% and 39.0% for the current year and prior year, respectively. The difference from the statutory rate is primarily due to State of Michigan income taxes plus the charge related to the state tax law change outlined above. Without this change the year-to-date effective rate would have been 38.3% this year.

 

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Adjusted EBITDA

Consolidated Adjusted EBITDA is a non-GAAP operating financial measure that we define as net earnings from continuing operations plus depreciation and amortization, and other non-cash items including imputed interest, deferred (stock) compensation, the LIFO provision, as well as adjustments for unusual items that do not reflect the ongoing operating activities of the Company and costs associated with the closing of operational locations, interest expense and the provision for income taxes to the extent deducted in the computation of Net Earnings.

We believe that Adjusted EBITDA provides a meaningful representation of our operating performance for the Company as a whole and for our operating segments. We consider 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 our retail stores and wholesale 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 is a performance measure that management uses to allocate resources, assess performance against its peers and evaluate overall performance, we believe it provides useful information for our investors. In addition, securities analysts, fund managers and other shareholders and stakeholders that communicate with us request our operating financial results in Adjusted EBITDA format.

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. 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 September 10, 2011 and September 11, 2010.

 

		Second Quarter								Year-to-Date
(In thousands)		Sept. 10, 2011				Sept. 11, 2010				Sept. 10, 2011				Sept. 11, 2010
Net earnings		$	10,252			$	11,239			$	16,281			$	17,226
Add:
Discontinued operations			18				106				124				194
Income taxes			6,341				7,244				11,030				11,137
Interest expense			3,412				3,504				6,654				6,933
Non-operating expense			(42	)			(4	)			(112	)			(54	)
Operating earnings			19,981				22,089				33,977				35,436
Add:
Depreciation and amortization			8,408				8,071				16,775				15,906
LIFO (income) expense			869				(1,400	)			1,527				(3,208	)
Restructuring and asset impairment costs			(135	)			183				(135	)			2,765
Other unusual items			1,194				—				1,194				—
Non-cash stock compensation and other charges			810				1,045				2,360				2,123
Adjusted EBITDA		$	31,127			$	29,988			$	55,698			$	53,022
Reconciliation of operating earnings to adjusted EBITDA by segment:
Retail:
Operating earnings		$	11,217			$	11,366			$	17,811			$	16,728
Add:
Depreciation and amortization			6,432				6,128				12,886				12,092
LIFO expense			526				100				964				200
Restructuring and asset impairment costs			(98	)			3				(98	)			153
Non-cash stock compensation and other charges			365				539	*			1,137				1,135	*
Adjusted EBITDA		$	18,442			$	18,136			$	32,700			$	30,308
Distribution:
Operating earnings		$	8,764			$	10,723			$	16,166			$	18,708
Add:
Depreciation and amortization			1,976				1,943				3,889				3,814
LIFO (income) expense			343				(1,500	)			563				(3,408	)
Restructuring and asset impairment costs			(37	)			180				(37	)			2,612
Other unusual items			1,194				—				1,194				—
Non-cash stock compensation and other charges			445				506	*			1,223				988	*
Adjusted EBITDA		$	12,685			$	11,852			$	22,998			$	22,714

* Prior year stock compensation has been reclassed to conform to the current year to reflect the amount included in the cost allocated to the Retail segment.

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.

 

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Liquidity and Capital Resources

The following table summarizes our consolidated statements of cash flows for the second quarter and prior year second quarter:

 

(In thousands)		September 10, 2011				September 11, 2010
Net cash provided by operating activities		$	42,463			$	45,459
Net cash used in investing activities			(21,439	)			(14,977	)
Net cash used in financing activities			(2,462	)			(13,733	)
Net cash used in discontinued operations			(306	)			(795	)
Net increase in cash and cash equivalents			18,256				15,954
Cash and cash equivalents at beginning of year			43,824				9,170
Cash and cash equivalents at end of period		$	62,080			$	25,124

Net cash provided by operating activities decreased from the prior year-to-date period primarily due to increased working capital as a result of increased sales and the payment of fiscal year 2011 incentive compensation.

Net cash used in investing activities increased during the current year-to-date period primarily due to capital expenditures which increased $5.9 million to $20.9 million. Of this amount, our Retail and Distribution segments utilized 85.8% and 14.2%, respectively, compared to 70.5% and 29.5%, respectively, in the prior year.

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 $118.4 million above these limits as of September 10, 2011 and we do not expect to fall below the restricted levels. We expect capital and real estate development expenditures to range from $42.0 million to $45.0 million for fiscal 2012.

