UNITED NATURAL FOODS, INC.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $660.9$1,489 million based upon the closing price of the registrant’s common stock on the New York Stock Exchange on January 25, 2019.29, 2021. The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of September 26, 201923, 2021 was 53,434,241.56,445,293.
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on December 18, 2019January 11, 2022 are incorporated herein by reference into Part III of this Annual Report on Form 10-K.
UNITED NATURAL FOODS, INC.
PART I.
In this Annual Report on Form 10-K (“Annual Report” or “Report”), unless otherwise specified, references to “United Natural Foods”, “UNFI”, “we”, “us”, “our” or the “Company” mean United Natural Foods, Inc. together with its consolidated subsidiaries. We are a Delaware corporation based in Providence, Rhode Island and Eden Prairie, Minnesota. We conduct our business through various subsidiaries. Since the formation of our predecessor in 1976, we have grown our business both organically and through acquisitions, which have expanded our distribution network, product selection and customer base.
As a leading distributor of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services to retailers in the United States and Canada, we believe we are uniquely positioned to provide the broadest array of products and services to customers throughout North America. We offer more than 250,000nearly 300,000 products consisting of national, regional and private label brands grouped into six product categories: grocery and general merchandise; produce; perishables and frozen foods; nutritional supplements and sports nutrition; bulk and food service productsproducts; and personal care items. Through our October 2018 acquisition of SUPERVALU INC. (“Supervalu”),We believe we are transforming into North America’s premier wholesaler with 6357 distribution centers and warehouses representing approximately 3230 million square feet of warehouse space. We are a coast-to-coast distributor with customers in all fifty states as well as all ten provinces in Canada, making us a desirable partner for retailers and consumer product manufacturers. We believe our total product assortment and service offerings are unmatched by our wholesale competitors. We plan to aggressively pursue new business opportunities to independent retailers who operate diverse formats, regional and national chains, military commissaries, as well as international customers with wide-ranging needs. Our business is classified into two reportable segments: Wholesale and Retail; and also includes a manufacturing division and a branded product line division.
Our subsidiary doing business as Woodstock Farms Manufacturing specializes in importing, roasting, packaging and the distribution ofdistributing nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections for our customers and in the Company’s branded products. Woodstock Farms Manufacturing sells items manufactured in bulk and through private label packaging arrangements with large health food, supermarket and convenience store chains and independent retailers.
We operate an organic (United States Department of Agriculture (“USDA”) and Quality Assurance International (“QAI”)) and kosher (Circle K) certified packaging, roasting, and processing facility in New Jersey that is SQF (Safety Quality Food) level 2 certified.
We offer a broad array of professional services that provide Wholesale customers with cost-effective and scalable solutions. These services include pass-through programs in which vendors provide services directly to our Wholesale customers, as well as services and solutions we develop and provide directly. Our services include retail store support, pricing strategy, shelf and planogram management, advertising, couponing, e-commerce,eCommerce, consumer convenience services, store design, equipment sourcing, electronic payments processing, network and data hosting solutions, training and certifications classes, and administrative back-office solutions. The sales and operating results for these services are included within Wholesale.
We offer a variety of marketing services designed to increase sales for our customers and suppliers, including consumer and trade marketing programs, as well as programs to support suppliers in understanding our markets. Trade and consumer marketing programs are supplier-sponsored programs that cater to a broad range of retail formats. These programs are designed to educate consumers, profile suppliers and increase sales for retailers, many of which do not have the resources necessary to conduct such marketing programs independently. Set forth below are the services offered by each toof these programs:
We maintain a comprehensive quality assurance program. All of the products we sell that are represented as “organic” are required to be certified as such by an independent third-party agency. We maintain current certification affidavits on most organic commodities and produce in order to verify the authenticity of the product. Most potential suppliers of organic products are required to provide such third-party certifications to us before they are approved as suppliers.
We have positioned ourselves as one of the largest purchasers of organically grown bulk products in the natural and organic products industry by centralizing our purchase of nuts, seeds, grains, flours and dried foods. As a result, we are able to negotiate purchases from suppliers on the basis of volume and other considerations that may include discounted pricing or prompt payment discounts. Furthermore, some of our purchase arrangements include the right of return to the supplier with respect to products that we do not sell in a certain period of time. Each region is responsible for placing its own orders and can select the products that it believes will most appeal to its customers, although each region is able to participate in our company-wide purchasing programs.
We ship certain orders for supplements or for items that are destined for areas outside of regular delivery routes through independent carriers. Deliveries to areas outside the continental United States and Canada are typically shipped by freight-forwarders through ocean-going containers on a weekly basis.containers.
Our operations and many of the products that we distribute in the United States are subject to regulation by state and local health departments, the USDA and the United States Food and Drug Administration (the “FDA”), which generally impose standards for product quality and sanitation and are responsible for the administration of bioterrorism legislation. In the United States, our facilities generally are inspected at least once annually by state or federal authorities. For certain product lines, we are also subject to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Packers and Stockyard Act and regulations promulgated by the USDA to interpret and implement these statutory provisions. The USDA imposes standards for product safety, quality and sanitation through the federal meat and poultry inspection program.
The Surface Transportation Board and the Federal Highway Administration regulate our trucking operations. In addition, interstate motor carrier operations are subject to safety requirements prescribed by the United States Department of Transportation and other relevant federal and state agencies. Such matters as weight and dimension of equipment are also subject to federal and state regulations.
Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management’s ability to execute our operating and growth strategies, personnel changes, demand for our products, supply shortages and general economic conditions. Our working capital needs are generally greater during the months leading up to high sales periods, such as the build up in inventory during the time period leading to the calendar year-end holidays. Our inventory, accounts payable and accounts receivable levels may be impacted by macroeconomic impacts and changes in food-at-home purchasing rates. These effects can result in normal operating fluctuations in working capital balances, which in turn can result in changes to cash flow from operations that are not necessarily indicative of long-term operating trends.
Our internet address is http://www.unfi.com. The contents of our website are not part of this Annual Report, and our internet address is included in this document as an inactive textual reference only. We make our Annual Report, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) available free of charge through our website as soon as reasonably practicable after we file such reports with, or furnish such reports to, the Securities and Exchange Commission.
ITEM 1A. RISK FACTORS
Our business, financial condition and results of operations are subject to various risks and uncertainties, including those described below and elsewhere in this Annual Report. This section discusses factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. If any of the events described below occurs, our business, financial condition or results of operations could be materially adversely affected and our stock price could decline.
We provide these factors for investors as permitted by and to obtain the rights and protections under the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties applicable to our business. See “ItemItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-Looking Statements”Statements for more information on our business and the forward-looking statements included in this Annual Report.
We depend heavily on our principal customers and our success is heavily dependent on our principal customers’ ability to maintain and grow their business.businesses.
Our business is acharacterized by low margin businessmargins, which are sensitive to inflationary and our profit margins may decrease due todeflationary pressures, and intense competition and consolidation in the grocery industry.industry, and our inability to maintain or increase our operating margins could adversely affect our results of operations.
The grocery industry is characterized by a relatively high volume of sales with relatively low profit margins, and as competition in certain areas intensifies and the industry continues to consolidate, our results of operations may be negatively impacted through a loss of sales and reductions in gross margins. The grocery business is intensely competitive, and the recentongoing consolidation and ongoing consolidationevolving competitive landscape within the grocery industry is expected to result in increased competition, including from some competitors that have greater financial marketing, and other resources than we do. Consumers also have more choices than conventionalfor grocery purchases, including independent retailers that we do not supply and e-commerceeCommerce solutions, which reduces the demand for products supplied by our wholesale customers. We cannot provide assurance that we will be able to compete effectively against current and future competitors.
Our ability to compete successfully will be largely dependent on our ability to provide quality products and services at competitive prices. Bidding for contracts or arrangements with customers, particularly within the supernatural and supermarkets channels, is highly competitive. Our competition comes from a variety of sources, including other distributors of natural and conventional products, as well as specialty or independent grocery and mass market grocery distributors and retailcooperatives, as well as customers that have their own distribution channels. Mass market grocery distributors in recent years have increased their emphasis on natural and organic products and are now competing more directly with our natural and organic product offerings, which are higher marginand they may have substantially greater financial and other resources than conventional product offerings. The higher margin on naturalwe have and may be better established in their markets. Natural and organic product offerings typically generate higher margins, but these margins could be affected by changes in the public’s perception of the benefits of natural and organic products compared to similar conventional products.
In addition, many supermarket chains have increased self-distribution or purchases directly from suppliers of particularcertain items that we sell or have increased their purchases of particular items that we sell directly from suppliers.sell. New competitors are also entering our markets as barriers to entry for new competitors are relatively low. For example, more natural and organic products are being sold in convenience stores and other mass market retailers and online through e-commerceeCommerce than was the case a few years ago, and many of these customers are being serviced by other conventional distributors or are self-distributing. Some of the mass market grocery distributors with whom we compete may have substantially greater financial and other resources than we have and may be better established in their markets. We also face indirect competition as a result of the fact that our customers with physical locations face competition from online retailers and distributors that seek to sell certain of the type of products we sell to our customers directly to consumers. We cannot assure you that our current or potential competitors will not provide products or services comparable or superior to those provided by us or adapt more quickly than we do to evolving industry trends or changing market requirements. It is also possible that alliances among competitors may develop and that competitors may rapidly acquire significant market share or that certain of our customers will increase distribution to their own retail facilities.share. Increased competition may result in price reductions, reduced gross margins, lost business and loss of market share, any of which could materially and adversely affect our business, financial condition, or results of operations.
The continuing consolidation of retailers, in the natural products industry, the growth of supernatural chains, and increased closures of conventional grocery locations may reduce our profit margins in the future as more customers qualify for greater volume discounts, and as we experience pricing pressures from suppliers and retailers. Sales to chain customers within our supernatural and supermarkets channels generate a lower gross margin than do sales to our independents channel customers. Many of these customers, including our largest customer, have agreements with us that include volume discounts. As the amounts these customers purchase from us increase, the price that they pay for the products they purchase is reduced, puttingdiscounts, which puts downward pressure on our gross margins onas sales to these sales.customers increase. To compensate for these lower gross margins, we must increase the amountdollar value of products we sell or reduce the expenses we incur to service these customers. If we are unable to reduce our expenses as a percentage of net sales, including our expenses related to servicing this lower gross margin business, our business, financial condition, or results of operations could be materially and adversely impacted.
We are transforming our business and have engaged, and may continue to engage in, acquisitions and divestitures and other strategic initiatives, and may encounter difficulties integrating acquired businesses or divesting businesses or assets and may not realize the anticipated benefits of our acquisitions and divestitures, including, in particular, our recent acquisition of Supervalu.
We have engaged in, and could potentially continue to pursue, strategic transactions and initiatives as we transform our business. Acquisitions and divestitures present significant challenges and risks relating to the integration of acquired businesses and the separation of divested businesses.
On October 22, 2018, we acquired Supervalu, a complex business that was in the process of integrating two recently acquired substantial businesses. On June 23, 2017, Supervalu acquired Unified Grocers, Inc. (“Unified”), a retailer-owned cooperative focused on wholesale grocery and specialty distribution on the West Coast of the United States. On December 8, 2017, Supervalu acquired Associated Grocers of Florida, Inc. (“AG Florida”), a retailer-owned cooperative that distributes full lines of grocery and general merchandise to independent retailers, located primarily in South Florida, the Caribbean, Central and South America and Asia. The processes of integrating Supervalu, Unified and AG Florida may be disruptive to our business operations and may distract our management team from their day-to-day responsibilities. There can also be no assurance that we will be able to successfully integrate Supervalu, Unified, and AG Florida to achieve the operational efficiencies, including synergistic and other benefits of the acquisitions.
Our ability to achieve the expected benefits of these acquisitions, and in particular the Supervalu acquisition, will depend on, among other things, our ability to effectively execute on our business strategies, retain customers and suppliers on terms similar to those in place with the acquired businesses, achieve desired operating efficiencies and sales growth, optimize delivery routes, coordinate administrative and distribution functions, integrate management information systems, expand into new markets to include markets of the acquired business, retain and assimilate the acquired businesses’ employees, and maintain our financial
and internal controls and systems as we expand our operations. Achieving the anticipated benefits of acquisitions also depends on the adequacy of our implementation plans and the ability of management to oversee and operate effectively the combined operations.
To realize the anticipated benefits of the Supervalu acquisition, our business must be successfully combined with Supervalu. We could fail to realize the anticipated benefits for a variety of reasons, including failure to manage relationships with Supervalu’s customers and suppliers, revenue attrition in excess of anticipated levels, potential incompatibility of distribution and logistics operations and systems, failure to leverage the increased scale of the combined company quickly and effectively, difficulties integrating and harmonizing financial reporting systems, loss of key employees, failure to effectively coordinate sales and marketing efforts to communicate the capabilities of the combined company, and failure to execute efficient distribution of our spectrum of product offerings.
The integration of the businesses that we acquired, and in particular Supervalu, might also cause us to incur unforeseen costs, which would lower our future earnings and would prevent us from realizing the expected benefits of these acquisitions. Any of the businesses we acquired may also have liabilities or adverse operating issues, including some that were not discovered before the acquisition, and our indemnity for such liabilities may also be limited or nonexistent. The integration process could divert the attention of management and temporarily redirect resources primarily focused on reducing product cost and operating expenses, resulting in lower gross profits in relation to sales. In addition, the process of combining our company with Supervalu could cause interruption or loss of momentum in the activities of the respective businesses, which could have a material adverse effect on the combined operations.
Additionally, our ability to make any future acquisitions may depend upon obtaining additional financing. We may not be able to obtain additional financing on acceptable terms or at all. To the extent that we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions. Failure to achieve the anticipated benefits of acquisitions could result in decreases in the amount of expected revenues and diversion of management’s time and energy. Therefore, future acquisitions, if any, could materially and adversely impact our business, financial condition, or operating results including, ultimately, a reduction in our stock price, particularly in periods immediately following the consummation of those transactions while the operations of the acquired business are being integrated with our operations.
We have announced our intention to divest Supervalu’s retail grocery businesses in an efficient and economic manner. There can be no assurance that we will be able to (i) identify buyers for the retail business of Supervalu on favorable terms or at all, (ii) effectively retain employees and conduct business at the stores within the retail business while we seek to identify buyers for these operations, or (iii) effectively minimize liabilities and stranded costs associated with the disposal of these operations, including surplus property and management of remaining obligations under real estate leases. If we are unable to divest Supervalu’s retail grocery business, or realize less net proceeds from the divesture than we anticipate, we may not be able to reduce our indebtedness
as planned and will incur higher interests costs as a result. Our inability to complete or realize the projected benefits of planned and/or future divestitures could have a material adverse effect on our business, financial condition, or results of operations.
We may have difficulty managing our growth.
The growth in the size of our business and operations has placed, and is expected to continue to place, a significant strain on our management. Our future growth may be limited by strong growth by certain of our largest customers or our inability to optimize our network of distribution centers to serve our customers, retain existing customers, successfully integrate acquired entities or significant new customers, implement information systems initiatives, or adequately manage our personnel.
We have substantially expanded our distribution center network through the acquisition of Supervalu. If we fail to optimize the volume of supply operations in our distribution center network or do not retain existing business, excess capacity may be created. Any excess capacity may create inefficiencies and adversely affect our business, financial condition, or results of operations, including as a result of incurring operating costs for these facilities while the volume of products supplied from these facilities is insufficient to cover these costs.
We cannot assure you that we will be able to successfully optimize our distribution center network or open new distribution centers in new or existing markets if needed to accommodate or facilitate growth or that certain of our distribution centers will not have, or continue to have, operational challenges. Our ability to compete effectively and to manage future growth, if any, will depend on our ability to maximize operational efficiencies across our distribution center network, to implement and improve on a timely basis operational, financial and management information systems, including our warehouse management systems, and to expand, train, motivate and manage our work force. We cannot assure you that our existing personnel, systems, procedures and controls will be adequate to support the future growth of our operations. Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition, or results of operations, or other operational challenges are addressed in a timely manner.
Our future growth is limited in part by the size and location of our distribution centers. As we near maximum utilization of a given facility or maximize our processing capacity, operations may be constrained and inefficiencies have been and may be created, which could adversely affect our business, financial condition or results of operations unless the facility is expanded, volume is shifted to another facility, or additional processing capacity is added.
Our inability to maintain or increase our operating margins could adversely affect our results of operations and the price of our stock.
As competition increases, the grocery industry consolidates, macro challenges in grocery demand become more pronounced, and we attempt to affiliate larger wholesale customers, we expect to continue to face pressure on our operating margins. If we are not able to continue to capture scale efficiencies and enhance our merchandise offerings, if we are not able to achieve our targeted synergies for our acquisition of Supervalu and Supervalu’s acquisitions of Unified and AG Florida, or if we are not able to reduce our costs as we divest certain of our retail operations, we may not be able to achieve our goals with respect to operating margins. In addition, if we do not refine and improve our systems continually or if we are unable to effectively improve our systems without disruption, including any information technology migration to a cloud environment, we may not be able to reduce costs, increase sales and services, effectively manage inventory and procurement processes, or effectively manage customer pricing plans. As a result, our operating margins may stagnate or decline,decline.
Further, because many of our sales are at prices that are based on our product cost plus a percentage markup, volatile food costs have a direct impact upon our profitability. Prolonged periods of product cost inflation and periods of rapidly increasing inflation may have a negative impact on our profit margins and results of operations to the extent that we are unable to pass on all or a portion of such product cost increases to our customers. In addition, product cost inflation may negatively impact the consumer discretionary spending trends and reduce the demand for higher-margin natural and organic products, which could adversely affect the price of our stock.
Our wholesale distribution business could be adversely affected if we are not able to affiliate new customers, increase sales to existing customers or retain existing customers, or if our wholesale customers fail to perform.
The profitability of our wholesale segment is dependent upon sufficient volume to support our operating infrastructure, which is dependent on our ability to attract new customers, increase sales to existing customers, and retain existing customers. The inability to attract new customers or the loss of existing customers to a competing wholesaler or due to retail closure, vertical integration by an existing customer converting to self-distribution, or industry consolidation may negatively impact our sales and operating margins.
Our success also relies in part on the financial success and cooperation of our wholesale customers. These wholesale customers manage their businesses independently and, therefore, are responsible for the day-to-day operation of their stores. They may not experience an acceptable level of sales or profitability, and our revenues and gross margins could be negatively affected as a result. We may also need to extend credit to our wholesale customers, including through loans, market support or guarantees. While we seek to obtain security interests and other credit support in connection with the financial accommodations we extend, such collateral may not be sufficient to cover our exposure. Additionally, we sometimes enter into wholesale customer support arrangements to guaranty or subsidize real estate obligations, which make us contingently liable in the event our wholesale customers default. If sales trends or profitability worsen for wholesale customers, their financial results may deteriorate, which could result in, among other things, lost business for us, delayed or reduced payments to us or defaults on payments or other liabilities owed by wholesale customers to us, any of which could adversely impact our financial condition and results of operations, as well as our ability to grow our wholesale business. In this regard, our wholesale customers are affected by the same economic conditions, including food inflation and deflation, and competition that our retail segment faces. The magnitude of these risks increases as the size of our wholesale customers increases.
Many of our customers are not obligated to continue purchasing products from us and larger customers that do have multiyear contracts with us may terminate these contracts early in certain situations or choose not to renew or extend the contract at its expiration.
Many of our wholesale customers buy from us under purchase orders, and we generally do not have written agreements with or long-term commitments from these customers for the purchase of products. We cannot assure you that these customers will maintain or increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. Decreases in our volumes or orders for products supplied by us for these customers with whom we do not have a long-term contract may have a material adverse effect on our business, financial condition, or results of operations.
We may have contracts with certain of our customers (as is the case withprofitability. Conversely, because many of our conventional supermarket customers and our supernatural chain customer)sales are at prices that obligate the customer to buy products from us for a particular period of time. Even in this case, the contracts may not require the customer to purchase a minimum amount of products from us or the contracts may afford the customer better pricing in the event that the volume of the customer’s purchases exceeds certain levels. If these customers were to terminate or fail to perform under these contracts prior to their scheduled termination, or if we or the customer elected not to renew or extend the term of the contract at its expiration at historical purchase levels, it may have a material adverse effect on our business, financial condition, or results of operations, including additional operational expenses to transition out of the business or to adjust our facilities and staffing costs to cover the reduction in net sales.
Changes in relationships with our suppliers may adversely affect our profitability, and conditions beyond our control can interrupt our supplies and alter our product costs.
We cooperatively engage in a variety of promotional programs with our suppliers. We manage these programs to maintain or improve our margins and increase sales. A reduction or change in promotional spending by our suppliers (including as a result of increased demand for natural and organic products) could have a significant impact on our profitability. We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices, and recently we have experienced a higher than anticipated level of vendor out-of-stocks, which may expose us to reduced fill rates with our customers, resulting in higher costs, fees, or penalties, and therefore lower margins. We have no assurances of continued supply, pricing, or access to new products and any supplier could at any time change the terms upon which it sells to us or discontinue selling to us.
The majority of our suppliers are based in the United States and Canada, but we also source products from suppliers throughout Europe, Asia, Central America, South America, Africa and Australia. For the most part, we do not have long-term contracts withupon product cost plus a percentage markup, our suppliers committing them to provide products to us. Although our purchasing volume can provide benefits when dealing with suppliers, suppliersprofit levels may not provide the products needed by us in the quantities and at the prices requested. We are also subject to delays caused by interruption in production and increases in product costs based on conditions outsidebe negatively impacted during periods of our control. These conditions include work slowdowns, work interruptions, strikes or other job actions by employees of suppliers, short-term weather conditions or more prolonged climate change, crop conditions, product recalls, water shortages, transportation interruptions, unavailability of fuel or increases in fuel costs, competitive demands, raw material shortages, and natural disasters or other catastrophic events (including, but not limited to food-borne illnesses). As demand for natural and organic products has increased and the distribution channels into which these products are sold have expanded, we have continued to experience higher levels of manufacturer out-of-stocks, and to a lesser degree, we also experience out-of-stocks on certain conventional products. These shortages have caused us to incur higher operating expenses due to the cost of moving products around and between our distribution facilities in order to keep our service level high. We cannot be sure when this trend will end or whether it will recur during future years. As the consumer demand for natural and organic products has increased, certain retailers and other producers have entered the market and attempted to buy certain raw materials directly, limiting their availability to be used in certain supplier products.
In addition, increased tariffs on imported goods, and any retaliatory actions by affected countries, may result in an increased in our costs for goods imported into the United States, and may reduce customer demand for affected products if the parties having to pay those tariffs increase their prices.
Further, increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products, including the specialty protein and cheese products sold by Tony’s. For example, in the past, weather patterns have at times resulted in lower than normal levels of precipitation in key agricultural states such as California, impacting the price of water and corresponding prices of food products grown in states facing drought conditions. The impact of sustained droughts is uncertain and could result in volatile input costs. Input costs could increase at any point in time for a large portion of the products that we sell for a prolonged period. Conversely, in years where rainfall levels are abundant product costs, particularly in our perishable and produce businesses, may decline and the results of this product cost deflation could negatively impacteven though our results of operations. Our inability to obtain adequate productsgross profit as a resultpercentage of anynet sales may remain relatively constant. To compensate for lower gross margins, we, in turn, must reduce expenses that we incur to service our customers. If we are unable to reduce our expenses as a percentage of the foregoing factors or otherwise could prevent us from fulfilling our obligations to customers, and customers may turn to other distributors. In that case,net sales, our business, financial condition, or results of operations could be materially and adversely affected.impacted.
We have experienced losses due to the uncollectability of accounts receivable in the past and could experience increases in such losses in the future if our customers are unable to timely pay their debts to us.
Certain of our customers have from time to time experienced bankruptcy, insolvency, or an inability to pay their debts to us as they come due. If our customers suffer significant financial difficulty, they may be unable to pay their debts to us timely or at all, which could have a material adverse effect on our business, financial condition, or results of operations. It is possible that customers may reject their contractual obligations to us under bankruptcy laws or otherwise. Significant customer bankruptcies could further adversely affect our revenues and increase our operating expenses by requiring larger provisions for bad debt. In addition, even when our contracts with these customers are not rejected, if customers are unable to meet their obligations on a timely basis, it could adversely affect our ability to collect receivables. Further, we may have to negotiate significant discounts and/or extended financing terms with these customers in such a situation, each of which could have a material adverse effect on our business, financial condition, or results of operations.
During periods of economic weakness, small to medium-sized businesses, like many of our independents channel customers, may be impacted more severely and more quickly than larger businesses. Similarly, these smaller businesses may be more likely to be more severely impacted by events outside of their control, like significant weather events. Consequently, the ability of such businesses to repay their obligations to us may deteriorate, and in some cases this deterioration may occur quickly, which could materially and adversely impact our business, financial condition, or results of operations.
Our business strategy of increasing our sales of fresh, perishable items, which we accelerated with our acquisitions of Tony’s, Global Organic and Nor-Cal and which should be facilitated by the Supervalu acquisition, may not produce the results that we expect.
A key element of our current growth strategy is to increase the amount of fresh, perishable products that we distribute. We believe that the ability to distribute these products that are typically found in the perimeter of our customers’ stores, in addition to the products we have historically distributed, will differentiate us from our competitors and increase demand for our products. We accelerated this strategy with our acquisitions of Tony’s, Global Organic/Specialty Source, Inc. and related affiliates, and Nor-Cal, and most importantly Supervalu. If we are unable to grow this portion of our business and manage that growth effectively, our business, financial condition, or results of operations may be materially and adversely affected, or we may not be able to fully realize the benefits of the Supervalu acquisition.
We face risks related to labor relations, labor costs, and the availability of qualified labor.
As of August 3, 2019, approximately 4,800 of our 19,000 employees (approximately 25.3%) were covered by 46 collective bargaining agreements, including agreements under negotiation, which expire through April 2023, including 37 collective bargaining agreements assumed in our acquisition of Supervalu. If we are not able to renew these agreements or are required to make significant changes to these agreements that are unfavorable to us, our relationship with these employees may become fractured, work stoppages could occur or we may incur additional expenses which could have a material adverse effect on our business, financial condition, or results of operations. We have in the past been the focus of union-organizing efforts, and we believe it is likely that we will be the focus of similar efforts in the future. Additionally, the terms of some legacy Supervalu collective bargaining agreements may limit our ability to increase efficiencies, while the threat of labor disruption is greater due to the larger number of represented locations.
As we increase our employee base and broaden our distribution operations to new geographic markets, our increased visibility could result in increased or expanded union-organizing efforts. New contracts with existing unions could have substantially less favorable terms than prior to such expanded union-organizing efforts. In the event we are unable to negotiate contract renewals with our union associates, we could be subject to work stoppages. In that event, it would be necessary for us to hire replacement workers to continue to meet our obligations to our customers. The costs to hire replacement workers and employ effective security measures could negatively impact the profitability of any affected facility. Depending on the length of time that we are required to employ replacement workers and security measures these costs could be significant and could have a material adverse effect on our business, financial condition, or results of operations.
We are subject to a wide range of labor costs. Because our labor costs are, as a percentage of net sales, higher than in many other industries, we may be significantly harmed by labor cost increases. In addition, labor is a significant cost of many of our wholesale customers. Any increase in their labor costs, including any increases in costs as a result of increases in minimum wage requirements, could reduce the profitability of our customers and reduce demand for the products we supply.
Additionally, we risk a shortage of qualified labor. Recruiting and retention efforts, and actions to increase productivity, may not be successful, and we could encounter a shortage of qualified labor in the future. Such a shortage could potentially increase labor costs, reduce profitability or decrease our ability to effectively serve customers. We are undertaking efforts to automate certain functions of our business. If we are unable to realize our efforts to improve labor efficiency through automation, or increase productivity and efficiency through other methods, including as a result of delays in executing our business transformation and integration efforts, we may be more susceptible to labor shortages than our competitors.
Increases in healthcare, pension, and other costs under the Company’s and multiemployer benefit plans could adversely affect our financial condition and results of operations.
We provide health, defined benefit pension, defined contribution, and, in certain cases, postretirement benefits to many of our employees and, in some cases, former employees and the costs of such benefits continue to increase. The amount of any increase depends on a number of different factors, many of which are beyond our control. These factors include governmental regulations such as The Patient Protection and Affordable Care Act, which has resulted in changes to the U.S. healthcare system and imposes mandatory types of coverage, reporting and other requirements; return on assets held in plans; changes in actuarial valuations, estimates, assumptions or calculations used to determine our benefit obligations for certain benefit plans, which require the use of significant estimates, including the discount rate, expected long-term rate of return on plan assets, mortality rates and the rates of increase in compensation and healthcare costs; for multiemployer plans, the outcome of collective bargaining and actions taken by trustees who manage the plans; and potential changes to applicable legislation or regulation. If we are unable to control these benefits and costs, we may experience increased operating costs, which may adversely affect our financial condition and results of operations.
Additionally, Company-sponsored plans and multiemployer pension plans are underfunded with the projected benefit obligations exceeding the fair value of those plans’ assets, in certain cases (for example, Central States Pension Plan), by a wide margin. Withdrawal liabilities from multiemployer plans could be material, and potential exposure to withdrawal liabilities could cause us to forgo or negatively impact our ability to enter into other business opportunities. Some of these plans have required rehabilitation plans or funding improvement plans, and we can give no assurances of the extent to which a rehabilitation plan or a funding improvement plan will improve the funded status of the plan. We expect that increases of unfunded liabilities of these plans would result in increased future payments by us and the other participating employers over the next few years. A significant increase to funding requirements could adversely affect our financial condition, results of operations, or cash flows. The financial condition of these pension plans may also negatively impact our debt ratings, which may increase the cost of borrowing or adversely affect our ability to access financial markets.
Failure by us to develop and operate a reliable technology platform and the costs of maintaining secure and effective information technology systems could negatively impact our business, and we may not realize the anticipated benefits of our recent investments in information technology.
Our ability to decrease costs and increase profits, as well as our ability to serve customers most effectively, depends on the reliability of our technology platform. We use software and other technology systems, among other things, to receive, generate and select orders, to load and route trucks and to monitor and manage our business on a day-to-day basis. Failure to have adequate computer systems across the enterprise and any disruption to these computer systems could adversely impact our customer service, decrease the volume of our business, and result in increased costs negatively affecting our business, financial condition, or results of operations.
In our attempt to reduce operating expenses and increase operating efficiencies, we have invested in the development and implementation of new information technology. We are in the process of rolling out a national warehouse management and procurement system to convert our existing facilities into a single warehouse management and supply chain platform. In light of the acquisition of Supervalu,addition, we are reevaluating our warehouse management system strategy. However, we currently plan to remain focused on the automation of our new or expanded distribution centers that are at different stages of construction. We may not be able to implement these technological changes in the time frame that we have planned and delays in implementation (including delays resulting from the integration of Supervalu) could negatively impact our business, financial condition or results of operations. In addition, the costs to make these changes may exceed our estimates and will exceed the benefits during the early stages of implementation. Even if we are able to implement the changes in accordance with our current plans, and within our current cost estimates, we may not be able to achieve the expected efficiencies and cost savings from this investment, which could have a material adverse effect on our business, financial condition, or results of operations. Moreover, as we implement information technology enhancements, disruptions in our business may be created (including disruption with our customers), which may have a material adverse effect on our business, financial condition, or results of operations.
We face risks related to the availability of qualified labor, labor costs, and labor relations.
We have experienced, and may continue to experience, a shortage of qualified labor. Recruiting and retention efforts, and actions to increase productivity, may not be successful, and we could encounter a shortage of qualified labor in the future. Such a shortage could potentially increase labor costs, reduce profitability or decrease our ability to effectively serve customers. We are undertaking efforts to automate certain functions of our business. If we are unable to realize the anticipated benefits of our efforts to improve labor efficiency through automation or to increase productivity and efficiency through other methods, including as a result of delays in executing our business transformation and integration efforts, we may be more susceptible to labor shortages than our competitors. We have incurred increased costs to address a shortage of qualified labor in certain geographies, particularly with warehouse workers and drivers, including wage actions, sign-on bonus programs, and increased us of third-party labor.
We are subject to a wide range of labor costs. Because our labor costs are, as a percentage of net sales, higher than in many other industries, we may be significantly harmed by labor cost increases. In addition, labor is a significant cost of many of our wholesale customers. Any increase in their labor costs, including any increases in costs as a result of increases in minimum wage requirements, could reduce the profitability of our customers and reduce demand for the products we supply. Additionally, the terms of some legacy Supervalu collective bargaining agreements may limit our ability to increase efficiencies.
As of July 31, 2021, approximately 11,000 of our 28,300 employees (approximately 39%) were covered by 48 collective bargaining agreements, including agreements under negotiation, which expire through April 2027. In the event we are unable to negotiate reasonable contract renewals with our union associates or are required to make significant changes to terms that are unfavorable to us, our relationship with employees may become fractured, and we could be subject to work stoppages or additional expenses, which could have a material adverse impact on our business, financial condition, or results of operations. In that event, it would be necessary for us to hire replacement workers or implement other business continuity contingency plans to continue to meet our obligations to our customers. The costs to hire replacement workers, employ effective security measures, and, if necessary, serve customers from alternative facilities, could negatively impact the profitability of any affected facility. Depending on the length of time that we are required to employ replacement workers and security measures these costs could be significant and could have a material adverse effect on our business, financial condition, or results of operations.
We have in the past been the focus of union-organizing efforts, and we believe it is likely that we will be the focus of similar efforts in the future, and as we increase our employee base and broaden our distribution operations to new geographic markets, our increased visibility could result in increased or expanded union-organizing efforts. New contracts with existing unions could have substantially less favorable terms than prior to such expanded union-organizing efforts.
We are transforming our business and have engaged, and may continue to engage in, acquisitions and other strategic initiatives, and may encounter difficulties integrating acquired businesses and may not realize the anticipated benefits of our acquisitions, including, in particular, our acquisition of Supervalu.
We have engaged in, and could continue to pursue, strategic transactions and initiatives as we transform our business. Acquisitions present significant challenges and risks relating to the integration of acquired businesses.
Our ability to achieve the expected benefits of acquisitions will depend on, among other things, our ability to effectively execute on our business strategies, integrate and manage the combined operations, retain customers and suppliers on terms similar to those in place with the acquired businesses, achieve desired operating efficiencies and sales growth, optimize delivery routes, coordinate administrative and distribution functions, integrate management information systems, expand into new markets to include markets of the acquired business, retain and assimilate the acquired businesses’ employees, and maintain our financial and internal controls and systems as we expand our operations. Achieving the anticipated benefits of acquisitions also depends on the adequacy of our implementation plans and the ability of management to oversee and operate effectively the combined operations.
To realize the anticipated benefits of the Supervalu acquisition, our business must be successfully combined with Supervalu. We could fail to realize the anticipated benefits for a variety of reasons, including failure to leverage the increased scale of the combined company effectively, difficulties integrating information technology systems, failure to effectively coordinate sales, procurement, and marketing efforts to communicate the capabilities of the combined company, and failure to execute an efficient integrated distribution network incorporating our spectrum of product offerings.
The integration businesses that we acquire might also cause us to incur unforeseen costs, which would lower our future earnings and would prevent us from realizing the expected benefits of these acquisitions. Any of the businesses we acquired may also have liabilities or adverse operating issues, including some that were not discovered before the acquisition, and our indemnity for such liabilities may also be limited or nonexistent.
Additionally, our ability to pursue any future acquisitions may depend upon obtaining additional financing, which may not be available on acceptable terms or at all. To the extent that we seek to acquire other businesses in exchange for our common stock, fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions. If we are unable to integrate acquired businesses successfully or to realize anticipated economic, operational or other benefits and synergies in a timely manner, management’s resources could be diverted and our business, financial condition, or operating results could be materially and adversely affected, particularly in transition periods immediately following the consummation of those transactions.
We may have difficulty managing our growth, and our growth plans may not produce the results that we expect.
The growth in the size of our business and operations has placed, and is expected to continue to place, a significant strain on our management. Our future growth may be limited by strong growth by certain of our largest customers or our inability to optimize our network of distribution centers to serve our customers, retain existing customers, successfully integrate acquired entities or significant new customers, implement information systems initiatives, or adequately manage our personnel.
We have substantially expanded our distribution center network through the acquisition of Supervalu. If we fail to optimize the volume of supply operations in our distribution center network or do not retain existing business, excess capacity may be created. Any excess capacity may create inefficiencies and adversely affect our business, financial condition, or results of operations, including as a result of incurring operating costs for these facilities without sufficient corresponding sales revenue to cover these costs.
We cannot assure you that we will be able to successfully optimize our distribution center network or open new distribution centers in new or existing markets if needed to accommodate or facilitate growth or that certain of our distribution centers will not have, or continue to have, operational challenges. Our ability to compete effectively, maintain service levels, and manage future growth, if any, will depend on our ability to maximize operational efficiencies across our distribution center network, to implement and improve on a timely basis operational, financial and management information systems, including our warehouse management systems, and to expand, train, motivate and manage our work force. We cannot assure you that our existing personnel, systems, procedures and controls will be adequate to support the future growth of our operations. Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition, or results of operations.
Further, a key element of our current growth strategy is to increase the amount of fresh, perishable products that we distribute. We believe that the ability to distribute these products that are typically found in the perimeter of our customers’ stores, in addition to the products we have historically distributed, will differentiate us from our competitors and increase demand for our products. We accelerated this fresh strategy with acquisitions. If we are unable to grow this portion of our business and manage that growth effectively, our business, financial condition, or results of operations may be materially and adversely affected, or we may not be able to fully realize the benefits of those acquisition.
Our wholesale distribution business could be adversely affected if we are not able to attract new customers, increase sales to or retain existing customers, or if our customers are unable to grow their businesses.
The profitability of our wholesale segment is dependent upon sufficient volume to support our operating infrastructure, which is dependent on our ability to attract new customers and increase sales to and retain existing customers. The inability to attract new customers or the loss of existing customers from a decision to use alternative sources of distribution, whether through a competing wholesaler or by converting to self-distribution, or due to retail closure or industry consolidation may negatively impact our sales and operating margins.
Our success also depends in part on the financial success and cooperation of our wholesale customers. These wholesale customers manage their businesses independently and, therefore, are responsible for the day-to-day operation of their stores. They may not experience an acceptable level of sales or profitability, and our revenues and gross margins could be negatively affected as a result. We may also need to extend credit to our wholesale customers. While we seek to obtain security interests and other credit support in connection with the financial accommodations we extend, such collateral may not be sufficient to cover our exposure. Additionally, in the past we have entered into wholesale customer support arrangements to guaranty or subsidize real estate obligations, which make us contingently liable in the event our wholesale customers default. If sales trends or profitability worsen for wholesale customers, their financial results may deteriorate, which could result in, among other things, lost business for us, delayed or reduced payments to us or defaults on payments or other liabilities owed by wholesale customers to us, any of which could adversely impact our financial condition and results of operations, as well as our ability to grow our wholesale business. In this regard, our wholesale customers are affected by the same economic conditions, including food inflation and deflation, and competition that our retail segment faces. The magnitude of these risks increases as the size of our wholesale customers increases.
Many of our customers are not obligated to continue purchasing products from us and larger customers that do have multiyear contracts with us may terminate these contracts early in certain situations or choose not to renew or extend the contract at its expiration.
Many of our wholesale customers buy from us under purchase orders, and we generally do not have written agreements with or long-term commitments from these customers for the purchase of products. We cannot assure you that these customers will maintain or increase their orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. Decreases in our volumes or orders for products supplied by us for these customers with whom we do not have a long-term contract may have a material adverse effect on our business, financial condition, or results of operations.
We may have contracts with certain of our customers (as is the case with many of our chain customers) that obligate the customer to buy products from us for a particular period of time. Even in this case, the contracts may not require the customer to purchase a minimum amount of products from us or the contracts may afford the customer better pricing in the event that the volume of the customer’s purchases exceeds certain levels. If these customers were to terminate or fail to perform under these contracts prior to their scheduled termination, or if we or the customer elected not to renew or extend the term of the contract at its expiration or not to renew or extend at historical purchase levels, it may have a material adverse effect on our business, financial condition, or results of operations, including additional operational expenses to transition out of the business or to adjust our facilities and staffing costs to cover the reduction in net sales.
Changes in relationships with our suppliers may adversely affect our profitability, and conditions beyond our control can interrupt our supplies and alter our product costs.
We cooperatively engage in a variety of promotional programs with our suppliers. We manage these programs to maintain or improve our margins and increase sales. Recently, we have experienced a reduction in promotional spending and payment of slotting fees for new products by our suppliers as a result of the COVID-19 pandemic, and we may experience further reductions or changes in promotional spending (including as a result of increased demand for natural and organic products) which could have a significant impact on our profitability. We depend heavily on our ability to purchase merchandise in sufficient quantities at competitive prices. We have no assurances of continued supply, pricing, or access to new products and any supplier could at any time change the terms upon which it sells to us or discontinue selling to us.
The majority of our suppliers are based in the United States and Canada, but we also source products from suppliers throughout the world. For the most part, we do not have long-term contracts with our suppliers committing them to provide products to us. Although our purchasing volume can provide benefits, suppliers may not provide the products needed by us in the quantities or at the prices requested. For example, we have experienced, and continue to experience, higher than usual levels of out-of-stocks leading to reduced fill rates during the COVID-19 pandemic. These shortages have caused us to incur higher Operating expenses due to the cost of moving products between our distribution facilities in order to attempt to maintain expected service levels. We cannot be sure when this trend will end or whether it will recur in the future. We are also subject to delays caused by interruption in production and increases in product costs based on conditions outside of our control. These conditions include work slowdowns, work interruptions, strikes, or other job actions by employees of suppliers, short-term weather conditions or more prolonged climate change, crop conditions, product recalls, water shortages, transportation interruptions, unavailability of fuel or increases in fuel costs, competitive demands, raw material shortages, and natural disasters or other catastrophic events (including, but not limited to food-borne illnesses). As the consumer demand for natural and organic products has increased, certain retailers and other producers have entered the market and attempted to buy certain raw materials directly, limiting their availability to be used in certain supplier products. In addition, increased tariffs on imported goods, and any retaliatory actions by affected countries, may result in an increase in our costs for goods imported into the United States, and may reduce customer demand for affected products if the parties having to pay those tariffs increase their prices.
Further, increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain, or impact demand for our products. For example, in the past, weather patterns have at times resulted in lower than normal levels of precipitation in key agricultural states, such as California, impacting the price of water and corresponding prices of food products grown in states facing drought conditions. In addition, wildfires in the West have impacted certain of our suppliers in the past. The impact of sustained extreme weather conditions is uncertain and could result in volatile input costs. Input costs could increase at any point in time for a large portion of the products that we sell for a prolonged period. Conversely, in years where rainfall levels are abundant, product costs, particularly in our perishable and produce businesses, may decline and the results of this product cost deflation could negatively impact our results of operations. Our inability to obtain adequate products as a result of any of the foregoing factors or otherwise could prevent us from fulfilling our obligations to customers, and customers may turn to other distributors. In that case, our business, financial condition or results of operations could be materially and adversely affected.
Disruptions to our or third-party information technology systems, including cyber-attacks and security breaches, and the costs of maintaining secure and effective information technology systems could negatively affect our business and results of operations.
The efficient operation of our businesses is highly dependent on computer hardware and software systems, including customized information technology systems. Additionally, our businesses increasingly involve the receipt, storage and transmission of sensitive data, including personal information about our customers, employees, and vendors and our proprietary business information. We also share information with vendors. Information systems are vulnerable to not functioning as designed and to disruptions and security breaches by computer hackers and cyber terrorists.terrorists, which risks may be more pronounced as associates continue to work from home.
Although we continue to take actions to strengthen the security of our information technology systems, these measures and technology may not adequately anticipate or prevent security breaches in the future or we may not be able to timely implement these measures and technology. Cyber-attacks are rapidly evolving and becoming increasingly frequent, sophisticated and difficult to detect. The failure to promptly detect, determine the extent of, appropriately respond to, and contain a significant data security attack or breach of our systems or any third-party systems used by us could have a material adverse impact on our business, financial condition, or results of operations. We could also lose credibility with our customers and suffer damage to our reputation and future sales, including through negative publicity and social media. In addition, the unavailability of the information systems or failure of these systems or software to perform as anticipated for any reason, including a ransomware attack, and any inability to respond to, or recover from, such an event, could disrupt our business, impact our customers and could result in decreased performance, increased overhead costs and increased risk for liability, causing our business and results of operations to suffer.
As a merchant that accepts debit and credit cards for payment, we are subject to the Payment Card Industry Data Security Standard (“PCI DSS”), issued by the PCI Council. Additionally, we are subject to PCI DSS as a service provider, which is a business entity that is not a payment brand directly involved in the processing, storage or transmission of cardholder data. PCI DSS contains compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. By accepting debit cards for payment, we are also subject to compliance with American National Standards Institute data encryption standards and payment network security operating guidelines. The cost of complying with stricter privacy and information security laws, standards and guidelines, including evolving PCI DSS standards, and developing, maintaining, and upgrading technology systems to address future advances in technology, could be significant and we could experience problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems. Failure to comply with such laws, standards, and guidelines, or payment card industry standards such as accepting Europay, MasterCard and Visa (EMV) transactions, could have a material adverse impact on our business, financial condition, or results of operations.
We have a significant service relationship with Save-A-Lot,Increases in healthcare, pension, and other costs under the wind-down of our relationship with Save-A-LotCompany’s and multiemployer benefit plans could adversely impactaffect our financial condition and results of operations.
We have providedprovide single employer and multiemployer health, defined benefit pension, defined contribution benefits to many of our employees and, in some cases, former employees. The costs of such benefits continue to increase, and the extent of any increase depends on a number of different factors, many of which are beyond our control. These factors include governmental regulations such as The Patient Protection and Affordable Care Act, which has resulted in changes to the U.S. healthcare system and imposes mandatory types of coverage, reporting and other requirements; return on assets held in plans; changes in actuarial valuations, estimates, or assumptions used to determine our benefit obligations for certain benefit plans, which require the use of significant support servicesestimates, including the discount rate, expected long-term rate of return on plan assets, mortality rates and the rates of increase in compensation and healthcare costs; for multiemployer plans, the outcome of collective bargaining and actions taken by trustees who manage the plans; and potential changes to Save-A-Lot sinceapplicable legislation or regulation. If we divested itare unable to control these benefits and costs, we may experience increased operating costs, which may adversely affect our financial condition and results of operations.
Additionally, certain multiemployer pension plans, and to a lesser extent, certain Company-sponsored plans, in December 2016. We will losewhich we participate are underfunded with the projected benefit obligations exceeding the fair value of those plans’ assets, in certain cases (for example, Central States Pension Plan), by a significant amount of revenue and corresponding operating earnings as a result of this wind down. We have been executing onwide margin. Withdrawal liabilities from multiemployer plans could be material, our planefforts to reduce costs, grow our sales and enhance our margins over the past several years, but wemitigate these liabilities may not be ablesuccessful, and potential exposure to grow sales quickly enough, further eliminate costswithdrawal liabilities could cause us to forgo or enhance margins to fully mitigate the lost revenue as the services agreement unwinds. Failure to execute on our services offering and growth strategy, including making the necessary capital investments for that growth while managing additional cost reductions, could further adverselynegatively impact our resultsability to enter into other business opportunities. Some of operations. Our large professional services agreement with Save-A-Lot provides certain rights for the customers. The services agreement will typically include a fixed term but provide the customer certain termination rights, including in the event of our material breach,these plans have required rehabilitation plans or funding improvement plans, and maywe can give the customer certain termination and monetary rights with respect to specified services or service categories in the event we do not perform to
agreed-upon minimum levels of service. The services agreement will also generally require us to indemnify the customer against third-party claims arising outno assurances of the performanceextent to which a rehabilitation plan or a funding improvement plan will improve the funded status of the services underplan. We expect that increases of unfunded liabilities of these plans would result in increased future payments by us and the agreement. Termination of servicesother participating employers over the next several years. Any changes to our pension plans that would impact associates covered by collective bargaining agreements in whole or in part, and in particular the services agreement with Save-A-Lot,will be subject to negotiation, which may limit our ability to manage our exposure to these plans. A significant increase to funding requirements could adversely affect our business orfinancial condition, results of operations.
Changes in the military commissary systemoperations, or decreases in governmental funding couldcash flows. The financial condition of these pension plans may also negatively impact our debt ratings, which may increase the sales and operating performancecost of borrowing or adversely affect our military business.ability to access financial markets.
Our wholesale segment sells and distributes grocery products to military commissaries and exchanges in the United States. The commissary system has experienced material changes as the Defense Commissary Agency has looked to reduce the level of governmental funding required for the system, including to lower prices from suppliers and to offer its own private-label products. The military food distribution industry already has narrow operating margins making economies of scale critical for distributors. These changes could have an adverse impact on the sales and operating performance of our military business. Additionally, our military business faces competition from large national and regional food distributors, as well as smaller food distributors, and the military commissaries and exchanges face competition from low-cost retailers.
Our insurance and self-insurance programs may not be adequate to cover future claims.
We use a combination of insurance and self-insurance to provide for potential liabilities, including workers’ compensation, general and auto liability, director and officer liability, property risk, cyber and privacy risks and employee healthcare benefits. We believe that our insurance coverage is customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure. These losses, should they occur, could have a material adverse effect on our business, financial condition or results of operations. In addition, the cost of insurance fluctuates based upon our historical trends, market conditions, and availability. In response to the current market, we have also increased deductibles and increased percentages of loss retention above the deductible for certain of our policies, which could expose us to higher costs in the event of a claim.
We estimate the liabilities and required reserves associated with the risks we retain. Any such estimates and actuarial projection of losses is subject to a considerable degree of variability. Among the causes of this variability are changes in benefit levels, medical fee schedules, medical utilization guidelines, severity of injuries and accidents, vocation rehabilitation and apportionment and unpredictable external factors affecting inflation rates, discount rates, rising healthcare costs, litigation trends, legal interpretations, benefit level changes, and actual claim settlement patterns. If actual losses incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our consolidated financial statements. If we suffer a
substantial loss that exceeds our self-insurance reserves and any excess insurance coverage, the loss and attendant expenses could harm our business, financial condition, or results of operations.
Our debt agreements contain restrictive covenants that may limit our operating flexibility.
Our debt agreements, including the loan agreement (the “ABL Loan Agreement”) related to our $2,100 million asset-based revolving credit facility (the “ABL Credit Facility”) entered into on August 30, 2018, as amended, and the term loan agreement (the “Term Loan Agreement”) related to our $1,950.0 million term loan facility (the “Term Loan Facility”) entered into in October 2018, as amended, and the indenture governing our unsecured 6.75% Senior Notes due October 15, 2028 (the “Senior Notes”) contain financial covenants and other restrictions that limit our operating flexibility and our flexibility in planning for or reacting to changes in our business. These restrictions may prevent us from taking actions that we believe would be in the best interest of our business if we were not subject to these limitations and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.
In addition, our ABL Loan Agreement, Term Loan Agreement, and the indenture governing the Senior Notes require that we comply with various financial tests and impose certain restrictions on us, including among other things, restrictions on our ability to incur additional indebtedness, create liens on assets, make loans or investments, or return capital to stockholders through share repurchases or paying dividends. Failure to comply with these covenants could have a material adverse effect on our business, financial condition, or results of operations.
The cost of the capital available to us and limitations on our ability to access additional capital may have a material adverse effect on our business, financial condition, or results of operations.
Historically, acquisitions and capital expenditures have been a large component of our growth. We anticipate that capital expenditures will continue to be, and acquisitions may be, important to our growth in the future. As a result, increases in the cost of capital available to us, which could result from volatility in the credit markets, downgrades of our credit ratings, our not being in compliance with restrictive covenants under our debt agreements, or our inability to access additional capital to finance acquisitions and capital expenditures through borrowed funds could restrict our ability to grow our business organically or through acquisitions, which could have a material adverse effect on our business, financial condition, or results of operations.
In addition, our profit margins depend on strategic investment buying initiatives, such as discounted bulk purchases, which require spending significant amounts of working capital up-front to purchase products that we then sell over a multi-month time period. Therefore, increases in the cost of capital available to us or our inability to access additional capital through borrowed funds at satisfactory economic terms could restrict our ability to engage in strategic investment buying initiatives, which could reduce our profit margins and have a material adverse effect on our business, financial condition, or results of operations.
We have purchased stop-loss coverageexperienced losses due to the uncollectibility of accounts and notes receivable in the past and could experience increases in such losses in the future if our customers are unable to timely pay their debts to us.
Certain of our customers have from third partiestime to time experienced bankruptcy, insolvency, or an inability to pay their debts to us as they come due. If our customers suffer significant financial difficulty, they may be unable to pay their debts to us timely or at all, which could have a material adverse effect on our business, financial condition, or results of operations. It is possible that customers may reject their contractual obligations to us under bankruptcy laws or otherwise. Significant customer bankruptcies could further adversely affect our revenues and increase our operating expenses by requiring larger provisions for certain employee healthcare plans,bad debt. For example, we incurred significant bad debt expense in the second quarter of fiscal 2020 as a result of three customer bankruptcies. In addition, even when our contracts with these customers are not rejected in bankruptcy, if customers are unable to meet their obligations on a timely basis, it could adversely affect our ability to collect receivables. Further, we may have to negotiate significant discounts and/or extended financing terms with these customers in such a situation, each of which limitscould have a material adverse effect on our exposure abovebusiness, financial condition, or results of operations.
During periods of economic weakness, small to medium-sized businesses, like many of our independents channel customers, may be impacted more severely and more quickly than larger businesses. Similarly, these smaller businesses may be more likely to be more severely impacted by events outside of their control, like significant weather events. Consequently, the amounts we have self-insured.ability of such businesses to repay their obligations to us may deteriorate, and in some cases this deterioration may occur quickly, which could materially and adversely impact our business, financial condition, or results of operations.
Impairment charges for goodwill or other long-lived assets could adversely affect the Company’s financial condition and results of operations.
We monitor the recoverability of our long-lived assets, such as buildings, equipment and equipment,leased assets, and evaluate their carrying value for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. We annually review goodwill to determine if impairment has occurred. Additionally, interim reviews are performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testingreview performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value and fair value of the long-lived assets, or the carrying value and fair value of the reporting unit, in the period the determination is made. The testing of long-lived assets and goodwill for impairment requires us to make estimates that are subject to significant assumptions about our future revenue, profitability, cash flows, fair value of assets and liabilities, weighted average cost of capital, as well as other assumptions. Changes in these estimates, or changes in actual performance compared with these estimates, may affect the fair value of long-lived assets, or reporting unit, which may result in an impairment charge.
We cannot accurately predict the amount or timing of any impairment of assets. Should the value of long-lived assets or goodwill become impaired, our financial condition and results of operations may be adversely affected.
Changes in the military commissary system or decreases in governmental funding could negatively impact the sales and operating performance of our military business.
Our debt agreements contain restrictive covenants that may limitWholesale segment sells and distributes grocery products to military commissaries and exchanges in the United States. The commissary system has experienced material changes as the Defense Commissary Agency has looked to reduce the level of governmental funding required for the system, including to lower prices from suppliers and to offer its own private label products. The military food distribution industry already has narrow operating margins making economies of scale critical for distributors. These changes could have an adverse impact on the sales and operating performance of our operating flexibility.
Our debt agreements, including the loan agreement (the “ABL Loan Agreement”) related tomilitary business. Additionally, our $2,100 million asset-based revolving credit facility (the “ABL Credit Facility”) entered into on August 30, 2018military business faces competition from large national and regional food distributors, as well as smaller food distributors, and the term loan agreement (the “Term Loan Agreement”) related to our $1,950.0 million term loan facility (the “Term Loan Facility”) entered into in October 2018, contain financial covenantsmilitary commissaries and other restrictions that limit our operating flexibility, limit our flexibility in planning for or reacting to changes in our business. These restrictions may prevent usexchanges face competition from taking actions that we believe would be in the best interest of ourlow-cost retailers.
business if we were not subject to these limitations and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.
In addition, our ABL Loan Agreement and Term Loan Agreement require that we comply with various financial tests and impose certain restrictions on us, including among other things, restrictions on our ability to incur additional indebtedness, create liens on assets, make loans or investments, or pay dividends. Failure to comply with these covenants could have a material adverse effect on our business, financial condition, or results of operations.
The cost of the capital available to us and limitations on our ability to access additional capital may have a material adverse effect on our business, financial condition, or results of operations.
Historically, acquisitions and capital expenditures have been a large component of our growth. We anticipate that capital expenditures will continue to be, and acquisitions may be, important to our growth in the future. As a result, increases in the cost of capital available to us, which could result from volatility in the credit markets, downgrades of our credit ratings, or the Company not being in compliance with restrictive covenants under our debt agreements, or our inability to access additional capital to finance acquisitions and capital expenditures through borrowed funds could restrict our ability to grow our business organically or through acquisitions, which could have a material adverse effect on our business, financial condition, or results of operations.
In addition, our profit margins depend on strategic investment buying initiatives, such as discounted bulk purchases, which require spending significant amounts of working capital up-front to purchase products that we then sell over a multi-month time period. Therefore, increases in the cost of capital available to us or our inability to access additional capital through borrowed funds at economic terms could restrict our ability to engage in strategic investment buying initiatives, which could reduce our profit margins and have a material adverse effect on our business, financial condition, or results of operations.
Economic Risks
Our high level ofleverage and debt makes us more sensitiveservice obligations increase our sensitivity to the effects of economic downturns and could adversely affect our business.
To finance the acquisitionAs of Supervalu,July 31, 2021, we incurred or assumedhad approximately $3.5$2.2 billion of indebtedness, including indebtedness incurred to refinance Supervalu’s and our then existing debt.long-term debt outstanding. Our leverage, and any increase therein, could have important potential consequences, including, but not limited to:
•increasing our vulnerability to, and reducing our flexibility to planin planning for and respondresponding to, adverse general adverse economic and industry conditionconditions and changes in our business and the competitive environment;environment and placing us at a disadvantage to our competitors that are less leveraged;
•requiring the dedication ofus to use a substantial portion of ouroperating cash flow from operations to the payment ofpay principal of, and interest on, indebtedness, thereby reducing the availabilityinstead of other purposes, such cash flow to fundas funding working capital, capital expenditures, acquisitions, share repurchases, or other corporate purposes;
•increasing our vulnerability to a downgrade of our credit rating, which could adversely affect our cost of funds, liquidity, and access to capital markets;
•restricting us from making desired strategic acquisitions in the future or causing us to make non-strategic divestitures;
•increasing our exposure to the risk of increased interest rates insofar as current and future borrowings are subject to variable rates of interest;
•making it more difficult for us to repay, refinance, or satisfy our obligations with respect to our debt;
•limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing; and
placing us at a competitive disadvantage compared to competitors with less leverage or better access to capital resources; and
•imposing restrictive covenants on our operations, which if not complied with, could result in an event of default which in turn, if not curedwe are unable to comply, and absent any cure or waived,waiver of such default ultimately could result in the acceleration of the applicablesuch debt and may result in the acceleration of anypotentially other debt to which awith cross-acceleration or cross-default provision applies.provisions.
There is no assurance that we will generate sufficient cash flow from operations or that future debt or equity financingsfinancing will be available to us to enable us to pay our indebtedness or to fund other needs.indebtedness. As a result, we may need to refinance all or a portion of our indebtedness on or before maturity. There is no assurance thatmaturity, however, we willmay not be able to refinance any of our indebtednessdo on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our indebtedness on favorable terms could have a material adverse effect on our business, financial condition, or results of operations. In addition, potential changes to, or the elimination of,upcoming transition away from the London Interbank Offered Rate (“LIBOR”), as a common reference rate in the global financial market, may adversely affect interest expense related to borrowings under our credit facilities and our interest rate swaps, which could potentially negatively impact our financial condition.
Our operations are sensitive to macroeconomic conditions.
The grocery industry is sensitive to national and regional economic conditions and the demand for the products that we distribute may be adversely affected from time to time by economic downturns that impact consumer spending, including discretionary spending, as well as general trends impacting the grocery retail business. Future economic conditions such as employment levels, business conditions, housing starts, interest rates, inflation rates, energy and fuel costs, and tax rates could reduce consumer spending or change consumer purchasing habits. Among these changes could be a reduction in the numberTable of our higher margin natural and organic products that consumers purchase where there are conventional lower margin alternatives given that many natural and organic products, and particularly natural and organic foods, often have higher retail prices than do their conventional counterparts.Contents
Our business may be sensitive to inflationary and deflationary pressures.
Many of our sales are at prices that are based on our product cost plus a percentage markup. As a result, volatile food costs have a direct impact upon our profitability. Prolonged periods of product cost inflation and periods of rapidly increasing inflation may have a negative impact on our profit margins and results of operations to the extent that we are unable to pass on all or a portion of such product cost increases to our customers. In addition, product cost inflation may negatively impact the consumer discretionary spending trends and reduce the demand for higher-margin natural and organic products, which could adversely affect profitability. Conversely, because many of our sales are at prices that are based upon product cost plus a percentage markup, our profit levels may be negatively impacted during periods of product cost deflation even though our gross profit as a percentage of net sales may remain relatively constant. To compensate for lower gross margins, we, in turn, must reduce expenses that we incur to service our customers. If we are unable to reduce our expenses as a percentage of net sales, our business, financial condition, or results of operations could be materially and adversely impacted.
Changes in consumer eating habits could materially and adversely affect our business, financial condition, or results of operations.
Changes in consumer eating habits away from natural, organic, or specialty products could reduce demand for our higher margin natural and organic products. Consumer eating habits could be affected by a number of factors, including changes in attitudes regarding benefits of natural and organic products when compared to similar lower margin conventional products or new information regarding the health effects of consuming certain foods. Although there is a growing consumer preference for sustainable, organic and locally grown products, there can be no assurance that such trend will continue. Changing consumer eating habits also occur due to generational shifts. Millennials, the largest demographic group in the U.S. in terms of spend, seekshifts, including younger generations seeking new and different foods, as well as more ethnic, menu options and menu innovation. However, there can be no assurance that such trend will continue. If consumer eating habits change significantly, we may be required to modify or discontinue sales of certain items in our product portfolio, and we may experience higher costs associated with the implementation of those changes. Additionally, if we are not able to effectively respond to changes in consumer perceptions or adapt our product offerings to trends in eating habits, our business, financial condition, or results of operations could suffer.
Increased fuel costs may adversely affect our results of operations.
Increased fuel costs may have a negative impact on our results of operations. The high cost of diesel fuel can increase the price we pay for products as well as the costs we incur to deliver products to our customers, including costs of inbound goods from our suppliers. These factors, in turn, may negatively impact our net sales, margins, operating expenses, and operating results. To manage this risk, we have in the past periodically entered, and may in the future periodically enter, into commodity derivative contracts to hedge a portion of our projected diesel fuel requirements. To the extent we do not enter into commodity swap agreements, our exposure to volatility in the price of diesel fuel would increase relative to our exposure to volatility in periods in which we had outstanding commodity derivative contracts. We do not enter into fuel hedge contracts for speculative purposes. We have in the past, and may in the future, periodically enter into forward purchase commitments for a portion of our projected monthly diesel fuel requirements at fixed prices. As of August 3, 2019, we had no forward diesel fuel commitments. We also maintain a fuel surcharge program with certain customers, which allows us to pass some of our higher fuel costs through to ourthose customers. We cannot guarantee that we will continue to be able to pass a comparable proportion or any of our higher fuel costs to our customers in the future, which may adversely affect our business, financial condition or results of operations.
Disruption of our distribution network or to the operations of our customers could adversely affect our business.
Damage or disruption to our distribution capabilities due to weather, including extreme or prolonged weather conditions, natural disaster, fire, civil unrest, terrorism, pandemic, strikes, product recalls or safety concerns generally, crop conditions, availability of key commodities, regulatory actions, disruptions in technology, the financial and/or operational instability of key suppliers, performance by outsourced service providers, transportation interruptions, labor supply or stoppages or vendor defaults or disputes, or other
reasons could impair our ability to distribute our products. For example, we have both distribution centers and retail stores in cities and states where civil unrest has led to extensive property damage. Further civil unrest and damage to our real and personal property, or our customers’ locations, could have an adverse impact to our business. To the extent that we are unable, or it is not financially feasible, to mitigate the likelihood or potential impact of such events, or to manage effectively such events if they occur, there could be an adverse effect on our business, financial condition or results of operations.
In addition, such disruptions may reduce the number of consumers who visit our customers’ facilities in any affected areas. Furthermore, such disruption may interrupt or impede access to our customers’ facilities, all of which could have a material adverse effect on our business, financial condition, or results of operations.
Legal and Regulatory Risks
We are subject to significant governmental regulation.
Our business is highly regulated at the federal, state, and local levels and our products and distribution operations require various licenses, permits, and approvals. In particular:approvals, including:
•the products that we distribute in the United States are subject to inspection by the United States Food and Drug Administration;
•our warehouse and distribution centers are subject to inspection by the United States Department of Agriculture, the United States Department of Labor Occupational and Health Administration, and various state health and workplace safety authorities; and
•the United States Department of Transportation and the United States Federal Highway Administration regulate our United States trucking operations.
In addition, the various federal, state and local laws, regulations and administrative practices to which we are subject require us to comply with numerous provisions regulating areas such as environmental, health and sanitation standards, food safety, marketing of natural or organically produced food, facilities, pharmacies, equal employment opportunity, public accessibility, employee benefits, wages and hours worked and licensing for the sale of food, drugs, tobacco and alcoholic beverages, among others. For example:
Environmental, Health and Safety: Our operations are subject to extensive and increasingly stringent laws and regulations pertaining to the protection of the environment, including those relating to the discharge of materials into the environment, the disposal of food by-products, the handling, treatment, and disposal of wastes, maintenance of refrigeration systems, and remediation of soil and groundwater contamination. Compliance with existing or changing environmental and safety requirements, including more stringent limitations imposed or expected to be imposed in recently renewed or soon-to-be renewed environmental permits, may require capital expenditures. Additionally, concern over climate change, including the impact of global warming, has led to significant United States and international legislative and regulatory efforts to limit greenhouse gas emissions. Increased regulation regarding greenhouse gas emissions, especially diesel engine emissions, could impose substantial costs on us. These costs include an increase in the cost of the fuel and other energy we purchase and capital costs associated with updating or replacing our vehicles prematurely. Until the timing, scope, and extent of such regulation becomes known, we cannot predict its effect on our results of operations. It is reasonably possible, however, that it could impose material costs on us which we may be unable to pass on to our customers.
Food Safety and Marketing: There is increasing governmental scrutiny, regulations and public awareness regarding food quality and food and drug safety. We may be adversely affected if consumers lose confidence in the safety and quality of our food and drug products. In addition, as a distributor and manufacturer of natural, organic, and specialty foods (along with conventional foods products), we are subject to increasing governmental scrutiny of and public awareness regarding food safety and the sale, packaging, and marketing of natural and organic products. Compliance with these laws may impose a significant burden on our operations.
Wage Rates and Paid Leave: Changes in federal, state or local minimum wage and overtime laws or employee paid leave laws could cause us to incur additional wage costs, which could adversely affect our operating margins. Failure to comply with existing or new laws or regulations could result in significant damages, penalties and/or penaltieslitigation costs.
Foreign Operations: Our supplier base includes domestic and foreign suppliers. In addition, we have customers located outside the United States and the acquisition of Supervalu, in particular its AG Florida business, expanded our wholesale business to additional international customers.States. Accordingly, laws and regulations affecting the importation and taxation of goods, including duties, tariffs and quotas, or changes in the enforcement of those laws and regulations could adversely impact our financial condition and results of operations. In addition, we are required to comply with laws and regulations governing export controls, and ethical, anti-bribery and similar business practices such as the Foreign Corrupt Practices Act. Our Canadian operations are similarly subject
to extensive regulation, including the English and French dual labeling requirements applicable to products that we distribute in Canada. The loss or revocation of any existing licenses, permits, or approvals or the failure to obtain any additional licenses, permits, or approvals in new jurisdictions where we intend to do business could have a material adverse effect on our business, financial condition, or results of operations.
Pharmacy: We are required to meet various security and operating standards and comply with the Controlled Substances Act and its accompanying regulations governing the sale, marketing, packaging, holding, record keeping, and distribution of controlled substances. During the past several years, the United States healthcare industry has been subject to an increase in governmental regulation and audits at both the federal and state levels. For example, Supervalu received an administrative subpoena issued byin 2019, the Company settled with the Drug Enforcement Administration requesting,alleged violations of the Controlled Substances Act relating to an administrative subpoena received by Supervalu that requested, among other things, information on the company’sCompany’s pharmacy policies and procedures generally, as well as the production of documents that are required to be kept and maintained pursuant to the Controlled Substances Act and its implementingaccompanying regulations. Additionally, the Patient Protection and Affordable Care Act made several significant changes to Medicaid rebates and to reimbursement. One of these changes was to revise the definition of the Average Manufacturer Price, a pricing element common to most payment formulas, and the reimbursement formula for multi-source (i.e., generic) drugs. This change will affect our reimbursement. In addition, the Patient Protection and Affordable Care Act made other changes that affect the coverage and plan designs that are or will be provided by many of our health plan clients, including the requirement for health insurers to meet a minimum medical loss ratio to avoid having to pay rebates to enrollees. These Patient Protection and Affordable Care Act changes may not affect our business directly, but they could indirectly impact our services and/or business practices.
The failure to comply with applicable regulatory requirements or make capital expenditures required to maintain compliance with governmental laws and regulations, including those referred to above and in Item 1. Business-Government Regulation of ourthis Annual Report, could result in, among other things, administrative, civil, or criminal penalties or fines; mandatory or voluntary product recalls; warning or other letters; cease and desist orders against operations that are not in compliance; closure of facilities or operations; the loss, revocation, or modification of any existing licenses, permits, registrations, or approvals; the failure to obtain additional licenses, permits, registrations, or approvals in new jurisdictions where we intend to do business; or the loss of our ability to participate in federal and state healthcare programs, any of which could have a material adverse effect on our business, financial condition, or results of operations. These laws and regulations may change in the future. We cannot
predict the nature of future laws, regulations, interpretations, or applications, nor can we determine the effect that additional governmental regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on our future business. We may incur material costs in our efforts to comply with current or future laws and regulations or due to any required product recalls.
In addition, if we fail to comply with applicable laws and regulations or encounter disagreements with respect to our contracts subject to governmental regulations, including those referred to above, we may be subject to investigations, criminal sanctions or civil remedies, including fines, injunctions, prohibitions on exporting, seizures, or debarments from contracting with the U.S. or Canadian governments. The cost of compliance or the consequences of non-compliance, including debarments, could have a material adverse effect on our business, financial condition, or results of operations. In addition, governmental units may make changes in the regulatory frameworks within which we operate that may require either the corporation as a whole or individual businesses to incur substantial increases in costs in order to comply with such laws and regulations.
Product liability claims could have an adverse effect on our business.
We face an inherenta risk of exposure to product liability claims if the products we manufacture or sell cause injury or illness. In addition, meat, seafood, cheese, poultry, and other products that we distribute could be subject to recall because they are, or are alleged to be, contaminated, spoiled or inappropriately labeled. Our meat and poultry products may be subject to contamination by disease-producing organisms, or pathogens, such as Listeria monocytogenes, Salmonella and generic E.coli. These pathogens are generally found in the environment, and as a result, there is a risk that they, as a result of food processing, could be present in the meat and poultry products we distribute. These pathogens can also be introduced as a result of improper handling at the consumer level. These risks may be controlled, although not eliminated, by adherence to good manufacturing practices and finished product testing. We have little, if any, control over proper handling before we receive the product or once the product has been shipped to our customers. Any events that give rise to actual or potential food contamination, drug contamination or food-borne illness or injury, or events that give rise to claims that our products are not of the quality or composition claimed to be, may result in product liability claims from individuals, consumers and governmental agencies, penalties and enforcement actions from government agencies, a loss of consumer confidence, harm to our reputation and could cause production and delivery disruptions, which may adversely affect our financial condition or results of operations. While we generally seek contractual indemnification and insurance coverage from our suppliers, we might not be able to recover these significant costs from our suppliers.We may be subject to liability, which could be substantial, because of actual or alleged contamination in products manufactured or sold by us, including products sold by companies before we acquired them.
In addition, if we were to manufacture or distribute foods that are or are perceived to be unsafe, contaminated, or defective, it may be necessary for us to recall such products, or we may recall products that we determine do not satisfy our quality standards. Any resulting product recalls could have an adverse effect on our business, financial condition, or results of operations. We have, and the companies we have acquired have had, liability insurance with respect to product liability claims. This insurance may not continue to be available at a reasonable cost or at all, and may not be adequate to cover product liability claims against us or against companies we have acquired. We generally seek contractual indemnification from manufacturers, but any such indemnification is limited, as a practical matter, to the creditworthiness of the indemnifying party. If we or any of our acquired companies do not have adequate insurance or contractual indemnification available, product liability claims and costs associated with product recalls, including a loss of business, could have a material adverse effect on our business, financial condition, or results of operations.
We may be unable to adequately protect our intellectual property rights, which could harm our business.
We rely on a combination of trademark, service mark trade secret, copyright, and domain name law and internal procedures and nondisclosure agreements to protect our intellectual property. We believe our trademarks, private-labelprivate label products, and domain names are valuable assets. However, our intellectual property rights may not be sufficient to distinguish our products and services from those of our competitors and to provide us with a competitive advantage. From time to time, third parties may use names, logos, and slogans similar to ours, may apply to register trademarks or domain names similar to ours, and may infringe or otherwise violate our intellectual property rights. Our intellectual property rights may not be successfully asserted against such third parties or may be invalidated, circumvented, or challenged. Asserting or defending our intellectual property rights could be time consuming and costly and could distract management’s attention and resources. If we are unable to prevent our competitors from using names, logos, slogans, and domain names similar to ours, consumer confusion could result, the perception of our brands and products could be negatively affected, and our sales and profitability could suffer as a result. In addition, if our wholesale customers receive negative publicity or fail to maintain the quality of the goods and services used in connection with our trademarks, our rights to, and the value of, our trademarks could potentially be harmed. Failure to protect our proprietary information could also have an adverse effect on our business.
We may also be subject to claims that our activities or the products we sell infringe, misappropriate, or otherwise violate the intellectual property rights of others. Any such claims can be time consuming and costly to defend and may distract management’s attention and resources, even if the claims are without merit, and may prevent us from using our trademarks in certain geographies or in connection with certain products and services, any of which could adversely affect our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We maintained 63 distribution centers and warehouses at August 3, 2019, which were utilized by our Wholesale segment and our other operating segments. These facilities, including off-site storage space, consisted of an aggregate of approximately 32.2 million square feet of storage space.
Distribution Centers
We maintained 57 distribution centers and warehouses at July 31, 2021, which were utilized by our Wholesale segment and our other operating segments. The following table shows our dry and cold storage distribution and warehouse facilities and thetheir associated owned and leased square footage we occupied as of August 3, 2019:July 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
Location(1) | | Owned Square Footage | | Leased Square Footage | | Total Square Footage |
| | (in thousands) |
Hopkins, Minnesota(2) | | 1,866 | | | — | | | 1,866 | |
| Allentown, Pennsylvania | | — | | | 1,327 | | | 1,327 | |
| Stockton, California | | — | | | 1,290 | | | 1,290 | |
Mechanicsville, Virginia(2) | | 1,249 | | | — | | | 1,249 | |
| Riverside, California | | — | | | 1,175 | | | 1,175 | |
| Centralia, Washington | | — | | | 1,155 | | | 1,155 | |
| York, Pennsylvania | | — | | | 1,039 | | | 1,039 | |
| Joliet, Illinois | | — | | | 988 | | | 988 | |
| Green Bay, Wisconsin | | — | | | 980 | | | 980 | |
| Champaign, Illinois | | — | | | 910 | | | 910 | |
| Harrisburg, Pennsylvania | | — | | | 883 | | | 883 | |
Fort Wayne, Indiana(2) | | 871 | | | — | | | 871 | |
| Commerce, California | | — | | | 858 | | | 858 | |
| Pompano Beach, Florida | | — | | | 799 | | | 799 | |
Ridgefield, Washington(2) | | 779 | | | — | | | 779 | |
Quincy, Florida(2) | | 758 | | | — | | | 758 | |
| Sarasota, Florida | | — | | | 743 | | | 743 | |
Montgomery, New York(2) | | 500 | | | 180 | | | 680 | |
Pittsburgh, Pennsylvania(2) | | 679 | | | — | | | 679 | |
Atlanta, Georgia(2) | | 389 | | | 259 | | | 648 | |
| Moreno Valley, California | | — | | | 613 | | | 613 | |
| Lancaster, Texas | | — | | | 590 | | | 590 | |
Anniston, Alabama(2) | | 465 | | | 105 | | | 570 | |
| Indianola, Mississippi | | 543 | | | — | | | 543 | |
| Aurora, Colorado | | — | | | 529 | | | 529 | |
Rocklin, California(2) | | 469 | | | — | | | 469 | |
Stevens Point, Wisconsin(2) | | 314 | | | 146 | | | 460 | |
Gilroy, California(2) | | 447 | | | — | | | 447 | |
Sturtevant, Wisconsin(2) | | 442 | | | — | | | 442 | |
| Carlisle, Pennsylvania | | — | | | 423 | | | 423 | |
Howell Township, New Jersey(2) | | 397 | | | — | | | 397 | |
Chesterfield, New Hampshire(2) | | 300 | | | 69 | | | 369 | |
Richburg, South Carolina(2) | | 342 | | | — | | | 342 | |
|
| | | | | | | | | |
| Location | | Owned Square Footage | | Leased Square Footage | | Total Square Footage |
| | | (in thousands) |
Hopkins, Minnesota(1)(2) | | 1,866 |
| | — |
| | 1,866 |
|
| Riverside, California | | — |
| | 1,858 |
| | 1,858 |
|
Stockton, California(1) | | — |
| | 1,290 |
| | 1,290 |
|
Mechanicsville, Virginia(1)(2) | | 1,249 |
| | — |
| | 1,249 |
|
| Centralia, Washington | | — |
| | 1,155 |
| | 1,155 |
|
| York, Pennsylvania | | — |
| | 1,039 |
| | 1,039 |
|
Joliet, Illinois(1) | | — |
| | 988 |
| | 988 |
|
| | | | | | | | | | | | | | | | | | | | |
Location(1) | | Owned Square Footage | | Leased Square Footage | | Total Square Footage |
| | (in thousands) |
Fargo, North Dakota(2) | | 336 | | | — | | | 336 | |
| Oglesby, Illinois | | — | | | 325 | | | 325 | |
Dayville, Connecticut(2) | | 317 | | | | | 317 | |
Greenwood, Indiana(2) | | 308 | | | — | | | 308 | |
Prescott, Wisconsin(2) | | 307 | | | — | | | 307 | |
| Santa Fe Springs, California | | — | | | 298 | | | 298 | |
| Iowa City, Iowa | | 271 | | | 20 | | | 291 | |
West Sacramento, California(2) | | 251 | | | — | | | 251 | |
Bismarck, North Dakota(2) | | 244 | | | — | | | 244 | |
| Anniston, Alabama | | — | | | 231 | | | 231 | |
| Yuba City, California | | — | | | 224 | | | 224 | |
Billings, Montana(2) | | 220 | | | — | | | 220 | |
| Vaughan, Ontario | | — | | | 180 | | | 180 | |
| Edison, New Jersey | | — | | | 178 | | | 178 | |
| West Newell, Illinois | | 155 | | | — | | | 155 | |
| Philadelphia, Pennsylvania | | — | | | 100 | | | 100 | |
| Richmond, British Columbia | | — | | | 96 | | | 96 | |
| Roseville, California | | — | | | 86 | | | 86 | |
West Sacramento, California(2) | | 85 | | | — | | | 85 | |
| Logan Township, New Jersey | | — | | | 70 | | | 70 | |
| Burnaby, British Columbia | | — | | | 41 | | | 41 | |
| Fife, Washington | | — | | | 39 | | | 39 | |
| Montreal, Quebec | | — | | | 31 | | | 31 | |
| Truckee, California | | — | | | 8 | | | 8 | |
| Total | | 13,304 | | | 16,988 | | | 30,292 | |
| | | | | | |
(1)Distribution centers and warehouses as presented here reflect the location of the main distribution center campus and warehouse combined with their related offsite storage used to supply customers out of these locations.
(2)These distribution centers secure our Term Loan Facility. |
| | | | | | | | | |
| Location | | Owned Square Footage | | Leased Square Footage | | Total Square Footage |
| | | (in thousands) |
Tacoma, Washington(1) | | 654 |
| | 305 |
| | 960 |
|
Milwaukie, Oregon(1) | | — |
| | 939 |
| | 939 |
|
Champaign, Illinois(1) | | — |
| | 910 |
| | 910 |
|
Harrisburg, Pennsylvania(1) | | — |
| | 883 |
| | 883 |
|
Green Bay, Wisconsin(1) | | — |
| | 880 |
| | 880 |
|
Fort Wayne, Indiana(1) | | 871 |
| | — |
| | 871 |
|
Commerce, California(1) | | 695 |
| | 163 |
| | 858 |
|
| Sarasota, Florida | | — |
| | 847 |
| | 847 |
|
Pompano Beach, Florida(1) | | — |
| | 799 |
| | 799 |
|
Quincy, Florida(1) | | 758 |
| | — |
| | 758 |
|
Pittsburgh, Pennsylvania(1) | | 679 |
| | — |
| | 679 |
|
Ocala, Florida(1)(2) | | 670 |
| | — |
| | 670 |
|
| Moreno Valley, California | | — |
| | 613 |
| | 613 |
|
| Lancaster, Texas | | — |
| | 590 |
| | 590 |
|
Indianola, Missouri(1) | | 543 |
| | 40 |
| | 583 |
|
Atlanta, Georgia(2) | | 389 |
| | 259 |
| | 648 |
|
Anniston, Alabama(1) | | 465 |
| | 105 |
| | 570 |
|
| Aurora, Colorado | | — |
| | 529 |
| | 529 |
|
Montgomery, New York(2) | | 500 |
| | — |
| | 500 |
|
Rocklin, California(2) | | 469 |
| | — |
| | 469 |
|
Stevens Point, Wisconsin(1) | | 314 |
| | 146 |
| | 460 |
|
Gilroy, California(2) | | 447 |
| | | | 447 |
|
Sturtevant, Wisconsin(2) | | 442 |
| | — |
| | 442 |
|
Carlisle, Pennsylvania(1) | | — |
| | 423 |
| | 423 |
|
Howell Township, New Jersey(2) | | — |
| | 397 |
| | 397 |
|
Ridgefield, Washington(2) | | 237 |
| | 103 |
| | 340 |
|
Chesterfield, New Hampshire(2) | | 300 |
| | | | 300 |
|
| Iowa City, Iowa | | 260 |
| | 31 |
| | 291 |
|
Auburn, Washington(1) | | — |
| | 359 |
| | 359 |
|
Richburg, South Carolina(2) | | 342 |
| | — |
| | 342 |
|
Fargo, North Dakota(1) | | 336 |
| | — |
| | 336 |
|
Oglesby, Illinois(1) | | — |
| | 325 |
| | 325 |
|
Dayville, Connecticut(2) | | 317 |
| | — |
| | 317 |
|
Greenwood, Indiana(2) | | 308 |
| | — |
| | 308 |
|
Santa Fe Springs, California(1)(2) | | 298 |
| | — |
| | 298 |
|
Prescott, Wisconsin(2) | | 307 |
| | — |
| | 307 |
|
West Sacramento, California(2) | | 251 |
| | — |
| | 251 |
|
Bismarck, North Dakota(1) | | 244 |
| | — |
| | 244 |
|
Anniston, Alabama(1) | | — |
| | 231 |
| | 231 |
|
| Yuba City, California | | — |
| | 224 |
| | 224 |
|
Billings, Montana(1) | | 220 |
| | — |
| | 220 |
|
| Vaughan, Ontario | | — |
| | 180 |
| | 180 |
|
| Edison, New Jersey | | — |
| | 178 |
| | 178 |
|
West Newell, Illinois(1) | | 155 |
| | — |
| | 155 |
|
| Auburn, California | | 126 |
| | — |
| | 126 |
|
| De Pere, Wisconsin | | — |
| | 100 |
| | 100 |
|
| Philadelphia, Pennsylvania | | — |
| | 100 |
| | 100 |
|
|
| | | | | | | | | |
| Location | | Owned Square Footage | | Leased Square Footage | | Total Square Footage |
| | | (in thousands) |
| Richmond, British Columbia | | — |
| | 96 |
| | 96 |
|
| Roseville, California | | — |
| | 86 |
| | 86 |
|
West Sacramento, California(2) | | 85 |
| | — |
| | 85 |
|
| Logan Township, New Jersey | | — |
| | 70 |
| | 70 |
|
| Charlotte, North Carolina | | — |
| | 43 |
| | 43 |
|
| Burnaby, British Columbia | | — |
| | 41 |
| | 41 |
|
| Montreal, Quebec | | — |
| | 31 |
| | 31 |
|
| Vernon, California | | 30 |
| | — |
| | 30 |
|
| Truckee, California | | — |
| | 6 |
| | 6 |
|
| | | 14,827 |
|
| 17,362 |
|
| 32,189 |
|
| |
(1) | These distribution centers were acquired as part of the Supervalu acquisition on October 22, 2018. |
| |
(2) | These distribution centers were mortgaged under and encumbered by our Term Loan Facility entered into on October 22, 2018. We expect additional distribution centers will become mortgaged under and encumbered by our Term Loan Facility once our collateral under the facility is finalized. |
Retail Stores
The following table summarizes continuing operations retail stores utilized by our Retail segment as of July 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Retail Banner | | Number of Stores | | Owned Square Footage | | Leased Square Footage | | Total Square Footage |
| | | | (square footage in thousands) |
Cub Foods(1) | | 53 | | | 1,134 | | | 2,514 | | | 3,648 | |
Shoppers(2) | | 21 | | | — | | | 1,263 | | | 1,263 | |
| Total | | 74 | | | 1,134 | | | 3,777 | | | 4,911 | |
(1)Cub Foods stores include stores in which we have a controlling ownership interest, and excludes 33 franchised Cub Foods stores in which we have a minority interest or no ownership interest.
(2)Shoppers retail stores exclude two Shoppers stores classified withinas discontinued operations as of August 3, 2019:in the Consolidated Financial Statements.
|
| | | | | | | | | | | | |
| Retail Banner | | Number of Stores | | Owned Square Footage | | Leased Square Footage | | Total Square Footage |
| | | | | (in thousands) |
Cub Foods(1)(2) | | 52 |
| | 1,132 |
| | 2,382 |
| | 3,514 |
|
Shoppers(2) | | 44 |
| | — |
| | 2,427 |
| | 2,427 |
|
| Total | | 96 |
| | 1,132 |
| | 4,809 |
| | 5,941 |
|
| |
(1) | Cub Foods stores include stores in which we have a controlling ownership interest, and excludes 29 franchised Cub Foods stores in which we have a minority interest or no interest. |
| |
(2) | These retail banners have been classified as held for sale and are reported within discontinued operations in the Consolidated Financial Statements. |
Corporate
WeAs of July 31, 2021, we had approximately 51 million square feet, 93 percent of which was leased, of surplus retail stores and warehouses, includingexcluding assigned leases, 84 percentleases.
As of July 31, 2021, we utilized approximately 6.9 million552 thousand square feet of owned vacant land as of August 3, 2019.
We leasecorporate office space primarily related to our principal executive offices located in Providence, Rhode Island. In addition, we leaseIsland and Eden Prairie, Minnesota, as well as other smaller administrative offices across the United States. We lease approximately 608 thousand building square feet related to our administrative offices
We own approximately 240 thousand square feet of buildingand lease the remaining 312 thousand square feet primarily related toof our executivecorporate office in Eden Prairie, Minnesota.space.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in routine litigation or other legal proceedings that arise in the ordinary course of our business, including investigations and claims regarding employment law, pension plans, ULP,unfair labor practices, labor union disputes, supplier, customer and service provider contract terms, real estate and antitrust. Other than as described in Note 18—17—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part II, Item 8 of this Annual Report, and as set forth below,which is incorporated herein, there are no pending material legal proceedings to which we are a party or to which our property is subject.
In August and November 2014, four class action complaints were filed against Supervalu relating to the criminal intrusion into Supervalu’s computer network that were previously announced by Supervalu in its fiscal 2015. The cases were centralized in the Federal District Court for the District of Minnesota under the caption In Re: SUPERVALU Inc. Customer Data Security Breach Litigation. On June 26, 2015, the plaintiffs filed a Consolidated Class Action Complaint. Supervalu filed a Motion to Dismiss the Consolidated Class Action Complaint and the hearing took place on November 3, 2015. On January 7, 2016, the District Court granted the Motion to Dismiss and dismissed the case without prejudice, holding that the plaintiffs did not have standing to sue as they had not met their burden of showing any compensable damages. On February 4, 2016, the plaintiffs
filed a motion to vacate the District Court’s dismissal of the complaint or in the alternative to conduct discovery and file an amended complaint, and Supervalu filed its response in opposition on March 4, 2016. On April 20, 2016, the District Court denied plaintiffs’ motion to vacate the District Court’s dismissal or in the alternative to amend the complaint. On May 18, 2016, plaintiffs appealed to the 8th Circuit and on May 31, 2016, Supervalu filed a cross-appeal to preserve its additional arguments for dismissal of the plaintiffs’ complaint. On August 30, 2017, the 8th Circuit affirmed the dismissal for 14 out of the 15 plaintiffs finding they had no standing. The 8th Circuit did not consider Supervalu’s cross-appeal and remanded the case back for consideration of Supervalu’s additional arguments for dismissal against the one remaining plaintiff. On October 30, 2017, Supervalu filed a motion to dismiss the remaining plaintiff and on November 7, 2017, the plaintiff filed a motion to amend its complaint. The court held a hearing on the motions on December 14, 2017, and on March 7, 2018, the District Court denied plaintiff’s motion to amend and granted Supervalu’s motion to dismiss. On March 14, 2018, plaintiff appealed to the 8th Circuit and on May 31, 2019, the 8th Circuit denied plaintiff’s appeal affirming the District Court’s dismissal of the case. We do not expect any further action on this case. Supervalu had $50 million of cyber threat insurance above a per incident deductible of $1 million at the time of the criminal intrusion, which the Company believes should cover any potential loss related to this litigation.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information, Holders and Dividends
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “UNFI.”“UNFI”.
On August 3, 2019,July 31, 2021, we had 7680 stockholders of record. The number of record holders is not representative of the number of beneficial holders of our common stock because depositories, brokers or other nominees hold many shares.
We have never declared or paid any cash dividends on our capital stock. We anticipate that all of our earnings in the foreseeable future will be retained to finance the continued growth and development of our business and repay our outstanding indebtedness, and we have no current intention to pay cash dividends. Our future dividend policy will depend on our earnings, capital requirements, and financial condition requirements of the financing agreements to which we are then a party and other factors considered relevant by our Board of Directors. Additionally, our ABL Credit Facility, and Term Loan Facility and Senior Notes contain terms that limit our ability to make any cash dividends unless certain conditions and financial tests are met.
Comparative Stock Performance
The following graph compares the yearly change in cumulative total stockholder returns on our common stock for the last five fiscal years with the cumulative return on the Standard & Poor’s (“S&P”) S&P SmallCap 600 Index and the S&P SmallCap 600 Food Distributors Index, the Fiscal 2018 Industry Peer Group, and the Fiscal 2018 NASDAQ Composite Index. The comparison assumes the investment of $100 on August 2, 2014July 30, 2016 in our common stock and in each of the indices and, in each case, assumes reinvestment of all dividends. The stock price performance shown below is not necessarily indicative of future performance.