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. Net payments on long-term borrowings were $1.9 million in the current year-to-date period, partially offset by net proceeds from revolver borrowings of $0.2 million. In the prior year-to-date period, net long-term repayments totaled $13.1 million partially offset by net proceeds from revolver borrowings of $0.2 million. Cash dividends of $1.5 million were paid in the first and second quarter fiscal 2012 versus $1.1 million in the prior year. This increase was due to a 30% increase in dividends from $0.05 per share to $0.065 per share that was approved by the Board of Directors and announced on May 18, 2011. 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 September 10, 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 leases related to closed stores, 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 September 10, 2011, our senior secured revolving credit facility had outstanding borrowings of $45.1 million and additional available borrowings of $138.4 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 total net long-term debt (including current maturities and capital lease obligations net of cash and cash equivalents) to total capital ratio at September 10, 2011 was 0.26:1.00 versus 0.30:1.00 at March 26, 2011, and our long-term debt to capital ratio for the same periods was 0.36:1.00 and 0.38:1.00, respectively. Total net long-term debt is a non-GAAP financial measure that is defined as long-term debt and capital lease obligations plus current

 

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maturities of long-term debt and capital lease obligations less cash and cash equivalents. The Company believes 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.

Following is a reconciliation of long-term debt and capital lease obligations to total net long-term debt and capital lease obligations as of September 10, 2011 and March 26, 2011.

 

(In thousands)		September 10, 2011				March 26, 2011
Current maturities of long-term debt and capital lease obligations		$	4,249			$	4,205
Long-term debt and capital lease obligations			173,282				170,711
Total Debt			177,531				174,916
Cash and cash equivalents			(62,080	)			(43,824	)
Total net long-term debt		$	115,451			$	131,092

The increase in total debt between March 26, 2011 and September 10, 2011 is primarily driven by a $2.8 million capital lease entered into during the second quarter of fiscal 2012.

For information on contractual obligations, see our Annual Report on Form 10-K for the fiscal year ended March 26, 2011. At September 10, 2011, there have been no material changes to our significant contractual obligations outside the ordinary course of business.

Our current ratio increased to 1.38:1.00 at September 10, 2011 from 1.29:1.00 at March 26, 2011 and our investment in working capital increased to $70.6 million at September 10, 2011 from $47.3 million at March 26, 2011 principally due to increased cash on hand.

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).

 

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The following table shows the indebtedness and other liabilities of our subsidiaries as of September 10, 2011:

Spartan Stores Subsidiaries Only

(In thousands)

 

		September 10, 2011
Current Liabilities
Accounts payable		$	126,350
Accrued payroll and benefits			30,001
Other accrued expenses			18,809
Current portion of restructuring costs			4,101
Current maturities of long-term debt and capital lease obligations			4,249
Total current liabilities			183,510
Long-term Liabilities
Postretirement benefits			13,355
Other long-term liabilities			14,502
Restructuring costs			8,908
Long-term debt and capital lease obligations			41,386
Total long-term liabilities			78,151
Total Subsidiary Liabilities			261,661
Operating Leases			117,148
Total Subsidiary Liabilities and Operating Leases		$	378,809

Ratio of Earnings to Fixed Charges

Our ratio of earnings to fixed charges was 3.78:1.00 and 4.00:1.00 for the second quarter and prior year second quarter, respectively, and 3.33:1.00 and 3.32:1.00 for the year-to-date and prior year-to-date periods, respectively. 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 $0.6 million outstanding and unused at September 10, 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.

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 26, 2011.

 

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 26, 2011.

 

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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 September 10, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds

On May 17, 2011, the Board of Directors authorized a five-year share repurchase program for up to $50 million of the Company’s common stock. There were no repurchases of the Company's common stock under this program during the quarter ended September 10, 2011.

The following table provides information regarding the Company's purchases of its own common stock during the first quarter. All transactions reported below are with associates under stock compensation plans. These may include: (1) shares of Spartan Stores, Inc. common stock delivered in satisfaction of the exercise price and/or tax withholding obligations by holders of employee stock options who exercised options, and (2) shares submitted for cancellation to satisfy tax withholding obligations that occur upon the vesting of the restricted shares. The value of the shares delivered or withheld is determined by the applicable stock compensation plan.

Spartan Stores, Inc. Purchases of Equity Securities

 

Period		Total Number of Shares Purchased				Average Price Paid per Share
June 19 – July 16, 2011
Employee Transactions			47			$	20.73
July 17 – August 13, 2011
Employee Transactions			—			$	—
August 14 – September 10, 2011
Employee Transactions			36			$	14.76
Total for Second Quarter ended September 10, 2011			83			$	18.14

 

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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. Previously filed as an exhibit to Spartan Stores’ Quarterly Report on Form 10-Q for the quarter ended January 1, 2011. Here incorporated by reference.
3.2		Bylaws of Spartan Stores, Inc., as amended.
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.
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

 

*

Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

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

 

				SPARTAN STORES, INC. (Registrant)
Date: October 20, 2011				By		/s/ David M. Staples
						David M. Staples Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and duly authorized to sign for Registrant)

 

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EXHIBIT INDEX

 

Exhibit Number		Document
3.1		Restated Articles of Incorporation of Spartan Stores, Inc. Previously filed as an exhibit to Spartan Stores’ Quarterly Report on Form 10-Q for the quarter ended January 1, 2011. Here incorporated by reference.
3.2		Bylaws of Spartan Stores, Inc., as amended.
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.
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

 

*

Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.