This performance graph shall not be deemed “soliciting material” or be deemed to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among United Natural Foods, Inc., the S&P SmallCap 600,(1), the S&P SmallCap 600 Food Distributors(2)(1)
(1)Our selected industry peer group reflects the S&P SmallCap 600 Food Distributors Index, which includes SpartanNash Company, The Andersons, Inc., the Fiscal 2018 NASDAQ Composite Index(1),The Chef’s Warehouse, Inc. and the Fiscal 2018 Industry Peer Group(2)United Natural Foods, Inc.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| July 30, 2016 | | July 29, 2017 | | July 28, 2018 | | August 3, 2019 | | August 1, 2020 | | July 31, 2021 |
| United Natural Foods, Inc. | $ | 100.00 | | | $ | 75.79 | | | $ | 65.05 | | | $ | 16.85 | | | $ | 39.72 | | | $ | 66.27 | |
| S&P SmallCap 600 Index | $ | 100.00 | | | $ | 117.85 | | | $ | 143.80 | | | $ | 131.55 | | | $ | 123.36 | | | $ | 193.62 | |
| S&P SmallCap 600 Food Distributors Index | $ | 100.00 | | | $ | 91.37 | | | $ | 87.58 | | | $ | 49.74 | | | $ | 50.95 | | | $ | 83.70 | |
| |
(1) | In fiscal 2019, we transferred the trading of our common stock to the NYSE from the NASDAQ, and determined that the performance of our common stock should be compared against a broad market index that includes our common stock and companies traded on the same stock exchange. Accordingly, we provide a comparison of our performance against the S&P SmallCap 600, in addition to the NASDAQ Composite, the broad equity market index against which our performance had been compared in prior years. |
| |
(2) | In fiscal 2019, we acquired Supervalu, one of two companies (Supervalu and SYSCO Corporation) within our selected fiscal 2018 Industry Peer Group. We determined it was more representative to compare our performance against the S&P SmallCap 600 Food Distributors Index, which includes SpartanNash Company, The Andersons, Inc., The Chef’s Warehouse, Inc. and UNFI. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | August 2, 2014 | | August 1, 2015 | | July 30, 2016 | | July 29, 2017 | | July 28, 2018 | | August 3, 2019 |
| United Natural Foods, Inc | $ | 100.00 |
| | $ | 77.55 |
| | $ | 85.13 |
| | $ | 64.52 |
| | $ | 55.37 |
| | $ | 14.34 |
|
| S&P SmallCap 600 Index | $ | 100.00 |
| | $ | 112.26 |
| | $ | 118.94 |
| | $ | 140.17 |
| | $ | 171.04 |
| | $ | 156.47 |
|
| S&P SmallCap 600 Food Distributors Index | $ | 100.00 |
| | $ | 99.16 |
| | $ | 99.69 |
| | $ | 91.09 |
| | $ | 87.30 |
| | $ | 49.59 |
|
| Fiscal 2018 Industry Peer Group | $ | 100.00 |
| | $ | 104.38 |
| | $ | 143.20 |
| | $ | 146.31 |
| | $ | 204.35 |
| | $ | 201.66 |
|
| Fiscal 2018 NASDAQ Composite Index | $ | 100.00 |
| | $ | 119.17 |
| | $ | 121.46 |
| | $ | 151.75 |
| | $ | 186.12 |
| | $ | 194.68 |
|
On October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200 million of our outstanding common stock. The repurchase program is scheduled to expire upon our repurchase of shares of our common stock having an aggregate purchase price of $200 million. We did not repurchase any shares of our common stock in fiscal 2021 or 2020 pursuant to the share repurchase program. As of July 31, 2021, we have $176 million remaining authorized under the share repurchase program. We do not expect to purchase shares under the share repurchase program during fiscal 2022. Additionally, our ABL Credit Facility, Term Loan Facility and Senior Notes contain terms that limit our ability to repurchase common stock above certain levels unless certain conditions and financial tests are met. We may also implement all or part of the repurchase program pursuant to a plan or plans meeting the conditions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except shares and per share amounts) | | Total Number of Shares Purchased(2) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(3) |
Period(1): | | | | | | | | |
| May 2, 2021 to June 5, 2021 | | 1,388 | | | $ | 37.23 | | | — | | | $ | — | |
| June 6, 2021 to July 3, 2021 | | 7,861 | | | 35.38 | | | — | | | — | |
| July 4, 2021 to July 31, 2021 | | 5,663 | | | 33.12 | | | — | | | 176 | |
| Total | | 14,912 | | | $ | 34.69 | | | — | | | $ | — | |
(1)The reported periods conform to our fiscal calendar.
(2)These amounts represent the deemed surrender by participants in our compensatory stock plans of 14,912 shares of our common stock to cover taxes from the vesting of restricted stock awards and restricted stock units granted under such plans.
(3)As of July 31, 2021, there was approximately $176 million that may yet be purchased under the share repurchase program. There were no share repurchases under the share repurchase program in the fourth quarter of fiscal 2021.
ITEM 6. SELECTED FINANCIAL DATARESERVED
The following table sets forth our selected historical financial data for the past five years derived from our Consolidated Financial Statements presented in this Annual Report and historical financial data derived from previously audited consolidated financial statements. The historical results are not necessarily indicative of results to be expected for any future period. The following selected consolidated financial data should be read in conjunction with andThis item is qualified by reference to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Item 1A. Risk Factors” and our Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report. We have not declared or paid cash dividends in anyreserved as a result of the following fiscal periods.Company’s early adoption of Item 301 of Regulation S-K, pursuant to rules adopted by the Securities and Exchange Commission on November 19, 2020, which included removing the requirement to include selected financial data.
Year-over-year comparisons are significantly affected by material acquisitions. Our acquisition of Supervalu, which closed on October 22, 2018, and the acquisitions discussed in Part I. Item 1. of this Annual Report, significantly impacts the comparability of reported results between periods.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year |
| Consolidated Statements of Operations Data: | | 2019 (53 weeks) | | 2018
(52 weeks) | | 2017
(52 weeks) | | 2016
(52 weeks) | | 2015
(52 weeks) |
| | | (In thousands, except per share data) |
| Net sales | | $ | 21,387,068 |
| | $ | 10,226,683 |
| | $ | 9,274,471 |
| | $ | 8,470,286 |
| | $ | 8,184,978 |
|
| Cost of sales | | 18,602,058 |
| | 8,703,916 |
| | 7,845,550 |
| | 7,190,935 |
| | 6,924,463 |
|
| Gross profit | | 2,785,010 |
| | 1,522,767 |
| | 1,428,921 |
| | 1,279,351 |
| | 1,260,515 |
|
| Operating expenses | | 2,629,713 |
| | 1,274,562 |
| | 1,196,032 |
| | 1,049,690 |
| | 1,017,755 |
|
Goodwill and asset impairment charges(1) | | 292,770 |
| | 11,242 |
| | — |
| | 1,012 |
| | 555 |
|
| Restructuring, acquisition and integration related expenses | | 153,539 |
| | 9,738 |
| | 6,864 |
| | 4,540 |
| | 248 |
|
| Operating (loss) income | | (291,012 | ) | | 227,225 |
| | 226,025 |
| | 224,109 |
| | 241,957 |
|
| Other expense (income): | | | | | | | | | | |
| Net periodic benefit income, excluding service cost | | (34,726 | ) | | — |
| | — |
| | — |
| | — |
|
| Interest expense, net | | 179,963 |
| | 16,025 |
| | 16,754 |
| | 15,144 |
| | 14,142 |
|
| Other, net | | (957 | ) | | (1,545 | ) | | (5,152 | ) | | 743 |
| | (1,954 | ) |
| Total other expense, net | | 144,280 |
| | 14,480 |
| | 11,602 |
| | 15,887 |
| | 12,188 |
|
| (Loss) income from continuing operations before income taxes | | (435,292 | ) | | 212,745 |
| | 214,423 |
| | 208,222 |
| | 229,769 |
|
| (Benefit) provision for income taxes | | (84,609 | ) | | 47,075 |
| | 84,268 |
| | 82,456 |
| | 91,035 |
|
| Net (loss) income from continuing operations | | $ | (350,683 | ) | | $ | 165,670 |
| | $ | 130,155 |
| | $ | 125,766 |
| | $ | 138,734 |
|
| Net (loss) income from continuing operations per common share—Basic | | $ | (6.84 | ) | | $ | 3.28 |
| | $ | 2.57 |
| | $ | 2.50 |
| | $ | 2.77 |
|
| Net (loss) income from continuing operations per common share—Diluted | | $ | (6.84 | ) | | $ | 3.26 |
| | $ | 2.56 |
| | $ | 2.50 |
| | $ | 2.76 |
|
| | | | | | | | | | | |
| | | As of the Fiscal Year Ended |
| Consolidated Balance Sheets Data: | | August 3,
2019 | | July 28,
2018 | | July 29,
2017 | | July 30,
2016 | | August 1,
2015 |
| Working capital | | $ | 1,458,974 |
| | $ | 1,089,690 |
| | $ | 958,683 |
| | $ | 991,468 |
| | $ | 1,018,437 |
|
| Total assets | | $ | 7,180,965 |
| | $ | 2,964,472 |
| | $ | 2,886,563 |
| | $ | 2,852,155 |
| | $ | 2,540,994 |
|
Total long-term debt and capital leases, excluding current portion(2) | | $ | 2,927,258 |
| | $ | 340,323 |
| | $ | 366,089 |
| | $ | 580,872 |
| | $ | 528,556 |
|
| Total stockholders’ equity | | $ | 1,510,934 |
| | $ | 1,845,955 |
| | $ | 1,681,292 |
| | $ | 1,519,507 |
| | $ | 1,381,088 |
|
| |
(1) | The line item presentation of Goodwill and asset impairment charges and Restructuring, acquisition and integration related expenses incurred in fiscal years 2018 and prior have been recast to conform with the current period presentation. |
| |
(2) | The line item presentation of total long-term debt and capital leases, excluding current portion has been recast for fiscal years 2018 and prior to conform with the current period presentation and to include the long-term portion of our revolving credit facility. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, appearing“Risk Factors” included in Part I, Item IA, “Forward-looking Statements” and other risks described elsewhere in this Annual Report.
FORWARD-LOOKING STATEMENTS
This Annual Report and the documents incorporated by reference in this Annual Report containcontains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information.
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:
•the impact and duration of the COVID-19 pandemic;
•labor and other workforce shortages and challenges;
•our dependence on principal customers;
•the potential for additional goodwill impairment charges as a resultaddition or loss of purchase accounting adjustmentssignificant customers or otherwise;material changes to our relationships with these customers;
•our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends;
•the relatively low margins of our business, which are sensitive to inflationary and deflationary pressures;
•our ability to realize anticipated benefits of our acquisitions and dispositions, in particular,strategic initiatives, including, our acquisition of Supervalu;
the possibility that restructuring, asset impairment, and other charges and costs we may incur in connection with the sale or closure of our retail operations exceed our current expectations;
our reliance on the continued growth in sales of our higher margin natural and organic foods and non-food products in comparison to lower margin conventional grocery products;
increased competition in our industry as a result of increased distribution of natural, organic and specialty products by conventional grocery distributors and direct distribution of those products by large retailers and online distributors;
increased competition as a result of continuing consolidation of retailers in the natural product industry and the growth of supernatural chains;
•our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company and to achieve efficiencies and cost savings from these efforts;
the addition or loss of significant customers or material changes•our ability to our relationships with these customers;
volatility in fuel costs;
volatility in foreign exchange rates;
our sensitivitycontinue to inflationary and deflationary pressures;
the relatively low margins and economic sensitivitygrow sales, including of our business;higher margin natural and organic foods and non-food products, and to manage that growth;
•increased competition in our industry as a result of increased distribution of natural, organic and specialty products, and direct distribution of those products by large retailers and online distributors;
•increased competition in our industry, including as a results of continuing consolidation of retailers and the growth of chains;
•union-organizing activities that could cause labor relations difficulties and increased costs;
•our ability to operate, and rely on third-parties to operate, reliable and secure technology systems;
•moderated supplier promotional activity, including decreased forward buying opportunities;
•the potential for disruptions in our supply chain or our distribution capabilities by circumstances beyond our control;control, including a health epidemic;
•the potential for additional asset impairment charges;
•the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise;
moderated supplier promotional activity, including decreased forward buying opportunities;•our ability to maintain food quality and safety;
union-organizing activities that could cause labor relations difficulties•volatility in fuel costs;
•volatility in foreign exchange rates; and increased costs; and
•our ability to identify and successfully complete asset or business acquisitions.
You should carefully review the risks described under “PartPart I. Item 1A. Risk Factors,” as well as any other cautionary language in this Annual Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.
EXECUTIVE OVERVIEW
Business Overview
As a leading distributor of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services to retailers in the United States and Canada, we believe we are uniquely positioned to provide the broadest array of products and services to customers throughout North America. We offer more than 250,000nearly 300,000 products consisting of national, regional and private label brands grouped into six product categories: grocery and general merchandise; produce; perishables and frozen foods; nutritional supplements and sports nutrition; bulk and food service products; and personal care items. Through our October 2018 acquisition of Supervalu,We believe we are transforming into North America’s premier wholesaler with 6357 distribution centers and warehouses representing approximately 3230 million square feet of warehouse space. We are a coast-to-coast distributor with customers in all fifty states as well as all ten provinces in Canada, making us a desirable partner for retailers and consumer product manufacturers. We believe our total product assortment and service offerings are unmatched by our wholesale competitors. We plan to aggressively pursue new business opportunities to independent retailers who operate diverse formats, regional and national chains, military commissaries, as well as international customers with wide-ranging needs. Our business is classified into two reportable segments: Wholesale and Retail; and also includes a manufacturing division and a branded product line division.
Fiscal 2019 and 2020
Fiscal 2019 was an historic year for UNFI asOver the past two years, we have substantially completed the acquisitionintegration of Supervalu and have turned our focus to transforming the business for further future growth. Our operating performance in fiscal 2021 benefited from the shift in food-at-home consumption resulting from the continued impacts of the COVID-19 global pandemic, and we expect to continue to benefit from ongoing changes in consumer purchasing behavior. Late in fiscal 2021, we introduced our Fuel the Future strategy with the mission of making our customers stronger, our supply chain better and our food solutions more inspired. Fuel the Future is composed of six strategic pillars, which are detailed in Part I. Item 1. Business.
Collectively, the tactics and plans behind each pillar are meant to capitalize on October 22, 2018our unique position in the food distribution industry, including the number and beganlocation of distribution centers we operate, the array of services and the data driven insights that we are able to transform into North America’s leading wholesale distributor. Bycustomize for each of our customers, our innovation platforms and the growth potential we see in each, our commitment to our people and the planet, the positioning of our retail operations, and our focus on delivering returns for our shareholders.
We also introduced our ValuePath initiative early in fiscal 2021, pursuant to which we plan to improve operating performance through various initiatives planned to be implemented through the end of fiscal 2019, we had combined our natural and conventional businesses,2023. We plan to re-invest a portion of these operating with a single executive leadership team. We neared completion of our Pacific Northwest distribution center consolidation whereby we will operate out of two distribution centerssavings in the future comparedbusiness to five previously, a move whichdrive market share gains, accelerate innovation, invest in automation and maintain competitive wage scales for our frontline workers.
We will provide significant operating benefits. We realized significant cost synergies, which were partially reinvested into the business. In fiscal 2020, we successfully created a four-region operating structure with a sales organization aligned in a similar fashion. We believe these changes will advance the execution ofcontinue to use free cash flow to reduce outstanding debt and are committed to improving our long-term strategic and growth objectives. We expect the competitive environment to remain challenging as other wholesalers look to capture new business, which is expected to lead to margin compression. We believe we have cost savings opportunities that will more than offset the impact to gross margin as well as cross-selling opportunities that will increase sales.financial leverage.
Our StrategyGrowth Drivers
A key component of our business andhistorical growth strategy has been to acquire wholesalersdistribution companies differentiated by product offerings, service offerings and market area.
On July 25, 2018, we entered into an Agreement and Plan of Merger pursuant to which we agreed to acquire Supervalu for an aggregate purchase price of approximately $2.3 billion, including the assumption of outstanding debt and liabilities. The transaction closed on October 22, 2018. Included in the liabilities assumed in the Supervalu acquisition were the Supervalu Senior Notes with a fair value of $546.6 million. These Senior Notes were redeemed in the second quarter of In fiscal 2019, following the required 30-day notice period, resulting in their satisfaction and discharge. The redemption of the Senior Notes was financed by borrowings under our Term Loan Facility. The acquisition of Supervalu acceleratesaccelerated our build“build out the storestore” strategy, diversifiesdiversified our customer base, enablesenabled cross-selling opportunities, expandsexpanded our market reach and scale, enhancesenhanced our technology, capacity and systems, and is expected to continue to deliver significant synergiescost savings and accelerate potential growth. We believe the Supervalu acquisition allows us to better serve our wholesale customers’ needs and compete in the current environment by providing additional warehouse and transportation capacity, which has enabled us to provide a broader array of products to our customers. As one of the largest wholesale grocery distributors in North America, and in light of the continued expansion of our distribution network and “build out the store” strategy, we believe we are well positioned to leverage our infrastructure in the current economic and social environment to continue to serve our customers and the communities in which we operate, and are actively pursuing new customers. We recently introduced our Fuel the Future strategy, which we believe will further accelerate our growth through increasing sales of products and services, providing tailored, data-driven solutions to help our existing customers run their business more efficiently and contributing to new customer acquisitions.
We believe the key drivers for growth through new customers will come from the benefits of our significant scale, product and service offerings, and nationwide footprint, will generate long-term shareholder valuewhich we believe were demonstrated by positioning usthe following larger customer developments in fiscal 2021.
•We’ve recently begun delivering product to continue to grow salesKey Food Stores co-operative, Inc. (“Key Food”), a Co-Operative of natural, organic, specialty, produce, and conventional grocery and non-food products across our network. We believe we will realize significant cost and revenue synergies from the acquisition of Supervalu by leveraging the scale and resources of the combined company, cross-selling to our customers, integrating our merchandising offerings into existing warehouses, optimizing our network footprint to lower our cost structure, and eliminating redundant administrative costs.
We maintain long-standing customer relationships with customers in our supernatural, supermarket, independent and other channels. Some of these long-standing customer relationships are established through contracts with our customers in the form of distribution agreements.
We currently operate approximately 96 retailover 300 grocery stores, acquired in the Supervalu acquisition. We intend to thoughtfully and economically divest these stores. These stores are reported within discontinued operations in our Consolidated Financial Statements included in this Annual Report.after being selected as Key Food’s primary wholesaler. Our supply agreement with Key Food has a term of 10 years with expected sales over that period of approximately $10 billion.
•We have been the primary distributor to Whole Foods Market for more than 20 years. We continueOn March 3, 2021, we entered into an amendment to serve asour distribution agreement dated October 30, 2015. The amendment extended the primary distributorterm of the distribution agreement from September 28, 2025 to Whole Foods MarketSeptember 27, 2027.
Trends and Other Factors Affecting our Business
Our results are impacted by macroeconomic and demographic trends, and changes in all of its regionsthe food distribution market structure and changes in trends in consumer behavior. Over the past several decades, total food expenditures on a constant dollar basis within the United States pursuanthas continued to increase, and the focus in recent decades on natural, organic and specialty foods has benefited the Company; however, consumer spending in the food-away-from-home industry had increased steadily as a percentage of total food expenditures. This trend paused during the 2008 recession, and then continued to increase. In general, economic recessions usually result in higher food-at-home expenditures, which would be expected to benefit our customers and result in higher sales.
In fiscal 2020 and continuing into fiscal 2021, the COVID-19 pandemic, which we refer to as the pandemic, led to a significant increase in food-at-home expenditures as a percentage of total food expenditures. We experienced increases in Net sales and Gross profit due to higher Wholesale customer purchases. Retail experienced similar trend increases in Net sales and Gross profit from sales to end consumers. We expect that food-at-home expenditures as a percentage of total food expenditures will remain elevated in the near term compared to pre-pandemic levels. We believe that changes in work being done outside of the traditional office setting will continue to contribute to more food being consumed at home. The pandemic also drove significant growth in eCommerce utilization by grocery consumers, and we expect that trend to continue. We expect to benefit from this trend through the growth of our traditional eCommerce customers, our Community Marketplace, an online marketplace connecting suppliers and retailers, and EasyOptions, which directly services non-traditional customers, such as bakeries or yoga studios, and through customers adopting our turnkey eCommerce platform.
We expect to continue to benefit from elevated sales as compared to historical periods prior to the pandemic while food-at-home expenditures as a percentage of total food expenditures remains higher than recent historical periods prior to the pandemic. Trends in increased sales and gross margin benefits have lessened since the initial onset of the pandemic. The ultimate impact on our results is uncertain and dependent upon future developments, including the severity and duration of the pandemic, including any resurgence of infection rates and new variants with higher transmissibility, any economic downturn, actions taken by governmental authorities and other third parties in response to the pandemic such as social distancing orders or companies’ remote work policies, the impact on capital and financial markets, food-at-home purchasing levels and other consumer trends, each of which is uncertain and rapidly changing. Any of these disruptions could adversely impact our business and results of operations. Considerable uncertainty remains regarding the future impact of the pandemic on our business.
We are also impacted by changes in food distribution agreement that expirestrends affecting our Wholesale customers, such as direct store deliveries and other methods of distribution. Our Wholesale customers manage their businesses independently and operate in a competitive environment. We seek to obtain security interests and other credit support in connection with the financial accommodations we extend these customers; however, we may incur additional credit or inventory charges related to our customers, as we expect the competitive environment to continue to lead to financial stress on September 28, 2025.some customers. The magnitude of these risks increases as the size of our Wholesale customers increases.
We recently began experiencing a tighter operating labor market for our warehouse and driver associates, which has caused additional reliance and higher costs from third-party resources, and incremental hiring and wage costs. We believe this operating environment has been impacted by labor force availability and the pandemic. We are working to implement actions to fill open roles and maintain existing and future employment levels.
Distribution Center Network
Network Optimization and Construction
With the Supervalu acquisition, we acquired the Unified and AG Florida subsidiaries, which were previously acquired by Supervalu in June 2017 and December 2017, respectively, as well as the recently opened new distribution centers in Harrisburg, Pennsylvania and Joliet, Illinois. As we integrate the distribution networks of Supervalu, Unified and AG Florida with our distribution network, expand our capacity and take steps to improve the efficiency of our warehouse capabilities including with our Joliet distribution center, we expect to incur start-up and transition costs including higher employee, trucking and inventory shrink costs. During fiscal 2019, we incurred higher than expected distribution expenses from our distribution network realignment due to the following:
We incurred higher operating and shrink costs resulting from our transition from the Lancaster distribution center to our Harrisburg distribution center. These transition costs sequentially improved in the third and fourth quarters of fiscal 2019, but we will incur higher operating costs on an ongoing basis in the Harrisburg facility than were historically incurred at Lancaster, which incorporated warehouse automation.
WithinIn the Pacific Northwest, we are transferringcompleted the consolidation of the volume of five distribution centers and thetheir related supporting off-site storage facilities into two distribution centers. This transition and operational consolidation is expected to be completedcenters during fiscal 2020, after which we2020. We expect to achieve synergies and cost savings bythrough eliminating inefficiencies, including incurring lower operating, shrink and off-site storage expenses. This plan includes expandingWe also expect that the optimization of the Pacific Northwest distribution network will help deliver meaningful synergies contemplated in the Supervalu acquisition. We expanded the Ridgefield, WA distribution center to enhance customer product offerings, create more efficient inventory management, streamline operations and incorporate greater technology to deliver a better customer experience. The optimizationWe are now supplying customers served by former Pacific Northwest locations from our Centralia, WA, Ridgefield, WA and Gilroy, CA distribution centers. In order to maintain and stabilize service levels of thethese higher volume Pacific Northwest distribution centers, we incurred incremental operating costs in fiscal 2021 that we believe temporarily reduced the realization of synergy benefits from this network will also help deliver meaningful synergies contemplatedconsolidation.
To support our continued growth within southern California, we began operating a newly leased facility in Riverside, CA with approximately 1.2 million square feet upon completion of its construction in the fourth quarter of fiscal 2020. This facility provides significant capacity to service our customers in this market. On February 24, 2020, we executed a purchase option with a delayed purchase provision to acquire the real property of this distribution center for approximately $152 million. We entered into an agreement to monetize the real property of this location through a sale-leaseback transaction, which is contingent upon the acquisition of Supervaluthe facility that we expect will occur on or before June 2022.
In fiscal 2022, we started operating our Allentown, PA distribution center with a capacity of 1.3 million square feet that will be utilized to service Key Food and other customers in October 2018.that facility’s geographical area. We acceleratedexpect to incur initial start-up costs and operating losses in fiscal 2022 as the Pacific Northwest consolidation timelinevolume in this facility ramps up to accelerate the realization of synergies from the Pacific Northwest consolidation through the operational start-up of Centraliamatch it’s expected full operating capacity.
We continue to evaluate our distribution center network to optimize its performance and have not yet completed the consolidation or closure ofexpect to incur incremental expenses related to any distribution centers as of August 3, 2019, but had completed the closure of an off-site storage facility.
Certain of these costs are expected to subside as we complete this work to realign ourfuture network realignment and we are working to both minimize these costs and obtain new business to further improve the efficiency of our transforming distribution network.
The construction of the new Centralia distribution center has been completed, and we are working on completing the expansion of the Ridgefield distribution center. As a result, we plan to close and sell our Tacoma, Portland and Auburn warehouses, as well as reduce our dependency on outside storage and third-party logistics services.
Our Ridgefield, Washington facility expansion will add 541 thousand square feet (to a total of nearly 800 thousand square feet) to provide capacity for our growing customer base in the natural, organic and specialty channel. This facility will deploy a warehouse automation solution that supports our slow-moving SKU portfolio.
Distribution Center Sales
We received aggregate proceeds of $172.5 million in fiscal 2019 from the sale of operating and surplus distribution centers. We closed on the sale and leaseback of two acquired Supervalu distribution centers and received aggregate proceeds of approximately $149.5 million. One of these distribution centers was the last remaining distribution center Supervalu sold and leased back as part of a previous portfolio transaction, which contained a longer-term lease. The other distribution center was a Pacific Northwest distribution center related to our consolidation strategy, which was subject to a short-term lease. In addition, we sold two surplus facilities and received aggregate proceeds of approximately $23.0 million.
In the fourth quarter of fiscal 2019, we entered into an agreement to sell a distribution center for $43.2 million related to our Pacific Northwest consolidation strategy, which we expect to close in the first quarter of fiscal 2020. This facility is classified as held for sale within Prepaid expenses and other current assets of continuing operations on our Consolidated Balance Sheets. As we consolidate our distribution networks, we may sell additional owned facilities or exit leased facilities.
OperatingNetwork Technology Efficiency
As part of our “one company” approach, we are in the process of converting to a single national warehouse management and procurement system to integrate our existing facilities including acquired Supervalu facilities, onto one nationalized platform across the organization. We continue to be focusedfocus on the automation of our new or expanded distribution centers that are at different stages of construction and implementation. These steps and others are intended to promote operational efficiencies and improve operating expenses as a percentage of net sales.
Goodwill Impairment Review
Retail Operations
During
We currently operate 74 continuing operations Retail grocery stores, including 53 Cub Foods corporate stores and 21 Shoppers Food Warehouse stores. In addition, we supply another 27 Cub Foods stores operated by our Wholesale customers through franchise and LLC arrangements. We operate 81 pharmacies primarily within the first quarter of fiscal 2019, the Company experienced a decline in its stock price and market capitalization. During the second quarter of fiscal 2019, the stock price continued to decline,stores we operate and the decline in the stock pricestores of our franchisees. In addition, we operate 22 “Cub Wine and market capitalization became significantSpirit” and sustained. Due to this sustained decline in stock price, the Company determined that it was more likely than not that the carrying value of the Supervalu Wholesale reporting unit exceeded its fair value and performed an interim quantitative impairment test of goodwill.
The Company estimated the fair values of all reporting units using both the market approach, applying a multiple of earnings based on guidelines for publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The rates used to discount projected future cash flows under the income approach reflect a weighted average cost of capital of 10%, which considered guidelines for publicly traded companies, capital structure and risk premiums, including those reflected in the Company’s then-current market capitalization. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling those fair values to its enterprise value and market capitalization. Based on this analysis, the Company determined that the carrying value of its Supervalu Wholesale reporting unit exceeded its fair value by an amount that exceeded the assigned goodwill as of the acquisition date. As a result, the Company recorded a goodwill impairment charge of $292.8 million in fiscal 2019, which reflects the preliminary goodwill impairment charge recorded in the second quarter of fiscal 2019 and adjustments to the charge recorded in the third and fourth quarters of fiscal 2019. The goodwill impairment charge adjustments recorded in the third and fourth quarters of fiscal 2019 were attributable to changes in the preliminary fair value of net assets, most notably changes in tax assets and liabilities, intangible assets and property and equipment, which affected the initial goodwill resulting from the Supervalu acquisition. The goodwill impairment charge is reflected in Goodwill and asset impairment charges in the Consolidated Statements of Operations. The goodwill impairment charge reflects all of Supervalu Wholesale’s reporting unit goodwill, based on preliminary acquisition date assigned fair values.
The goodwill impairment charge recorded in fiscal 2019 is subject to change based upon the final purchase price allocation during the measurement period for estimated fair values of assets acquired and liabilities assumed from the Supervalu acquisition. There can be no assurance that such final assessments will not result in material increases or decreases to the recorded goodwill impairment charge based upon the preliminary purchase price allocations, due to changes in the provisional opening balance sheet estimates of goodwill. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date). Refer to Note 4—Acquisitions in Part II, Item 8 of this Annual Report on Form 10-K for further information about the preliminary purchase price allocation and provisional goodwill estimated as of the acquisition date.
The estimated fair value of the Supervalu Wholesale reporting unit was below its estimated carrying value by approximately 20%. The goodwill impairment review indicated that the estimated fair value of the legacy Company Wholesale and Canada Wholesale reporting units were in excess of their carrying values by over 20%. Other continuing operations reporting units were substantially in excess of their carrying value. If the estimated fair value of the Company were to decrease further, or other circumstances were to arise that indicate the value of one of these other reporting units have decreased, the Company may incur additional impairment charges for other reporting units based on additional impairment reviews. The Company’s goodwill impairment review included a reconciliation of all of the reporting units’ fair value of to the Company’s market capitalization and enterprise value.
If the Company were to determine that a change in the composition of its goodwill reporting units was necessary in fiscal 2020, or in the future as a result of the change in the structure of management and financial reporting, the Company would perform a reallocation of goodwill based on the relative fair values to its new reporting units. If this were to occur, the Company would consider whether an impairment exists based on the composition and measurement of the new reporting units’ fair values, which may result in additional goodwill impairment charges based on a number of factors, including the relative fair value allocation at the time that a change could occur, the fair value of the individual reporting units at that time, and the fair value of the Company at the time of the change in the composition of the goodwill reporting units.
Divestiture of Retail Operations
“Cub Liquor” stores. We havehad previously announced our intention to thoughtfully and economically divest our retail businesses acquired as part of the Supervalu acquisition as soon as practical in an efficient and economic manner in order to focus on our core wholesaleWholesale distribution business. At this time, we do not have any current plans to divest our Retail business. We continue to strive to maximize the operating value of Retail. As part of that strategy, our new strategic focus is to invest in our stores and optimize our operations to be customer centric. We continue to remodel and upgrade our stores, while investing in eCommerce growth in the form of click-and-collect, delivery, and technology investments, such as mobile customer applications.
Part of our optimization efforts included updating our benefit plan offerings to minimize liabilities and stranded costs associated with these divestitures. We expect to obtain ongoing supply relationships with the purchasers of some of these retail operations, but we anticipate some reductions in supply volume will result from the divestiture of certain of these retail operations. Actions associated with retail divestitures and adjustments to our core cost structurea defined contribution plan as a replacement for our wholesale food distribution business are expected to result in headcount reductions and other costs and charges. These costs and charges, which may be material, include multiemployer plan charges, severance costs, store closure charges, and related costs. A withdrawal from a multiemployer pension planplans to which we contribute pursuant to three Cub Foods collective bargaining agreements. In fiscal 2021, we withdrew from participating in three Retail multiemployer pension plans, resulting in a $63 million withdrawal charge, which is recorded within Operating expenses within our Consolidated Statements of Operations, Other long-term liabilities on the Consolidated Balance Sheets and within changes in operating assets and liabilities within Accrued expenses and other liabilities in the Consolidated Statements of Cash Flows. As part of our optimization efforts, we are continuing to evaluate various options to address our off-balance sheet liability under certain of our Retail multiemployer pension plans, which actions may result in a material obligation to make payments over an extended period of time.significant costs or charges. The extent of these costs and charges will be determined based on outcomes achieved under the divestiture process. Atprocess undertaken to minimize or eliminate the liability for the respective multiemployer pension plan. As we continue to work to find solutions to under-funded multiemployer pension plans, it is possible we could incur withdrawal liabilities for certain additional multiemployer pension plan obligations in the future as we actively bargain collective agreements with a number of our unions in due course. Beyond this immaterial plan, at this time, however, we are unable to make an estimate with reasonable certainty of the amount or type of costs and charges expected to be incurred in connection with the foregoing actions. A withdrawal from a multiemployer pension plan may result in an obligation to make material payments over an extended period of time or one-time lump sum payments on a net present value basis.
In the fourth quarter of fiscal 2021, we determined we no longer met the held for sale criterion for a probable sale to be completed within 12 months for two of the four Shoppers retail stores that were previously included within discontinued operations due to the criterion being met as of the Supervalu acquisition date. We revised our Consolidated Financial Statements to reclassify these stores from discontinued operations to continuing operations. This change in financial statement presentation resulted in the inclusion of these stores’ results of operations, financial position, cash flows and related disclosures within continuing operations for all periods presented in the Consolidated Financial Statements and presented below. In addition, in order to present these stores’ results of operations within continuing operations, Wholesale sales to these additional Retail stores have been eliminated upon consolidation.
Our discontinued operations as of the end of the fourth quarter of fiscal 20192021 include Cub Foodstwo Shoppers stores, and Shopper’s and ourfor historical periods, results of discontinued operations include the Hornbacher’s and Shop ‘n Save and Shop ‘n Save East retail banners, which were divested in the second and third quarters of fiscal 2019, respectively.and Shoppers stores that were sold or closed in fiscal 2020 and fiscal 2021. In addition, cash flows from discontinued operations includes certaininclude real estate sales related to those historical retail operations. These retail assets have been classified as held for sale as of the Supervalu acquisition date, and the results of operations, financial position and cash flows directly attributable to these operations are reported within discontinued operations in our Consolidated Financial Statements for all periods presented. The assets of these retail operations were recorded at what we believe to be their estimated fair value less costs to sell.
Prior to the Supervalu acquisition date, 19 St. Louis-based Shop ‘n Save stores, 15 in-store pharmacies, one stand-alone pharmacy, four fuel centers and all remaining prescription files were sold to Schnuck Markets, Inc. (“Schnucks”). Schnucks agreed to assume the multi-employer pension obligations related to the Shop ‘n Save stores it acquired. The sale of the stores was completed in the first quarter of fiscal 2019, and we closed the remaining Shop ‘n Save St. Louis-based retail stores and the dedicated distribution center in the second quarter of fiscal 2019, and we continue to hold the owned real estate assets related to these locations for sale. In addition, we entered into a supply agreement to serve as the primary supplier to nine Schnucks stores across northern Illinois, Iowa and Wisconsin. In connection with the closure of the Shop ‘n Save locations and the acquisition of Supervalu, we assumed a $35.7 million multiemployer pension plan withdrawal liability, and recorded a closed stores’ reserve charge of approximately $17.1 million in the second quarter of fiscal 2019 based on the retail stores’ November cease-use date.Services Agreement
In fiscal 2019, the Company closed three of its eight Shop ‘n Save East stores and sold the remaining five Shop ‘n Save East stores to GIANT Food Store, LLC, and did not incur a gain or loss on the sale of this disposal group. The Company closed the remaining Shop ‘n Save St. Louis retail stores and the distribution center that were not sold prior to the Supervalu acquisition date.
In fiscal 2019, the Company completed the sale of seven of its eight Hornbacher's locations, as well as Hornbacher’s newest store currently under development in West Fargo, North Dakota, to Coborn's Inc. (“Coborn’s”). The Company did not incur a gain or loss on the sale of this disposal group. The Hornbacher’s store in Grand Forks, North Dakota was not included in the sale to Coborn’s and has closed pursuant to the terms of the definitive agreement. As part of the sale, Coborn's entered into a long-term agreement for the Company to serve as the primary supplier of the Hornbacher's locations and expand its existing supply arrangements for other Coborn’s locations.
In the fourth quarter of fiscal 2019, the Company completed the sale of the pharmacy prescription files and inventory of the Shoppers disposal group. As of August 3, 2019, only the Cub Foods and Shoppers disposal groups continue to be classified as operations held for sale as discontinued operations.
We disposed of our retail business, Earth Origins Market (“Earth Origins”), during fiscal 2018.
Supervalu Professional Services Agreements
In connection with the sale of Save-A-Lot on December 5, 2016, Supervalu entered into a services agreement (the “Services Agreement”) with Moran Foods, LLC, (“Moran Foods”), the entity that operates the Save-A-Lot business. Pursuant to the Services Agreement, we provide certain technical, human resources, finance and other operational services to Save-A-Lot for a term of five years, on the terms and subject to the conditions set forth therein. The initial annual base chargeDuring fiscal 2021, we earned $17 million under the Services Agreement, is $30 million, subject to adjustments.which was recorded within Net sales. We expect that services provided under the Services Agreement will wind down at or near the end of the initial term in December 2021. At that time, we will lose the revenue associated with this agreement, and any fixed or variable costs associated with servicing this agreement not eliminated concurrently with the decline in revenue, would result in decreased operating profit.
Impact of Inflation or Deflation
We monitor product cost inflation and deflation and evaluate whether to absorb cost increases or decreases, or pass on pricing changes.changes to our customers. We experienced a mix of inflation and deflation across product categories during fiscal 20192021 and 2018.2020. In the aggregate across all of our legacy businesses excluding Supervalu, and taking into account the mix of products, management estimates our businesses experienced cost inflation of approximately one percent in fiscal 2019.2021. Cost inflation and deflation estimates are based on individual like items sold during the periods being compared. Changes in merchandising, customer buying habits and competitive pressures create inherent difficulties in measuring the impact of inflation and deflation on Net sales and Gross profit. Absent any changes in units sold or the mix of units sold, deflation has the effect of decreasing sales. Inflation also impacts our measurement ofUnder the last-in, first-outfirst out (“LIFO”) method of inventory charge.
Other Factors Affecting our Business
Weaccounting, product cost increases are also impacted by macroeconomicrecognized within Cost of sales based on expected year-end inventory quantities and demographic trends, and changes incosts, which has the food distribution market structure. Over the past several decades, total food expenditures on a constant dollar basis within the United States has continued to increase in total,effect of decreasing Gross profit and the focus in recent decades on natural, organic and specialty foods have benefited the Company; however, consumer spending in the food-away-from-home industry has increased steadily as a percentagecarrying value of total food expenditures. This trend pausedinventory during the 2008 recession, and then continued to increase. We are also impacted by changes in food distribution trends to our wholesale customers, such as direct store deliveries and other methodsperiods of distribution.inflation.
Business Performance Assessment and Composition of Consolidated Statements of Operations and Business Performance Assessment
Net sales
Our net sales consist primarily of product sales of conventional, natural, organic, specialty, produce and produceconventional grocery and non-food products, and support services torevenue from retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue. Net sales also include amounts charged by us to customers for shipping and handling and fuel surcharges.
Cost of sales and Gross profit
The principal components of our cost of sales include the amounts paid to suppliers for product sold, plus the cost of transportation costs necessary to bring the product to, or move product between, our various distribution centers offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products. Cost of sales also includes amounts incurred by us at our manufacturing subsidiary, Woodstock Farms Manufacturing, for inbound transportation costsand retail stores, partially offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses.
Operating expenses
Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation, and amortization expense. These expenses relate toinclude the departmental expenses of warehousing, and delivery, expenses including purchasing, receiving, selecting and outbound transportation expenses.
Restructuring, acquisition and integration expenses
Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, change-in-control related charges, facility closure asset impairment charges and costs, stock-based compensation acceleration charges, store closure charges and acquisition and integration expenses. For fiscal 2019, theseIntegration expenses are primarilyinclude certain professional consulting expenses related to business transformation and incremental expenses related to combining facilities required to optimize our distribution network as a result of the Supervalu acquisition. Fiscal 2018acquisitions.
Interest expense, net
Interest expense, net includes primarily reflects Supervalu acquisitioninterest expense on long-term debt, net of capitalized interest, loss on debt extinguishment, interest expense on finance lease obligations, amortization of financing costs and Earth Origins exitdiscounts, and disposal costs.interest income.
Other expenses
Other expense (income), net includes interest on outstanding indebtedness, including direct financing and capital lease obligations, netNet periodic benefit plan income, excluding service costs,cost
Net periodic benefit income, excluding service cost reflects the recognition of expected returns on benefit plan assets in excess of interest income and miscellaneous income and expenses.costs.
Adjusted EBITDA
Our Consolidated Financial Statements are prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). In addition to the GAAP results, we consider certain non-GAAP financial measures to assess the performance of our business and understand underlying operating performance and core business trends, which we use to facilitate operating performance comparisons of our business on a consistent basis over time. Adjusted EBITDA is provided as a supplement to our results of operations and related analysis, and should not be considered superior to, a substitute for or an alternative to, any financial measure of performance prepared and presented in accordance with GAAP. Adjusted EBITDA excludes certain items because they are non-cash items or are items that aredo not considered in our supplementalreflect management’s assessment of on-goingongoing business performance.
We believe Adjusted EBITDA is useful to investors and financial institutions because it provides additional understanding of otherinformation regarding factors and trends affecting our business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and because of its importance as onea measure of underlying operating performance, as the primary compensation performance measuresmeasure under certain compensation programs and plans. We believe Adjusted EBITDA is more reflective of factors that affect our underlying operating performance and facilitate operating performance comparisons of our business on a consistent basis over time. Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Certain adjustments to our GAAP financial measures reflected below exclude items that may be considered recurring in nature and may be reflected in our financial results for the foreseeable future. These measurements and items may be different from non-GAAP financial measures used by other companies. Adjusted EBITDA should be reviewed in conjunction with our results reported in accordance with GAAP in this Annual Report.
There are significant limitations to using Adjusted EBITDA as a financial measure including, but not limited to, it not reflecting the cost of cash expenditures for capital assets or certain other contractual commitments, capitalfinance lease obligation and debt service expenses, income taxes, and any impacts from changes in working capital.
We define Adjusted EBITDA as a consolidated measure inclusive of continuing and discontinued operations results, which we reconcile by adding Net income (loss) income from continuing operations, less net income attributable to noncontrolling interests, plus Total othernon-operating income and expenses, including Net periodic benefit income, excluding service cost, Interest expense, net and (Benefit) provisionOther, net, plus Provision (benefit) for income taxes plusand Depreciation and amortization all calculated in accordance with GAAP, plus non-GAAP adjustments for Share-based compensation, Restructuring, acquisition and integration related expenses, goodwill and assetGoodwill impairment charges, (Gain) loss on sale of assets, certain legal charges and gains, certain other non-cash charges or other items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in a manner consistent with the results of continuing operations, outlined above. The changes to the definition of Adjusted EBITDA from prior periods reflect changes to line item references in our Consolidated Financial Statements, which do not impact the calculation of Adjusted EBITDA.
Assessment of Our Business Results
The following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods indicated:indicated. We have revised the following table for the prior period presentation of two discontinued operations stores moved to continuing operations as discussed in Note 1—Significant Accounting Policies within Part II, Item 8 of this Annual Report.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Increase (Decrease) |
| (in millions) | 2021 (52 weeks) | | 2020 (52 weeks) | | 2019 (53 weeks) | | 2021 | | 2020 |
| Net sales | $ | 26,950 | | | $ | 26,559 | | | $ | 22,341 | | | $ | 391 | | | $ | 4,218 | |
| Cost of sales | 23,011 | | | 22,670 | | | 19,121 | | | 341 | | | 3,549 | |
| Gross profit | 3,939 | | | 3,889 | | | 3,220 | | | 50 | | | 669 | |
| Operating expenses | 3,593 | | | 3,552 | | | 2,976 | | | 41 | | | 576 | |
| Goodwill impairment charges | — | | | 425 | | | 293 | | | (425) | | | 132 | |
| Restructuring, acquisition and integration related expenses | 56 | | | 87 | | | 148 | | | (31) | | | (61) | |
| (Gain) loss on sale of assets | (4) | | | 18 | | | (1) | | | (22) | | | 19 | |
| Operating income (loss) | 294 | | | (193) | | | (196) | | | 487 | | | 3 | |
| Net periodic benefit income, excluding service cost | (85) | | | (39) | | | (35) | | | (46) | | | (4) | |
| Interest expense, net | 204 | | | 192 | | | 181 | | | 12 | | | 11 | |
| Other, net | (8) | | | (4) | | | (1) | | | (4) | | | (3) | |
| Income (loss) from continuing operations before income taxes | 183 | | | (342) | | | (341) | | | 525 | | | (1) | |
| Provision (benefit) for income taxes | 34 | | | (91) | | | (59) | | | 125 | | | (32) | |
| Net income (loss) from continuing operations | 149 | | | (251) | | | (282) | | | 400 | | | 31 | |
| Income (loss) from discontinued operations, net of tax | 6 | | | (18) | | | (3) | | | 24 | | | (15) | |
| Net income (loss) including noncontrolling interests | 155 | | | (269) | | | (285) | | | 424 | | | 16 | |
| Less net income attributable to noncontrolling interests | (6) | | | (5) | | | — | | | (1) | | | (5) | |
| Net income (loss) attributable to United Natural Foods, Inc. | $ | 149 | | | $ | (274) | | | $ | (285) | | | $ | 423 | | | $ | 11 | |
| | | | | | | | | |
| Adjusted EBITDA | $ | 746 | | | $ | 673 | | | $ | 563 | | | $ | 73 | | | $ | 110 | |
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | 2019 (53 weeks) | | 2018 (52 weeks) | | 2017 (52 weeks) | | 2019 Change | | 2018 Change |
| Net sales | $ | 21,387,068 |
| | $ | 10,226,683 |
| | $ | 9,274,471 |
| | $ | 11,160,385 |
| | $ | 952,212 |
|
| Cost of sales | 18,602,058 |
| | 8,703,916 |
| | 7,845,550 |
| | 9,898,142 |
| | 858,366 |
|
| Gross profit | 2,785,010 |
| | 1,522,767 |
| | 1,428,921 |
| | 1,262,243 |
| | 93,846 |
|
| Operating expenses | 2,629,713 |
| | 1,274,562 |
| | 1,196,032 |
| | 1,355,151 |
| | 78,530 |
|
| Goodwill and asset impairment charges | 292,770 |
| | 11,242 |
| | — |
| | 281,528 |
| | 11,242 |
|
| Restructuring, acquisition and integration related expenses | 153,539 |
| | 9,738 |
| | 6,864 |
| | 143,801 |
| | 2,874 |
|
| Operating (loss) income | (291,012 | ) | | 227,225 |
| | 226,025 |
| | (518,237 | ) | | 1,200 |
|
| Other expense (income): | | | | | | | | | |
| Net periodic benefit income, excluding service cost | (34,726 | ) | | — |
| | — |
| | (34,726 | ) | | — |
|
| Interest expense, net | 179,963 |
| | 16,025 |
| | 16,754 |
| | 163,938 |
| | (729 | ) |
| Other, net | (957 | ) | | (1,545 | ) | | (5,152 | ) | | 588 |
| | 3,607 |
|
| Total other expense, net | 144,280 |
| | 14,480 |
| | 11,602 |
| | 129,800 |
| | 2,878 |
|
| (Loss) income from continuing operations before income taxes | (435,292 | ) | | 212,745 |
| | 214,423 |
| | (648,037 | ) | | (1,678 | ) |
| (Benefit) provision for income taxes | (84,609 | ) | | 47,075 |
| | 84,268 |
| | (131,684 | ) | | (37,193 | ) |
| Net (loss) income from continuing operations | (350,683 | ) | | 165,670 |
| | 130,155 |
| | (516,353 | ) | | 35,515 |
|
| Income from discontinued operations, net of tax | 65,800 |
| | — |
| | — |
| | 65,800 |
| | — |
|
| Net (loss) income including noncontrolling interests | (284,883 | ) | | 165,670 |
| | 130,155 |
| | (450,553 | ) | | 35,515 |
|
| Less net (income) loss attributable to noncontrolling interests | (107 | ) | | — |
| | — |
| | (107 | ) | | — |
|
| Net (loss) income attributable to United Natural Foods, Inc. | $ | (284,990 | ) | | $ | 165,670 |
| | $ | 130,155 |
| | $ | (450,660 | ) | | $ | 35,515 |
|
| | | | | | | | | | |
| Adjusted EBITDA | $ | 562,484 |
| | $ | 361,619 |
| | $ | 344,615 |
| | $ | 200,865 |
| | $ | 17,004 |
|
The following table reconciles Adjusted EBITDA to Net income (loss) income from continuing operations and to Income (loss) from discontinued operations, net of tax.
| | | | | | | | | | | | | | | | | |
| (in millions) | 2021 (52 weeks) | | 2020 (52 weeks) | | 2019 (53 weeks) |
| Net income (loss) from continuing operations | $ | 149 | | | $ | (251) | | | $ | (282) | |
| Adjustments to continuing operations net income (loss): | | | | | |
| Less net income attributable to noncontrolling interests | (6) | | | (5) | | | — | |
Net periodic benefit income, excluding service cost(1) | (85) | | | (39) | | | (35) | |
| Interest expense, net | 204 | | | 192 | | | 181 | |
| Other, net | (8) | | | (4) | | | (1) | |
Provision (benefit) for income taxes(2) | 34 | | | (91) | | | (59) | |
| Depreciation and amortization | 285 | | | 282 | | | 248 | |
| Share-based compensation | 49 | | | 34 | | | 40 | |
Goodwill impairment charges(3) | — | | | 425 | | | 293 | |
Restructuring, acquisition and integration related expenses(4) | 56 | | | 87 | | | 148 | |
(Gain) loss on sale of assets(5) | (4) | | | 18 | | | (1) | |
Multiemployer pension plan withdrawal charges(6) | 63 | | | — | | | — | |
Notes receivable charges(7) | — | | | 13 | | | — | |
Inventory fair value adjustment(8) | — | | | — | | | 10 | |
Legal reserve charge, net of settlement income(9) | — | | | 1 | | | (1) | |
Other retail expense(10) | 5 | | | 1 | | | — | |
| Adjusted EBITDA of continuing operations | 742 | | | 663 | | | 541 | |
Adjusted EBITDA of discontinued operations(11) | 4 | | | 10 | | | 22 | |
| Adjusted EBITDA | $ | 746 | | | $ | 673 | | | $ | 563 | |
| | | | | |
Income (loss) from discontinued operations, net of tax(11) | $ | 6 | | | $ | (18) | | | $ | (3) | |
| Adjustments to discontinued operations net income (loss): | | | | | |
| | | | | |
| Benefit for income taxes | (1) | | | (5) | | | (3) | |
| | | | | |
Restructuring, store closure and other charges, net(12) | (1) | | | 33 | | | 28 | |
Adjusted EBITDA of discontinued operations(11) | $ | 4 | | | $ | 10 | | | $ | 22 | |
(1)Fiscal 2021 includes a postretirement settlement gain of $17 million associated with the termination of remaining corporate plans. Fiscal 2020 includes a lump sum defined benefit pension plan settlement expense of $11 million associated with the acceleration of a portion of the accumulated unrecognized actuarial loss as a result of the lump sum settlement payments.
(2)Fiscal 2020 includes the tax benefit from the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which includes the impact of tax loss carrybacks to 35% tax years allowed under the CARES Act.
(3)Fiscal 2020 primarily reflects a goodwill impairment charge attributable to a reorganization of our reporting units and a sustained decrease in market capitalization and enterprise value of the Company, resulting in a decline in the estimated fair value of the U.S. Wholesale reporting unit. In addition, this charge includes a goodwill finalization charge attributable to the Supervalu acquisition and an asset impairment charge. Fiscal 2019 reflects a goodwill impairment charge attributable to the Supervalu acquisition. Refer to Note 6—Goodwill and Intangible Assets, Net in Part II, Item 8 of this Annual Report for additional information.
(4)Fiscal 2021 primarily reflects costs associated with advisory and transformational activities as we position our business for further value-creation post Supervalu acquisition, as well as costs associated with distribution center consolidations. Fiscal 2020 primarily reflects Shoppers asset impairment charges, closed property and distribution center impairment charges and costs, and administrative fees associated with integration activities. Fiscal 2019 primarily reflects expenses resulting from the acquisition of Supervalu and acquisition and integration expenses, including employee-related costs. Refer to Note 4—Restructuring, Acquisition and Integration Related Expenses in Part II, Item 8 of this Annual Report for additional information.
(5)Fiscal 2020 primarily reflects a $50 million accumulated depreciation and amortization charge related to the requirement to move Retail from discontinued operations to continuing operations, partially offset by $32 million of gains on the sale of distribution centers and other assets.
(6)Fiscal 2021 includes charges related to withdrawal liabilities from three Retail multiemployer pension plans.
(7)Reflects reserves and charges for notes receivable issued by the Supervalu business prior to its acquisition to finance the purchase of stores by its customers.
(8)Reflects a non-cash charge related to the step-up of inventory values as part of purchase accounting.
(9)Reflects a charge to settle a legal proceeding and income received to settle a separate legal proceeding.
(10)Reflects expenses associated with event-specific damages to certain retail stores.
|
| | | | | | | | | | | |
| (in thousands) | 2019
(53 weeks) | | 2018
(52 weeks) | | 2017
(52 weeks) |
| Net (loss) income from continuing operations | $ | (350,683 | ) | | $ | 165,670 |
| | $ | 130,155 |
|
| Adjustments to continuing operations net (loss) income: | | | | | |
| Total other expense, net | 144,280 |
| | 14,480 |
| | 11,602 |
|
| (Benefit) provision for income taxes | (84,609 | ) | | 47,075 |
| | 84,268 |
|
| Depreciation and amortization | 246,825 |
| | 87,631 |
| | 86,051 |
|
| Share-based compensation | 38,879 |
| | 25,783 |
| | 25,675 |
|
Restructuring, acquisition and integration related expenses(1) | 153,539 |
| | 9,738 |
| | 6,864 |
|
Goodwill and asset impairment charges(2) | 292,770 |
| | 11,242 |
| | — |
|
Inventory fair value adjustment(3) | 10,463 |
| | — |
| | — |
|
Legal settlement income, net of reserve adjustment(4) | (1,390 | ) | | — |
| | — |
|
Adjusted EBITDA of discontinued operations(5) | 112,410 |
| | — |
| | — |
|
| Adjusted EBITDA | $ | 562,484 |
| | $ | 361,619 |
| | $ | 344,615 |
|
| | | | | | |
| Income from discontinued operations, net of tax | $ | 65,800 |
| | $ | — |
| | $ | — |
|
| Adjustments to discontinued operations net income: | | | | | |
| Less net (income) loss attributable to noncontrolling interests | (107 | ) | | — |
| | — |
|
| Total other expense, net | 2,378 |
| | — |
| | — |
|
| Provision for income taxes | 21,840 |
| | — |
| | — |
|
| Other expense | 860 |
| | — |
| | — |
|
| Share-based compensation | 1,616 |
| | — |
| | — |
|
Restructuring, store closure and other charges, net(6) | 20,023 |
| | — |
| | — |
|
Adjusted EBITDA of discontinued operations(5) | $ | 112,410 |
| | $ | — |
| | $ | — |
|
| |
(1) | Primarily reflects expenses resulting from the acquisition of Supervalu, including severance costs, store closure charges, and acquisition and integration expenses. Refer to Note 5—Restructuring, Acquisition and Integration Related Expenses in Part II, Item 8 of this Annual Report on Form 10-K for additional information. |
| |
(2) | Fiscal 2019 reflects a goodwill impairment charge attributable to the Supervalu acquisition. Fiscal 2018 reflects goodwill and asset impairment charges recorded related to the previously disposed Earth Origin’s Market retail business. Refer to Note 7—Goodwill and Intangible Assets in Part II, Item 8 of this Annual Report on Form 10-K for additional information. |
| |
(3) | Reflects a non-cash charge related to the step-up of acquired Supervalu inventory from purchase accounting. |
| |
(4) | Reflects income received to settle a legal proceeding and a charge related to our assessment of legal proceedings, which are more fully described in Note 18—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part II, Item 8 of this Annual Report on Form 10-K. |
| |
(5) | Fiscal 2019 Adjusted EBITDA of discontinued operations excludes rent expense of $32.2 million of operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases. Due to these GAAP requirements to show rent expense, along with other administrative expenses of discontinued operations within continuing operations, we believe the inclusion of discontinued operations results within Adjusted EBITDA provides investors a meaningful measure of total performance. |
| |
(6) | Amounts represent store closure charges and costs, and an inventory charges related to discontinued operations, net of the effect of fees received from credit card companies related to a settlement. |
(12)Amounts represent store closure charges and costs, operational wind-down and inventory charges, and asset impairment charges related to discontinued operations. Fiscal 2021 also reflects income related to a severance benefit amount.
RESULTS OF OPERATIONS
Fiscal year ended July 31, 2021 (fiscal 2021) compared to fiscal year ended August 1, 2020 (fiscal 2020)
Net Sales
Our net sales by customer channel was as follows (in millions except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 (52 weeks) | | | | 2020(1) (52 weeks) | | | | Increase (Decrease) | |
Customer Channel(1) | | | | | | $ | | % | |
| Chains | | $ | 12,104 | | | | | $ | 12,010 | | | | | $ | 94 | | | 0.8 | % | |
| Independent retailers | | 6,638 | | | | | 6,699 | | | | | (61) | | | (0.9) | % | |
| Supernatural | | 5,050 | | | | | 4,720 | | | | | 330 | | | 7.0 | % | |
| Retail | | 2,442 | | | | | 2,375 | | | | | 67 | | | 2.8 | % | |
| Other | | 2,300 | | | | | 2,324 | | | | | (24) | | | (1.0) | % | |
| Eliminations | | (1,584) | | | | | (1,569) | | | | | (15) | | | 1.0 | % | |
| Total net sales | | $ | 26,950 | | | | | $ | 26,559 | | | | | $ | 391 | | | 1.5 | % | |
(1)Refer to Note 3—Revenue Recognition in Part II, Item 8 of this Annual Report for our channel definitions and for information regarding the recast of sales by customer channel to align with the current period presentation.
Our net sales for fiscal 2021 increased 1.5% from fiscal 2020. The increase in net sales for fiscal 2021 was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from certain customers and business lost prior to the pandemic.
Chains net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by consumers’ response to the pandemic, partially offset by lower sales from certain customers and business lost prior to the pandemic.
Independent retailers net sales decreased primarily due to lower existing store sales driven by a decline in demand for center store and natural products compared to last year's elevated demand due to a strong initial response to the pandemic, and lower sales from certain customers and stores lost prior to the pandemic.
Supernatural net sales increased primarily due to growth in existing store sales related to the pandemic and increased sales to new stores, partially offset by the impact of categories that have been adversely impacted by the pandemic, such as bulk and ingredients used for prepared foods.
Retail’s net sales increased primarily due to a 2.9% increase in identical store sales from higher average basket sizes related to the pandemic. The increase in Retail sales included the benefit of a 52.3% increase in eCommerce sales at Cub Foods.
Other net sales decreased primarily due to a 20% (or $71 million) decline in sales to food service customers resulting from the lower purchases due to the pandemic and a decrease in military sales, for which we have intentionally resigned certain business, which were partially offset by an increase of $161 million in sales to eCommerce customers.
Eliminations net sales increased primarily due to increased Wholesale sales to Retail.
Cost of Sales and Gross Profit
Our gross profit increased $50 million, or 1.3%, to $3,939 million in fiscal 2021, from $3,889 million in fiscal 2020. Our gross profit as a percentage of net sales decreased slightly to 14.62% in fiscal 2021 compared to 14.64% in fiscal 2020. The increase in gross profit dollar growth was primarily driven by higher Wholesale and Retail sales volume. The slight decrease in gross profit rate included lower Wholesale margin including the mix effect from larger customers, partially offset by an increase due to mix from the Retail segment representing a greater percentage of total net sales and lower levels of promotional activity.
Operating Expenses
Operating expenses increased $41 million, or 1.2%, to $3,593 million, or 13.33% of net sales, in fiscal 2021 compared to $3,552 million, or 13.37% of net sales, in fiscal 2020. Operating expense in fiscal 2021 included a $63 million Retail multiemployer pension plan withdrawal charge discussed further above. Operating expenses in fiscal 2020 included $27 million of bad debt expense associated with customer bankruptcies and $20 million of charges and expenses, primarily related to customer notes receivable, surplus property depreciation and a legal reserve charge. The remaining 10 basis point decrease in operating expenses as a percent of net sales was driven by prior-year pandemic costs, including temporary higher pandemic compensation costs for our front line workers, estimated to be approximately $57 million or 21 basis points, which was partially offset by higher operating costs related to starting up three distribution centers in the Pacific Northwest and our Allentown distribution center during fiscal 2021. Operating expenses also included share-based compensation expense of $49 million and $34 million for fiscal 2021 and 2020, respectively.
Goodwill Impairment Charges
During fiscal 2020 we recorded $425 million of goodwill and asset impairment charges, which reflected $422 million from an impairment charge on the remaining goodwill attributable to the U.S. Wholesale reporting unit, $2 million related to purchase accounting adjustments to finalize the opening balance sheet goodwill and $1 million of other asset impairment charges. Refer to Note 6—Goodwill and Intangible Assets, Net in Part II, Item 8 of this Annual Report for additional information.
Restructuring, Acquisition and Integration Related Expenses
Restructuring, acquisition and integration related expenses were $56 million for fiscal 2021, which included $50 million of integration costs primarily associated with advisory and transformational activities as we position our business for further value creation following the Supervalu acquisition and $6 million of closed property charges. Expenses for fiscal 2020 were $87 million, which primarily included $42 million of integration related costs, $40 million of closed property reserve charges related to the divestiture of retail banners and $5 million of primarily employee related separation costs.
(Gain) Loss on Sale of Assets
Gain on sale of assets was $4 million in fiscal 2021, which increased $22 million from a loss on sale of assets of $18 million in fiscal 2020. Loss on sale of assets in fiscal 2020 included an accumulated depreciation and amortization charge of $50 million related to the requirement to move Retail from discontinued operations to continuing operations, which was partially offset by $32 million of gains on the sale of distribution centers and other assets.
Operating Income (Loss)
Reflecting the factors described above, operating income increased $487 million to $294 million for fiscal 2021, from an operating loss of $193 million for fiscal 2020. The increase in operating income was primarily driven by the fiscal 2020 goodwill impairment charge, an increase in Gross profit and lower Restructuring, acquisition and integration related expenses discussed above, which was partially offset by an increase in Operating expenses.
Net Periodic Benefit Income, Excluding Service Cost
Net periodic benefit income, excluding service cost increased $46 million to $85 million for fiscal 2021, from $39 million in fiscal 2020. The increase in Net periodic benefit income, excluding service cost was primarily driven by lower interest costs from a lower discount rate utilized in the measurement of pension liabilities, a $17 million settlement gain for the purchase of an irrevocable annuity to settle participant’s post-employment obligations in fiscal 2021, and a lump sum defined benefit pension plan settlement charge of $11 million in fiscal 2020.
Interest Expense, Net
| | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 (52 weeks) | | 2020 (52 weeks) | | Increase (Decrease) | |
| Interest expense on long-term debt, net of capitalized interest | | $ | 143 | | | $ | 166 | | | $ | (23) | | |
| Interest expense on finance lease obligations | | 19 | | | 12 | | | 7 | | |
| Amortization of financing costs and discounts | | 13 | | | 15 | | | (2) | | |
| Loss on debt extinguishment | | 30 | | | — | | | 30 | | |
| Interest income | | (1) | | | (1) | | | — | | |
| Interest expense, net | | $ | 204 | | | $ | 192 | | | $ | 12 | | |
The decrease in interest expense on long-term debt for fiscal 2021 compared to fiscal 2020 was primarily driven by lower amounts of outstanding debt.
The increase in interest expense on finance leases in fiscal 2021 primarily reflects interest on a distribution center for which we executed a purchase option with a delayed purchase provision.
The increase in loss on debt extinguishment costs primarily reflects the acceleration of unamortized debt issuance costs and original issue discounts related to mandatory and voluntary prepayments on the Term Loan Facility made in fiscal 2021. Refer to Note 9—Long-Term Debt in Part II, Item 8 of this Annual Report for further information.
Provision (Benefit) for Income Taxes
The effective income tax rate for continuing operations was an expense of 18.6% compared to a benefit of 26.6% on pre-tax losses for fiscal 2021 and 2020, respectively. The fiscal 2020 effective tax rate was primarily driven by the impact of non-deductible goodwill impairment charges recorded in fiscal 2020, partially offset by the net operating loss (“NOL”) carryback provisions of the CARES Act. For fiscal 2021, the effective tax rate was reduced by solar and employment tax credits, including the tax credit impact of a fiscal 2021 investment in an equity method partnership, the recognition of previously unrecognized tax benefits, excess tax deductions attributable to share-based compensation and inventory deductions, as well as the impact of favorable return-to-provision adjustments.
Income (Loss) from Discontinued Operations, Net of Tax
The results of discontinued operations for fiscal 2021 reflect net sales of $42 million for which we recognized $14 million of gross profit and $6 million of Income from discontinued operations, net of tax. Net sales, gross profit and operating expenses of discontinued operations decreased $142 million, $39 million and $34 million, respectively, for the fiscal 2021 as compared to fiscal 2020 primarily due to a lower operating store base due to closures and sales that occurred in fiscal 2020. Discontinued operations for fiscal 2020 included $33 million of charges and costs primarily related to store closures charges and expenses, and asset impairment charges related to exited locations.
Refer to Note 18—Discontinued Operations in Part II, Item 8 of this Annual Report for additional information regarding these discontinued operations.
Net Income (Loss) Attributable to United Natural Foods, Inc.
Reflecting the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $149 million, or $2.48 per diluted common share, for fiscal 2021, compared to a net loss of $274 million, or $5.10 per diluted common share, for fiscal 2020.
Fiscal year ended August 1, 2020 (fiscal 2020) compared to fiscal year ended August 3, 2019 (fiscal 2019) compared to fiscal year ended July 28, 2018 (fiscal 2018)
Within our results of operations we have estimated the impact of the additional week in fiscal 2019 and the acquisition of Supervalu, where applicable and estimable, to provide more comparable financial results on a year-over-year basis. The impact of the 53rd week in fiscal 2019 discussed below represents an estimate of the contribution from the additional week in fiscal 2019 and is calculated by taking one-fifth of the respective metrics for the last five-week period, within the 14-week fourth quarter of fiscal 2019. Our analysis within the Results of Operations section below of Net sales, Gross profit, Operating expenses and Operating (loss) income is presented on a consolidated basis, as our single reportable segment principally comprises the entire operations of our business. The quantification of Supervalu’s impact on our results of operations presented below is to discuss the incremental impact of Supervalu, and provide analysis of our underlying business for year-over-year comparability purposes. Our analysis of Net sales is presented on a customer channel basis inclusive of all segments. References to legacy company results are presented to provide a comparative results analysis excluding the Supervalu acquired business impacts.
The requirement to move two of the four remaining Shoppers stores from discontinued operations to continuing operations in fiscal 2021 required the revision of historical financial information to conform with current period presentation. As a result, the following results comparison has been updated.
Net Sales
Our net sales by customer channel waswere as follows (in millions)millions except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020(1)
(52 weeks) | | | | 2019(1)
(53 weeks) | | | | Increase (Decrease) |
Customer Channel(1) | | | | | | $ | | % |
| Chains | | $ | 12,010 | | | | | $ | 9,769 | | | | | $ | 2,241 | | | 22.9 | % |
| Independent retailers | | 6,699 | | | | | 5,536 | | | | | 1,163 | | | 21.0 | % |
| Supernatural | | 4,720 | | | | | 4,394 | | | | | 326 | | | 7.4 | % |
| Retail | | 2,375 | | | | | 1,687 | | | | | 688 | | | 40.8 | % |
| Other | | 2,324 | | | | | 2,087 | | | | | 237 | | | 11.4 | % |
| Eliminations | | (1,569) | | | | | (1,132) | | | | | (437) | | | 38.6 | % |
| Total net sales | | $ | 26,559 | | | | | $ | 22,341 | | | | | $ | 4,218 | | | 18.9 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Increase (Decrease) |
| Customer Type | | 2019
(53 weeks) | | % of Total
Net Sales | | 2018(1) (52 weeks) | | % of Total
Net Sales | | $ | | % Total Net Sales |
| Supermarkets | | $ | 12,505 |
| | 58 | % | | $ | 2,820 |
| | 28 | % | | $ | 9,685 |
| | 30 | % |
| Supernatural | | 4,393 |
| | 21 | % | | 3,758 |
| | 37 | % | | 635 |
| | (16 | )% |
| Independents | | 3,179 |
| | 15 | % | | 2,668 |
| | 26 | % | | 511 |
| | (11 | )% |
| Other | | 1,310 |
| | 6 | % | | 981 |
| | 9 | % | | 329 |
| | (3 | )% |
| Total net sales | | $ | 21,387 |
| | 100 | % | | $ | 10,227 |
| | 100 | % | | $ | 11,160 |
| | — | % |
| |
(1) | During fiscal 2019, the presentation of net sales by customer channel was adjusted to reflect changes in the classification of customer types as a result of a detailed review of customer channel definitions. There was no impact to the Consolidated Statements of Operations as a result of revising the classification of customer types. As a result of this adjustment, net sales to our supermarkets channel and to our other channel for fiscal 2018 decreased approximately $36 million and $58 million, respectively, compared to the previously reported amounts, while net sales to the independents channel for fiscal 2018 increased approximately $95 million compared to the previously reported amounts. |
Our net sales for fiscal 20192020 increased approximately $11.16 billion, or 109%, to $21.39 billion,19% from $10.23 billion for fiscal 2018.2019. The increase in fiscal 2019 net sales for fiscal 2020 was driven by incremental Supervalu net sales from the first quarter of fiscal 2020, as Supervalu was only included in our results for approximately one week in the first quarter of fiscal 2019, of approximately $10.47 billion, which included $247.9$3,345 million and was partially offset by $475 million from thean incremental 53rd week in fiscal 2019, the increase in2019. The remaining underlying net sales of our supernatural channel, the remaining company estimated impact from the 53rd week of approximately $203.4increased $1,348 million and an increase in independents channelor 6.2%.
Chains net sales which were partially offset by decreases in other and supermarket sales.
Net sales to our supermarkets channel increased by approximately $9,685 million, or 343%, in fiscal 2019 compared to fiscal 2018, and represented approximately 58% and 28% of total net sales for fiscal 2019 and 2018, respectively. The increase in supermarkets net sales is primarily due to $9,655$1,892 million of an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $213 million. The remaining increase of $562 million was primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers’ response to the COVID-19 pandemic, partially offset by lower sales from previously lost customers and business prior to the pandemic.
Independent retailers net sales increased primarily due to $971 million of an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019, of $120 million. The remaining increase of $312 million was primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers response to the COVID-19 pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Supernatural net sales increased primarily due to increased sales related to the COVID-19 pandemic, growth in existing and new product categories, and increased sales to existing and new stores prior to the pandemic, partially offset by the impact of categories that have been adversely impacted by COVID such as bulk and ingredients used for prepared foods and the estimated impact from the 53rd week in fiscal 2019 of $53 million, with the remaining decrease of $23 million$84 million.
Retail’s net sales increased primarily due to $495 million of an incremental 12 weeks of net sales decreases to existing customers and lost customers.
Whole Foods Market is our only supernatural customer, and net sales to Whole Foods Market for fiscal 2019 increasedfrom the acquired Supervalu business, which was partially offset by approximately $635 million, or 17%, in fiscal 2019 as compared to fiscal 2018, and accounted for approximately 21% and 37% of our total net sales for fiscal 2019 and 2018, respectively. The increase in net sales to Whole Foods Market is primarily due to an increase in same store sales, which have continued following its acquisition by Amazon.com, Inc. in August 2017, coupled with growth in new product categories, most notably the health, beauty and supplement categories, the estimated impact from the 53rd week in fiscal 2019 of $84$40 million. The remaining increase of $233 million andwas driven by increased identical store sales from new stores.related to the COVID-19 pandemic.
Net sales to our independents channel increased by approximately $511 million, or 19%, in fiscal 2019 compared to fiscal 2018, and accounted for 15% and 26%
Other net sales for fiscal 2019 and 2018, respectively. The increase in independents net sales isincreased primarily due to $391$267 million of an incremental 12 weeks of net sales from the acquired Supervalu business, andwhich was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $50 million, with the$42 million. The remaining increase of $70$12 million primarily due to sales growth to existing customers.
Net sales to our other channel increased by approximately $329 million, or 34%, in fiscal 2019 compared to fiscal 2018, and accounted for approximately 6% and 9% of total net sales for fiscal 2019 and 2018, respectively. The increase in other net sales is primarily due to $429an increase in eCommerce and other, partially offset by a 23% (or $104 million) decline in sales to foodservice customers, whose purchases slowed due to the COVID-19 pandemic based on their locations being temporarily closed.
Eliminations of net sales increased primarily due to $280 million of an incremental 12 weeks of net sales from the acquired Supervalu business and increased Wholesale sales to Retail, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $16 million, partially offset by $116 million due to sales declines driven by our e-commerce business and lack of sales from our retail business, Earth Origins, which was disposed in the fourth quarter of fiscal 2018.$24 million.
Cost of Sales and Gross Profit
Our gross profit increased $1,262.2$669 million, or 82.9%20.8%, to $2,785.0$3,889 million in fiscal 2019,2020, from $1,522.8$3,220 million in fiscal 2018.2019. Our gross profit as a percentage of net sales decreasedincreased to 13.02%14.64% in fiscal 20192020 compared to 14.89%14.41% in fiscal 2018.2019. Our gross profit for fiscal 20192020 included 41an incremental 12 weeks of gross profit from the acquired Supervalu business ofestimated as approximately $1,206.2$480 million net of its related LIFO inventory charge, and fiscal 2019 included an estimated increase in gross profit from the 53rd week of $28.0 million on the legacy company results. In addition, our legacy company Wholesale business gross profit decreased from a LIFO charge of $15.0 million in fiscal 2019, and from cycling the fiscal 2018 gross profit from a change in accounting estimate benefit of $20.9$69 million. The remaining increase in gross profit of $63.9$258 million which reflects awas primarily driven by higher Wholesale and Retail sales volume. The 23 basis point increase in gross profit decrease of approximately 10 basis points,
rate was driven by the faster growtha 92 basis point increase in Retail gross profit as a percent of the supernatural channel relative to the other customer channels, offset in partits net sales, which was driven by lower inbound freight expense.
Total Gross profitpromotional activity and contributed to a segment business mix impact that increased by $58.4 million from the impact of the additional 53rd week. The adoption of the LIFO inventory costing method decreased our fiscal 2019 Gross profit by $24.1 million or 11 basis points.
Refer to Note 1—Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K and below under the heading Net (Loss) Income Attributable to United Natural Foods, Inc. for additional information regarding the impact of a change in estimate for theoverall gross profit impactrate. This increase was partially offset by a 12 basis point decrease in Wholesale gross profit as a percent of $20.9 million recorded during fiscal 2018.its net sales, and included a decrease due to lower gross profit rates on conventional products.
Operating Expenses
Operating expenses increased $1,355.2$576 million, or 106.3%19.4%, to $2,629.7$3,552 million, or 12.30%13.37% of net sales, in fiscal 20192020 compared to $1,274.6$2,976 million, or 12.46%13.32% of net sales, in fiscal 2018.2019. The decreaseincrease in operating expenses as a percentpercentage of net sales was driven by the mix impact from the acquired Supervalu business, lower employee costs, including the impact25 basis points of cost synergies and lowerhigher incentive compensation, costs,including temporary COVID-19 compensation expense and 13 basis points of higher bad debt expense primarily from customer bankruptcies prior to the pandemic, which were partially offset by higher depreciation31 basis points of lower other employee costs driven by lower salaries and amortization expense of approximately 30 basis points.benefits expenses. Operating expenses increaseddecreased by $55.6$65 million from the impact of the additional 53rd week in fiscal 2019.
Goodwill and Asset Impairment Charges
During fiscal 2020 we recorded $425 million of goodwill and asset impairment charges, which reflects $422 million from an impairment charge on the remaining goodwill attributable to the U.S. Wholesale reporting unit, $2 million related to purchase accounting adjustments to finalize the opening balance sheet goodwill and $1 million of other asset impairment charges.
During fiscal 2019 we recorded a $292.8$293 million goodwill impairment charge, which reflects the preliminary goodwill impairment charge of $292.8 million based on the preliminary fair value of net assets assigned.assigned, which was finalized in the first quarter of fiscal 2020. The goodwill impairment charge recorded in fiscal 2019 iswas subject to further change based upon the final purchase price allocation during the measurement period for estimated fair values of assets acquired and liabilities assumed from the Supervalu acquisition. The estimates and assumptions arewere subject to change during the measurement period (up to one year from the acquisition date). Refer to the section above Executive Overview—Goodwill Impairment Review and Note 7—Goodwill and Intangible Assets in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
During fiscal 2018, the Company made the decision to close three non-core, under-performing stores of its total of twelve Earth Origins stores. Based on this decision, coupled with the decline in results in the first half of fiscal 2018 and the future outlook as a result of competitive pressure, the Company determined that both a test for recoverability of long-lived assets and a goodwill impairment analysis should be performed. The determination of the need for a goodwill analysis was based on the assertion that it was more likely than not that the fair value of the reporting unit was below its carrying amount. As a result of both these analyses, the Company recorded a total impairment charge of $3.4 million on long-lived assets and $7.9 million to goodwill, respectively, during the second quarter of fiscal 2018. During the fourth quarter of fiscal 2018 the Company disposed of its Earth Origins retail business.
Restructuring, Acquisition and Integration Related Expenses
Restructuring, acquisition and integration related expenses were $153.5$87 million for fiscal 20192020 and primarily included $74.4$42 million of integration related costs, $40 million of closed property reserve charges related to the divestiture of retail banners and $5 million of primarily employee related separation costs. Expenses incurred in fiscal 2019 primarily related to $74 million of employee related costs and charges due to severance, settlement of outstanding equity awards and benefits costs, $56.6$51 million of other acquisition and integration related costs and $22.5$23 million of closed property reserve charges primarily related to the divestiture of retail banners. Expenses incurred
Loss (Gain) on Sale of Assets
Loss on sale of assets increased $19 million to $18 million in fiscal 2018 primarily related to $5.02020 from a gain on sale of assets of $1 million in fiscal 2019. Loss on sale of acquisition related costs associated with the Supervalu acquisitionassets in fiscal 2020 included an accumulated depreciation and $4.8amortization charge of $50 million charges related to the exitrequirement to move Retail from discontinued operations to continuing operations, which was partially offset by gains on sales of our Earth Origins Marketdistribution centers and a retail accounting services business.
We expect to incur additional integration and restructuring costs throughout fiscal 2020 related to our operational and administrative restructuring to achieve cost synergies and supply chain efficiencies of continuing operations. In addition, further restructuring costs may be incurred related to the divestiture of retail operations.
Operating (Loss) IncomeLoss
Reflecting the factors described above, operating incomeloss decreased $518.2$3 million to an operating loss of $291.0$193 million for fiscal 2019,2020, from an operating incomeloss of $227.2$196 million for fiscal 2018. As a percentage of net sales, operating loss was 1.36% for fiscal 2019, compared to operating income of 2.22% for fiscal 2018.2019. The decrease in operating incomeloss was driven by higher goodwill and asset impairment charges, highergross profit increases in excess of operating expense increases, lower restructuring, acquisition and integration related expenses, partially offset by a higher Operating expenses, includinggoodwill impairment charge and a higher depreciation and amortization expense, and the change in accounting estimate benefit from last year, which were offset in part by higher Gross profit, excluding the change in accounting estimate discussed above.loss on sale of assets.
The fiscal 2020 and fiscal 2019 operating loss includes $32.2$6 million and $10 million, respectively, of operating lease rent expense and $10.2$2 million and $4 million, respectively, of depreciation and amortization expenses related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases. In addition, continuing operations operating loss includes certain retail related overhead costs that are related to retail but are required to be presented within continuing operations.
Total Other Expense, Net Periodic Benefit Income, Excluding Service Cost
|
| | | | | | | | | | | | |
| (in thousands) | | 2019
(53 weeks) | | 2018 (52 weeks) | | Increase (Decrease) |
| Net periodic benefit income, excluding service cost | | $ | (34,726 | ) | | $ | — |
| | $ | (34,726 | ) |
| Interest expense on long-term debt, net of capitalized interest | | 136,284 |
| | 14,016 |
| | 122,268 |
|
| Interest expense on capital and direct financing lease obligations | | 26,910 |
| | 2,455 |
| | 24,455 |
|
| Amortization of financing costs and discounts | | 12,640 |
| | — |
| | 12,640 |
|
| Debt refinancing costs and unamortized financing charges | | 4,903 |
| | — |
| | 4,903 |
|
| Interest income | | (774 | ) | | (446 | ) | | (328 | ) |
| Interest expense, net | | 179,963 |
| | 16,025 |
| | 163,938 |
|
| Other, net | | (957 | ) | | (1,545 | ) | | 588 |
|
| Total other expense, net | | $ | 144,280 |
| | $ | 14,480 |
| | $ | 129,800 |
|
Net periodic benefit income, excluding service cost increased $4 million to $39 million for fiscal 2020, from $35 million in fiscal 2019. Net periodic benefit income for fiscal 2020 includes $11 million of non-cash pension settlement charges primarily from the lump sum pension settlement offering completed in fiscal 2020. Fiscal 2019 net periodic benefit income reflects a partial year due to the recognitionacquisition of expected returns on benefit plan assets in excessSupervalu near the end of interest costs. the first quarter of fiscal 2019.
Interest Expense, Net
| | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2020 (52 weeks) | | 2019 (53 weeks) | | Increase (Decrease) | |
| Interest expense on long-term debt, net of capitalized interest | | $ | 166 | | | $ | 147 | | | $ | 19 | | |
| Interest expense on finance and direct financing lease obligations | | 12 | | | 16 | | | (4) | | |
| Amortization of financing costs and discounts | | 15 | | | 13 | | | 2 | | |
| Loss on debt extinguishment | | — | | | 5 | | | (5) | | |
| Interest income | | (1) | | | — | | | (1) | | |
| Interest expense, net | | $ | 192 | | | $ | 181 | | | $ | 11 | | |
The increase in interest expense on long-term debt for fiscal 2020 compared to fiscal 2019 was primarily due to an increase in average outstanding debt year-over-year driven by the Supervalu acquisition financing. The increase in interestfinancing executed near the end of the first quarter of fiscal 2019. Interest on capitalfinance and direct financing leases decreased primarily reflects lease obligations related to retail stores of discontinued operations acquired in the Supervalu acquisition, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases.
We expect interest expense to increase in future periods as compared to periods prior to the Supervalu acquisition due to the increased indebtedness incurred to finance the acquisition of Supervalu. As a resultadoption of the Supervalu acquisition,new lease accounting standard, ASC 842, in fiscal 2020. Beginning in the third quarter of fiscal 2020, interest on financing leases includes interest expense related to a distribution center for which we assumed defined benefit pension and other postretirement benefit obligations.executed a purchase option with a delayed purchase provision.
(Benefit) ProvisionBenefit for Income Taxes
OurThe effective income tax rate for continuing operations was 19.4%a benefit of 26.6% and 22.1%17.3% on pre-tax losses for fiscal 20192020 and 2018,2019, respectively. The increase in the benefit rate for fiscal 2019 effective tax rate reflects a tax benefit based on a consolidated pre-tax loss from continuing operations while fiscal 2018 reflected a tax expense on pre-tax income. The fiscal 2018 effective income tax rate2020 was primarily driven by a non-cash net tax benefit of $21.7 million related to the impactNOL carryback provisions of the re-measurement of the U.S. net deferred tax liabilities due to tax reform. For fiscal 2019, the effective income tax rate captures the full impact of the reduced federal tax rate, as well as tax cost associated with stock compensation payments not expected to be deductible in under the Section 162(m) tax reform rules and the impact of non-deductible goodwill impairment charges recorded in fiscal 2019.CARES Act.
(Loss) Income from Discontinued Operations, Net of Tax
The results of operations for fiscal 20192020 reflect net sales of $2,094.0$184 million for which we recognized $570.3$53 million of gross profit and Incomea loss from discontinued operations, net of tax of $65.8$18 million. As noted above, pre-tax incomeloss from discontinued operations excludes $32.2$6 million of operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations. In addition, store closure charges related to leases are recorded within continuing operations. Discontinued operations included $16.9$33 million of restructuring expenses primarily related to Shoppers store closures expenses related to employee severancecosts and store closurewind-down expenses, and asset impairment charges. In addition, gross profit of discontinued operations included inventory charges from store closures. As of the end of fiscal 2020, discontinued operations consisted of only five Shoppers stores.
Net sales, gross profit and operating expenses of discontinued operations decreased $223 million, $64 million and $55 million, respectively, for the fiscal 2020 as compared to fiscal 2019 primarily due to closed and sold Shoppers stores, results from the Hornbacher’s retail banner, which was sold in December 2019, and the closed Shop ‘n Save East stores, which were partially offset by the partial year in 2019 due to the section above Executive Overview—Divestituretiming of Retail Operations and to Note 19—Discontinued Operations in Part II, Item 8 of this Annual Report on Form 10-K for additional financial information regarding these discontinued operations.the Supervalu acquisition.
Net (Loss) IncomeLoss Attributable to United Natural Foods, Inc.
Reflecting the factors described in more detail above, we incurred a net loss attributable to United Natural Foods, Inc. of $285.0 million ($5.56 per diluted common share) for fiscal 2019, compared to net income of $165.7$274 million, or $3.26$5.10 per diluted common share, for fiscal 2018.2020, compared to net income of $285 million, or $5.56 per diluted common share, for fiscal 2019.
As described in more detail inwithin Note 1—Significant Accounting Policies12—Share-Based Awards in Part II, Item 8 of this Annual Report, on Form 10-K, duringin fiscal 2018 we experienced an increased volume in our accrual for inventory purchases as a result of increasing volumes of inventory purchases2020 and work flow changes to our practices resulting from the establishment of a centralized processing function for supplier payables. In the third quarter of fiscal 2018, we changed our estimate for the accrual for inventory purchases as a result of our review of the criteria for determining amounts where a liability is no longer considered probable as well as a review of historical data and data relating to fiscal 2018 purchases of inventory. As a result of this change in estimate, accounts payable was reduced by $20.9 million, resulting in an increase to net income of $13.9 million, or $0.27 per diluted share, for fiscal 2018. Absent the change in accounting estimate, we would have expected to recognize the benefit to operating income of the change in estimate within the following four quarters, as the accrual would be expected to be reduced in accordance with our prior estimate methodology.
As described in more detail within Note 13—Share-Based Awards, in fiscal 2019 we issued approximately 1.3 million and 2.0 million shares of common stock, respectively, to fund the settlement of time-vesting replacement award obligations from the Supervalu acquisition. We have approximately 3.0 million additional shares authorized for issuance
Segment Results of Operations
In evaluating financial performance in each business segment, management primarily uses Net sales and registered on a Registration Statement on Form S-8 filed withAdjusted EBITDA of its business segments as discussed and reconciled within Note 16—Business Segments within Part II, Item 8 of this Annual Report and the SECabove table within the Executive Overview section. The following tables set forth Net sales and Adjusted EBITDA by segment for the issuanceperiods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Increase (Decrease) |
| (in millions) | | 2021 (52 weeks) | | 2020 (52 weeks) | | 2019 (53 weeks) | | 2021 | | 2020 |
| Net sales: | | | | | | | | | | |
| Wholesale | | $ | 25,873 | | | $ | 25,525 | | | $ | 21,551 | | | $ | 348 | | | $ | 3,974 | |
| Retail | | 2,442 | | | 2,375 | | | 1,687 | | | 67 | | | 688 | |
| Other | | 219 | | | 228 | | | 235 | | | (9) | | | (7) | |
| Eliminations | | (1,584) | | | (1,569) | | | (1,132) | | | (15) | | | (437) | |
| Total Net sales | | $ | 26,950 | | | $ | 26,559 | | | $ | 22,341 | | | $ | 391 | | | $ | 4,218 | |
| Continuing operations Adjusted EBITDA: | | | | | | | | | | |
| Wholesale | | $ | 654 | | | $ | 593 | | | $ | 465 | | | $ | 61 | | | $ | 128 | |
| Retail | | 96 | | | 88 | | | 35 | | | 8 | | | 53 | |
| Other | | (9) | | | (16) | | | 42 | | | 7 | | | (58) | |
| Eliminations | | 1 | | | (2) | | | (1) | | | 3 | | | (1) | |
| Total continuing operations Adjusted EBITDA | | $ | 742 | | | $ | 663 | | | $ | 541 | | | $ | 79 | | | $ | 122 | |
Net Sales
Wholesale’s net sales increased in order to satisfy replacement award and option issuance obligations. In fiscal 2020, we may issue additional shares to fund replacement award obligations in full, issue shares to partially fund the obligations, or utilize cash on hand to fund the obligations.
Fiscal year ended July 28, 2018 (fiscal 2018)2021 as compared to fiscal year ended July 29, 2017 (fiscal 2017)
2020 primarily due to growth in the Supernatural and Chains channels, which was partially offset primarily by lower sales from the Independent retailers channel. Refer to the Net Sales discussion above for additional information.
OurRetail’s net sales increased for fiscal 2021 as compared to fiscal 2020 primarily due to a 2.9% increase in identical store sales from higher average basket sizes related to the fiscal year ended July 28, 2018 increased approximately 10.3%, or $952.2 million, to $10.23 billion from $9.27 billion for the fiscal year ended July 29, 2017. Ourpandemic.
Wholesale’s net sales increased in fiscal 2020 as compared to fiscal 2019 driven by customer type for the fiscal years ended July 28, 2018 and July 29, 2017 were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Increase (Decrease) |
| Customer Type | | 2018
(52 weeks)(1) | | % of Total
Net Sales | | 2017
(52 weeks)(1) | | % of Total
Net Sales | | $ | | % Total Net Sales |
| Supernatural | | $ | 3,758 |
| | 37 | % | | $ | 3,096 |
| | 33 | % | | $ | 662 |
| | 4 | % |
| Supermarkets | | 2,820 |
| | 28 | % | | 2,731 |
| | 30 | % | | 89 |
| | (2 | )% |
| Independents | | 2,668 |
| | 26 | % | | 2,490 |
| | 27 | % | | 178 |
| | (1 | )% |
| Other | | 981 |
| | 9 | % | | 957 |
| | 10 | % | | 24 |
| | (1 | )% |
| Total net sales | | $ | 10,227 |
| | 100 | % | | $ | 9,274 |
| | 100 | % | | $ | 953 |
| | — | % |
| |
(1) | During the second quarteran incremental 12 weeks of fiscal 2019, the presentation of net sales by customer channel was adjusted to reflect changes in the classification of customer types as a result of a detailed review of customer channel definitions. There was no impact to the Consolidated Statements of Operations as a result of revising the classification of customer types. As a result of this adjustment, net sales to our supermarkets channel and to our other channel for fiscal 2018 decreased approximately $36 million and $58 million, respectively, compared to the previously reported amounts, while net sales to the independents channel for fiscal 2018 increased approximately $95 million compared to the previously reported amounts. In addition, net sales to our supermarkets channel and to our other channel for fiscal 2017 decreased approximately $16 million and $47 million, respectively, compared to the previously reported amounts, while net sales to the independents channel for fiscal 2017 increased approximately $63 million compared to the previously reported amounts. |
Whole Foods Market is our only supernatural customer, and net sales from the acquired Supervalu business of approximately $3,123 million and was partially offset by $455 million from an incremental 53rd week in fiscal 2019, with the remaining increase primarily due to Whole Foods Marketgrowth in sales to existing customers in the Chains, Supernatural and Independent retailers channels. Sales growth was primarily driven by demand for center store and natural products from customers response to the fiscal year ended July 28, 2018 increasedCOVID-19 pandemic, and was partially offset by approximately $662 million or 21.4% overlower sales from previously lost customers and stores prior to the prior year and accounted for approximately 37% and 33%pandemic.
Retail’s net sales increased for fiscal 2020 as compared to fiscal 2019 primarily due to $495 million of an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal years ended July 28, 2018 and July 29, 2017, respectively. 2019 of $40 million. The remaining increase was driven by increased identical store sales related to the COVID-19 pandemic. All Retail net sales related to the acquired Supervalu business.
The increase in net sales to Whole Foods Marketeliminations in fiscal 2021 and 2020 was primarily due to an increase in same store sales following its acquisition by Amazon.com, Inc. in August 2017 coupled with growth in new product categories, most notably the health, beauty and supplement categories. Net sales within our supernatural channel do not include net sales to Amazon.com, Inc. in either the current period or the prior period, as these net sales are reported in our other channel.
NetWholesale sales to our supermarkets channel for the fiscal year ended July 28, 2018Retail banners, which are eliminated upon consolidation.
Adjusted EBITDA
Wholesale’s Adjusted EBITDA increased by approximately $89 million, or 3.3% from fiscal 2017 and represented approximately 28% and 30% of total net sales10% in fiscal 20182021 as compared to fiscal 2020. Wholesale’s gross profit dollar growth for fiscal 2021 was $26 million and fiscal 2017, respectively. The increase in net sales to supermarkets was primarilygross profit rate decreased 7 basis points driven by growththe mix effect from larger customers. Wholesale’s operating expense decreased $36 million, which excludes depreciation and amortization, stock-based compensation and other adjustments outlined in our wholesale division, which includes our broadline distribution business.
Net sales to our independents channel increased by approximately $178 million, or 7.1% during the fiscal year ended July 28, 2018 compared to the fiscal year ended July 29, 2017, and accounted for 26% and 27% of our total net sales in fiscal 2018 and
fiscal 2017, respectively. The increase in net sales in this channel was primarily due to growth in our wholesale division, which includes our broadline distribution business.
Other net sales, which included sales to foodservice customers and sales from the United States to other countries, as well as sales through our e-commerce business, branded product lines, retail division, manufacturing division, and our brokerage business, increased by approximately $24 million or 2.5% for the fiscal year ended July 28, 2018 over the prior fiscal year and accounted for approximately 9% and 10% of total net sales in fiscal 2018 and fiscal 2017, respectively. The increase in other net sales was primarilyNote 16—Business Segments, driven by growth inprior-year pandemic costs, including temporary higher pandemic compensation costs for our e-commerce business.
Cost of Sales and Gross Profit
Our gross profit increased approximately 6.6%, or $93.8 million, to $1.52 billion for the fiscal year ended July 28, 2018, from $1.43 billion for the fiscal year ended July 29, 2017. Our gross profit as a percentage of net sales was 14.9% for the fiscal year ended July 28, 2018 and 15.4% for the fiscal year ended July 29, 2017. The decrease in gross profit as a percentage of net sales was primarily driven by a shift in customer mix where net sales growth of our largest customer outpaced growth of other customers with higher margin and by an increase in inbound freight costs.
Operating Expenses
Our total operating expenses increased approximately 7.7%, or $92.6 million, to $1.30 billion for the fiscal year ended July 28, 2018, from $1.20 billion for the fiscal year ended July 29, 2017. As a percentage of net sales, total operating expenses decreased to approximately 12.7% for the fiscal year ended July 28, 2018, from approximately 13.0% for the fiscal year ended July 29, 2017. The decrease in operating expenses as a percentage of net sales was primarily driven by leveraging of fixed costs on increased net sales. Thisfront line workers, which was partially offset by higher operating costs related to starting up three distribution centers in the Pacific Northwest and our Allentown distribution center during fiscal 2021. Wholesale’s depreciation expense decreased $15 million compared to fiscal 2020.
Retail’s Adjusted EBITDA increased costs incurred9% in fiscal 2021 as compared to fulfill the increased demandfiscal 2020. The increase was driven by leveraged sales growth from increases in food-at-home purchases that drove sales at our stores. Retail’s gross profit dollar growth for our products. Total operating expenses also included share-based compensation expense of $25.8fiscal 2021 was $28 million and $25.7its gross profit rate increased 41 basis points from lower promotional activity. Retail’s operating expense, which excludes depreciation and amortization, stock-based compensation and other adjustments as outlined in Note 16—Business Segments, increased $19 million primarily due to higher employee related costs to support higher sales. Retail’s depreciation and amortization expense increased $25 million compared to fiscal 2020 primarily related to assets previously classified as held for fiscal 2018 and 2017, respectively. For more information, refersale that were moved to Note 13—Share-Based Awards to our Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Annual Report.
Goodwill and Asset Impairment Charges
Fiscal 2018 goodwill and asset impairment charges reflects a goodwill impairment charge of $7.8 million and $3.4 million of asset impairment charges recorded for our Earth Origins retail business, which was disposedcontinuing operations in the fourth quarter of fiscal 2018.2020 for which we were required to begin recording depreciation and amortization expense.
Restructuring, Acquisition and Integration Related Expenses
Fiscal 2018 restructuring, acquisition and integration related expense reflects $5.0 million of Supervalu-related acquisition costs, and $4.8 million of restructuring costs and a loss on disposal for our Earth Origins retail business.
Operating Income
Reflecting the factors described above, operating income increased approximately 0.5%, or $1.2 million, to $227.2 million for the fiscal year ended July 28, 2018, from $226.0 million for the fiscal year ended July 29, 2017. As a percentage of net sales, operating income was 2.2% and 2.4% for the fiscal years ended July 28, 2018 and July 29, 2017, respectively.
Other Expense (Income)
Other expense, net increased $2.9 million to $14.5 million for theAdjusted EBITDA improved 44% in fiscal year ended July 28, 2018, from $11.6 million for the fiscal year ended July 29, 2017. Interest expense for the fiscal year ended July 28, 2018 decreased to $16.5 million from $17.1 million for the fiscal year ended July 29, 2017. The decrease in interest expense was2021 primarily due to a reductionlower incentive compensation costs.
Wholesale’s Adjusted EBITDA increased 28% in outstanding debt year over year. Interest income was $0.4 million for the fiscal years ended July 28, 2018 and July 29, 2017. Other income for the fiscal year ended July 28, 2018 was $1.5 million,2020 as compared to other incomefiscal 2019. The increase was driven by leveraged sales growth, particularly in the second half of $5.2 million forfiscal 2020 from increases in food-at-home purchases that drove sales to our customers, an incremental 12 weeks of Adjusted EBITDA from the fiscal year ended July 29, 2017. Other incomeacquired Supervalu business. Gross profit dollar growth for fiscal 20182020 was $469 million with a gross profit rate decrease of approximately 8 basis points, which outpaced operating expense increases, which excludes depreciation and amortization, stock-based compensation and other adjustments outlined in Note 16—Business Segments, of $342 million. Operating expense rate decrease of approximately 29 basis points primarily related to positive returns on the Company's equity method investment. Other income for fiscal 2017 was primarily related to a $6.1 million gain recorded during the fourth quarter of fiscal 2017driven by lower trucking expense, partially offset by higher temporary incentive pay and operating costs related to the saleCOVID-19 pandemic and higher bad debt expense prior to the COVID-19 pandemic. Wholesale depreciation expense increased $39 million to $267 million due to an incremental 12 weeks of depreciation and amortization expense from the Company's stakeSupervalu acquisition.
Retail’s Adjusted EBITDA increased 151% in Kicking Horse Coffee.
Provision for Income Taxes
Our effective income tax rate was 22.1% and 39.3% for the fiscal years ended July 28, 2018 and July 29, 2017, respectively.2020 as compared to fiscal 2019. The decrease in the effective income tax rate for the fiscal year ended July 28, 2018increase was driven by a $15.5 million tax benefit which was recorded as resulthigher sales volume from the impacts of the newCOVID-19 pandemic and the incremental 12 weeks of Adjusted EBITDA from the acquired Supervalu business, fixed and variable cost leveraging and lower federal taxpromotional activity. Gross profit dollar growth for fiscal 2020 was $200 million with gross profit rate as well as a net tax benefitincrease of approximately $21.790 basis points from lower promotional activity. Operating expense growth, which excludes depreciation and amortization, stock-based compensation and other adjustments outlined in Note 16—Business Segments, of $142 million with an operating expense rate decrease of 93 basis points driven by variable cost leveraging partially offset by higher temporary incentive pay and operating costs related to the COVID-19 pandemic. Retail depreciation and amortization expense for fiscal 2020 and 2019 relate to finance lease amortization expense associated with leases previously amortizing in continuing operations as a resultthey were not previously classified as held for sale.
Other Adjusted EBITDA decreased 138% in fiscal 2020 primarily due to higher incentive compensation costs.
Net Income
Reflecting the factors described in more detail above, net income increased $35.5 million to $165.7 million, or $3.26 per diluted share, for the fiscal year ended July 28, 2018, compared to $130.2 million, or $2.56 per diluted share for the fiscal year ended July 29, 2017.
LIQUIDITY AND CAPITAL RESOURCES
Highlights
Our total debt increased $2,587.6 million to $2,906.5 million as of August 3, 2019 from $318.8 million•Total liquidity as of July 28, 2018, primarily related to31, 2021 was $1.32 billion and consisted of the additional borrowings under the Term Loan Facility and ABL Credit Facility to finance the Supervalu acquisition, and loans to finance equipment and improvements to the Harrisburg, PA and Centralia, WA distribution centers. These increases in debt were partially offset by payments made from free cash flow generated from operations and distribution center property sales and proceeds from retail store sales, both discussed above.following:
Scheduled debt maturities are expected to be $102.7 million in fiscal 2020 and payments to reduce capital lease obligations are expected to be approximately $24.7 million in fiscal 2020. Proceeds from the sale of properties mortgaged and encumbered under our Term Loan Facility are required and will be used to make additional Term Loan Facility payments.
We expect to be able to fund fiscal 2020 debt maturities of $102.7 million through internally generated funds, proceeds from the asset sales, borrowings under the ABL Credit Facility or new debt issuances.
◦Unused available credit under our revolving line of credit was $1,280 million as of July 31, 2021, which increased $269.0$45 million to $919.2from $1,235 million as of August 3, 2019 from $650.2 million as of July 28, 2018,1, 2020, primarily due to net payments made on the larger borrowing capacity supported byABL Credit Facility as cash flow generated from the larger borrowing basebusiness was utilized to reduce outstanding debt. This net reduction of the outstanding balance under the ABL Credit Facility put in place in conjunction with the Supervalu acquisition, partially offset by higher levelsfiscal 2021 was net of outstandingincremental borrowings under the facility resulting fromused to fund certain mandatory and voluntary prepayments on the Supervalu acquisition.Term Loan Facility (as discussed below).
◦Cash and cash equivalents increased $19.0was $41 million to $42.4as of July 31, 2021, which decreased $6 million from $47 million as of August 3, 2019 from $23.31, 2020.
•Our total debt decreased $310 million to $2,188 million as of July 28, 2018, primarily due to cash31, 2021 from the acquired Supervalu business.
Working capital increased $369.3 million to $1,459.0$2,498 million as of August 3, 20191, 2020, primarily driven by net positive cash flows from $1,089.7 million as of July 28, 2018, primarily dueoperating activities and asset dispositions, partially offset by payments for capital expenditures during fiscal 2021.
•In fiscal 2021, we amended our Term Loan Agreement to, among other things, reduce the acquisition of Supervalu’s working capital, offset in part by a larger current maturityapplicable margin for LIBOR and base rate loans under the Term Loan Facility thanby 75 basis points.
•In fiscal 2021, we made voluntary prepayments of $186 million on the Term Loan Facility funded with incremental borrowings under the ABL Credit Facility that will reduce our interest costs.
•In fiscal 2021, we issued $500 million of unsecured 6.750% Senior Notes due October 15, 2028 (the “Senior Notes”) and utilized the net proceeds and borrowings under the ABL Credit Facility to make a $500 million prepayment on our Term Loan Facility. In addition, during fiscal 2021, we made $85 million of additional repayments under the Term Loan Facility, including a mandatory repayment of $72 million related to Excess Cash Flow (as defined in the Term Loan Agreement) generated in fiscal 2020, as required under the Term Loan Agreement and prepayments of $13 million with asset sale proceeds.
•In fiscal 2022, scheduled debt maturities are expected to be $14 million. We are also obligated to make payments to reduce finance lease obligations, including a payment to acquire the Riverside, CA distribution center in fiscal 2022, which we expect to fund with the proceeds of a concurrent sale-leaseback transaction in fiscal 2022. Based on our Consolidated First Lien Net Leverage Ratio (as defined in the Term Loan Agreement) at the end of fiscal 2021, no prepayment from Excess Cash Flow in fiscal 2021 is required to be made in fiscal 2022.
•Working capital decreased $272 million to $1,063 million as of July 31, 2021 from $1,335 million as of August 1, 2020, primarily due to the contractual requirement to acquire the Riverside, CA distribution center discussed above reflected in the current portion of finance lease liabilities and accrued expenses, and the collection of tax refunds related to prior term loan facility, which it replaced.year tax returns, partially offset by a reduction of the current portion of long-term debt resulting from the Term Loan Facility Excess Cash Flow prepayment described above.
Sources and Uses of Cash
We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds and proceeds from the sale of surplus and/or non-core assets. A significant reduction in operating earnings or the incurrence of operating losses could have a negative impact on our operating cash flow, which may limit our ability to pay down our outstanding indebtedness as planned. Our credit facilities are secured by a substantial portion of our total assets. We expect to be able to fund debt maturities through fiscal 2022 with internally generated fund, proceeds from asset sales or borrowings under the ABL Credit Facility.
Our primary sources of liquidity are from internally generated funds and from borrowing capacity under the ABL Credit Facility. We believe our credit facilities. Our short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to satisfy debt obligations and fund capital expenditures as opportunities arise. Our continued access to short-term and long-term financing through credit markets depends on numerous factors, including the condition of the credit markets and our results of operations, cash flows, financial position and credit ratings.
Primary uses of cash include debt service, capital expenditures, working capital maintenance and income tax payments. We typically finance working capital needs with cash provided from operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories.
We currently do not pay a dividend on our common stock, and have no current plans to do so. In addition, we are limited in the aggregate amount of dividends that we may pay under the terms of our Term Loan Facility, and our ABL Credit Facility.
Long-Term Debt
During fiscal 2019, our capital structure materially changed in connection with the Supervalu acquisition. We repaid all amounts outstanding under our prior asset-based revolving credit facility and term loan facility entered into in August 2014, as amended with proceeds from the ABL Credit Facility, and Senior Notes. Subject to certain limitations contained in our debt agreements and as market conditions warrant, we may from time to time refinance indebtedness that we have incurred, including through the incurrence or repayment of loans under existing or new credit facilities or the issuance or repayment of debt securities. Proceeds from the sale of any properties mortgaged and encumbered under our Term Loan Facility.Facility are required to be used to make additional Term Loan Facility payments or to be reinvested in the business.
InLong-Term Debt
During fiscal 2019,2021, we borrowed $1,475.0repaid a net $56 million under the ABL Credit Facility, and $1,950.0repaid $771 million underon the Term Loan Facility related to finance the Supervalu acquisition. During the second quarter of fiscal 2019, we paid $566.4 million to extinguish the remaining $350.0mandatory and voluntary prepayments, and issued $500 million of 7.75% Supervalu Senior Notes and the remaining $180.0 million of 6.75% Supervalu Senior Notes (together with the 7.75% Supervalu Senior Notes, the “Supervalu Senior Notes”) assumed in conjunction with the Supervalu acquisition and paid the related prepayment premiums and accrued interest with restricted cash set aside on the closing date of the acquisition for this purpose. In addition, during fiscal 2019 we made mandatory prepayments of $85.1 million under the Term Loan Facility with asset sale proceeds.Notes. Refer to Note 10—9—Long-Term Debt in Part II, Item 8 of this Annual Report on Form 10-K for a detailed discussion of the provisions of our credit facilities and certain long-term debt agreements and additional information.
Our Term Loan Agreement doesand Senior Notes do not include any financial maintenance covenants. Our ABL Loan Agreement subjects us to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) of at least 1.0 to 1.0 calculated at the end of each of our fiscal quarters on a rolling four quarter basis, whenif the adjusted aggregate availability (as defined in the ABL Loan Agreement) is ever less than the greater of (i) $235.0$235 million and (ii) 10% of the aggregate borrowing base. We werehave not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement, during fiscal 2019.including through the filing date of this Annual Report. The Term Loan Agreement, ABL Loan Agreement and the Term Loan AgreementSenior Notes contain certain customary operational and informational covenants.covenants customary for debt securities of these types that limit our and our restricted subsidiaries’ ability to, among other things, incur debt, declare or pay dividends or make other distributions to our stockholders, transfer or sell assets, create liens on our assets, engage in transactions with affiliates, and merge, consolidate or sell all or substantially all of our and our subsidiaries’ assets on a consolidated basis. We were in compliance with all such covenants for all periods presented. If we fail to comply with any of these covenants, we may be in default under the applicable loandebt agreement, and all amounts due thereunder may become immediately due and payable.
The following chart outlines our scheduled debt maturities by fiscal year, which excludes debt prepayments whichthat may be required from Excess Cash Flowproceeds from sales of mortgaged properties beyond fiscal 2022 (as defined in the Term Loan Agreement) or proceeds. Based on our Consolidated First Lien Net Leverage Ratio at the end of fiscal 2021, no prepayment from salesExcess Cash Flow in fiscal 2021 is required to be made in fiscal 2022.
Derivatives and Hedging Activity
We enter into interest rate swap contracts from time to time to mitigate our exposure to changes in market interest rates as part of our overall strategy to manage our debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates. Interest rate swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures.
As of August 3, 2019,July 31, 2021, we had an aggregate of $2.20 billion$1,233 million of floating rate notional debt hedgedsubject to active interest rate swap contracts, which effectively hedge the LIBOR component of our interest rate payments through pay fixed and receive floating interest rate swap contracts to effectively fix the LIBOR component of our floating LIBOR based debt atagreements. These fixed rates rangingrange from 0.926%1.795% to 2.959%, with maturities between December 2019August 2022 and October 2025. The fair value of these interest rate derivatives represents a total net liability of $76.6$75 million and are subject to volatility based on changes in market interest rates. In fiscal 2021, we paid $17 million to terminate or novate $1,204 million of interest rate swap contracts over our floating rate notional debt. The termination payments reflect the amount of accumulated other comprehensive loss that will continue to be amortized into interest expense over the original interest rate swap contract terms as long as the hedged interest rate transactions are still probable of occurring. See Note 9—8—Derivatives in Part II, Item 8 and —Interest Rate Risk within Item 7A of this Annual Report on Form 10-K for additional information.
From time-to-time, we enter into fixed price fuel supply agreements.agreements and foreign currency hedges. As of August 3, 2019July 31, 2021, we had fixed price fuel contracts outstanding and July 28, 2018, we were not a party to any such agreements.foreign currency forward agreements outstanding. Gains and losses and the outstanding assets and liabilities from these arrangements are insignificant.
Payments for Capital Expenditures
Our capital expenditures forincreased $137 million in fiscal 2019 were $207.82021 to $310 million compared to $44.6$173 million for fiscal 2018, an increase of $163.2 million driven2020, primarily bydue to the new Allentown, PA distribution center expansions, newinvestment in fiscal 2021 compared to the Riverside, CA distribution centers,center investments in fiscal 2020, as well as higher distribution center improvements, including automation, and higher capital expenditures attributable to Supervalu.information technology investments. Fiscal 2019 capital spending included the Ridgefield expansion, and construction of the new Centralia and Moreno Valley distribution centers. Fiscal 20202022 capital spending is expected to be approximately $300 million and include projects that optimize and expand our distribution network, technology platform investments and technology platform. Longer term,the remaining investments in the Allentown, PA distribution center. In addition to this fiscal 2022 capital spending, is expectedwe expect to be approximately 1.0%spend another $152 million to acquire the real property of net sales.the Riverside, CA distribution center, which we expect to fund with the proceeds of a concurrent sale-leaseback transaction. We expect to finance fiscal 2022 capital expenditures requirements with cash generated from operations and borrowings under our ABL Credit Facility. Longer term, capital spending is expected to be at or below 1.0% of net sales. Future investments may be financed through long-term debt or borrowings under our ABL Credit Facility.
The following chart outlines our capital expenditures by type over the last three fiscal years.
Cash Flow Information
The following summarizes our Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Increase (Decrease) |
| (in millions) | 2021 (52 weeks) | | 2020 (52 weeks) | | 2019 (53 weeks) | | 2021 | | 2020 |
| Net cash provided by operating activities of continuing operations | $ | 614 | | | $ | 457 | | | $ | 293 | | | $ | 157 | | | $ | 164 | |
| Net cash used in investing activities of continuing operations | (239) | | | (28) | | | (2,341) | | | (211) | | | 2,313 | |
| Net cash (used in) provided by financing activities | (384) | | | (453) | | | 1,996 | | | 69 | | | (2,449) | |
| Net cash flows from discontinued operations | 2 | | | 27 | | | 74 | | | (25) | | | (47) | |
| Effect of exchange rate on cash | 1 | | | (1) | | | — | | | 2 | | | (1) | |
| Net (decrease) increase in cash and cash equivalents | (6) | | | 2 | | | 22 | | | (8) | | | (20) | |
| Cash and cash equivalents, at beginning of period | 47 | | | 45 | | | 23 | | | 2 | | | 22 | |
| Cash and cash equivalents at end of period, including discontinued operations | $ | 41 | | | $ | 47 | | | $ | 45 | | | $ | (6) | | | $ | 2 | |
|
| | | | | | | | | | | | | | | | | | | |
| (in thousands) | 2019
(53 weeks) | | 2018
(52 weeks) | | 2017
(52 weeks) | | 2019
Change | | 2018
Change |
| Net cash provided by operating activities of continuing operations | $ | 175,122 |
| | $ | 109,038 |
| | $ | 273,331 |
| | $ | 66,084 |
| | $ | (164,293 | ) |
| Net cash used in investing activities of continuing operations | (2,326,785 | ) | | (47,005 | ) | | (59,959 | ) | | (2,279,780 | ) | | 12,954 |
|
| Net cash provided by (used in) financing activities of continuing operations | 1,997,564 |
| | (53,557 | ) | | (217,116 | ) | | 2,051,121 |
| | 163,559 |
|
| Net cash flows from discontinued operations | 176,194 |
| | — |
| | — |
| | 176,194 |
| | — |
|
| Effect of exchange rate on cash | (143 | ) | | (575 | ) | | 565 |
| | 432 |
| | (1,140 | ) |
| Net increase (decrease) in cash and cash equivalents | 21,952 |
| | 7,901 |
| | (3,179 | ) | | 14,051 |
| | 11,080 |
|
| Cash and cash equivalents at beginning of period | 23,315 |
| | 15,414 |
| | 18,593 |
| | 7,901 |
| | (3,179 | ) |
| Cash and cash equivalents at end of period, including discontinued operations | $ | 45,267 |
| | $ | 23,315 |
| | $ | 15,414 |
| | $ | 21,952 |
| | $ | 7,901 |
|
Fiscal 20192021 compared to Fiscal 20182020
The increase in net cash provided by operating activities of continuing operations was primarily due to lower levels of cash invested in net working capital provided primarily due to the higher use of cash in fiscal 2020 due to credit extended on continued sales growth and build inventories in excess of accounts payable increases. In addition, we had higher cash flow from pre-tax earnings excluding non-cash impairments, restructuring charges, net periodic benefit income, multiemployer pension plan charges and other expenses, and incurred lower cash interest expense.
The increase in net cash used in investing activities of continuing operations was primarily due to higher payments for capital expenditures discussed below and lower proceeds from asset sales, including from distribution center sales related to optimizing our distribution network, primarily those in the Pacific region.
The decrease in net cash used in financing activities of continuing operations was primarily due to less cash available from operating activities, net of cash used in investing activities, to reduce our outstanding debt.
The decrease in cash flows from discontinued operations was primarily due to higher cash provided by investing activities from the sale of property in fiscal 2020 that did not recur in 2021.
Fiscal 2020 compared to Fiscal 2019
The increase in net cash provided by operating activities of continuing operations was primarily due to higher amounts of cash utilized in fiscal 2018 in inventory acquisition and credit extension to meet increased product demand and our service level agreements and cash provided in fiscal 2020 related to higher earnings before the goodwill impairment charges and depreciation and amortization expense, cash received from income taxes in fiscal 2020 compared to cash paid for income taxes in fiscal 2019, and lower payments for assumed liabilities and transaction costs, which were partially offset by the reductionuses of inventory, including cash inflowsto build inventory. In fiscal 2019, we benefited from the reduction of the seasonally high levels of inventory and accounts receivable at the time of the Supervalu inventory since the acquisition date, as the acquisition occurred at a time when inventories were seasonally high. These increasesacquisition; however, these cash inflows were offset in part by decreases from cash utilizedpayments made in payments offiscal 2019 for assumed liabilities and the payment of transaction costs from the Supervalu acquisition, including transaction-related expenses, accrued employee costs, and restructuring costs associated with reductions in force, higher cash paid for interest expense, higher cash utilized to reduce accounts payable primarily related to inventory reductions, and higher cash paid for taxes including a $59 million cash tax payment related to the Supervalu acquisition.force.
The increasedecrease in net cash used in investing activities of continuing operations was primarily due to $2,292.4$2,292 million of cash paid for theto purchase Supervalu acquisitionin fiscal 2019 and an increase$55 million of $163.2 million inlower cash utilizedpayments for capital expenditures, partially offset by $32 million of less cash received from the sale of property and equipment, primarily due to lower cash received from the sale of distribution centers. In fiscal 2019, we received cash from the sale and leaseback of two distribution centers, andone of which was a shorter-term lease related to the exit of that facility. In fiscal 2020, we received cash proceeds from the sale of two surplus facilities, for aggregate proceedsfive distribution centers, one of $172.5 million, as discussed above.which contained a shorter-term leaseback related to the exit of that facility.
The increasedecrease in net cash provided by financing activities of continuing operations was primarily due to fiscal 2019 borrowings on long-term debt of $1,926.6 million to finance the Supervalu acquisition, and a net increasedecrease in cash provided by the revolving credit facility borrowings of $883.4$1,193 million, including paymentswhich was driven by borrowings to finance the Supervalu acquisition the absence of cash utilized to repurchase common stock in fiscal 2019, compared to $24.2 millionoffset in part by net payments made in fiscal 2018, an increase2020 from operating activities cash flows in proceeds from the issuanceexcess of common stockinvesting activities. These decreases in fiscal 2019 of $23.0 million, and other borrowings of $22.4 millioncash provided by financing activities, were offset in fiscal 2019, partially offsetpart by an increasea decrease in repaymentspayments of long-term debt and capitalfinance lease obligations of $767.8$658 million includingdriven by the repayment of the Supervalu Senior Notes,acquired senior notes in fiscal 2019 and $63 million of payments for debt financingissuance costs of $62.6 million.in fiscal 2019.
Net cash flows from discontinued operations primarily include investing activity cash flows from asset sales and operating activity cash flowflows from operating income and investing activityof the retail disposal groups. The decrease in net cash inflowsflows from discontinued operations is primarily due to higher proceeds received in fiscal 2019 related to the sale of retail locations, including Hornbacher’s, than proceeds received in fiscal 2020, including proceeds from the sale of Hornbacher’s, a surplusformer dedicated retail distribution center and surplus retail stores, partially offset by capital expendituresstores.
Other Obligations and Commitments
Our principal contractual obligations and commitments consist of discontinued operations.
Fiscal 2018 compared to Fiscal 2017
Net cash provided by operations was $109.0 million for the fiscal year ended July 28, 2018, a decrease of $164.3 million from the $273.3 million provided by operations for the year ended July 29, 2017. The primary reasons for the net cash provided by operating activities for fiscal 2018 were net income for the year of $165.7 million, which included depreciation and amortization of $87.6 million, and share based compensation expense of $25.8 million, offset by increases in inventory and accounts receivable of $108.8 million and $67.3 million, respectively. Net cash provided by operations of $273.3 million for the year ended July 29, 2017 was primarily due to net income for the year of $130.2 million, which included depreciation and amortization of $86.1 million, and an increase in accounts payable of $82.8 million, offset by an increase in accounts receivable of $38.8 million.
Working capital increased by $131.0 million, or 13.7%, to $1.09 billion at July 28, 2018, compared to working capital of $958.7 million at July 29, 2017. This increase was primarily as a result of an increase in inventory to support increased demand for our products.
Net cash used in investing activities decreased approximately $13.0 million to $47.0 million for the fiscal year ended July 28, 2018, compared to $60.0 million for the fiscal year ended July 29, 2017. This decrease was primarily due to a decrease in cash paid for acquisitions of $9.2 million and a $11.5 million decrease in capital spending.
Net cash used in financing activities was $53.6 million for the fiscal year ended July 28, 2018. The net cash used in financing activities was primarily due to repayments of borrowingsobligations under our prior asset-backed revolving credit facility of $569.7 million, share repurchases of $24.2 million and repayments of long-term debt of $12.1 million, partially offset by proceeds from borrowings under our prior asset-backed revolving credit facility of $556.1 million. Net cash used in financing activities was $217.1 million for the fiscal year ended July 29, 2017 and was primarily due to repayments of borrowings under our prior asset-backed revolving credit facility and long term debt, of $418.7 millioninterest on long-term debt, operating and $11.5 million, respectively, partially offset by proceeds from borrowings under our prior asset-backed revolving credit facility of $215.7 million.finance leases, purchase obligations, self-insurance liabilities and multiemployer plan withdrawals.
Other
On October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for upRefer to $200.0 million of our outstanding common stock. The repurchase program is scheduledNote 9—Long-Term Debt, Note 11—Leases, Note 13—Benefit Plans, Note 1—Significant Accounting Policies and Note 17—Commitments, Contingencies and Off-Balance Sheet Arrangements to expire upon our repurchase of shares of our common stock having an aggregate purchase price of $200.0 million. We repurchased 614,660 shares of our common stock at an aggregate cost of $24.2 millionthe Consolidated Financial Statements in fiscal 2018. We did not purchase any shares of the Company’s common stock under the share repurchase program in the fiscal 2019. As of August 3, 2019, we have $175.8 million remaining authorized under the share repurchase program.
We no longer intend to indefinitely reinvest accumulated earnings in our Canada operations. Accordingly, we have recorded the tax impactsPart II, Item 8 of this treatment (a taxAnnual Report for more information on the nature and timing of obligations for debt, leases, benefit plans, self-insurance and purchase obligations, respectively. The future amount and timing of $0.6 million dueinterest expense payments are expected to vary with the foreign exchange loss on previously taxed income)amount and then prevailing contractual interest rates over our debt as discussed in fiscal 2019.—Interest Rate Risk within Item 7A of this Annual Report.
Pension and Other Postretirement Benefit Obligations
We contributed $4.1$2 million and $1.6$9 million to our defined benefit pension and other postretirement benefit plans, respectively, in fiscal 2019.2021. In fiscal 2020, $8.3 million of2022, no minimum pension contributions are required to be made under the Unified Grocers, Inc. Cash Balance Plan or the SUPERVALU INC. Retirement Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”). No minimum pensionAn insignificant amount of contributions are requiredexpected to be made to the SUPERVALU Retirement Plan under ERISAdefined benefit pension plans and postretirement benefit plans in fiscal 2020. We anticipate fiscal 2020 discretionary pension contributions and required minimum other postretirement benefit plan contributions to be approximately $0 million to $6 million.2022. We fund our defined benefit pension plans based on the minimum contribution amount required under ERISA, the Pension Protection Act of 2006 and other applicable laws, as determined by us, including our external actuarial consultant, and additional contributions made at our discretion. We may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable. We assess the relative attractiveness of the use of cash to accelerate contributions considering such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required Pension Benefit Guaranty Corporation variable rate premiums or in order to achieve exemption from participant notices of underfunding.
Lump SumOff-Balance Sheet Multiemployer Pension Settlement OfferingArrangements
On August 1,We contribute to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Trustees are appointed in equal number by employers and unions that are parties to the collective bargaining agreement. Based on the assessment of the most recent information available from the multiemployer plans, we believe that most of the plans to which we contribute are underfunded. We are only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability to us.
Our contributions can fluctuate from year to year due to store closures, employer participation within the respective plans and reductions in headcount. Our contributions to these plans could increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of our collective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, we could trigger a partial or complete withdrawal that could require us to record a withdrawal liability obligation and make withdrawal liability payments to the fund. Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized continuing and discontinued operations expense, of $48 million, $52 million and $41 million in fiscal 2021, 2020 and 2019, respectively. In fiscal 2022, we amendedexpect to contribute approximately $46 million to multiemployer plans related to continuing operations, subject to the SUPERVALU Retirement Planoutcome of collective bargaining and capital market conditions. We expect required cash payments to provide forfund multiemployer pension plans from which we have withdrawn from to be immaterial in any one fiscal year, which would exclude any payments that may be agreed to on a lump sum settlement window. On August 2, 2019, we sent plan participants lump sum settlement election offeringsbasis to satisfy existing withdrawal liabilities. Any future withdrawal liability would be recorded when it is probable that committed the SUPERVALU Retirement Plan to pay certain deferred vested pension plan participantsa liability exists and retirees, that make such an election, a lump sum paymentcan be reasonably estimated, in exchange for their rights to receive ongoing payments from the plan. The lump sum payment amounts are equal to the present value of the participant’s pension benefits, and will be made to certain former (i) retired associates and beneficiaries who are receiving their monthly pension benefit payment and (ii) terminated associates who are deferred vested in the Plan, had not yet begun receiving monthly pension benefit payments and who are not eligible for any prior lump sum offerings under the plan. Benefit obligations associatedaccordance with the lump sum offering have been incorporated into the funded status utilizing the actuarially determined lump sum payments based on estimated offer acceptances. The Company expects the Plan to make lump sum settlement payments to Plan participants on or around November 1, 2019, which we anticipate willGAAP. Any triggered withdrawal obligation could result in a material charge and payment obligations that would be required remeasurementto be made over an extended period of time.
We also make contributions to multiemployer health and welfare plans in amounts set forth in the defined benefit pension obligationsrelated collective bargaining agreements. A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating expenses could increase in the future.
Refer to Note 13—Benefit Plans in Part II, Item 8 of this Annual Report for further information regarding the plans in which we participate.
Share Repurchases
On October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200 million of our outstanding common stock. The repurchase program is scheduled to expire upon our repurchase of shares of our common stock having an aggregate purchase price of $200 million. We did not repurchase any shares of our common stock in fiscal 2021 or 2020 pursuant to the share repurchase program. As of July 31, 2021, we have $176 million remaining authorized under the plan atshare repurchase program. We do not expect to purchase shares under the share repurchase program during fiscal 2022. Additionally, our ABL Credit Facility, Term Loan Facility and Senior Notes contain terms that time.limit our ability to repurchase common stock above certain levels unless certain conditions and financial tests are met.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management believes the following critical accounting policies reflect our more subjective or complex judgments and estimates used in the preparation of our Consolidated Financial Statements.
Inventories
Inventories are valued at the lower of cost or market. Substantially all of our inventory consists of finished goods. Inventories are recorded net of vendor allowances and cash discounts. We evaluate inventory shortages (shrink) throughout each fiscal year based on actual physical counts in our facilities.
Prior to fiscal 2019, we determined The majority of our inventory cost using the first-in, first-out (“FIFO”) method. For a substantial portion of legacy Supervalu inventory, cost was determined usingis costed under the LIFO method, with the rest primarily determined using FIFO. Inventories acquired as part of the Supervalu acquisition were recorded at their fair market values as of the acquisition date. During the second quarter of fiscal 2019, we completed our evaluation of our combined inventory accounting policies and changed our method of inventory costing for certain historical United Natural Foods, Inc. inventory from the FIFO accounting method to the LIFO accounting method. We concluded that the LIFO method of inventory costing is preferable because itwhich allows for better matching of costs and revenues, as historical inflationary inventory acquisition prices are expected to continue in the future and the LIFO method uses the current acquisition cost to value cost of goods sold as inventory is sold. Additionally, LIFO allows for better comparability ofIf the results of our operations with those of similar companies in its peer group. As a result of the change to the LIFOfirst-in, first-out method certain Company inventories, excluding Supervalu inventories, were reducedhad been used, Inventories, net, would have been higher by $15.0approximately $67 million and $43 million for fiscal 2019, which resulted in increases to Cost of sales2021 and Loss from continuing operations before income taxes of the same amount in the Consolidated Statements of Operations for fiscal 2019.2020, respectively. As of August 3, 2019,July 31, 2021, approximately $1.6$1.8 billion or 76 percent of inventory was valued under the LIFO method, before the application of a LIFO reserve, and primarily included grocery, frozen food and general merchandise products, with the remaining inventory valued under the FIFOfirst-in, first-out method and primarily included meat, dairy and deli products.
Vendor funds
We receive funds from many of the vendors whose products we buy for resale. These vendor funds are generally provided to increase the purchasing and sell-through of the related products. We receive vendor funds for a variety of merchandising activities: placement of the vendors’ products in our advertising; display of the vendors’ products in prominent locations in our stores; supporting the introduction of new products into our stores and distribution centers; exclusivity rights in certain categories; and to compensate for temporary price reductions offered to customers on products held for sale. We also receive vendor funds for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of the vendor fund contracts have terms of less than a year, although some of the contracts have terms of longer than one year.
We recognize vendor funds for merchandising activities as a reduction of Cost of sales when the related products are sold, unless it has been determined that a discrete identifiable benefit has been provided to the vendor, in which case the related amounts are recognized within Net sales and represent less than one half of one percent of total Net sales. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions to the value of on-hand inventory.
The amount and timing of recognition of vendor funds as well as the amount of vendor funds to be recognized as a reduction to ending inventory requires management judgment and estimates. Management determines these amounts based on estimates of current year purchase volume using forecast and historical data, and a review of average inventory turnover data. These judgments and estimates impact our reported gross profit, operating income and inventory amounts. The historical estimates have been reliable in the past, and we believe our methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant changes in the level of vendor support. However, if such changes were to occur, cost of sales and net sales could change, depending on the specific vendors involved. If vendor advertising allowances were substantially reduced or eliminated, we would consider changing the volume, type and frequency of the advertising, which could increase or decrease our advertising expense.expense.
Benefit plans
We sponsor pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. Pension benefits associated with these plans are generally based on each participant’s years of service, compensation, and age at retirement or termination. Our defined benefit pension plans and certain supplemental executive retirement plans were closed to new participants and service crediting.
While we believe the valuation methods used to determine the fair value of plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The determination of our obligation and related expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions used in calculating these amounts. These assumptions include, among other things, the discount rate and the expected long-term rate of return on plan assets and the rates of increase in compensation and healthcare costs.assets. We measure our defined benefit pension and other postretirement plan obligations as of the nearest calendar month end. Refer to Note 14—13—Benefit Plans in Part II, Item 8 of this Annual Report on Form 10-K for information related to the actuarial assumptions used in determining pension and postretirement healthcare liabilities and expenses.
Discount rates
We review and select the discount rate to be used in connection with our pension and other postretirement obligations annually. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. We set our rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
Our expected long-term rate of return on plan assets assumption is determined based on the portfolio’s actual and target composition, current market conditions, forward-looking return and risk assumptions by asset class, and historical long-term investment performance. The assumed long-term rate of return on pension assets ranged from 6.25 percent to 6.5 percent for fiscal 2019. The 10-year rolling average annualized return for a portfolio of investments applied in a manner consistent with our target allocations have generated average returns of approximately 8.04 percent based on returns from 1990 to 2017. In accordance with GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods.
Each 25 basis point reduction in the discount rate would increase the postretirement benefit obligation by $65 million, as of August 3, 2019, and for fiscal 2019 would decrease pension expense by approximately $3.5 million and each 25 basis point reduction in expected return on plan assets would increase pension expense by approximately $5.6 million. Similarly, for postretirement benefits, a 100 basis point increase in the healthcare cost trend rate would increase the accumulated postretirement benefit obligation by approximately $3.2 million as of the end of fiscal 2019 and would increase service and interest cost by less than $0.1 million. Conversely, a 100 basis point decrease in the healthcare cost trend rate would decrease the accumulated postretirement benefit obligation as of the end of fiscal 2019 by approximately $2.6 million and would decrease service and interest cost by less than $0.1 million. Although we believe our assumptions are appropriate, the actuarial assumptions may differ from actual results due to changing market and economic conditions, higher or lower withdrawal rates and longer or shorter life spans of participants.
We recognize the amortization of net actuarial loss on the SUPERVALU Retirement Plan and the Unified Grocers Inc. Cash Balance Plan over the remaining life expectancy of inactive participants based on our determination that almost all of the defined benefit pension plan participants are inactive and the plan is frozen to new participants. For the purposes of inactive participants, we utilized an over approximately 90 percent threshold established under our policy.
We utilize the “full yield curve” approach for determining the interest and service cost components of net periodic benefit cost for defined benefit pension and other postretirement benefit plans. Under this method, the discount rate assumption used in the interest and service cost components of net periodic benefit cost is built through applying the specific spot rates along the yield curve used in the determination of the benefit obligation described above, to the relevant projected future cash flows of our pension and other postretirement benefit plans. We believe the “full yield curve” approach reflects a greater correlation between projected benefit cash flows and the corresponding yield curve spot rates and provides a more precise measurement of interest and service costs.
Business dispositions
The Company reviews the presentation of planned business dispositionsEach 25 basis point reduction in the Consolidated Financial Statementsdiscount rate would increase our projected pension benefit obligation by $62 million, as of July 31, 2021, and for fiscal 2022 would increase Net periodic benefit income by approximately $4 million.
Expected rate of return on plan assets
Our expected long-term rate of return on plan assets assumption is determined based on the available informationportfolio’s actual and eventstarget composition, current market conditions, forward-looking return and risk assumptions by asset class, and historical long-term investment performance. The assumed long-term rate of return on pension assets ranged from 5.00 percent to 5.50 percent for fiscal 2021. The 10-year rolling average annualized return for the SUPERVALU INC. Retirement Plan is approximately 8.07 percent based on returns from 2012 to 2021. In accordance with GAAP, actual results that have occurred. The review consistsdiffer from our assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods. Each 25 basis point reduction in expected return on plan assets would decrease Net periodic benefit income for fiscal 2022 by approximately $5 million.
Amortizing gains and losses
We recognize the amortization of evaluating whethernet actuarial loss on the business meetsSUPERVALU INC. Retirement Plan and the definitionUnified Grocers, Inc. Cash Balance Plan over the remaining life expectancy of a component for which the operations and cash flows are clearly distinguishable from the other componentsinactive participants based on our determination that almost all of the business,defined benefit pension plan participants are inactive and if so, whether itthe plan is anticipatedfrozen to new participants. For the purposes of inactive participants, we utilized an over approximately 90 percent threshold established under our policy.
Multiemployer pension plans
We contribute to various multi-employer pension plans based on obligations arising from collective bargaining agreements. These multi-employer pension plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that afterpurpose. Trustees are typically responsible for determining the disposal the cash flowslevel of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results. In addition, the Company evaluates whether the business has met the criteria as a business held for sale. In order for a planned dispositionbenefits to be classifiedprovided to participants as a business held for sale,well as such matters as the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year.
Planned business dispositions are presented as discontinued operations when all the criteria described above are met. Operations of the business components meeting the discontinued operations requirements are presented within Income from discontinued operations, net of tax in the Consolidated Statements of Operations, and assets and liabilities of the business component planned to be disposed of are presented as separate lines within the Consolidated Balance Sheets.
The carrying value of the business held for sale is reviewed for recoverability upon meeting the classification requirements. Evaluating the recoverabilityinvestment of the assets and the administration of the plans.
We continue to evaluate and address our potential exposure to under-funded multi-employer pension plans as it relates to our associates who are or were beneficiaries of these plans. In the future, we may consider opportunities to limit the Company’s exposure to under-funded multi-employer pension obligations by moving our active associates in such plans to defined contribution plans, and withdrawing from the pension plan or continuing to participate in the plans for prior obligations. In fiscal 2021, we incurred a business classified as held$63 million charge for sale follows aobligations related to withdrawal liabilities for three Retail multiemployer pension plans where our active associates moved to defined order in which property and intangible assets subjectcontribution plans for future benefits. As we continue to amortization are considered only after the recoverability of goodwill, indefinite lived intangible assets and other assets are assessed. After the valuation processwork to find solutions to under-funded multiemployer pension plans, it is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell, and no additional depreciation or amortization expense is recognized. Acquired businesses are evaluatedpossible we could incur withdrawal liabilities for certain criteriaadditional multiemployer pension plan obligations. As we continue to be classified as heldwork to find solutions to under-funded multiemployer pension plans, it is possible we could incur withdrawal liabilities for sale, and if so, are reported at their fair value less costs to sell as of the acquisition date and subsequently adjusted each reporting period.
Judgments and estimates utilized to determine whether impairment charges exist include the review of the business units fair value, which may occur under the income and market approaches and include forecasted revenues, operating expenses, income tax expenses, depreciation and amortization expenses and discount rates. In addition, we evaluate the recognition of other charges and costs, including potentialcertain additional multiemployer pension plan withdrawal charges. The sale of a business can resultobligations in the future as we actively bargain collective agreements with a number of our unions in due course.
We continue to evaluate our exposure to under-funded multiemployer pension plans. Although these liabilities are not a direct obligation or an on-balance sheet liability of ours, addressing these uncertainties requires judgment in the timing of expense recognition of a gain or loss that differs from that anticipated priorwhen we determine our commitment is probable and estimable.
Refer to closing. See Note 19—Discontinued Operations in Part II, Item 813—Benefit Plans of this Annual Report on Form 10-K for more information relating to our participation in these multiemployer pension plans and to the carrying value of discontinued operations held for sale assetsactuarial assumptions used in determining pension and other postretirement liabilities and additional information.expenses.
Self-InsuranceSelf-insurance liabilities
We are primarily self-insured for workers’ compensation, general and automobile liability insurance. It is our policy to record the self-insured portions of our workers’ compensation, general and automobile liabilities based upon actuarial methods of estimating the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported. Any projection of losses concerning these liabilities is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting litigation trends, benefit level changes and claim settlement patterns. If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our Consolidated Financial Statements. Accruals for workers’ compensation, general and automobile liabilities totaled $88.8$103 million and $24.7$101 million as of July 31, 2021 and August 3, 2019 and July 28, 2018,1, 2020, respectively.
Valuation of assets and liabilities acquired in a business combination
We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. Goodwill represents the excess of consideration transferred over the fair value of net assets acquired in a business combination. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as the estimated useful life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. During the measurement period, purchase price allocation changes that impact the carrying value of goodwill effects any measurement of goodwill impairment that was taken during the time period. In fiscal 2019, we recorded a goodwill impairment charge related to the Supervalu distribution reporting unit in a period in which the purchase price allocation had not been completed. Estimates that are sensitive include judgments as to whether information gathered during the measurement period relate to information that was not yet available or whether subsequent developments have occurred that indicate the recognition of other asset and liabilities should be recorded within net income.
In determining the estimated fair value for intangible assets, we typically utilize the income approach, which discounts the projected future net cash flow using an appropriate discount rate that reflects the risks associated with such projected future cash flow. Estimates that are sensitive to the determination of the fair value of acquired customer intangibles, include forecasted revenues, operating expenses, income tax expenses, depreciation and amortization expenses, and attrition and discount rates, all of which can have a material impact on the estimated fair values of customer relationship intangible assets.
Other significant judgments include the estimated fair value of real and personal property that utilizes significant inputs such as rental and discount rates to determine the fair value of the acquired assets, and the market approach that utilizes significant inputs such as market rental rates and sales comparisons. Fair value estimates are based on available historical information, future expectations and assumptions determined to be reasonable but are inherently uncertain with respect to future events, including economic conditions, competition, the useful life of the acquired assets and other factors. Estimates that are sensitive to the determination of the fair value of real and personal property include external transactions and other comparable transactions, estimated replacement and reproduction costs, and estimated useful lives and salvage values.
Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Intangible assets determined to have an indefinite useful life are reassessed periodically based on the expected use of the asset by us, legal or contractual provisions that may affect the useful life or renewal or extension of the asset’s contractual life without substantial cost, and the effects of demand, competition and other economic factors.
Recoverability of goodwill and intangiblelong-lived assets
Goodwill
We review goodwill for impairmentlong-lived assets, including definite-lived intangible assets at least annually, and on an interim basis if events occur or circumstances indicate that it is more likely than not that a reporting units’ fair value is below its carrying amount. We have elected to perform our annual tests for indications of goodwill impairment as of the first day of the fourth quarter of each fiscal year. We test for goodwill impairment at the reporting unit level, which is at or one level below the operating segment level, unless components are determined to be economically similar, in which case components would be aggregated into goodwill reporting units that are at the same level as an operating segment. The determination of reporting units considers the quantitative and qualitative characteristics of aggregation of each of the components within the operating segments. The significant qualitative and economic characteristics used in determining our components to support their aggregation include types of businesses and the manner in which the components operate, consideration of key impacts to net sales, cost of sales, competitive risks and the extent to which components share assets and other resources. Based an interim fiscal 2019 quantitative assessment, the Supervalu distribution reporting unit’s fair value was substantially less than its carrying value and the entire amount of goodwill from the acquisition that was attributed to the reporting unit was impaired. If we were to change the composition of our reporting units, such that the unrealized fair value deficit over the carrying value was subject to measurement as part of the recoverability of other reporting units, under a new basis of reporting units, we may incur additional impairment charges. Goodwill has been assigned as of the acquisition date of the respective components. Goodwill has only been allocated upon a business’s disposal or upon achievement of criterion to classify an existing component as a new reporting unit.
Total goodwill by reporting unit is as follows:
|
| | | | |
| (in thousands) | | August 3, 2019 |
| Legacy Company distribution | | $ | 423,534 |
|
| UNFI Canada | | 8,862 |
|
| Blue Marble Brands | | 5,436 |
|
| Woodstock Farms | | 4,424 |
|
| Supervalu distribution | | — |
|
| Total Goodwill | | $ | 442,256 |
|
A qualitative review may be conducted to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative review is bypassed or it is determined that it is more likely than not that the carrying value is greater than the fair value of the reporting unit, a quantitative impairment test must be performed. The quantitative impairment test determines the fair value of each reporting unit, which is then compared against the carrying amount of the reporting unit, including goodwill, to determine if an impairment exists. In fiscal 2019, we performed two qualitative reviews, and as a result of one of the qualitative reviews a quantitative review of goodwill was conducted in the second quarter of fiscal 2019. During fiscal 2019, we recorded a total impairment charge of $292.8 million to goodwill related to the acquired Supervalu distribution business.
For the fiscal 2019 quantitative assessment, we estimated the fair value for our reporting units, utilizing the income and market approaches, which were weighted on a 50:50 basis to determine each reporting unit’s fair value. Estimates that were sensitive to the fair value determination under income and market approach, include forecasted revenues, operating expenses, income tax expenses, depreciation and amortization expenses and discount rates. In addition, the market approach quantifications included comparable company market multiples relative to each reporting unit. Refer to Note 7—Goodwill and Intangible Assets in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
Intangible Assets
We review indefinite lived intangible assets and other long lived assets with finite lives at least annually, and on an interim basis if events occur or circumstances indicate that the carrying value of the respective asset may not be recoverable. If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow model. Impairment is measured as the difference between the fair value of the asset and its carrying value. Cash flows expected to be generated by the related assets are estimated over the asset’s useful life based on projected cash flows.
Indefinite-lived intangible assets are reviewed for impairment at least annually as of the first day of the fourth fiscal quarter and if events occur or circumstances change that would indicate that the value of the asset may be impaired. We perform qualitative assessments of goodwill and indefinite lived intangibles assets for impairment, unless we believe it is more likely than not that an intangible asset’s fair value is less than the carrying value, in which case a quantitative assessment would be performed.
Our fiscal 2019 annual indefinite lived impairment assessment indicated that no impairment existed. Refer to Note 7—Goodwill and Intangible Assets in Part II, Item 8 of this Annual Report on Form 10-K for the carrying values reviewed and additional information.
We review long-lived assets, including definite-lived intangible assets, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We evaluate these assets at the asset-group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. IfWhen the evaluation indicates that the carrying amount of an asset may not be recoverable, the potential impairment is measured based using the income approach. We group long-lived assets with other assets at the lowest level for which identifiableundiscounted future cash flows are largely independentnot sufficient to recover an asset’s carrying amount, the fair value is compared to the carrying value to determine the loss to be recorded.
Estimates of thefuture cash flows and expected sales prices are judgements based on the Company’s experience and knowledge of other assets.operations. These estimates project cash flows several years into the future and include assumptions on variables such as changes in supply contracts, macroeconomic impacts and market competition.
We did not identify any impairments in fiscal 2021 as part of our quarterly procedures or annual impairment assessment.
Income taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized inwithin the provision for income tax in the period that includes the enactment date.
The calculation of the Company’s tax liabilities includes addressing uncertainties in the application of complex tax regulations and is based on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Addressing these uncertainties requires judgment and estimates; however, actual results could differ, and we may be exposed to losses or gains. Our effective tax rate in a given financial statement period could be affected based on favorable or
unfavorable tax settlements. Unfavorable tax settlements will generally require the use of cash and may result in an increase to our effective tax rate in the period of resolution. Favorable tax settlements may be recognized as a reduction to our effective tax rate in the period of resolution.
The Company regularly reviews its deferred tax assets for recoverability to evaluate whether it is more likely than not that they will be realized. In making this evaluation, the Company considers the statutory recovery periods for the assets, along with available sources of future taxable income, including reversals of existing and future taxable temporary differences, tax planning strategies, history of taxable income and projections of future income. The Company gives more significance to objectively verifiable evidence, such as the existence of deferred tax liabilities that are forecast to generate taxable income within the relevant carryover periods and a history of earnings. A valuation allowance is provided when the Company concludes, based on all available evidence, that it is more likely than not that the deferred tax assets will not be realized during the applicable recovery period.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the TCJA. The TCJA makes broad and complex changes to the U.S. tax code, including reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. Shortly after the TCJA was enacted, the Securities and Exchange Commission (“SEC”) issued accounting guidance, which provides a one-year measurement period during which a company may complete its accounting for the impacts of the TCJA. To the extent a company’s accounting for certain income tax effects of the TCJA is incomplete, the company may determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. See Note 15—Income Taxes for further effects of the new tax legislation on the Company.
COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ARRANGEMENTS
Off-Balance Sheet Arrangements
Guarantees and Contingent Liabilities
We have outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of August 3, 2019. We are contingently liable for leases that have been assigned to various parties in connection with facility closings and dispositions. We are also a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise. Refer to Note 18—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding our outstanding guarantees and contingent liabilities.
Multiemployer Benefit Plans
We contribute to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Trustees are appointed in equal number by employers and unions that are parties to the collective bargaining agreement. Based on the assessment of the most recent information available from the multiemployer plans, we believe that most of the plans to which we contribute are underfunded. We are only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability to us.
Our contributions can fluctuate from year to year due to store closures, employer participation within the respective plans and reductions in headcount. Our contributions to these plans could increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of our collective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, we could trigger a partial or complete withdrawal that could require us to make withdrawal liability payments to the fund. Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized continuing and discontinued operations expense, of $41.0 million, $0.5 million and $0.0 million in fiscal 2019, 2018 and 2017, respectively. In fiscal 2020, we expect to contribute approximately $37 million related to continuing operations contributions to the multiemployer pension plans, subject to the outcome of collective bargaining and capital market conditions. Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, it could trigger a partial or complete withdrawal that would require us to record a withdrawal liability. Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP. Any triggered withdrawal obligation could result in a material charge and payment obligations that would be required to be made over an extended period of time.
We also make contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating expenses could increase in the future.
Refer to Note 14—Benefit Plans in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding the plans in which we participate.
Contractual Obligations
The following schedule summarizes our significant contractual obligations as of August 3, 2019:
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| | | | | | | | | | | | | | | | | | | |
| | Payments Due Per Period |
| (in millions) | Total | | Fiscal 2020 | | Fiscal 2021-2022 | | Fiscal 2023-2024 | | Thereafter |
Contractual obligations(1)(2): | | | | | | | | | |
Long-term debt(3) | $ | 3,003 |
| | $ | 103 |
| | $ | 62 |
| | $ | 1,137 |
| | $ | 1,701 |
|
Interest on long-term debt(4) | 913 |
| | 167 |
| | 324 |
| | 284 |
| | 138 |
|
Operating leases(5) | 1,732 |
| | 174 |
| | 300 |
| | 251 |
| | 1,007 |
|
Capital leases(6) | 180 |
| | 35 |
| | 55 |
| | 45 |
| | 45 |
|
Purchase obligations(7) | 260 |
| | 182 |
| | 68 |
| | 6 |
| | 4 |
|
Self-insurance liabilities(8) | 96 |
| | 31 |
| | 34 |
| | 15 |
| | 16 |
|
| Multiemployer plan withdrawal liabilities | 74 |
| | 2 |
| | 3 |
| | 6 |
| | 63 |
|
| Deferred compensation | 6 |
| | 1 |
| | 2 |
| | 1 |
| | 2 |
|
| Total contractual obligations | $ | 6,264 |
| | $ | 695 |
| | $ | 848 |
| | $ | 1,745 |
| | $ | 2,976 |
|
| |
(1) | Because the timing of certain future payments beyond fiscal 2019 cannot be reasonably determined, contractual obligations payments due per fiscal period presented here exclude our discretionary funding of our pension plans and required funding of our postretirement benefit obligations. Pension and postretirement benefit obligations were $239 million as of fiscal year ended August 3, 2019. The Company expects to contribute approximately $8 million to $14 million to its defined benefit pension plans and postretirement benefit plans in fiscal 2020.
|
| |
(2) | Unrecognized tax benefits, which totaled $40 million as of fiscal year ended August 3, 2019, were excluded from the contractual obligations table because an estimate of the timing of future tax settlements cannot be reasonably determined. |
| |
(3) | Long-term debt amounts exclude original issue discounts and deferred financing costs. Long-term debt payments due per period exclude any cash prepayments that may be required under the provisions of the Term Loan Facility because future prepayment amounts, if any, are not reasonably estimable as of August 3, 2019. |
| |
(4) | Amounts include contractual interest payments (net of our interest rate swap payments) using the face value and applicable interest rate as of August 3, 2019. The face value of variable debt instruments with a variable rate equal to one-month LIBOR plus an applicable margin is $2,892 million. The face value of variable interest debt instruments with a variable rate equal to the prime rate plus an applicable margin is $53 million. |
| |
(5) | Represents the minimum rents payable under operating leases, excluding common area maintenance, insurance or tax payments, for which we are also obligated, offset by minimum subtenant rentals of $215 million total, $50 million, $69 million, $39 million and $57 million, respectively. |
| |
(6) | Represents the minimum payments under capital leases, excluding common area maintenance, insurance or tax payments, for which we are also obligated, offset by minimum subtenant rentals of $21 million total, $6 million, $8 million, $4 million and $3 million, respectively. |
| |
(7) | Our purchase obligations include various obligations that have annual purchase commitments of $1 million or greater. As of fiscal year ended August 3, 2019, future purchase obligations existed that primarily related to fixed asset, information technology and inventory purchase commitments. In addition, in the ordinary course of business, we enter into supply contracts to purchase product for resale to wholesale customers and to consumers, which are typically of a short-term nature with limited or no purchase commitments. The majority of our supply contracts are short-term in nature and relate to fixed assets, information technology and contracts to purchase product for resale. These supply contracts typically include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. The supply contracts that are cancelable have not been included above. |
| |
(8) | Our insurance liabilities include the undiscounted obligations related to workers’ compensation, general and automobile liabilities at the estimated ultimate cost of reported claims and claims incurred but not yet reported and related expenses. Future payments reflected here represent our reasonably determined estimate. |
Recently Issued Financial Accounting Standards
For a discussion of recently issued financial accounting standards, refer to Note 2—Recently Adopted and Issued Accounting Pronouncementsin Part II, Item 8 of this Annual Report on Form 10-K for further detail.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to a number of market related risks, including changes in interest rates, fuel prices, foreign exchange rates and changes in the market price of investments held in our master trust used to fund defined benefit pension obligations. We have historically employed financial derivative instruments from time to time to reduce these risks. We do not use financial instruments or derivatives for any trading or other speculative purposes. We currently utilize derivative financial instruments to reduce the market risks related to changes in interest rates, fuel prices and foreign exchange rates.
Interest Rate Risk
We are exposed to market pricing risk consisting of interest rate risk related to certain of our debt instruments and notes receivable outstanding. Our debt obligations are more fully described in Note 10—9—Long-Term Debt to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report. Interest rate risk is managed through the strategic use of fixed and variable rate debt and derivative instruments. As more fully described in Note 9—8—Derivatives to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report, we have used interest rate swap agreements with the objective to protect us against adverse changes in interest rates by effectively converting certain of our variable rate obligations to fixed rate obligations. These interest rate swaps are derivative instruments designated as cash flow hedges on the forecasted interest payments related to a certain portion of our debt obligations. Our variable rate borrowings consist primarily of LIBOR based loans, which is the benchmark interest rate being hedged in our interest rate swap agreements.
Changes in interest rates could also affect the interest rates we pay on future borrowings under our ABL Credit Facility and Term Loan Facility, which rates are typically related to LIBOR. We estimate that a 100 basis point increase in the interest rates related to our variable rate borrowings would increase our annualized interest expense by approximately $7.4$5 million, net of the floating interest rate receivable on our interest rate swaps. Changes in interest rates related to our fixed rate debt instruments dowould not have an impact upon future results of operations or cash flows while outstanding; however, if additional debt issuances at higher interest rates are required to fund fixed rate debt maturities, future results of operations or cash flows may be impacted.
At August 3, 2019, a 100 basis point increase in interest rates would decrease the unrealized fair market valueAs of our debt currently bearing fixed rates or debt scheduled to convert to fixed rates by approximately $2.3 million, while a 100 basis point decrease in interest rates would increase the unrealized fair market value of those same debt instruments by approximately $2.4 million. At August 3, 2019,July 31, 2021, a 100 basis point increase in forward LIBOR interest rates would increase the fair value of our outstandingthe interest rate swaps by approximately $69.7 million, while$31 million; a 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of thosethe interest rate swaps by approximately $73.0$32 million. Refer to Note 8—Derivatives for further information on interest rate swap contracts.
Loans areCustomer loans have been extended to certain wholesale customers in the normal course of business through notes receivable. The notes generally bear fixed interest rates negotiated with each wholesale customer. The market value of the fixed rate notes is subject to change due to fluctuations in market interest rates.rates; however, this market risk is not significant to us.
The table below provides information about our financial instruments that are sensitive to changes in interest rates, including debt obligations, interest rate swaps and notes receivable. For debt obligations, the table presents principal amounts due and related weighted average interest rates by expected maturity dates using interest rates as of August 3, 2019,July 31, 2021, excluding any original issue and purchase accounting discounts, and deferred financing costs. For interest rate swaps, the table presents the notional amounts and related weighted average interest rates by maturity. For notes receivable, the table presents the expected collection of principal cash flows and weighted average interest rates by expected year of maturity.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| July 31, 2021 | | Expected Fiscal Year of Maturity |
| Fair Value | | Total | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
| (in millions, except interest rates) |
| Long-term Debt: | | | | | | | | | | | | | | | |
| Variable rate—principal payments | $ | 1,700 | | | $ | 1,703 | | | $ | — | | | $ | — | | | $ | 701 | | | $ | — | | | $ | 1,002 | | | $ | — | |
Weighted average interest rate(1) | | | 2.7 | % | | — | % | | — | % | | 1.5 | % | | — | % | | 3.6 | % | | — | % |
| Fixed rate—principal payments | $ | 578 | | | $ | 537 | | | $ | 14 | | | $ | 14 | | | $ | 8 | | | $ | 1 | | | $ | — | | | $ | 500 | |
| Weighted average interest rate | | | 6.6 | % | | 5.3 | % | | 5.3 | % | | 4.8 | % | | 4.4 | % | | — | % | | 6.8 | % |
Interest Rate Swaps(2): | | | | | | | | | | | | | | | |
| Notional amounts hedged under pay fixed, receive variable swaps | $ | (75) | | | $ | 1,233 | | | $ | 4 | | | $ | 429 | | | $ | 350 | | | $ | 250 | | | $ | 200 | | | $ | — | |
| Weighted average pay rate | | | 2.7 | % | | 1.8 | % | | 2.7 | % | | 2.7 | % | | 2.6 | % | | 2.9 | % | | — | % |
| Weighted average receive rate | | | 0.4 | % | | 0.1 | % | | 0.2 | % | | 0.3 | % | | 0.5 | % | | 0.6 | % | | — | % |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | August 3, 2019 | | Expected Fiscal Year of Maturity |
| | Fair Value | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| | (in millions, except interest rates) |
| Long-term Debt: | | | | | | | | | | | | | | | |
| Variable rate—principal payments | $ | 2,671 |
| | $ | 2,945 |
| | $ | 92 |
| | $ | 18 |
| | $ | 18 |
| | $ | 18 |
| | $ | 1,098 |
| | $ | 1,701 |
|
Weighted average interest rate(1) | | | 5.4 | % | | 4.7 | % | | 6.5 | % | | 6.5 | % | | 6.5 | % | | 3.6 | % | | 6.5 | % |
| Fixed rate—principal payments | $ | 59 |
| | $ | 58 |
| | $ | 11 |
| | $ | 12 |
| | $ | 13 |
| | $ | 14 |
| | $ | 8 |
| | $ | — |
|
| Weighted average interest rate | | | 5.3 | % | | 5.3 | % | | 5.3 | % | | 5.3 | % | | 5.3 | % | | 4.9 | % | | — |
|
| Interest Rate Swaps: | | | | | | | | | | | | | | | |
| Notional amounts hedged under pay fixed, receive variable swaps | $ | (77 | ) | | $ | 2,200 |
| | $ | 208 |
| | $ | 360 |
| | $ | 360 |
| | $ | 472 |
| | $ | 350 |
| | $ | 450 |
|
| Weighted average pay rate | | | 2.5 | % | | 2.4 | % | | 2.3 | % | | 2.4 | % | | 2.6 | % | | 2.7 | % | | 2.7 | % |
| Weighted average receive rate | | | 1.5 | % | | 1.8 | % | | 1.6 | % | | 1.5 | % | | 1.5 | % | | 1.5 | % | | 1.5 | % |
| Notes receivable: | | | | | | | | | | | | | | | |
| Principal receivable | $ | 45 |
| | $ | 46 |
| | $ | 12 |
| | $ | 8 |
| | $ | 6 |
| | $ | 5 |
| | $ | 2 |
| | $ | 13 |
|
| Weighted average receivable rate | | | 5.1 | % | | 5.3 | % | | 5.4 | % | | 5 | % | | 4.8 | % | | 6 | % | | 4.6 | % |
| |
(1) | (1)Excludes the effect of interest rate swaps effectively converting certain of our variable rate obligations to fixed rate obligations. |
Fuel Price Risk
We are exposed to market pricing risk consisting of changes in diesel prices. We maintain a fuel surcharge program, which allows us to pass some of our higher fuel costs throughvariable rate obligations to our customers. In addition,fixed rate obligations.
(2)Refer to reduce diesel price risk, we have in the past, and may in the future, periodically enter in to derivative financial instruments and forward purchase commitmentsNote 8—Derivatives for a portion of our projected monthly diesel fuel requirements at fixed prices. As of August 3, 2019, we had no forward diesel fuel commitments or derivatives outstanding.further information on interest rate swap contracts.
Foreign Exchange Risk
We are exposed to market pricing risk consisting of changes in foreign exchange rates. To reduce foreign exchange risk, we have in the past, and may in the future, periodically enter into derivative financial instruments for a portion of our projected monthly foreign currency requirements at fixed prices. As of August 3, 2019, our outstanding foreign currency forward contracts were immaterial.
Investment Risk
We assumed the defined benefit pension plan obligations and assets of the SUPERVALU INC. Retirement Plan from the Supervalu acquisition. This plan holds investments in fixed income, public and private equity, fixed income and real estate securities, which is described further in Note 14—13—Benefit Plans in Part II, Item 8 of this Annual Report. Changes in SUPERVALU INC. Retirement Plan assets can affect the amount of our anticipated future contributions. In addition, increases or decreases in SUPERVALU INC. Retirement Plan assets can result in a related increase or decrease to our equity through Accumulated other comprehensive loss. As of August 3, 2019,July 31, 2021, a 10 percent unfavorable change in the total value of investments held by the SUPERVALU INC. Retirement Plan (entirely within the return-seeking portion of the plan assets) would not have had an impact on our minimum contributions required under ERISA for fiscal 2019,2021, but would have resulted in an unfavorable change in net periodic pension income for fiscal 20202022 of $3$2 million and would have reduced stockholders’ equity by $250$186 million on a pre-tax basis as of August 3, 2019.July 31, 2021.
Fuel Price and Foreign Exchange Risk
To reduce diesel price risk, we have entered into derivative financial instruments and/or forward purchase commitments for a portion of our projected monthly diesel fuel requirements at fixed prices primarily related to inbound transportation. To reduce foreign exchange risk, we have entered into derivative financial instruments for a portion of our projected monthly foreign currency requirements at fixed prices. The fair values of fuel derivative and foreign exchange agreements are measured using Level 2 inputs. As of July 31, 2021, the fair value and expected exposure risk based on aggregate notional values are insignificant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|
| | | | | | | |
| Consolidated Financial Statements | | Page |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
All other schedules are omitted because they are not applicable or not required.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
United Natural Foods, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of United Natural Foods, Inc. and subsidiaries (the Company) as of July 31, 2021 and August 3, 2019 and July 28, 2018,1, 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended August 3, 2019,July 31, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of August 3, 2019,July 31, 2021, based on criteria established in Internal Control -– Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 31, 2021 and August 3, 2019 and July 28, 2018,1, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended August 3, 2019,July 31, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 3, 2019,July 31, 2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired SUPERVALU Inc. (Supervalu) on October 22, 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of August 3, 2019, Supervalu’s internal control over financial reporting associated with total assets of $4.4 billion (of which $923 million represents goodwill and intangible assets included within the scope of management’s assessment) and total revenues of $10.5 billion includedChange in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, of the Company has changed its method of accounting for leases as of and forAugust 4, 2019 due to the year ended August 3, 2019. Our auditadoption of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Supervalu.Accounting Standards Codification (ASC) Topic 842, Leases.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.
Evaluation of the acquisition-date fair value of customer relationship assets
As discussed in Note 4 to the consolidated financial statements, on October 22, 2018, the Company acquired Supervalu. As a result of the transaction, the Company acquired customer relationship assets representing the generation of future income from Supervalu’s existing customers. The acquisition-date fair value for the customer relationship assets was $810 million.
We identified the evaluation of the acquisition-date fair value of the Supervalu customer relationship assets as a critical audit matter due to the high degree of subjectivity in evaluating certain inputs in the discounted cash flow model used to determine the fair value of such assets. The discounted cash flow model included the following internally-developed assumptions for which there was limited observable market information, and the calculated fair value of such assets was sensitive to possible changes to these key assumptions:
| |
– | forecasted revenues attributable to existing customers |
| |
– | forecasted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins for the acquired business |
| |
– | estimated annual customer attrition rates |
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition-date valuation process, including controls over the development of the key assumptions listed above. We performed sensitivity analyses to assess the impact of reasonably possible changes to forecasted revenues, EBITDA margins, annual customer attrition rates, and the discount rate. We evaluated the forecasted revenue growth rates from existing customers by comparing the growth assumptions to those of the Company’s peers and industry reports. In connection with our assessment of the forecasts used in the valuation, we compared (1) forecasted revenue, cost of sales, and operating expense margins to Supervalu’s historical actual results and (2) estimated annual customer attrition rates to historical Supervalu customer attrition data. We tested the Company’s determined weighted average cost of capital (WACC), which was used to determine the discount rate, by comparing it to the WACC of comparable companies. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
| |
– | evaluating the selected discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable companies, and |
| |
– | developing an estimate of the acquisition-date fair value of the customer relationship assets using the Company’s cash flow forecasts and the independently developed discount rate, and comparing the result to the Company’s fair value estimate. |
Evaluation of the acquisition-date fair value of property, plant, and equipment assets
As discussed in Note 4 to the consolidated financial statements, the Supervalu acquisition resulted in the acquisition of property, plant, and equipment assets, which were recorded at fair value as of the acquisition date. The acquisition-date fair value of the acquired property, plant, and equipment was $1.2 billion.
We identified the evaluation of the acquisition-date fair value of the Supervalu property, plant, and equipment assets as a critical audit matter. A high degree of subjectivity was involved in evaluating the methodologies and certain key inputs and assumptions used to determine the acquisition-date fair values of those assets. The Company used a combination of cost and market approaches to determine the estimated fair values of such assets, which were sensitive to changes in the following key inputs and internally-developed assumptions:
| |
– | external transactions and other information related to comparable assets |
| |
– | estimated replacement or reproduction costs |
| |
– | estimated useful lives and salvage values |
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition-date valuation process, including controls over the selection of the valuation methodologies used as well as the key inputs and assumptions listed above. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
| |
– | evaluating the valuation methodologies selected |
| |
– | evaluating the relevance and reliability of the Company’s inputs and assumptions by comparing them to industry sources |
| |
– | developing estimates of the property, plant, and equipment fair values using independently obtained external information and comparing the results to the Company’s fair value estimates |
| |
– | performing sensitivity analyses to assess the impact of reasonably possible changes to the key inputs and assumptions on the acquisition-date fair values. |
Evaluation of the Company’s second quarter goodwill impairment assessment
As discussed in Note 7 to the consolidated financial statements, due to a sustained decline in stock price through the second quarter, the Company determined that there was more than a 50% likelihood that the carrying value of the Supervalu wholesale reporting unit exceeded its fair value. Accordingly, the Company performed an interim quantitative impairment test of goodwill for all of its reporting units. Based on this analysis, the Company determined that the carrying value of its Supervalu wholesale reporting unit exceeded its fair value by an amount that was greater than its assigned goodwill. As a result, the Company recorded a goodwill impairment charge of $292.8 million. The goodwill impairment charge represented the impairment of all of the Supervalu wholesale reporting unit’s goodwill.
We identified the evaluation of the goodwill impairment assessment as a critical audit matter because of the high degree of subjectivity in evaluating the assumptions used to estimate the fair values of the Company’s reporting units. The reporting unit fair values were used as the basis to determine whether goodwill impairment existed in one or more of the Company’s reporting units. The fair value estimation methodologies used the following internally-developed assumptions for which there was limited observable market information, and the determined fair values were sensitive to changes to the following key assumptions:
| |
– | forecasted reporting unit cash flows |
| |
– | estimated long-term growth rates |
| |
– | estimated discount rates |
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s quantitative impairment test process, including controls related to the development of the key assumptions listed above. We performed sensitivity analyses to assess the impact of reasonably possible changes to forecasted cash flows, long-term growth rates, and discount rates. We evaluated the Company’s forecasted growth rates by comparing the growth assumptions to those of the Company’s peers and industry reports. We compared the Company’s forecasted revenue, cost of sales, and operating expense margins to historical actual results to assess the Company’s ability to accurately forecast cash flows. We tested the Company’s determined WACC, which was used to determine the discount rates, by comparing it to the WACC of comparable companies. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
| |
– | evaluating the discount rates used by the Company by comparing them against discount rate ranges that were independently developed using publicly available market data for comparable companies, and |
| |
– | developing an estimate of fair value for each of the Company’s reporting units, using the Company’s cash flow forecasts and the independently developed discount rates, and comparing the results to the Company’s fair value estimates. |
relates.
Assessment of the value of the defined benefit pension obligation
As discussed in Note 1413 to the consolidated financial statements, the Company sponsors defined benefit pension plans, acquired in connection with the Supervalu acquisition, covering primarily former Supervalu employees who meet certain eligibility requirements. The fair value of the defined benefit pension obligation at the date of acquisition and at year end was $2.5$2.1 billion, and $2.7 billion, respectively, partially offset by plan assets totaling $2.3 billion and $2.5 billion as of the acquisition date and year end, respectively.$2.1 billion. The determination of the Company’s defined benefit pension obligation with respect to these plans is dependent, in part, on the selection of certain actuarial assumptions, including the discount raterates used.
We identified the assessment of the value of the defined benefit pension obligation as a critical audit matter because of the subjectivity in evaluating the discount rates used, and the impact small changes in this assumption would have on the measurement of the defined benefit pension obligation. Additionally, the audit effort associated with the evaluation of the discount rates required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls overrelated to the Company’s defined benefit pension obligation process, including controlsa control related to the development of the discount rates used. We compared the methodology used in the current year to develop the discount rates to the methodology used by Supervalu in periods prior to the acquisition.periods. In addition, we involved an actuarial professionalsprofessional with specialized skills and knowledge, who assisted in the evaluation of the Company’s discount rates, by understandingevaluating the methodology usedutilized by the Company and assessing the selected discount rates against publicly available discount rate benchmark information.
/s/ KPMG LLP
We have served as the Company’s auditor since 1993.
Providence, Rhode Island
October 1, 2019September 28, 2021
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands,millions, except for per share data)
| | | | | | | | | | | |
| July 31,
2021 | | August 1,
2020 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 41 | | | $ | 47 | |
| Accounts receivable, net | 1,103 | | | 1,120 | |
| Inventories, net | 2,247 | | | 2,282 | |
| Prepaid expenses and other current assets | 157 | | | 253 | |
| Current assets of discontinued operations | 2 | | | 3 | |
| Total current assets | 3,550 | | | 3,705 | |
| Property and equipment, net | 1,784 | | | 1,701 | |
| Operating lease assets | 1,064 | | | 983 | |
| Goodwill | 20 | | | 20 | |
| Intangible assets, net | 891 | | | 970 | |
| Deferred income taxes | 57 | | | 108 | |
| Other long-term assets | 157 | | | 96 | |
| Long-term assets of discontinued operations | 2 | | | 4 | |
| Total assets | $ | 7,525 | | | $ | 7,587 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| Accounts payable | $ | 1,644 | | | $ | 1,634 | |
| Accrued expenses and other current liabilities | 341 | | | 283 | |
| Accrued compensation and benefits | 243 | | | 229 | |
| Current portion of operating lease liabilities | 135 | | | 131 | |
| Current portion of long-term debt and finance lease liabilities | 120 | | | 83 | |
| Current liabilities of discontinued operations | 4 | | | 10 | |
| Total current liabilities | 2,487 | | | 2,370 | |
| Long-term debt | 2,175 | | | 2,427 | |
| Long-term operating lease liabilities | 962 | | | 874 | |
| Long-term finance lease liabilities | 35 | | | 143 | |
| Pension and other postretirement benefit obligations | 53 | | | 292 | |
| Other long-term liabilities | 299 | | | 337 | |
| Long-term liabilities of discontinued operations | — | | | 2 | |
| Total liabilities | 6,011 | | | 6,445 | |
| Commitments and contingencies | 0 | | 0 |
| Stockholders’ equity: | | | |
| Preferred stock, $0.01 par value, authorized 5.0 shares; none issued or outstanding | — | | | — | |
| Common stock, $0.01 par value, authorized 100.0 shares; 57.0 shares issued and 56.4 shares outstanding at July 31, 2021; 55.3 shares issued and 54.7 shares outstanding at August 1, 2020 | 1 | | | 1 | |
| Additional paid-in capital | 599 | | | 569 | |
| Treasury stock at cost | (24) | | | (24) | |
| Accumulated other comprehensive loss | (39) | | | (239) | |
| Retained earnings | 978 | | | 838 | |
| Total United Natural Foods, Inc. stockholders’ equity | 1,515 | | | 1,145 | |
| Noncontrolling interests | (1) | | | (3) | |
| Total stockholders’ equity | 1,514 | | | 1,142 | |
Total liabilities and stockholders’ equity | $ | 7,525 | | | $ | 7,587 | |
|
| | | | | | | |
| | August 3,
2019 | | July 28,
2018 |
| ASSETS | | | |
| Cash and cash equivalents | $ | 42,350 |
| | $ | 23,315 |
|
| Accounts receivable, net | 1,065,699 |
| | 579,702 |
|
| Inventories | 2,089,416 |
| | 1,135,775 |
|
| Prepaid expenses and other current assets | 226,727 |
| | 50,122 |
|
| Current assets of discontinued operations | 143,729 |
| | — |
|
| Total current assets | 3,567,921 |
| | 1,788,914 |
|
| Property and equipment, net | 1,639,259 |
| | 571,146 |
|
| Goodwill | 442,256 |
| | 362,495 |
|
| Intangible assets, net | 1,041,058 |
| | 193,209 |
|
| Deferred income taxes | 31,087 |
| | — |
|
| Other assets | 107,319 |
| | 48,708 |
|
| Long-term assets of discontinued operations | 352,065 |
| | — |
|
| Total assets | $ | 7,180,965 |
| | $ | 2,964,472 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Accounts payable | $ | 1,476,857 |
| | $ | 517,125 |
|
| Accrued expenses and other current liabilities | 249,426 |
| | 103,526 |
|
| Accrued compensation and benefits | 148,296 |
| | 66,132 |
|
| Current portion of long-term debt and capital lease obligations | 112,103 |
| | 12,441 |
|
| Current liabilities of discontinued operations | 122,265 |
| | — |
|
| Total current liabilities | 2,108,947 |
| | 699,224 |
|
| Long-term debt | 2,819,050 |
| | 308,836 |
|
| Long-term capital lease obligations | 108,208 |
| | 31,487 |
|
| Pension and other postretirement benefit obligations | 237,266 |
| | — |
|
| Deferred income taxes | 1,042 |
| | 44,384 |
|
| Other long-term liabilities | 393,595 |
| | 34,586 |
|
| Long-term liabilities of discontinued operations | 1,923 |
| | — |
|
| Total liabilities | 5,670,031 |
| | 1,118,517 |
|
| Commitments and contingencies |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, $0.01 par value, authorized 5,000 shares; none issued or outstanding | — |
| | — |
|
| Common stock, $0.01 par value, authorized 100,000 shares; 53,501 shares issued and 52,886 shares outstanding at August 3, 2019; 51,025 issued and 50,411 shares outstanding shares at July 28, 2018 | 535 |
| | 510 |
|
| Additional paid-in capital | 530,801 |
| | 483,623 |
|
| Treasury stock at cost | (24,231 | ) | | (24,231 | ) |
| Accumulated other comprehensive loss | (108,953 | ) | | (14,179 | ) |
| Retained earnings | 1,115,519 |
| | 1,400,232 |
|
Total United Natural Foods, Inc. stockholders’ equity | 1,513,671 |
| | 1,845,955 |
|
| Noncontrolling interests | (2,737 | ) | | — |
|
| Total stockholders' equity | 1,510,934 |
| | 1,845,955 |
|
Total liabilities and stockholders’ equity | $ | 7,180,965 |
| | $ | 2,964,472 |
|
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands,millions, except for per share data)
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | July 31, 2021 (52 weeks) | | August 1, 2020 (52 weeks) | | August 3, 2019 (53 weeks) |
| Net sales | $ | 26,950 | | | $ | 26,559 | | | $ | 22,341 | |
| Cost of sales | 23,011 | | | 22,670 | | | 19,121 | |
| Gross profit | 3,939 | | | 3,889 | | | 3,220 | |
| Operating expenses | 3,593 | | | 3,552 | | | 2,976 | |
| Goodwill impairment charges | — | | | 425 | | | 293 | |
| Restructuring, acquisition and integration related expenses | 56 | | | 87 | | | 148 | |
| (Gain) loss on sale of assets | (4) | | | 18 | | | (1) | |
| Operating income (loss) | 294 | | | (193) | | | (196) | |
| Net periodic benefit income, excluding service cost | (85) | | | (39) | | | (35) | |
| Interest expense, net | 204 | | | 192 | | | 181 | |
| Other, net | (8) | | | (4) | | | (1) | |
| Income (loss) from continuing operations before income taxes | 183 | | | (342) | | | (341) | |
| Provision (benefit) for income taxes | 34 | | | (91) | | | (59) | |
| Net income (loss) from continuing operations | 149 | | | (251) | | | (282) | |
| Income (loss) from discontinued operations, net of tax | 6 | | | (18) | | | (3) | |
| Net income (loss) including noncontrolling interests | 155 | | | (269) | | | (285) | |
| Less net income attributable to noncontrolling interests | (6) | | | (5) | | | — | |
| Net income (loss) attributable to United Natural Foods, Inc. | $ | 149 | | | $ | (274) | | | $ | (285) | |
| | | | | |
| Basic earnings (loss) per share: | | | | | |
| Continuing operations | $ | 2.55 | | | $ | (4.76) | | | $ | (5.51) | |
| Discontinued operations | $ | 0.10 | | | $ | (0.34) | | | $ | (0.05) | |
| Basic earnings (loss) per share | $ | 2.65 | | | $ | (5.10) | | | $ | (5.56) | |
| Diluted earnings (loss) per share: | | | | | |
| Continuing operations | $ | 2.38 | | | $ | (4.76) | | | $ | (5.51) | |
| Discontinued operations | $ | 0.09 | | | $ | (0.34) | | | $ | (0.05) | |
| Diluted earnings (loss) per share | $ | 2.48 | | | $ | (5.10) | | | $ | (5.56) | |
| Weighted average shares outstanding: | | | | | |
| Basic | 56.1 | | | 53.8 | | | 51.2 | |
| Diluted | 60.0 | | | 53.8 | | | 51.2 | |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | August 3,
2019 | | July 28,
2018 | | July 29,
2017 |
| Net sales | $ | 21,387,068 |
| | $ | 10,226,683 |
| | $ | 9,274,471 |
|
| Cost of sales | 18,602,058 |
| | 8,703,916 |
| | 7,845,550 |
|
| Gross profit | 2,785,010 |
| | 1,522,767 |
| | 1,428,921 |
|
| Operating expenses | 2,629,713 |
| | 1,274,562 |
| | 1,196,032 |
|
| Goodwill and asset impairment charges | 292,770 |
| | 11,242 |
| | — |
|
| Restructuring, acquisition and integration related expenses | 153,539 |
| | 9,738 |
| | 6,864 |
|
| Operating (loss) income | (291,012 | ) | | 227,225 |
| | 226,025 |
|
| Other expense (income): | | | | | |
| Net periodic benefit income, excluding service cost | (34,726 | ) | | — |
| | — |
|
| Interest expense, net | 179,963 |
| | 16,025 |
| | 16,754 |
|
| Other, net | (957 | ) | | (1,545 | ) | | (5,152 | ) |
| Total other expense, net | 144,280 |
| | 14,480 |
| | 11,602 |
|
| (Loss) income from continuing operations before income taxes | (435,292 | ) | | 212,745 |
| | 214,423 |
|
| (Benefit) provision for income taxes | (84,609 | ) | | 47,075 |
| | 84,268 |
|
| Net (loss) income from continuing operations | (350,683 | ) | | 165,670 |
| | 130,155 |
|
| Income from discontinued operations, net of tax | 65,800 |
| | — |
| | — |
|
| Net (loss) income including noncontrolling interests | (284,883 | ) | | 165,670 |
| | 130,155 |
|
| Less net (income) loss attributable to noncontrolling interests | (107 | ) | | — |
| | — |
|
| Net (loss) income attributable to United Natural Foods, Inc. | $ | (284,990 | ) | | $ | 165,670 |
| | $ | 130,155 |
|
| | | | | | |
| Basic (loss) earnings per share: | | | | | |
| Continuing operations | $ | (6.84 | ) |
| $ | 3.28 |
|
| $ | 2.57 |
|
| Discontinued operations | $ | 1.28 |
| | $ | — |
| | $ | — |
|
| Basic (loss) income per share | $ | (5.56 | ) | | $ | 3.28 |
| | $ | 2.57 |
|
| Diluted (loss) earnings per share: | | | | | |
| Continuing operations | $ | (6.84 | ) | | $ | 3.26 |
| | $ | 2.56 |
|
| Discontinued operations | $ | 1.27 |
| | $ | — |
| | $ | — |
|
| Diluted (loss) income per share | $ | (5.56 | ) | | $ | 3.26 |
| | $ | 2.56 |
|
| Weighted average shares outstanding: | | | | | |
| Basic | 51,245 |
| | 50,530 |
| | 50,570 |
|
| Diluted | 51,537 |
| | 50,837 |
| | 50,775 |
|
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)millions)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| July 31, 2021 (52 weeks) | | August 1, 2020 (52 weeks) | | August 3, 2019 (53 weeks) |
| Net income (loss) including noncontrolling interests | $ | 155 | | | $ | (269) | | | $ | (285) | |
| Other comprehensive income (loss): | | | | | |
Recognition of pension and other postretirement benefit obligations, net of tax(1) | 153 | | | (83) | | | (33) | |
Recognition of interest rate swap cash flow hedges, net of tax(2) | 42 | | | (46) | | | (61) | |
| Foreign currency translation adjustments | 5 | | | (1) | | | (1) | |
| | | | | |
| Total other comprehensive income (loss) | 200 | | | (130) | | | (95) | |
| Less comprehensive income attributable to noncontrolling interests | (6) | | | (5) | | | — | |
| Total comprehensive income (loss) attributable to United Natural Foods, Inc. | $ | 349 | | | $ | (404) | | | $ | (380) | |
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| | August 3, 2019 (53 weeks) | | July 28, 2018 (52 weeks) | | July 29, 2017 (52 weeks) |
| Net (loss) income including noncontrolling interests | $ | (284,883 | ) | | $ | 165,670 |
| | $ | 130,155 |
|
| Other comprehensive (loss) income: | | |
| | |
Recognition of pension and other postretirement benefit obligations, net of tax(1) | (32,458 | ) | | — |
| | — |
|
Recognition of interest rate swap cash flow hedges, net of tax(2) | (61,287 | ) | | 3,575 |
| | 4,879 |
|
| Foreign currency translation adjustments | (1,029 | ) | | (3,791 | ) | | 3,537 |
|
| Total other comprehensive (loss) income | (94,774 | ) | | (216 | ) | | 8,416 |
|
| Less comprehensive (income) loss attributable to noncontrolling interests | (107 | ) | | — |
| | — |
|
| Total comprehensive (loss) income attributable to United Natural Foods, Inc. | $ | (379,764 | ) | | $ | 165,454 |
| | $ | 138,571 |
|
(2)Amounts are net of tax expense (benefit) of $13 million, $(16) million and (23) million, respectively.
| |
(1) | Amounts are net of tax (benefit) expense of $(11.3) million, $0 million and $0 million for the fiscal years ended August 3, 2019, July 28, 2018 and July 29, 2017, respectively. |
| |
(2) | Amounts are net of tax (benefit) expense of $(22.5) million, $1.5 million and 3.2 million for the fiscal years ended August 3, 2019, July 28, 2018 and July 29, 2017, respectively. |
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY
(In thousands)millions)
| | | | | | | | | | | | | | | | | | | | | | | Additional
Paid-in Capital | | Accumulated
Other
Comprehensive Loss | | Retained Earnings | | Total United Natural Foods, Inc.
Stockholders’ Equity | | Noncontrolling Interests | | Total Stockholders’ Equity |
| | | | | | | | | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total United Natural Foods, Inc. Stockholders’ Equity | | Noncontrolling Interests | | Total Stockholders’ Equity | | Common Stock | | Treasury Stock | |
| | Common Stock | | Treasury Stock | | | Shares | | Amount | | Shares | | Amount | |
| | Shares | | Amount | | Shares | | Amount | | |
| Balances at July 30, 2016 | 50,383 |
| | $ | 504 |
| | — |
| | $ | — |
| | $ | 436,167 |
| | $ | (22,379 | ) | | $ | 1,105,212 |
| | $ | 1,519,504 |
| | — |
| | $ | 1,519,504 |
| |
| Restricted stock vestings and stock option exercises, net | 239 |
| | 2 |
| |
|
| |
|
| | (1,041 | ) | |
|
| |
|
| | (1,039 | ) | | | | (1,039 | ) | |
| Share-based compensation | | | | | | | | | 26,205 |
| | | | | | 26,205 |
| | | | 26,205 |
| |
| Tax deficit associated with stock plans | | | | | | | | | (1,320 | ) | | | | | | (1,320 | ) | | | | (1,320 | ) | |
| Other comprehensive income | | | | | | | | | | | 8,416 |
| | | | 8,416 |
| | | | 8,416 |
| |
| Net income | | | | | | | | | | | | | 130,155 |
| | 130,155 |
| | | | 130,155 |
| |
| Balances at July 29, 2017 | 50,622 |
| | $ | 506 |
| | — |
| | $ | — |
| | $ | 460,011 |
| | $ | (13,963 | ) | | $ | 1,235,367 |
| | $ | 1,681,921 |
| | $ | — |
| | $ | 1,681,921 |
| |
| Cumulative effect of change in accounting principle | | | | | | | | | 1,314 |
| | | | (805 | ) | | 509 |
| | | | 509 |
| |
| Restricted stock vestings and stock option exercises, net | 403 |
| | 4 |
| |
|
| |
|
| | (3,592 | ) | | | | | | (3,588 | ) | | | | (3,588 | ) | |
| Share-based compensation | | | | | | | | | 25,890 |
| | | | | | 25,890 |
| | | | 25,890 |
| |
| Repurchase of common stock | | | | | 615 |
| | (24,231 | ) | | | | | | | | (24,231 | ) | | | | (24,231 | ) | |
| Other comprehensive loss | | | | | | | | | | | (216 | ) | | | | (216 | ) | | | | (216 | ) | |
| Net income | | | | | | | | | | | | | 165,670 |
| | 165,670 |
| | | | 165,670 |
| |
| Balances at July 28, 2018 | 51,025 |
| | $ | 510 |
| | 615 |
| | $ | (24,231 | ) | | $ | 483,623 |
| | $ | (14,179 | ) | | $ | 1,400,232 |
| | $ | 1,845,955 |
| | $ | — |
| | $ | 1,845,955 |
| Balances at July 28, 2018 | 51.0 | | | $ | 1 | | | 0.6 | | | $ | (24) | | | $ | 484 | | | $ | (14) | | | $ | 1,393 | | | $ | 1,840 | | | $ | — | | | $ | 1,840 | |
| Cumulative effect of change in accounting principle | | | | | | | | | | | | | 277 |
| | 277 |
| | | | 277 |
| |
| Restricted stock vestings and stock option exercises, net | 471 |
| | 5 |
| | | | | | (2,613 | ) | | | | | | (2,608 | ) | | | | (2,608 | ) | |
| Restricted stock vestings | | Restricted stock vestings | 0.5 | | | — | | | — | | | — | | | (3) | | | — | | | — | | | (3) | | | — | | | (3) | |
| Share-based compensation | | | | | | | | | 25,954 |
| | | | | | 25,954 |
| | | | 25,954 |
| Share-based compensation | — | | | — | | | — | | | — | | | 26 | | | — | | | — | | | 26 | | | — | | | 26 | |
| Other comprehensive loss | | | | | | | | | | | (94,774 | ) | |
|
| | (94,774 | ) | | | | (94,774 | ) | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (95) | | | — | | | (95) | | | — | | | (95) | |
| Acquisition of noncontrolling interests | | | | | | | | | | | | | | | — |
| | (1,633 | ) | | (1,633 | ) | Acquisition of noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| Distributions to noncontrolling interests | | | | | | | | | | | | | | | — |
| | (1,211 | ) | | (1,211 | ) | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Proceeds from issuance of common stock, net | | Proceeds from issuance of common stock, net | 2.0 | | | — | | | — | | | — | | | 24 | | | — | | | — | | | 24 | | | — | | | 24 | |
| Net loss | | Net loss | — | | | — | | | — | | | — | | | — | | | — | | | (285) | | | (285) | | | — | | | (285) | |
| Balances at August 3, 2019 | | Balances at August 3, 2019 | 53.5 | | | $ | 1 | | | 0.6 | | | $ | (24) | | | $ | 531 | | | $ | (109) | | | $ | 1,108 | | | $ | 1,507 | | | $ | (3) | | | $ | 1,504 | |
| Cumulative effect of change in accounting principle | | Cumulative effect of change in accounting principle | — | | | — | | | — | | | — | | | — | | | — | | | 4 | | | 4 | | | — | | | 4 | |
| Restricted stock vestings | | Restricted stock vestings | 0.5 | | | — | | | — | | | — | | | (1) | | | — | | | — | | | (1) | | | — | | | (1) | |
| Share-based compensation | | Share-based compensation | — | | | — | | | — | | | — | | | 25 | | | — | | | — | | | 25 | | | — | | | 25 | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (130) | | | — | | | (130) | | | — | | | (130) | |
| Distributions to noncontrolling interests | | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
| Proceeds from issuance of common stock, net | | Proceeds from issuance of common stock, net | 1.3 | | | — | | | — | | | — | | | 14 | | | — | | | — | | | 14 | | | — | | | 14 | |
| Net (loss) income | | Net (loss) income | — | | | — | | | — | | | — | | | — | | | — | | | (274) | | | (274) | | | 5 | | | (269) | |
| Balances at August 1, 2020 | | Balances at August 1, 2020 | 55.3 | | | $ | 1 | | | 0.6 | | | $ | (24) | | | $ | 569 | | | $ | (239) | | | $ | 838 | | | $ | 1,145 | | | $ | (3) | | | $ | 1,142 | |
| Cumulative effect of change in accounting principle | | Cumulative effect of change in accounting principle | — | | | — | | | — | | | — | | | — | | | — | | | (9) | | | (9) | | | — | | | (9) | |
| Restricted stock vestings | | Restricted stock vestings | 1.6 | | | — | | | — | | | — | | | (14) | | | — | | | — | | | (14) | | | — | | | (14) | |
| Share-based compensation | | Share-based compensation | — | | | — | | | — | | | — | | | 45 | | | — | | | — | | | 45 | | | — | | | 45 | |
| Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 200 | | | — | | | 200 | | | — | | | 200 | |
| Distributions to noncontrolling interests | | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| Proceeds from the issuance of common stock, net | 2,005 |
| | 20 |
| | | | | | 23,837 |
| | | | | | 23,857 |
| | | | 23,857 |
| Proceeds from the issuance of common stock, net | 0.1 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | | | — | | | 1 | |
| Net (loss) income | | | | | | | | | | | | | (284,990 | ) | | (284,990 | ) | | 107 |
| | (284,883 | ) | |
| Balances at August 3, 2019 | 53,501 |
| | $ | 535 |
| | 615 |
| | $ | (24,231 | ) | | $ | 530,801 |
| | $ | (108,953 | ) | | $ | 1,115,519 |
| | $ | 1,513,671 |
| | $ | (2,737 | ) | | $ | 1,510,934 |
| |
| Acquisition of noncontrolling interests | | Acquisition of noncontrolling interests | — | | | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) | | | — | | | (2) | |
| Net income | | Net income | — | | | — | | | — | | | — | | | — | | | — | | | 149 | | | 149 | | | 6 | | | 155 | |
| Balances at July 31, 2021 | | Balances at July 31, 2021 | 57.0 | | | $ | 1 | | | 0.6 | | | $ | (24) | | | $ | 599 | | | $ | (39) | | | $ | 978 | | | $ | 1,515 | | | $ | (1) | | | $ | 1,514 | |
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Fiscal Year Ended |
| (In thousands) | August 3, 2019 (53 weeks) | | July 28, 2018 (52 weeks) | | July 29, 2017 (52 weeks) |
| CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| Net (loss) income including noncontrolling interests | $ | (284,883 | ) |
| $ | 165,670 |
| | $ | 130,155 |
|
| Income from discontinued operations, net of tax | 65,800 |
| | — |
| | — |
|
| Net (loss) income from continuing operations | (350,683 | ) | | 165,670 |
| | 130,155 |
|
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 246,825 |
| | 87,631 |
| | 86,051 |
|
| Share-based compensation | 25,551 |
| | 25,783 |
| | 25,675 |
|
| Loss on disposal of assets | 2,859 |
| | 2,820 |
| | 943 |
|
| Gain associated with disposal of investment | — |
| | (699 | ) | | (6,106 | ) |
| Closed property and other restructuring charges | 26,875 |
| | — |
| | 640 |
|
| Goodwill and asset impairments | 292,770 |
| | 11,242 |
| | — |
|
| Net pension and other postretirement benefit income | (34,553 | ) | | — |
| | — |
|
| Deferred income tax benefit | (60,798 | ) | | (14,819 | ) | | (1,891 | ) |
| LIFO charge | 24,120 |
| | — |
| | — |
|
| Change in accounting estimate | — |
| | (20,909 | ) | | — |
|
| Provision for doubtful accounts | 9,749 |
| | 12,006 |
| | 5,728 |
|
| Loss on debt extinguishment | 2,903 |
| | — |
| | — |
|
| Excess tax deficit from share-based payment arrangements | — |
| | — |
| | 1,320 |
|
| Non-cash interest expense | 12,751 |
| | 275 |
| | 175 |
|
| Changes in operating assets and liabilities, net of acquired businesses | | | | | |
| Accounts receivable | 52,735 |
| | (67,283 | ) | | (38,757 | ) |
| Inventories | 177,094 |
| | (108,795 | ) | | (6,929 | ) |
| Prepaid expenses and other assets | (43,167 | ) | | 4,473 |
| | (6,383 | ) |
| Accounts payable | (40,149 | ) | | 3,961 |
| | 82,772 |
|
| Accrued expenses, other liabilities and other | (169,760 | ) | | 7,682 |
| | (62 | ) |
| Net cash provided by operating activities of continuing operations | 175,122 |
|
| 109,038 |
| | 273,331 |
|
| Net cash provided by operating activities of discontinued operations | 109,408 |
| | — |
| | — |
|
| Net cash provided by operating activities | 284,530 |
| | 109,038 |
| | 273,331 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| Capital expenditures | (207,817 | ) | | (44,608 | ) | | (56,112 | ) |
| Purchases of acquired businesses, net of cash acquired | (2,292,435 | ) | | (39 | ) | | (9,207 | ) |
| Proceeds from dispositions of assets | 173,747 |
| | 283 |
| | 168 |
|
| Proceeds from disposal of investments | — |
| | 756 |
| | 9,192 |
|
| Payments for long-term investment | (110 | ) | | (3,397 | ) | | (2,000 | ) |
| Payment of company owned life insurance premiums | (170 | ) | | — |
| | (2,000 | ) |
| Net cash used in investing activities of continuing operations | (2,326,785 | ) |
| (47,005 | ) | | (59,959 | ) |
| Net cash provided by investing activities of discontinued operations | 67,998 |
| | — |
| | — |
|
| Net cash used in investing activities | (2,258,787 | ) | | (47,005 | ) | | (59,959 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| Proceeds from borrowings of long-term debt | 1,926,642 |
| | — |
| | — |
|
| Proceeds from borrowings under revolving credit line | 3,971,504 |
| | 556,061 |
| | 215,662 |
|
| Proceeds from issuance of other loans | 22,358 |
| | — |
| | — |
|
| Repayments of borrowings under revolving credit line | (3,101,679 | ) | | (569,671 | ) | | (418,693 | ) |
| Repayments of long-term debt and capital lease obligations | (779,909 | ) | | (12,128 | ) | | (11,546 | ) |
| Repurchase of common stock | — |
| | (24,231 | ) | | — |
|
| Proceeds from the issuance of common stock and exercise of stock options | 23,975 |
| | 975 |
| | 274 |
|
| Payment of employee restricted stock tax withholdings | (2,727 | ) | | (4,563 | ) | | (1,313 | ) |
| Excess tax deficit from share-based payment arrangements | — |
| | — |
| | (1,320 | ) |
| Payments for debt issuance costs | (62,600 | ) | | — |
| | (180 | ) |
| Net cash provided by (used in) financing activities of continuing operations | 1,997,564 |
| | (53,557 | ) | | (217,116 | ) |
| Net cash used in by financing activities of discontinued operations | (1,212 | ) | | — |
| | — |
|
| Net cash provided by (used in) financing activities | 1,996,352 |
|
| (53,557 | ) | | (217,116 | ) |
| EFFECT OF EXCHANGE RATE ON CASH | (143 | ) |
| (575 | ) | | 565 |
|
|
| | | | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 21,952 |
|
| 7,901 |
| | (3,179 | ) |
| Cash and cash equivalents at beginning of period | 23,315 |
|
| 15,414 |
| | 18,593 |
|
| Cash and cash equivalents at end of period | 45,267 |
| | 23,315 |
| | 15,414 |
|
| Less: cash and cash equivalents of discontinued operations | (2,917 | ) | | — |
| | — |
|
| Cash and cash equivalents of continuing operations | $ | 42,350 |
| | $ | 23,315 |
| | $ | 15,414 |
|
| Supplemental disclosures of cash flow information: | |
| | | |
| Cash paid for interest | $ | 183,042 |
|
| $ | 16,471 |
| | $ | 17,115 |
|
| Cash paid for federal and state income taxes, net of refunds | $ | 77,676 |
|
| $ | 64,042 |
| | $ | 78,984 |
|
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| (In millions) | July 31, 2021 (52 weeks) | | August 1, 2020 (52 weeks) | | August 3, 2019 (53 weeks) |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net income (loss) including noncontrolling interests | $ | 155 | | | $ | (269) | | | $ | (285) | |
| Income (loss) from discontinued operations, net of tax | 6 | | | (18) | | | (3) | |
| Net income (loss) from continuing operations | 149 | | | (251) | | | (282) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 285 | | | 282 | | | 248 | |
| Share-based compensation | 45 | | | 25 | | | 26 | |
| (Gain) loss on sale of assets | (4) | | | 18 | | | (1) | |
| Closed property and other restructuring charges | 6 | | | 46 | | | 30 | |
| Goodwill impairment charges | — | | | 425 | | | 293 | |
| Net pension and other postretirement benefit income | (85) | | | (39) | | | (35) | |
| Deferred income tax benefit | (5) | | | (71) | | | (61) | |
| LIFO charge | 24 | | | 18 | | | 25 | |
| Provision for losses on receivables | (5) | | | 46 | | | 10 | |
| Non-cash interest expense and other adjustments | 51 | | | 15 | | | 16 | |
| Changes in operating assets and liabilities, net of acquired businesses | | | | | |
| Accounts and notes receivable | 24 | | | (124) | | | 53 | |
| Inventories | 14 | | | (111) | | | 183 | |
| Prepaid expenses and other assets | (37) | | | 113 | | | (48) | |
| Accounts payable | 15 | | | 107 | | | (25) | |
| Accrued expenses and other liabilities | 137 | | | (42) | | | (139) | |
| Net cash provided by operating activities of continuing operations | 614 | | | 457 | | | 293 | |
| Net cash used in operating activities of discontinued operations | — | | | — | | | (8) | |
| Net cash provided by operating activities | 614 | | | 457 | | | 285 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Payments for capital expenditures | (310) | | | (173) | | | (228) | |
| Purchases of acquired businesses, net of cash acquired | — | | | — | | | (2,292) | |
| Proceeds from dispositions of assets | 82 | | | 147 | | | 179 | |
| Other | (11) | | | (2) | | | — | |
| Net cash used in investing activities of continuing operations | (239) | | | (28) | | | (2,341) | |
| Net cash provided by investing activities of discontinued operations | 2 | | | 27 | | | 82 | |
| Net cash used in investing activities | (237) | | | (1) | | | (2,259) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Proceeds from borrowings of long-term debt | 500 | | | 2 | | | 1,927 | |
| Proceeds from borrowings under revolving credit line | 3,676 | | | 4,278 | | | 3,972 | |
| Proceeds from issuance of other loans | — | | | 6 | | | 22 | |
| Repayments of borrowings under revolving credit line | (3,731) | | | (4,601) | | | (3,102) | |
| Repayments of long-term debt and finance leases | (792) | | | (122) | | | (780) | |
| Proceeds from the issuance of common stock and exercise of stock options | 1 | | | 14 | | | 24 | |
| Payment of employee restricted stock tax withholdings | (14) | | | (1) | | | (3) | |
| Payments for debt issuance costs | (13) | | | — | | | (63) | |
| Distributions to noncontrolling interests | (4) | | | (5) | | | (1) | |
| Repayments of other loans | (6) | | | (24) | | | — | |
| Other | (1) | | | — | | | — | |
| | | | | |
| | | | | |
| Net cash (used in) provided by financing activities | (384) | | | (453) | | | 1,996 | |
| EFFECT OF EXCHANGE RATE ON CASH | 1 | | | (1) | | | — | |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (6) | | | 2 | | | 22 | |
| Cash and cash equivalents, at beginning of period | 47 | | | 45 | | | 23 | |
| Cash and cash equivalents, at end of period | 41 | | | 47 | | | 45 | |
| Less: cash and cash equivalents of discontinued operations | — | | | — | | | (1) | |
| Cash and cash equivalents | $ | 41 | | | $ | 47 | | | $ | 44 | |
| | | | | |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid for interest | $ | 146 | | | $ | 182 | | | $ | 183 | |
| Cash (refunds) payments for federal, state and foreign income taxes, net | $ | (16) | | | $ | (22) | | | $ | 78 | |
| Additions of property and equipment included in Accounts payable | $ | 35 | | | $ | 27 | | | $ | 10 | |
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United Natural Foods, Inc. and its subsidiaries (the “Company”, “we”, “us”, “UNFI”, or “our”) is a leading distributor of natural, organic, specialty, produce, and conventional grocery and non-food products, and provider of support services in the United States and Canada. On October 22, 2018, we acquired all of the outstanding equity securities of SUPERVALU INC. (“Supervalu”); refer to Note 4—Acquisitions for further information.retailers. The Company sells its products primarily throughout the United States and Canada.
Fiscal Year
OurThe Company’s fiscal years end on the Saturday closest to July 31 and contain either 52 or 53 weeks. References to fiscal 2021, fiscal 2020 and fiscal 2019, or 2021, 2020 and 2019, as presented in tabular disclosure, fiscal 2018 or 2018, and fiscal 2017 or 2017, relate to the 53-week,52-week, 52-week and 52-week53-week fiscal periods ended July 31, 2021, August 1, 2020 and August 3, 2019, July 28, 2018 and July 29, 2017, respectively.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly and majority-owned subsidiaries. The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation, with the exception of sales transactions from continuing to discontinued operations for wholesale supply to a retail disposal group that was sold with a supply agreement in fiscal 2019 discussed further in Note 3—Revenue Recognition. Unless otherwise indicated, references to the Consolidated Statements of Operations and the Consolidated Balance Sheets in the Notes to the Consolidated Financial Statements exclude all amounts related to discontinued operations. Refer to Note 19—18—Discontinued Operations for additional information including accounting policies, about the Company’s discontinued operations.
Discontinued Operations
In the fourth quarter of fiscal 2021, the Company determined it no longer met the held for sale criterion for a probable sale to be completed within 12 months for 2 of the 4 stores that were previously included within discontinued operations, as a result of criterion met as of the SUPERVALU INC. (“Supervalu”) acquisition date. As a result, the Company revised its Consolidated Financial Statements to reclassify 2 Shoppers stores from discontinued operations to continuing operations. Prior periods presented in the Consolidated Financial Statements have been conformed to the current period presentation.
Net Sales
NetOur net sales consist primarily of product sales of conventional, natural, organic, specialty, produce and produceconventional grocery and non-food products, and provision of support services torevenue from retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue. Net sales also include amounts charged by the Company to customers for shipping and handling and fuel surcharges. Vendor incentives do not reduce sales in circumstances where the vendor tenders the incentive to the customer, when the incentive is not a direct reimbursement from a vendor, when the incentive is not influenced by or negotiated in conjunction with any other incentive arrangements and when the incentive is not subject to an agency relationship with the vendor, whether expressed or implied.
The Company recognizes revenue in an amount that reflects the consideration that is expected to be received for goods or services when its performance obligations are satisfied by transferring control of those promised goods or services to its customers. ASC 606 defines a five-step process to recognize revenue that requires judgment and estimates, including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when or as the performance obligation is satisfied.
Revenues from wholesale product sales are recognized when control is transferred, which typically happens upon either shipment or delivery, depending on the contract terms with the customer. Typically, shipping and customer receipt of wholesale products occur on the same business day. Discounts and allowances provided to customers are recognized as a reduction in Net sales as control of the products is transferred to customers. The Company recognizes freight revenue related to transportation of its products when control of the product is transferred, which is typically upon delivery.
Revenues from Retail product sales are recognized at the point of sale upon customer check-out. Advertising income earned from our franchisees that participate in our Retail advertising program are recognized as Net sales. The Company recognizes loyalty program expense in the form of fuel rewards as a reduction of Net sales.
Sales tax is excluded from Net sales. Limited rights of return exist with our customers due to the nature of the products we sell.
Refer to Note 3—Revenue Recognition for additional information regarding the Company’s revenue recognition policies.
Cost of Sales
Cost of sales consist primarily of amounts paid to suppliers for product sold, plus transportation costs necessary to bring the product to, or move product between, the Company’s distribution facilities and retail stores, partially offset by consideration received from suppliers in connection with the purchase, transportation, or promotion of the suppliers’ products. Retail store advertising expenses are components of Cost of sales also includes production and labor costs for the Company’s Woodstock Farms manufacturing business.are expensed as incurred.
The Company receives allowances and credits from vendors for buying activities, such as volume incentives, promotional allowances directed by the Company to customers, cash discounts, and new product introductions (collectively referred to as “vendor funds”), which are typically based on contractual arrangements covering a period of one year or less. The Company recognizes vendor funds for merchandising activities as a reduction of Cost of sales when the related products are sold, unless it has been determined that a discrete identifiable benefit has been provided to the vendor, in which case the related amounts are recognized within Net sales. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as a reduction to the cost of inventory. When payments or rebates can be reasonably estimated and it is probable that the specified target will be met, the payment or rebate is accrued. However, when attaining the milestonetarget is not probable, the payment or rebate is recognized only when and if the milestonetarget is achieved. Any upfront payments received for multi-period contracts are generally deferred and
amortized over the life of the contracts. The majority of the vendor fund contracts have terms of less than a year, with a small proportion of the contracts longer than one year.
Shipping and Handling Fees and Costs
The Company includes shipping and handling fees billed to customers in netNet sales. Shipping and handling costs associated with inbound freight are recorded in Cost of sales, whereas shipping and handling costs for receiving, selecting, quality assurance, and outbound transportation are recorded in Operating expenses. Outbound shipping and handling costs, including allocated employee benefit expenses that are recorded in Operating expenses, totaled $1,298.9$1,513 million, $582.9$1,505 million and $517.2$1,299 million for fiscal 2019, 2018,2021, 2020 and 2017,2019, respectively.
Operating Expenses and Other Expenses
Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation, and amortization expense. OtherThese expenses include the departmental expenses of warehousing, delivery, purchasing, receiving, selecting and outbound transportation expenses.
Restructuring, Acquisition and Integration Expenses
Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, change-in-control related charges, facility closure asset impairment charges and costs, stock-based compensation acceleration charges and acquisition and integration expenses. Integration expenses include certain professional consulting expenses related to business transformation and incremental expenses related to combining facilities required to optimize our distribution network as a result of acquisitions.
(Gain) Loss on Sale of Assets
(Gain) loss on sale of assets includes (gain) loss on sale of assets and non-cash charges related to changes in plans of sales of discontinued operations. In fiscal 2020, the Company recorded a non-cash charge of $50 million to reduce the carrying amount of Retail’s property and equipment, and intangible assets for any depreciation and amortization expense (income),that would have been recognized had the assets been held and used as part of continuing operations since their acquisition date through the end of fiscal 2020, which was comprised of $39 million related to property and equipment, and $11 million related to intangible assets.
Interest expense, net
Interest expense, net includes primarily interest expense on outstanding indebtedness, including direct financing and capitallong-term debt, net of capitalized interest, loss on debt extinguishment, interest expense on finance lease obligations, net periodic benefit plan income, excluding serviceamortization of financing costs and discounts, and interest income and miscellaneous income and expenses.income.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported therein. Due toamounts of revenues and expenses during the inherent uncertainty involved in making estimates, actualreporting period. Actual results reported in future periods may be based on amounts thatcould differ from those estimates.
Change in Accounting EstimateReclassifications
As a result of growth in net sales and inventory in fiscal 2018, and the changes in processing and the resulting increase in the Company’s estimate of its accrual for inventory purchases, the Company initiated a review of its vendor invoicing processes and undertook a review of its estimate of its accrual for inventory purchases. In the third quarter of fiscal 2018, the Company finalized its analysis and review of its accrual for inventory purchases, including a historical data analysis of unmatched and partially matched amounts that were aged greater than twelve months and the ultimate resolution of such aged accruals. Based on its analysis, the Company determined that it could reasonably estimate the outcome of its partially matched vendor invoices upon receipt of such invoice rather than when the amount was aged greater than twelve months and a liability was no longer considered probable. As a result of this change in estimate, Accounts payable was reduced by $20.9 million, resulting in an increase to net income of $13.9 million, or $0.27 per diluted share, for fiscal 2018.
Change in Inventory Accounting Policy
Inventories are valued at the lower of cost or market. Prior to fiscal 2019, inventory cost was determined using the first-in, first-out (“FIFO”) method. For a substantial portion of legacy Supervalu inventory, cost was determined using the last-in, first-out (“LIFO”) method, with the rest primarily determined using FIFO. Inventories acquired as part of the Supervalu acquisition were recorded at their fair market values as of the acquisition date. During the second quarter of fiscal 2019, the Company completed its evaluation of its combined inventory accounting policies and changed its method of inventory costing for certain historical United Natural Foods, Inc. inventory from the FIFO accounting method to the LIFO accounting method. The Company concluded that the LIFO method of inventory costing is preferable because it allows for better matching of costs and revenues, as historical inflationary inventory acquisition prices are expected to continue in the future and the LIFO method uses the current acquisition cost to value cost of goods sold as inventory is sold. Additionally, LIFO allows for better comparability of the results of the Company’s operations with those of similar companies in its peer group. As a result of the change to the LIFO method, certain Company inventories, excluding Supervalu inventories, were reduced by $15.0 million for fiscal 2019, which resulted in increases to Cost of sales and Loss from continuing operations before income taxes of the same amount inWithin the Consolidated Financial Statements of Operations for fiscal 2019. This resulted in an increase to Net loss from continuing operations of $11.0 million, or $0.21 per diluted share, for fiscal 2019. The Company has not retrospectively adjustedcertain immaterial amounts prior to fiscal 2019 in its Consolidated Balance Sheets or Consolidated Statements of Operations, as applying the change in accounting policy prior to fiscal 2019 is not practicable due to data limitations of inventory costs in prior periods.
Change in Book Overdraft Accounting Policy
In the first quarter of fiscal 2019, the Company changed its accounting policy for reporting book overdrafts in the Consolidated Statements of Cash Flows. Amounts previously reported as increase in bank overdrafts on the Consolidated Statements of Cash Flows represent outstanding checks issued but not yet presented to financial institutions for disbursement in excess of positive balances held at financial institutions, and as such represent book overdrafts. Book overdrafts are included within the Accounts payable balance in the Consolidated Balance Sheets. The change in these book overdraft amounts were previously reported as financing activities cash flows on the Consolidated Statements of Cash Flows, on a line item titled Increase in bank overdrafts. The Company has elected a preferable accounting policy presentation for classifying the change in book overdrafts from financing activities to operating activities, which resulted in the reclassification of prior period amounts to conform to the current period presentation. The Company concluded that operating activity classification is preferable, as book overdrafts do not result in financial institution borrowing or repayment activity at the end of respective reporting periods and the presentation presents a more accurate disclosure of its cash generation and consumption activities. The reclassification resulted in decreases to cash provided by operating activities of $0.4 million and $7.4 million, and corresponding decreases in cash used in financing activities for fiscal 2018 and 2017, respectively. The reclassification had no effect on previously reported Consolidated Balance Sheets, Consolidated Statements of Operations or Consolidated Statements of Stockholders’ Equity.
Reclassifications
Certain prior year amounts within the Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Stockholder’s Equity and Consolidated Statements of Cash Flows have been reclassified to conform to thewith current period’syear presentation.
Reclassifications of prior year amounts within the Consolidated Balance Sheets include:
the reclassification of Accrued compensation and benefits to present separately from Accrued expenses and other current liabilities;
the reclassification of Notes payable balances into Long-term debt;
the reclassification of the long-term portion of capital lease obligations from Long-term debt to present separately within Long-term capital lease obligations; and
the reclassification of residual financing obligations of $7.4 million associated with build-to-suit properties for which the Company is not obligated to fund unless it is obligated under a future extension of a lease agreement from the Long-term capital lease obligations to Other long-term liabilities.
Reclassifications of prior year amounts within the Consolidated Statements of Operations include:
the reclassification of goodwill and asset impairment charges of $11.2 million from a line item previously titled Restructuring and asset impairment charges to a new line item titled Goodwill and asset impairment charges;
the reclassification of acquisition costs previously included within Operating expenses of $5.0 million to a new line item titled Restructuring, acquisition and integration related expenses; and
the combination of Interest expense and Interest income to present the same amounts within Interest expense, net.
Within the Consolidated Statements of Cash Flows, prior year amounts for asset impairment charges have been reclassified within operating activities in a line item titled Goodwill and asset impairment charges. These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less. OurThe Company’s banking arrangements allow usit to fund outstanding checks when presented to the financial institution for payment. We fundThe Company funds all intraday bank balance overdrafts during the same business day. Checks outstanding in excess of bank balances create book overdrafts, which are recorded in Accounts payable in the Consolidated Balance Sheets and are reflected as an operating activity in the Consolidated Statements of Cash Flows. As of July 31, 2021 and August 3, 2019 and July 28, 2018, we1, 2020, the Company had net book overdrafts of $236.9$268 million and $115.8$268 million, respectively.
Accounts Receivable, Net
Accounts receivable primarily consist of trade receivables from customers and net receivable balances from suppliers. In determining the adequacy of the allowances, management analyzes customer creditworthiness, aging of receivables, payment terms, the value of the collateral, customer financial statements, historical collection experience, aging of receivables and other economic and industry factors. In instances where a reserve has been recorded for a particular customer, future sales to the customer are conducted using either cash-on-delivery terms, or the account is closely monitored so that as agreed upon payments are received, orders are released; a failure to pay results in held or canceled orders.
Inventories
Inventories, Net
Substantially all of the Company’s inventories consist primarily of finished goods and are valuedgoods. To value discrete inventory items at the lower of cost or net realizable value, withmarket before application of any last-in, first-out (“LIFO”) reserve, the Company utilizes the weighted average cost primarily being determined usingmethod, perpetual cost method, the LIFOretail inventory method (“RIM”) and under FIFO for inventories such as perishables and other inventory.the replacement cost method. Allowances for vendor funds received from suppliers are recorded as a reduction to Inventories, net and subsequently within Cost of sales upon the sale of the related products. Inventories are evaluated for shortages throughout each fiscal year based on actual physical counts in our distribution facilities and stores. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the end of each fiscal year. As of July 31, 2021 and August 3, 2019,1, 2020, approximately $1.6$1.8 billion of inventory was valued under the LIFO method, before the application of a LIFO reserve, and primarily included grocery, frozen food and general merchandise products, with the remaining inventory valued under the FIFO method and primarily included meat, dairy and deli products.
Property and Equipment, Net
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is based on the estimated useful lives of the assets using the straight-line method. Applicable interest charges incurred during the construction of new facilities are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives if certain criteria are met. Refer to Note 6—5—Property and Equipment, Net for additional information.
Capital lease assets are stated at the lower of the present value of minimum lease payments at the inception of the lease or the fair value of the asset. Property and equipment includes the non-cash expenditures made by the landlord for the Aurora, Colorado and Moreno Valley, California distribution centers, and office Corporate headquarters office space in Providence, Rhode Island. Refer to Note 12—Leases for additional information.
The Company reviews long-lived assets, including amortizing intangible assets, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. The Company groups long-lived assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the evaluation indicates that the carrying amount of an asset group may not be recoverable, the potential impairment is measured based on a fair value discounted cash flow model or a market approach method.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company records liabilities to address uncertain tax positions we have taken in previously filed tax returns or that we expect to take in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that our tax position, based on technical merits, will be sustained upon examination. For those positions for which we conclude it is more likely than not it will be sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded.
The Company allocates tax expense among specific financial statement components using a “with-or-without” approach. Under this approach, the Company first determines the total tax expense or benefit (current and deferred) for the period. The Company then calculates the tax effect of pretax income from continuing operations only. The residual tax expense is allocated on a proportional basis to other financial statement components (i.e. discontinued operations, other comprehensive income).
Goodwill and Intangible Assets, Net
We accountThe Company accounts for acquired businesses using the purchase method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the acquisition date at their respective estimated fair values. Goodwill represents the excess acquisition cost over the fair value of net assets acquired in a business combination. Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that generated the goodwill. Goodwill reporting units exist at or one level below the operating segment level unless they are determined to be economically similar, and are evaluated for events or changes in circumstances indicating a goodwill reporting unit has changed. Relative fair value allocations are performed when components of an aggregated goodwill reporting unit become separate reporting units.units or move from one reporting unit to another.
Goodwill is reviewed for impairment at least annually as of the first day of the fourth fiscal quarter and if events occur or circumstances change that would indicate that the value of the asset may be impaired. The Company performs qualitative assessments of goodwill for impairment. If the qualitative assessment indicates it is more likely than not that a reporting unit’s fair value is less than the carrying value, or the Company bypasses the qualitative assessment, a quantitative assessment would be performed. The Company estimates the fair values of its reporting units in a quantitative assessment by using the market approach, applying a multiple of earnings based on guidelines for publicly traded companies, and/or the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit. Refer to Note 7—6—Goodwill and Intangible Assets, Net for additional information regarding the Company’s fiscal 2019goodwill impairment reviews, changes to its reporting units and other information. Refer to Note 4—Acquisitionsfor further detail on the valuation
Intangible Assets, Net
Indefinite-lived intangible assets include a branded product line asset group and a Tony’s Fine Foods (“Tony’s”) tradename. Indefinite-lived intangible assets are reviewed for impairment at least annually as of the first day of the fourth fiscal quarter and if events occur or circumstances change that would indicate that the value of the asset may be impaired. The Company performed a qualitative reviewreviews of its indefinite lived intangible assets in fiscal 2019,2021 and 2020, which indicated a quantitative assessment was not required. During fiscal 2018, the Company performed its annual qualitative assessment of its indefinite lived intangible assets and determined that a quantitative analysis was required for the Tony’s tradename. Based on the results of its quantitative test performed, the Company determined that the fair value was in excess of its carrying value and no impairment existed.
In determining the estimated fair value for intangible assets, wethe Company typically utilizeutilizes the income approach, which discounts the projected future net cash flow using an appropriate discount rate that reflects the risks associated with such projected future cash flow. Refer to Note 7—6—Goodwill and Intangible Assets, and Note 4—AcquisitionsNet for additional information on the Company’s intangible assets.
The Company performs qualitative assessments of goodwill and indefinite lived intangibles assets for impairment. If the qualitative assessment indicates it is more likely than not that a reporting unit’s or intangible asset’s fair value is less than the carrying value, or the Company bypasses the qualitative assessment, a quantitative assessment would be performed.
The Company reviews long-lived assets, including definite-lived intangible assets, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. If the evaluation indicates that the carrying amount of an asset may not be recoverable, the potential impairment is measured based using the income approach. The Company groups long-lived assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.
Intangible assets with definite lives are amortized on a straight-line basis over the following lives:
|
| | | | |
| Customer relationships | 7-207 - 20 years |
Non-competition agreementsTrademarks and tradenames | 1-102 - 10 years |
Trademarks and tradenamesFavorable operating leases | 2-102 - 8 years |
Leases in placeUnfavorable operating leases | 1-92 - 8 years |
Favorable operating leases | 2-25 years |
Unfavorable operating leases | 2-25 years |
| Pharmacy prescription files | 5-77 years |
Business Dispositions
The Company reviews the presentation of planned business dispositions in the Consolidated Financial Statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results. In addition, the Company evaluates whether the business has met the criteria as a business held for sale. In order for a planned disposition to be classified as a business held for sale, the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year.
Planned business dispositions are presented as discontinued operations when all the criteria described above are met. Operations of the business components meeting the discontinued operations requirements are presented within Income from discontinued operations, net of tax in the Consolidated Statements of Operations, and assets and liabilities of the business component planned to be disposed of are presented as separate lines within the Consolidated Balance Sheets. See Note 19—18—Discontinued Operations for additional information.
The carrying value of the business held for sale is reviewed for recoverability upon meeting the classification requirements. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, indefinite lived intangible assets and other assets are assessed. After the valuation process is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell, and no additional depreciation or amortization expense is recognized.
There are inherent judgments and estimates used in determining the fair value less costs to sell of a business and any impairment charges. The sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to closing.
Investments
The Company has long term investments in unconsolidated entities, which it accounts for using either the cost method or the equity method of accounting. Investments in which the Company cannot exercise significant influence over the operating and financial policies of the investee are recorded at their historical cost. Investments where the Company has the ability to exercise significant influence over the investee are accounted for using the equity method, with income or loss attributable to the Company from the investee adjusting the carrying value of the investment and recorded in the Company’s Consolidated Statements of Operations. The carrying values of both cost and equity method investments were not material for fiscal 2019 or 2018, either individually or in the aggregate, and are included within Other assets in the Consolidated Balance Sheets. Income attributable to investments accounted for using the equity method is not material for fiscal 2019, 2018, or 2017, and is recorded in Other, net, within the Consolidated Statements of Operations.
On May 24, 2017, the Company sold its stake in Kicking Horse Coffee, a Canadian roaster and marketer of organic and fair trade coffee, which was accounted for using the cost method of accounting. As a result of the sale, the Company recognized a pre-tax gain of $6.1 million in fiscal 2017, which is included in Other, net in the Consolidated Statements of Operations.
Fair Value of Financial Instruments
Financial assets and liabilities measured on a recurring basis, and non-financial assets and liabilities that are recognized on a non-recurring basis, are recognized or disclosed at fair value on at least an annual basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value:
•Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2 Inputs—Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data.
•Level 3 Inputs—One or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation.
The carrying amounts of the Company’s financial instruments including cash and cash equivalents, accounts receivable, accounts payable and certain accrued expenses and other assets and liabilities approximate fair value due to the short-term nature of these instruments.
Share-Based Compensation
Share-based compensation consists of restricted stock units, performance units, stock options and SupervaluSUPERVALU INC. (“Supervalu”) replacement awards. Share-based compensation expense is measured by the fair value of the award on the date of grant. The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period of the individual grants. Forfeitures are recognized as reductions to share-based compensation when they occur. The grant date closing price per share of the Company’s stock is used to determine the fair value of restricted stock units. Supervalu Replacement Awards are liability classified awards as they may ultimately be settled in cash or shares at the discretion of the employee. The Company’s Chief Executive Officer and Chairman and other executive officers and members of senior management have been granted performance units which vest, when and if earned, in accordance with the terms of the related performance unit award agreements. The Company recognizes share-based compensation expense based on the target number of shares of common stock and the Company’s stock price on the date of grant and subsequently adjusts expense based on actual and forecasted performance compared to planned targets. Stock options are granted at exercise prices equal to the fair market value of the Company’s stock at the dates of grant. The fair value of stock option grants is estimated at the date of grant using the Black-Scholes option pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and expected life. Expected volatilities utilized in the model are based on the historical volatility of the Company’s stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The model incorporates exercise and post-vesting forfeiture assumptions based on an analysis of historical data. The expected term is derived from historical information and other factors. Share-based compensation expense is recognized within Operating expenses for ongoing employees and in certain instances is recorded within Restructuring, acquisition and integration related expenses when an employee is notified of termination and their awards become accelerated. Refer to Note 13—12—Share-Based Awards for additional information.
Benefit Plans
The Company recognizes the funded status of its company-sponsoredCompany-sponsored defined benefit plans which it assumed in the first quarter of fiscal 2019 through the acquisition of Supervalu, in the Consolidated Balance Sheets and gains or losses and prior service costs or credits not yet recognized as a component of Accumulated other comprehensive loss, net of tax, in the Consolidated Balance Sheets. The Company measures its defined benefit pension and other postretirement plan obligations as of the nearest calendar month end. The Company records net periodic benefit income or expense related to interest cost, expected return on plan assets and the amortization of actuarial gains and losses, excluding service costs, in the Consolidated Statements of Operations within Total other expense, net.Net periodic benefit income, excluding service cost. Service costs are recorded in Operating expenses in the Consolidated Statements of Operations.
The Company sponsors pension and other postretirement plans in various forms covering participants who meet eligibility requirements. The determination of the Company’s obligation and related income or expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in healthcare costs. These assumptions are disclosed in Note 14—13—Benefit Plans. Actual results that differ from the assumptions are accumulated and amortized over future periods.
The Company contributes to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans.pension. Pension expense for these plans is recognized as contributions are funded. In addition, the Company provides postretirement health and welfare benefits for certain groups of union and non-union employees. See Note 14—13—Benefit Plans for additional information on participation in multiemployer plans.
Earnings Per Share
Basic earnings per share is calculated by dividing net income (loss) income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adding the dilutive potential common shares to the weighted average number of common shares that were outstanding during the period. For purposes of the diluted earnings per share calculation, outstanding stock options, restricted stock units and performance-based awards, if applicable, are considered common stock equivalents, using the treasury stock method.
Treasury Stock
The Company records the repurchase of shares of common stock at cost based on the settlement date of the transaction. These shares are classified as treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.
On October 6, 2017, the Company announced that its Board of Directors authorized a share repurchase program for up to $200.0$200 million of the Company’s outstanding common stock. The repurchase program is scheduled to expire upon the Company’s repurchase of shares of the Company’s common stock having an aggregate purchase price of $200.0$200 million. The Company repurchased 614,660 shares of its common stock at an aggregate cost of $24.2 million in fiscal 2018. The Company did not repurchase any shares of its common stock in fiscal 2021, 2020 or 2019. As of July 31, 2021, we have $176 million remaining authorized under the share repurchase program. Additionally, our ABL Credit Facility, Term Loan Facility, and Senior Notes contain terms that limit our ability to repurchase shares of common stock above certain levels unless certain conditions and financial tests are met.
Comprehensive Income (Loss)
Comprehensive income (loss) is reported in the Consolidated Statements of Comprehensive Income. Comprehensive income (loss) includes all changes in stockholders’ equity during the reporting period, other than those resulting from investments by and distributions to stockholders. OurThe Company’s comprehensive income (loss) is calculated as Net income (loss) income including noncontrolling interests, plus or minus adjustments for foreign currency translation related to the translation of UNFI Canada, Inc. (“UNFI Canada”) from the functional currency of Canadian dollars to U.S. dollar reporting currency, changes in the fair value of cash flow hedges, net of tax, and changes in defined pension and other postretirement benefit plan obligations, net of tax, less comprehensive income attributable to noncontrolling interests.
Accumulated other comprehensive loss represents the cumulative balance of other comprehensive income (loss) income,, net of tax, as of the end of the reporting period and relates to foreign currentcurrency translation adjustments, and unrealized gains or losses on cash flow hedges, net of tax and changes in defined pension and other postretirement benefit plan obligations, net of tax.
Derivative Financial Instruments
The Company is exposedutilizes derivative financial instruments to market risks arising frommanage its exposure to changes in interest rates, fuel costs, and with the operation of UNFI Canada, foreign currency exchange rates. The Company usesAll derivatives principallyare recognized on the Company’s Consolidated Balance Sheets at fair value based on quoted market prices or estimates, and are recorded in either current or noncurrent assets or liabilities based on their maturity. Changes in the managementfair value of interest ratederivatives are recorded in comprehensive income or net earnings, based on whether the instrument is designated and fuel price exposure. From time to timeeffective as a hedge transaction and, if so, the Company may use contracts to hedge transactions in foreign currency. The Company does not utilize derivatives that contain leverage features. For derivative transactions accounted for as hedges, on the date the Company enters into the derivative transaction, the exposure is identified. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking thetype of hedge transaction. In this documentation,Gains or losses on derivative instruments are recorded in Accumulated other comprehensive loss and are reclassified to earnings in the Company specifically identifies the asset, liability, firm commitment, forecasted transaction, or net investment that has been designated asperiod the hedged item and states how the hedging instrument is expected to reduce the risks related toaffects earnings. If the hedged item.relationship ceases to exist, any associated amounts reported in Accumulated other comprehensive loss are reclassified to earnings at that time. The Company measures effectiveness of its hedging relationships both at hedge inception and on an ongoing basis as needed.basis.
Self-Insurance Liabilities
The Company is primarily self-insured for workers’ compensation, general and automobile liability insurance. It is the Company’s policy to record the self-insured portion of workers’ compensation, general and automobile liabilities based upon actuarial methods to estimate the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported, discounted at a risk-free interest rate. The present value of such claims was calculated using a discount rates ranging from 1.9 percent to 3.0rate of 2.0 percent.
Changes in our insurancethe Company’s self-insurance liabilities consisted of the following:
| | | | | | | | | | | | | | | | | |
| (in millions) | 2021 | | 2020 | | 2019 |
| Beginning balance | $ | 101 | | | $ | 89 | | | $ | 25 | |
| Assumed liabilities from the Supervalu acquisition | — | | | — | | | 55 | |
| Expense | 48 | | | 44 | | | 43 | |
| Claim payments | (48) | | | (36) | | | (33) | |
| Reclassifications | 2 | | | 4 | | | (1) | |
| Ending balance | $ | 103 | | | $ | 101 | | | $ | 89 | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| (in thousands) | 2019 | | 2018 | | 2017 |
| Beginning balance | $ | 24,703 |
| | $ | 22,776 |
| | $ | 20,109 |
|
| Assumed liabilities from the Supervalu acquisition | 55,213 |
| | — |
| | — |
|
| Expense | 42,764 |
| | 14,274 |
| | 13,740 |
|
| Claim payments | (33,087 | ) | | (12,347 | ) | | (11,073 | ) |
| Reclassifications | (755 | ) | | — |
| | — |
|
| Ending balance | $ | 88,838 |
| | $ | 24,703 |
| | $ | 22,776 |
|
The current portion of the self-insurance liabilitiesliability was $32 million and $34 million as of July 31, 2021 and August 1, 2020, respectively, and is included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. The long-term portions were $71 million and the long-term portion is$67 million as of July 31, 2021 and August 1, 2020, respectively, and are included in Other long-term liabilities in the Consolidated Balance Sheets. The insuranceself-insurance liabilities as of the end of the fiscal year are net of discounts of $6.6$10 million and $1.3$7 million as of July 31, 2021 and August 3, 2019 and July 28, 2018,1, 2020, respectively. Amounts due from insurance companies were $11.1$17 million and $12 million as of July 31, 2021 and August 3, 2019.1, 2020, respectively, and are recorded in Prepaid expenses and other current assets and Other long-term assets.
Leases, After ASC 842 Adoption
At the inception or modification of a contract, the Company determines whether a lease exists and classifies its leases as an operating or finance lease at commencement. Subsequent to commencement, lease classification is only reassessed upon a change to the expected lease term or contract modification. Finance and operating lease assets represent the Company’s right to use an underlying asset as lessee for the lease term, and lease obligations represent the Company’s obligation to make lease payments arising from the lease. These assets and obligations are recognized at the lease commencement date based on the present value of lease payments, net of incentives, over the lease term. Incremental borrowing rates are estimated based on the Company’s borrowing rate as of the lease commencement date to determine the present value of lease payments, when lease contracts do not provide a readily determinable implicit rate. Incremental borrowing rates are determined by using the yield curve based on the Company’s credit rating adjusted for the Company’s specific debt profile and secured debt risk. The lease asset also reflects any prepaid rent, initial direct costs incurred and lease incentives received. The Company’s lease terms include optional extension periods when it is reasonably certain that those options will be exercised. Leases with an initial expected term of 12 months or less are not recorded in the Consolidated Balance Sheets and the related lease expense is recognized on a straight-line basis over the lease term. For certain classes of underlying assets, the Company has elected to not separate fixed lease components from the fixed nonlease components.
The Company recognizes contractual obligations and receipts on a gross basis, such that the related lease obligation to the landlord is presented separately from the sublease created by the lease assignment to the assignee. As a result, the Company continues to recognize on its Consolidated Balance Sheets the operating lease assets and liabilities, and finance lease assets and obligations, for assigned leases.
The Company records operating lease expense and income using the straight-line method within Operating expenses, and lease income on a straight-line method for leases with its customers within Net sales. Finance lease expense is recognized as amortization expense within Operating expenses, and interest expense within Interest expense, net. For operating leases with step rent provisions whereby the rental payments increase over the life of the lease, and for leases with rent-free periods, the Company recognizes expense and income on a straight-line basis over the expected lease term, based on the total minimum lease payments to be made or lease receipts expected to be received. The Company is generally obligated for property tax, insurance and maintenance expenses related to leased properties, which often represent variable lease expenses. For contractual obligations on properties where the Company remains the primary obligor upon assignment of the lease and does not obtain a release from landlords or retain the equity interests in the legal entities with the related rent contracts, the Company continues to recognize rent expense and rent income within Operating expenses.
Operating and finance lease assets are reviewed for impairment based on an ongoing review of circumstances that indicate the assets may no longer be recoverable, such as closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations, and other factors. The Company calculates operating and finance lease impairments using a discount rate to calculate the present value of estimated subtenant rentals that could be reasonably obtained for the property. Lease Expenseimpairment charges for properties no longer used in operations are recorded as a component of Restructuring, acquisition and integration related expenses in the Consolidated Statements of Operations.
The calculation of lease impairment charges requires significant judgments and estimates, including estimated subtenant rentals, discount rates and future cash flows based on the Company’s experience and knowledge of the market in which the property is located, previous efforts to dispose of similar assets and the assessment of existing market conditions. Impairments are recognized as a reduction of the carrying value of the right of use asset and finance lease assets. Refer to Note 11—Leases for additional information.
Leases, Prior to Adoption of ASC 842
The Company records lease expense and income using the straight-line method within Operating expenses. For leases with step rent provisions whereby the rental payments increase over the life of the lease, and for leases where the Company receives rent-free periods, the Company recognizes expense and income based on a straight-line basis based on the total minimum lease payments to be made over the expected lease term. Deferred rent obligations are included in Other current liabilities and Other long-term liabilities in the Consolidated Balance Sheets.
For contractual obligations on properties where we remain the primary obligor upon assignment of the lease and do not obtain a release from landlords or retain the equity interests in the legal entities with the related rent contracts, the Company continues to recognize rent expense and rent income. In addition, the The Company continues to recognize contractual obligations and receipts on a gross basis, such that the related lease obligation to the landlord is presented separately from the sublease created by the lease assignment to the assignee. As a result, the Company continues to recognize on its Consolidated Balance Sheets the carrying value of capital lease assets and obligations, and property and equipment where the Company determined it was the accounting owner pursuant to a lease agreement.
Reserves for Closed Properties
The Company maintains reserves for costs associated with closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations. We calculate closed property operating lease liabilities using a discount rate to calculate the present value of the remaining noncancellable lease payments after the closing date, reduced by estimated subtenant rentals that could be reasonably obtained for the property. Lease reserve impairment charges are recorded as a component of Restructuring, acquisition and integration related expenses in the Consolidated Statements of Operations.
The closed property lease liabilities are usually paid over the remaining lease terms, which generally range from one to 12 years. Adjustments to closed property reserves primarily relate to changes in subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.
The calculation of the closed property charges requires significant judgments and estimates, including estimated subtenant rentals, discount rates and future cash flows based on our experience and knowledge of the market in which the closed property is located, previous efforts to dispose of similar assets and the assessment of existing market conditions. Reserves for closed properties are included in Other current liabilities and Other long-term liabilities in the Consolidated Balance Sheets.
NOTE 2—RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In March 2017,February 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standardstandards update (“ASU”) 2017-07, Compensation-Retirement BenefitsNo. 2016-02, Leases (Topic 715)842) (“ASC 842”), which provided new comprehensive lease accounting guidance that supersedes previous lease guidance. The Company adopted this standard in fiscal 2020, on August 4, 2019. Adoption of this standard did not have a material impact to the Company’s Consolidated Statements of Operations, Consolidated Statements of Stockholders' Equity or Consolidated Statements of Cash Flows.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued accounting ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): ImprovingMeasurement of Credit Losses on Financial Instruments and subsequent amendments to the Presentationinitial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, “Topic 326”). Topic 326 changed the impairment model for most financial assets and certain other instruments. For trade and other receivables, guarantees and other instruments, entities are required to use a new forward-looking expected loss model that replaces the previous incurred loss model and generally results in earlier recognition of Net Periodic Pension Costcredit losses. The Company adopted this standard in fiscal 2021, on August 2, 2020, the effective and Net Periodic Postretirement Benefit Costinitial application date, using a modified-retrospective basis as required by the standard by means of a cumulative-effect adjustment to the opening balance of Retained earnings in the Company’s Consolidated Statements of Stockholders' Equity. The difference between reserves and allowances recorded under the former incurred loss model and the amount determined under the current expected loss model, net of the deferred tax impact, was recorded as an adjustment to Retained earnings. Adoption of this standard did not have a material impact to the Company’s Consolidated Financial Statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326 Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825. This ASU clarifies the accounting treatment for the measurement of credit losses under ASC 326 and provides further clarification on previously issued updates including ASU 2017-12, Derivatives and Hedging (Topic 815): TargetedImprovements to Accounting for Hedging Activities andASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Since the Company adopted ASU 2017-12 in the fourth quarter of fiscal 2018, the amendments in ASU 2019-04 related to clarifications on Accounting for Hedging Activities which were adopted by the Company in fiscal 2020, with no impact to Accumulated other comprehensive loss or Retained earnings for fiscal 2020, as the Company did not have separately measured ineffectiveness related to its cash flow hedges. The remaining amendments within ASU 2019-04 were adopted in fiscal 2021 with the adoption of Topic 326. Adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2017-072018-15 requires implementation costs incurred by customers in cloud computing arrangements (i.e. hosting arrangements) to be capitalized under the same premises as authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any optional renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The Company adopted this standard on a prospective basis in fiscal 2021. Under this standard, the Company is required to defer these costs and recognize these costs as a service expense over future periods. Adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 requires entities to disclose the weighted-average interest crediting rates used, reasons for significant gains and losses affecting benefit obligations, and an explanation of any other significant changes how benefit plan costs for defined benefit pension and other postretirement benefit plans are presented in the statement of operations.benefit obligation or plan assets. The amendment also removed certain required disclosures. The Company adopted this guidance in fiscal 2021. The provisions of the first quarter of fiscal 2019, and it presents non-service cost components of net periodic benefit income, as disclosed in Note 14—Benefit Plans, in an other income and expense line titled “Net periodic benefit income, excluding service cost” in the Consolidated Statements of Operations. The service cost components are recorded within Operating expenses. The adoption of thisnew standard diddo not have an impact on the Company’s prior period Consolidated Financial Statements of Operations, as all benefit plan costs for defined benefit pension and other postretirement benefit plans incurred are attributable to the Supervalu business, which was acquired in the first quarter of fiscal 2019.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies the presentation of restricted cash on the statement of cash flows by requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amount generally described as restricted cash or restricted cash equivalents. This ASU is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2017, with retrospective application required. The Company adopted this ASU in the first quarter of fiscal 2019. The adoption of this ASU had no impact to the Consolidated Statement of Cash Flows for fiscal 2019, as the Company did not have restricted cash in its beginning or ending amounts for those periods.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted the new standard in the first quarter of fiscal 2019, with no impact to its financial position, results of operations, or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The eight specific issues are (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Businesses Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; (6) Distributions Received from Equity Method Investees; (7) Beneficial Interests in Securitization Transactions; and (8) Separately Identifiable Cash and Application of the Predominance Principle. This ASU is effective for public companies with interim periods and fiscal years beginning after December 15, 2017. The Company adopted this standard in the first quarter of fiscal 2019, with no impact to its Consolidated Statements of Cash Flows.
In April 2015, the FASB issued ASU 2015-04, Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, which allows employers with a fiscal year end that does not coincide with a calendar month end to make an accounting policy election to measure defined benefit plan assets and obligations as of the end of the month closest to their fiscal year end. ASU 2015-04 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with prospective application required. The Company adopted this ASU in fiscal 2019 and measures its defined benefit plan assets and obligations as of the month end closest to the applicable measurement date. The adoption of this standard did not have an impact on the Company’s prior period financial statements, as all defined benefit pension and other postretirement benefit plans are attributable to the Supervalu business, which was acquired in the first quarter of fiscal 2019.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (Topic 606), which has been updated by multiple amending ASUs (collectively “ASC 606”) and supersedes previous revenue recognition requirements (“ASC 605”). The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the ASU requires new, enhanced quantitative and qualitative disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The collective guidance is effective for public companies with annual periods, and interim periods within those periods, beginning after December 15, 2017. The new standard permits either of the following adoption methods: (i) a full retrospective application with restatement of each period presented in the financial statements with the option to elect certain practical expedients, or (ii) a retrospective application with the cumulative effect of adopting the guidance recognized as of the date of initial application (“only modified retrospective method”). The Company has adopted this new guidance in the first quarter of fiscal 2019 using the modified retrospective method, with no significant impact to our Consolidated Balance sheets, Consolidated Statements of Operations or Consolidated Statements of Cash flows.
The primary impact of adopting the new standard, contained within the wholesale distribution reportable segment, is related to the sale of certain private label products for which revenue is recognized over time under the new standard as opposed to at a point in time under ASC 605. Private label products are specific to the customer to which they are sold, and are typically packaged with the customer’s logo or other products for which the customer has an exclusive right to sell. The Company is contractually restricted from selling private label products with the customer’s logo or other exclusive products to other third-party customers. As a result, the underlying good has no alternative use to the Company. In some instances, the Company’s contracts also require the customer to purchase private label inventory held by the Company if the agreement is terminated, the customer discontinues selling the specific product, or the product is nearing its expiration date. This gives the Company an enforceable right to payment for performance completed to date from certain customers, once it has procured private label product. As a result, the Company now recognizes revenue from these product sales over time, as control is transferred to the customer, using a cost-incurred input measure of progress, as opposed to at a point in time, typically upon delivery, under ASC 605. Control of these products is transferred to the customer upon incurrence of substantially all of the Company’s costs related to the product, and therefore the cost-incurred input method is determined to be a faithful depiction of the transfer of goods.
The effect of adopting this change resulted in an increase to Retained earnings of $0.3 million, which was recorded in the first quarter of fiscal 2019. This change did not materially impact our Consolidated Statements of Operations for fiscal 2019.disclosure requirements. Refer to Note 3—Revenue Recognition13—Benefit Plans for further discussion of our adoption of the new standard.disclosures presented for all periods in accordance with this amendment.
Recently Issued Accounting Pronouncements
In AprilDecember 2019, the FASB issued ASU No. 2019-04, Codification Improvements2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions to Topic 326 Financial Instruments - Credit Losses, Topic 815, Derivatives740’s general principles. The amendments also improve consistent application and Hedging, and Topic 825. This ASU clarifies the accounting treatment for the measurement of credit losses under ASC 236 and provides further clarification on previously issued updates including ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities and ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Since the Company adopted ASU 2017-12 in the fourth quarter of fiscal 2018, the amendments in ASU 2019-04 related to clarifications on Accounting for Hedging Activities are effective for the Company in the first quarter of fiscal 2020. The remaining amendments within ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, which for the Company is the first quarter of fiscal 2021. Early adoption is permitted. The Company is currently reviewing the provisions of the new standard and evaluatingsimplifies its timing of adoption and impact on the Company’s consolidated financial statements.
In October 2018, the FASB issued authoritative guidance under ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU adds the Overnight Index Swap (OIS) rate based on Secured Overnight Financing Rate (SOFR) as a benchmark interest rate for hedge accounting purposes. This ASU is effective for public companies with interim and fiscal years beginning after December 15, 2018, which for the Company is the first quarter of fiscal year 2020. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-05 requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The Company is required to adopt this new guidance in the first quarter of fiscal 2021. The Company has outstanding cloud computing arrangements and continues to incur costs that it believes would be required to be capitalized under ASU 2018-05. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other postretirement plans.application. The Company is required to adopt this guidance in the first quarter of fiscal 2021.2022. The Company is currently reviewinghas evaluated the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of fiscal 2020, with early adoption permitted. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The Company is required to adopt this new guidance in the first quarter of fiscal 2021. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides new comprehensive lease accounting guidance that supersedes existing lease guidance. The objective of this ASU is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Criteria for distinguishing leases between finance leases and operating leases are substantially similar to criteria for distinguishing between capital leases and operating leases in existing lease guidance. ASC 842 will require the Company to recognize most current operating lease obligations as right-of-use assets with a corresponding liability based on the present value of future operating lease payments. Lease agreements with terms that are 12 months or less are permitted to be excluded
from the balance sheet. In addition, this ASU expands the disclosure requirements of lease arrangements. The Company is required to adopt this standard in the first quarter of fiscal 2020 on August 4, 2019, the effective and initial application date. The Company will utilize the additional transition method under ASU 2018-11, which allows for a cumulative effect adjustment within retained earnings in the period of adoption. In addition, the Company elected the “package of three” practical expedients which allows companies to not reassess whether arrangements contain leases, the classification of leases, and the capitalization of initial direct costs. The estimated impact of the adoption to the Company’s Consolidated Balance Sheets includes the recognition of operating lease liabilities of approximately $1.1 billion with corresponding right-of-use assets of approximately the same amount based on the present value of the remaining lease payments for existing operating leases. In addition, the adoption of the standard is expected to result in the derecognition of existing assets of approximately $140.0 million and liabilities of $130.0 million for certain sale-leaseback transactions that do not qualify for sale accounting, including build-to-suit arrangements for which construction is complete and the Company is leasing the constructed asset. The difference between the assets and liabilities derecognized for these sale-leaseback transactions, net of the deferred tax impact, is expected to be recorded as an adjustment to retained earnings. The difference between the amount of right-of-use assets and lease liabilities recognized upon the adoption of ASC 842 is primarily related to adjustments to existing prepaid rent, deferred rent, lease intangible assets/liabilities, and closed property reserves. The Company does not expect a material impact on its lessor accounting from the adoption of this standard. Adoption of this standard is not expected to have a material impact toon the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows. The Company is in the process of revising its accounting policies, processes and controls, and systems as applicable to comply with the provisions and disclosure requirements of the standard.Financial Statements.
NOTE 3—REVENUE RECOGNITION
Revenue Recognition Accounting Policy
The Company recognizes revenue in an amount that reflects the consideration that is expected to be received for goods or services when its performance obligations are satisfied by transferring control of those promised goods or services to its customers. ASC 606 defines a five-step process to recognize revenue that requires judgment and estimates, including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when or as the performance obligation is satisfied. This footnote addresses the Company’s revenue recognition policies for its continuing operations only; refer to Note 19—Discontinued Operations for additional information about our revenue recognition policies of discontinued operations.
Revenues from wholesale product sales are recognized when control is transferred, which typically happens upon either shipment or delivery, depending on the contract terms with the customer. Typically, shipping and customer receipt of wholesale products occur on the same business day. Discounts and allowances provided to customers are recognized as a reduction in Net sales as control of the products is transferred to customers. The Company recognizes freight revenue related to transportation of its products when control of the product is transferred, which is typically upon delivery.
Sales tax is excluded from Net sales. Limited rights of return or product warranties exist with the Company’s customers due to the nature of the products it sells.
Product sales
The Company enters into wholesale customer distribution agreements that provide terms and conditions of our order fulfillment. The Company’s distribution agreements often specify levels of required minimum purchases in order to earn certain rebates or incentives. Certain contracts include rebates and other forms of variable consideration, including consideration payable to the customer up-front, over time or at the end of a contract term. Many of the Company’s contracts with customers outline various other promises to be performed in conjunction with the sale of product. The Company determined that these promises provided are immaterial within the overall context of the respective contract, and as such has not allocated the transaction price to these obligations.
In transactions for goods or services where the Company engages third-parties to participate in its order fulfillment process, it evaluates whether it is the principal or an agent in the transaction. The Company’s analysis considers whether it controls the goods or services before they are transferred to its customer, including an evaluation of whether the Company has the ability to direct the use of, and obtain substantially all the remaining benefits from, the specified good or service before it is transferred to the customer. Agent transactions primarily reflect circumstances where the Company is not involved in order fulfillment or where it is involved in the order fulfillment but is not contractually obligated to purchase the related goods or services from vendors, and instead extends wholesale customers credit by paying vendor trade accounts payable and does not control products prior to their sale. Under ASC 606, if the Company determines that it is acting in an agent capacity, transactions are recorded on a net basis. If the Company determines that it is acting in a principal capacity, transactions are recorded on a gross basis.
The Company also evaluates vendor sales incentives to determine whether they reduce the transaction price with its customers. The Company’s analysis considers which party tenders the incentive, whether the incentive reflects a direct reimbursement from a vendor, whether the incentive is influenced by or negotiated in conjunction with any other incentive arrangements and whether the incentive is subject to an agency relationship with the vendor, whether expressed or implied. Typically, when vendor incentives are offered directly by vendors to the Company’s customers, require the achievement of vendor-specified requirements to be earned by customers, and are not negotiated by the Company or in conjunction with any other incentive agreement whereby the Company does not control the direction or earning of these incentives, then Net sales are not reduced as part of the Company’s determination of the transaction price. In circumstances where the vendors provide the Company consideration to promote the sale of their goods and the Company determines the specific performance requirements for its customers to earn these incentives, Net sales are reduced for these customer incentives as part of the determination of the transaction price.
Sales from the Company’s Wholesale segment to its retail discontinued operations are presented within Net Sales when the Company holds the business for sale with a supply agreement that it anticipates the sale of the retail banner to include upon its disposal. The Company recorded $769.8 million within Net sales from continuing operations attributable to discontinued operations inter-company product purchases in fiscal 2019, which the Company expects will continue subsequent to the sale of certain retail banners. These amounts were recorded at gross margin rates consistent with sales to other similar wholesale customers of the acquired Supervalu business. No sales were recorded within continuing operations for retail banners that the Company expects to dispose of without a supply agreement, which were eliminated upon consolidation within continuing operations and amounted to $411.9 million in fiscal 2019.
Certain customer agreements provide for the right to license one or more of the Company’s tradenames, such as FESTIVAL FOODS®, SENTRY®, COUNTY MARKET®, NEWMARKET®, FOODLAND®, JUBILEE® and SUPERVALU®. In addition, the Company enters into franchise agreements to separately charge its customers, who the Company also sells wholesale products to, for the right to use its CUB FOODS®CUB® tradename. The Company typically does not separately charge for the right to license its tradenames. The Company believes that these tradenames are capable of being distinct, but are not distinct within the context of the contracts with its customers. Accordingly, the Company does not separately recognize revenue related to tradenames utilized by its customers.
The Company enters into distribution agreements with manufacturers to provide wholesale supplies to the Defense Commissary Agency (“DeCA”) and other government agency locations. DeCA contracts with manufacturers to obtain grocery products for the commissary system. The Company contracts with manufacturers to distribute products to the commissaries after being authorized by the manufacturers to be a military distributor to DeCA. The Company must adhere to DeCA’s delivery system procedures governing matters such as product identification, ordering and processing, information exchange and resolution of discrepancies. DeCA identifies the manufacturer with which an order is to be placed, determines which distributor is contracted by the manufacturer for a particular commissary or exchange location, and then places a product order with that distributor that is covered under DeCA’s master contract with the applicable manufacturer. The Company supplies product from its existing inventory, delivers it to the DeCA designated location, and bills the manufacturer for the product price plus a drayage fee. The manufacturer then bills DeCA under the terms of its master contract. The Company has determined that it controls the goods before they are transferred to the customer, and as such it is the principal in the transaction. Revenue is recognized on a gross basis when control of the product passes to the DeCA designated location.
Customer incentives
The Company provides incentives to its wholesale customers in various forms established under the applicable agreement, including advances, payments over time that are earned by achieving specified purchasing thresholds, and upon the passage of time. The Company typically records customer advances within Other long-term assets and OtherPrepaid expenses and other current assets and typically recognizes customer incentive payments that are based on expected purchases over the term of the agreement as a reduction to Net sales. To the extent that the transaction price for product sales includes variable consideration, such as certain of these customer incentives, the Company estimates the amount of variable consideration that should be included in the transaction price primarily by utilizing the expected value method. Variable consideration is included in the transaction price if it is probable that a significant future reversal of cumulative revenue under the agreement will not occur. The Company believes that there will not be significant changes to its estimates of variable consideration, as the uncertainty will be resolved within a relatively short time and there is a significant amount of historical data that is used in the estimation of the amount of variable consideration to be received. Therefore, the Company has not constrained its estimates of variable consideration.
Customer incentive assets are reviewed for impairment when circumstances exist for which the Company no longer expects to recover the applicable customer incentives.
Professional services and equipment sales
Separate from the services provided in conjunction with the sale of product describeproducts described above, many of the Company’s agreements with customers also include distinct professional services and other promises to customers, in addition to the sale of the product itself, such as retail store support, advertising, store layout and design services, merchandising support, couponing, e-commerce,eCommerce, network and data hosting solutions, training and certifications classes, and administrative back-office solutions. These professional services may contain a single performance obligation for each respective service, in which case such services revenues are recognized when delivered. Relative to total Net sales, revenueRevenue from professional services is insignificant.are less than 1 percent of total Net sales.
Wholesale equipment sales are recorded as direct sales to customers when shipped or delivered, consistent with the recognition of product sales.
Disaggregation of Revenues
The Company records revenue to fourfive customer channels within Net sales, which are described below:
•Chains, which consists of customer accounts that typically have more than 10 operating stores and exclude stores included within the Supernatural and Other channels defined below;
•Independent retailers, which include smaller size accounts and include single store and multiple store locations, and group purchasing entities, but are not classified within Chains above or Other discussed below;
•Supernatural, which consists of chain accounts that are national in scope and carry primarily natural products, and at this time currently consists solely of Whole Foods Market;
Independents•Retail, which include single storereflects our Retail segment, including the Cub Foods business and chain accounts (excluding supernatural, as defined above), which carry primarily natural productsthe remaining Shoppers locations, excluding Shoppers locations that are held for sale within discontinued operations; and buying clubs of consumer groups joined to buy products;
Supermarkets, which include accounts that also carry conventional products, and at this time currently include chain accounts, supermarket independents, and gourmet and ethnic specialty stores; and
•Other, which includes foodservice, e-commerce and international customers outside of Canada, as well as sales to Amazon.com, Inc.
foodservice, eCommerce, conventional military business and other sales.
The following tables detail the Company’s net sales for the periods presented by customer channel for each of its segments. The Company does not record its revenues within its wholesaleWholesale reportable segment for financial reporting purposes by product group, and it is therefore impracticable for it to report them accordingly.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Net Sales for Fiscal 2021 (52 weeks) |
| Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(2) | | Consolidated |
| Chains | | $ | 12,104 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,104 | |
| Independent retailers | | 6,638 | | | — | | | — | | | — | | | 6,638 | |
| Supernatural | | 5,050 | | | — | | | — | | | — | | | 5,050 | |
| Retail | | — | | | 2,442 | | | — | | | — | | | 2,442 | |
| Other | | 2,081 | | | — | | | 219 | | | — | | | 2,300 | |
| Eliminations | | — | | | — | | | — | | | (1,584) | | | (1,584) | |
| Total | | $ | 25,873 | | | $ | 2,442 | | | $ | 219 | | | $ | (1,584) | | | $ | 26,950 | |
| | | (in millions) | | Net Sales for Fiscal 2019 (53 weeks) | (in millions) | | Net Sales for Fiscal 2020(1) (52 weeks) |
| Customer Channel | | Wholesale | | Other | | Eliminations | | Consolidated | Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(2) | | Consolidated |
| Chains | | Chains | | $ | 12,010 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,010 | |
| Independent retailers | | Independent retailers | | 6,699 | | | — | | | — | | | — | | | 6,699 | |
| Supernatural | | $ | 4,393 |
| | $ | — |
| | $ | — |
| | $ | 4,393 |
| Supernatural | | 4,720 | | | — | | | — | | | — | | | 4,720 | |
| Independents | | 3,179 |
| | — |
| | — |
| | 3,179 |
| |
| Supermarkets | | 12,505 |
| | — |
| | — |
| | 12,505 |
| |
| Retail | | Retail | | — | | | 2,375 | | | — | | | — | | | 2,375 | |
| Other | | 1,248 |
| | 228 |
| | (166 | ) | | 1,310 |
| Other | | 2,096 | | | — | | | 228 | | | — | | | 2,324 | |
| Eliminations | | Eliminations | | — | | | — | | | — | | | (1,569) | | | (1,569) | |
| Total | | $ | 21,325 |
| | $ | 228 |
| | $ | (166 | ) | | $ | 21,387 |
| Total | | $ | 25,525 | | | $ | 2,375 | | | $ | 228 | | | $ | (1,569) | | | $ | 26,559 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Net Sales for Fiscal 2019(1) (53 weeks) |
| Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(2) | | Consolidated |
| Chains | | $ | 9,769 | | | $ | — | | | $ | — | | | $ | — | | | $ | 9,769 | |
| Independent retailers | | 5,536 | | | — | | | — | | | — | | | 5,536 | |
| Supernatural | | 4,394 | | | — | | | — | | | — | | | 4,394 | |
| Retail | | — | | | 1,687 | | | — | | | — | | | 1,687 | |
| Other | | 1,852 | | | — | | | 235 | | | — | | | 2,087 | |
| Eliminations | | — | | | — | | | — | | | (1,132) | | | (1,132) | |
| Total | | $ | 21,551 | | | $ | 1,687 | | | $ | 235 | | | $ | (1,132) | | | $ | 22,341 | |
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Net Sales for Fiscal 2018(1) (52 weeks) |
| Customer Channel | | Wholesale | | Other | | Eliminations | | Consolidated |
| Supernatural | | $ | 3,758 |
| | $ | — |
| | $ | — |
| | $ | 3,758 |
|
| Independents | | 2,668 |
| | — |
| | — |
| | 2,668 |
|
| Supermarkets | | 2,820 |
| | — |
| | — |
| | 2,820 |
|
| Other | | 925 |
| | 228 |
| | (172 | ) | | 981 |
|
| Total | | $ | 10,171 |
| | $ | 228 |
| | $ | (172 | ) | | $ | 10,227 |
|
|
| | | | | | | | | | | | | | | | |
| (in millions) | | Net Sales for Fiscal 2017(1) (52 weeks) |
| Customer Channel | | Wholesale | | Other | | Eliminations | | Consolidated |
| Supernatural | | $ | 3,096 |
| | $ | — |
| | $ | — |
| | $ | 3,096 |
|
| Independents | | 2,490 |
| | — |
| | — |
| | 2,490 |
|
| Supermarkets | | 2,731 |
| | — |
| | — |
| | 2,731 |
|
| Other | | 894 |
| | 232 |
| | (169 | ) | | 957 |
|
| Total | | $ | 9,211 |
| | $ | 232 |
| | $ | (169 | ) | | $ | 9,274 |
|
| |
(1) | During fiscal 2019, the presentation of net sales by customer channel was adjusted to reflect changes in the classification of customer types as a result of a detailed review of customer channel definitions.(1)In the first quarter of fiscal 2021, the presentation of net sales by customer channel was recast to present the Chains and Other channel exclusive of the intercompany eliminations and present total eliminations separately. There was no impact to the Consolidated Statements of Operations as a result of revising the classification of customer types. As a result of this adjustment, net sales to our supermarkets channel and to our other channel for fiscal 2018 decreased approximately $36 million and $58 million, respectively, compared to the previously reported amounts, while net sales to the independents channel for fiscal 2018 increased approximately $95 million compared to the previously reported amounts. In addition, based on the consistent application of these impacts to fiscal 2017, net sales to our supermarkets channel and to our other channel for fiscal 2017 decreased approximately $16 million and |
$47 million, respectively, compared to the previously reported amounts, whileConsolidated Statements of Operations. The Company believes this modified basis better reflects its channel presentation, as it further aligns with segment presentation.
(2)Eliminations primarily includes the net sales elimination of Wholesale’s sales to the independents channel for fiscal 2017 increased approximately $63 million comparedRetail segment and the elimination of sales from segments included within Other to the previously reported amounts.Wholesale.
Whole Foods Market, Inc. was the Company’s largest customer in each fiscal year presented. Whole Foods Market, Inc. accounted for approximately 21%19%, 37%18% and 33%20% of the Company’s net sales for fiscal 2019, 20182021, 2020 and 2017,2019, respectively. There were no other customers that individually generated 10% or more of the Company’s net sales during those periods.
The Company serves customers in the United States and Canada, as well as customers located in other countries. However, all of the Company’s revenue is earned in the U.S. and Canada, and international distribution occurs through freight-forwarders. The Company does not have any performance obligations on international shipments subsequent to delivery to the domestic port.
Contract Balances
The Company does not typically incur costs that are required to be capitalized in connection with obtaining a contract with a customer. Expenses related to contract origination primarily relate to employee costs that the Company would incur regardless of whether the contract was obtained with the customer.
The Company typically does not have any performance obligations to deliver products under its contracts until its customers submit a purchase order, as it stands ready to deliver product upon receipt of a purchase order under contracts with its customers. These performance obligations are generally satisfied within a very short period of time. Therefore, the Company has utilized the practical expedient that provides an exemption from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not typically receive pre-payments from its customers.
Customer payments are due when control of goods or services are transferred to the customer and are typically not conditional on anything other than payment terms, which typically rangeare less than 30 days. Since no significant financing components exist between the period of time the Company transfers goods or services to the customer and when it receives payment for those goods or services, the Company has electedgenerally does not to adjust its revenue recognition policythe transaction price to recognize a financing components.component. Customer incentives are not considered contract assets as they are not generated through the transfer of goods or services to the customers. No material contract asset or liability existexists for any period reported within these Consolidated Financial Statements.
Accounts and Notes Receivable Balances
Accounts and notes receivable are as follows:
| | | | | | | | | | | |
| (in millions) | July 31, 2021 | | August 1, 2020 |
| Customer accounts receivable | $ | 1,115 | | | $ | 1,157 | |
| Allowance for uncollectible receivables | (28) | | | (56) | |
| Other receivables, net | 16 | | | 19 | |
| Accounts receivable, net | $ | 1,103 | | | $ | 1,120 | |
| | | |
| Notes receivable, net, included within Prepaid expenses and other current assets | $ | 7 | | | $ | 49 | |
| Long-term notes receivable, net, included within Other long-term assets | $ | 15 | | | $ | 26 | |
|
| | | | | | | |
| (in thousands) | August 3, 2019 | | July 28, 2018 |
| Customer accounts receivable | $ | 1,063,167 |
| | $ | 595,698 |
|
| Allowance for uncollectible receivables | (20,725 | ) | | (15,996 | ) |
| Other receivables, net | 23,257 |
| | — |
|
| Accounts receivable, net | $ | 1,065,699 |
| | $ | 579,702 |
|
| | | | |
| Customer notes receivable, net, included within Prepaid expenses and other current assets | $ | 11,912 |
| | $ | 1,277 |
|
| Long-term notes receivable, net, included within Other assets | $ | 34,408 |
| | $ | 653 |
|
The allowance for uncollectible receivables, and estimated variable consideration allowed for as sales concessions consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| Balance at beginning of year | | $ | 56 | | | $ | 21 | | | $ | 16 | |
| Impact of adoption of new credit loss standard | | 4 | | | — | | | — | |
| Provision for losses in Operating expenses | | (9) | | | 38 | | | 10 | |
| Reductions of Net sales | | 3 | | | 12 | | | 7 | |
| Write-offs charged against the allowance | | (26) | | | (15) | | | (12) | |
| | | | | | |
| Balance at end of year | | $ | 28 | | | $ | 56 | | | $ | 21 | |
|
| | | | | | | | | | | | |
| (in thousands) | | 2019 | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 15,996 |
| | $ | 14,509 |
| | $ | 11,230 |
|
| Additions charged to operating expenses | | 9,749 |
| | 12,006 |
| | 5,728 |
|
| Reductions of net sales | | 7,061 |
| | — |
| | — |
|
| Deductions | | (12,081 | ) | | (10,519 | ) | | (2,449 | ) |
| Balance at end of year | | $ | 20,725 |
| | $ | 15,996 |
| | $ | 14,509 |
|
NOTE 4—ACQUISITIONS
SUPERVALU INC.
On July 25, 2018, the Company entered into an agreement and plan of merger (the “Merger Agreement”) to acquire all of the outstanding equity securities of Supervalu, which was then the largest publicly traded conventional grocery distributor in the United States. The acquisition of Supervalu diversifies the Company’s customer base, further enables cross-selling opportunities, expands market reach and scale, enhances technology, capacity and systems, and is expected to deliver significant synergies and accelerate potential growth. The merger was completed on October 22, 2018 (the “Closing Date”). At the effective time of the acquisition, each share of Supervalu common stock, par value $0.01 per share, issued and outstanding, was canceled and converted into the right to receive a cash payment equal to $32.50 per share, without interest. Total consideration related to this acquisition was $2.3 billion, $1.3 billion of which was paid in cash to Supervalu shareholders and $1.0 billion of which was used to satisfy Supervalu’s outstanding debt obligations. Included in the liabilities assumed in the Supervalu acquisition were the Supervalu Senior Notes with a fair value of $546.6 million. These Senior Notes were redeemed in the second quarter of fiscal 2019 following the required 30-day notice period, resulting in their satisfaction and discharge.
The assets and liabilities of Supervalu were recorded in the Company’s consolidated financial statements on a preliminary basis at their estimated fair values as of the acquisition date. In conjunction with the Supervalu acquisition, the Company announced its plan to sell the remaining acquired retail operations of Supervalu. Refer to Note 19—Discontinued Operations for more information on discontinued operations.
The following table summarizes the consideration, preliminary fair value of assets acquired and liabilities assumed, and the resulting preliminary goodwill. As of August 3, 2019, the Company is continuing its assessment of fair values of assets acquired and liabilities assumed. There can be no assurance that such final assessments will not result in material changes from the preliminary purchase price allocations, and such changes may result in increases or decreases to the goodwill impairment charge recorded in fiscal 2019 due to changes in the opening balance sheet value of goodwill. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date), as the Company finalizes the valuations of certain tangible and intangible assets acquired, and liabilities assumed. As of August 3, 2019, the primary areas of the purchase price allocation that are not yet finalized relate to current and deferred income taxes and certain discontinued operations real and personal property. Any potential fair value changes to these areas, would be assessed to determine whether identifiable intangible assets or the allocation of goodwill between reporting units should also be updated.
|
| | | | |
| (in thousands) | | Preliminary Acquisition Date Fair Values as of August 3, 2019 |
| Consideration: | | |
| Outstanding shares | | $ | 1,258,450 |
|
| Outstanding debt, excluding acquired senior notes | | 1,046,170 |
|
| Equity-based awards | | 18,411 |
|
| Total consideration | | $ | 2,323,031 |
|
| | | |
| Preliminary fair value of assets acquired and liabilities assumed: | | |
| Cash and cash equivalents | | $ | 25,102 |
|
| Accounts receivable | | 552,381 |
|
| Inventories | | 1,159,642 |
|
| Prepaid expenses and other current assets | | 108,830 |
|
| Current assets of discontinued operations | | 196,848 |
|
| Property, plant and equipment | | 1,210,416 |
|
| Goodwill | | 374,757 |
|
| Intangible assets | | 918,103 |
|
| Other assets | | 75,965 |
|
| Long-term assets of discontinued operations | | 429,304 |
|
| Accounts payable | | (972,888 | ) |
| Current portion of long-term debt and capital lease obligations | | (579,565 | ) |
| Other current liabilities | | (331,693 | ) |
| Current liabilities of discontinued operations | | (148,763 | ) |
| Long-term debt | | (34,355 | ) |
| Long-term capital lease obligations | | (103,289 | ) |
| Pension and other postretirement benefit obligations | | (234,324 | ) |
| Deferred income taxes | | (20,131 | ) |
| Other long-term liabilities | | (303,544 | ) |
| Long-term liabilities of discontinued operations | | (1,398 | ) |
| Noncontrolling interests | | 1,633 |
|
| Total consideration | | 2,323,031 |
|
Less: Cash and cash equivalents(1) | | (30,596 | ) |
| Total consideration, net of cash and cash equivalents acquired | | $ | 2,292,435 |
|
| |
(1) | Includes cash and cash equivalents acquired attributable to continuing operations and discontinued operations. |
Preliminary goodwill represents the future economic benefits arising largely from the synergies expected from combining the operations of the Company and Supervalu that could not be individually identified and separately recognized. The Company is currently evaluating the tax deductibility of the provisional goodwill amount, however it currently expects a substantial portion of its goodwill to be deductible for income tax purposes. Goodwill from the acquisition was attributed to the Company’s Supervalu Wholesale reporting unit and the legacy Company Wholesale reporting unit. No goodwill was attributed to the Retail reporting unit within discontinued operations. Refer to Note 7—Goodwill and Intangible Assets for additional information regarding the assignment of goodwill to the Company’s reporting units.
During fiscal 2019, the Company updated its preliminary fair value estimates of its net assets primarily due to a review of the cash flows used to measure fair value of intangible assets, estimates of current and deferred income taxes, estimates of expected fair value, less costs to sell, of its retail disposal groups based on indications of value, and estimates of carrying values of other assets and liabilities.
The following table summarizes the identifiable intangible assets and liabilities recorded based on preliminary valuations. The identifiable intangible assets are expected to be amortized on a straight-line basis over the estimated useful lives indicated. The preliminary fair value of identifiable intangible assets acquired was determined using income approaches. Significant assumptions utilized in the income approach were based on Company-specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance.
|
| | | | | | | | | | |
| | | | | Preliminary Acquisition Date Fair Values as of August 3, 2019 |
| (in thousands) | | Estimated Useful Life | | Continuing Operations | | Discontinued Operations |
| Customer relationship assets | | 10-17 years | | $ | 810,000 |
| | $ | — |
|
| Favorable operating leases | | 1-19 years | | 21,629 |
| | — |
|
| Leases in place | | 1-8 years | | 10,474 |
| | — |
|
| Tradenames | | 2-9 years | | 66,000 |
| | 17,000 |
|
| Pharmacy prescription files | | 5-7 years | | — |
| | 45,900 |
|
| Non-compete agreement | | 2 years | | 10,000 |
| | — |
|
| Unfavorable operating leases | | 1-12 years | | (21,754 | ) | | — |
|
| Total | | | | $ | 896,349 |
| | $ | 62,900 |
|
The Company incurred acquisition-related costs in conjunction with the Supervalu acquisition, which are quantified in Note 5—Restructuring, Acquisition and Integration Related Expenses.
The accompanying Consolidated Statements of Operations include the results of operations of Supervalu since the October 22, 2018 acquisition date through August 3, 2019, which consisted of net sales from continuing operations of $10.47 billion. Supervalu’s net sales from discontinued operations for this time period are reported in Note 19—Discontinued Operations.
The following table presents unaudited supplemental pro forma consolidated Net sales and Net income (loss) from continuing operations based on the Company’s historical reporting periods as if the acquisition of Supervalu had occurred as of July 30, 2017:
|
| | | | | | | | |
| (in thousands, except per share data) | | August 3, 2019(1) (53 weeks) | | July 28, 2018(2) (52 weeks) |
| Net sales | | $ | 24,503,882 |
| | $ | 24,184,056 |
|
| Net (loss) income from continuing operations | | $ | (287,001 | ) | | $ | 13,201 |
|
| Basic net (loss) income from continuing operations per share | | $ | (5.60 | ) | | $ | 0.26 |
|
| Diluted net (loss) income from continuing operations per share | | $ | (5.60 | ) | | $ | 0.26 |
|
| |
(1) | Includes 12 weeks of pro forma Supervalu results for the period ended September 8, 2018. |
| |
(2) | Includes 52 weeks of pro forma Supervalu results for the period ended July 28, 2018, including 19 weeks of pro forma Associated Grocers of Florida, Inc. results, which was acquired by Supervalu on December 8, 2017. |
These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined companies would have been had the acquisitions occurred at the beginning of the periods being presented, nor are they indicative of future results of operations.
Gourmet Guru, Inc.
On August 10, 2016, the Company acquired all of the outstanding equity securities of Gourmet Guru, Inc. (“Gourmet Guru”). Gourmet Guru is a distributor and merchandiser of fresh and organic food focusing on new and emerging brands. Total cash consideration related to this acquisition was approximately $10.0 million, subject to certain customary post-closing adjustments. The fair value of identifiable intangible assets acquired was determined by using an income approach. The identifiable intangible asset recorded based on a provisional valuation consisted of customer lists of $1.0 million, which are being amortized on a straight-line basis over an estimated useful life of approximately 2 years. During the first quarter of fiscal 2018, in finalizing the purchase accounting related to the Gourmet Guru acquisition, the Company recorded an increase to goodwill of approximately $0.2 million with a decrease to prepaid expenses. The goodwill of $10.3 million represents the future economic benefits expected to arise that could not be individually identified and separately recognized.
Cash paid for Gourmet Guru was financed through borrowings under the Company’s Former ABL Credit Facility. The results of the acquired business’s operations have been included in the Consolidated Financial Statements since the applicable date of acquisition. Operations for this acquisition have been combined with the Company’s existing wholesale distribution business and therefore results are not separable from the rest of the wholesale distribution business. The Company has not furnished pro forma financial information relating to this acquisition as such information is not material to the Company’s financial results.
NOTE 5—RESTRUCTURING, ACQUISITION AND INTEGRATION RELATED EXPENSES
Restructuring, acquisition and integration related expenses were as follows:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | 2021 | | 2020 | | 2019 |
| 2019 SUPERVALU INC. restructuring expenses | | $ | — | | | $ | 5 | | | $ | 74 | |
| Restructuring and integration costs | | 50 | | | 42 | | | 51 | |
| Closed property charges and costs | | 6 | | | 40 | | | 23 | |
| Total | | $ | 56 | | | $ | 87 | | | $ | 148 | |
|
| | | | | | | | | | | | |
| (in thousands) | | 2019 | | 2018 | | 2017 |
| 2019 SUPERVALU INC. restructuring expenses | | $ | 74,414 |
| | $ | — |
| | $ | — |
|
| Acquisition and integration costs | | 56,589 |
| | 4,967 |
| | — |
|
| Closed property charges | | 22,536 |
| | — |
| | — |
|
| 2018 Earth Origins Market restructuring expenses and loss on sale | | — |
| | 4,771 |
| | — |
|
| 2017 Cost Saving and Efficiency Initiatives | | — |
| | — |
| | 6,864 |
|
| Total | | $ | 153,539 |
| | $ | 9,738 |
| | $ | 6,864 |
|
Closed Property Reserves
Changes in reserves for closed properties, including additions noted above, consisted of the following:
|
| | | | | | | | | | | | |
| (in thousands) | | 2019 | | 2018 | | 2017 |
| Beginning balance | | $ | — |
| | $ | — |
| | $ | 443 |
|
| Acquired liabilities | | 34,581 |
| | — |
| | — |
|
| Additions, accretion and changes in estimates, net | | 16,529 |
| | 1,400 |
| | 258 |
|
| Payments | | (22,467 | ) | | (1,400 | ) | | (701 | ) |
| Ending balance | | $ | 28,643 |
| | $ | — |
| | $ | — |
|
Reserves for closed property are included in the Consolidated Balance Sheets within Accrued expenses and other current liabilities and Other long-term liabilities. Closed property charges recorded in fiscal 2019 primarily relate to 17 retail stores, including certain Shop ‘n Save and Shop ‘n Save East branded stores, and are net of estimated sublease assumptions. In addition, 12 property leases including non-retail properties with reserves were terminated in fiscal 2019.
Restructuring Programs
The following is a summary of the restructuring reserves by reserve type included in the Consolidated Balance Sheets, primarily within Accrued compensation and benefits for severance and other employee separation costs and tax payments, within Accrued expenses and other current liabilities for the current portion of closed property reserves and within Other long-term liabilities for the long-term portion of closed property reserves.
|
| | | | | | | | | | | | | | | | |
| (in thousands) | | 2019 SUPERVALU INC. | | 2018 Earth Origins Market | | 2017 Cost Saving and Efficiency Initiatives | | Total |
| Balances at July 29, 2017 | | $ | — |
| | $ | — |
| | $ | 4,298 |
| | $ | 4,298 |
|
| Restructuring program charge | | — |
| | 2,219 |
| | — |
| | 2,219 |
|
| Cash payments | | — |
| | (1,836 | ) | | (3,597 | ) | | (5,433 | ) |
| Balances at July 28, 2018 | | — |
| | 383 |
| | 701 |
| | 1,084 |
|
Restructuring program charge(1) | | 74,414 |
| | — |
| | — |
| | 74,414 |
|
| Acquired restructuring liability | | 12,573 |
| | — |
| | — |
| | 12,573 |
|
| Cash payments | | (75,130 | ) | | — |
| | — |
| | (75,130 | ) |
| Balances at August 3, 2019 | | $ | 11,857 |
| | $ | 383 |
| | $ | 701 |
| | $ | 12,941 |
|
| | | | | | | | | |
| Cumulative program charges incurred from inception to date | | $ | 74,414 |
| | $ | 2,219 |
| | $ | 6,864 |
| | $ | 83,497 |
|
| |
(1) | Includes $43.0 million of charges related to change-in-control expense to satisfy outstanding equity awards and severance related costs. |
2019 SUPERVALU INC.
As part of its acquisition of Supervalu and in order to achieve synergies from this combination, the Company is takinghas taken certain actions, which began during the first quarter of fiscal 2019 and will continue through at least fiscal 2020 to: (i) review its organizational structure and the strategic needs of the business going forward to identify and place talent with the appropriate skills, experience and qualifications to meet these needs; and (ii) dispose of and exit thecertain Supervalu legacy retail operations, as efficiently and economically as possible in order to focus on the Company’s core wholesale distribution business. ActionsExpenses related to this program primarily related to actions associated with retail divestitures and adjustments to the Company’s core cost-structure, for its wholesale food distribution business are expected to resultwhich resulted in headcount reductions and other costs and charges.
2018 Earth Origins Market
During Incremental and identifiable expenses associated with integrating the second quarter of fiscal 2018 the Company made the decision to close three non-core, under-performing stores of its total twelve storeslegacy companies operations and information technology systems are reflected within integration costs, and asset impairments related to its Earth Origins Market Retail business. Based on this decision,retail are included in closed property charges and costs.
Restructuring and Integration Costs
Restructuring and integration costs for fiscal 2021 primarily relate to certain professional fees for advisory and transformational activities. Fiscal 2020 restructuring and integration costs primarily relate to expenses associated with integrating and consolidating distribution centers, certain professional fees for distribution center network and administrative integration activities. Fiscal 2019 acquisition and integration costs primarily reflect transaction expenses and professional fees related to the CompanySupervalu acquisition.
Closed Property Charges and Costs
In fiscal 2021 and 2020, closed property charges relate to lease, and property and equipment asset impairments related to retail stores, lease terminations of non-operating stores and distribution center consolidation. Closed property charges recorded restructuring costs of $9.7 million duringin fiscal 2018. In the fourth quarter of fiscal 2018, the Earth Origins Retail business was sold2019 primarily relate to retail stores and the Company recorded a loss on disposition of assets of $2.7 million.non-operating properties for which leases were terminated.
2017 Cost Saving and Efficiency Initiatives
During fiscal 2017, the Company announced a restructuring program in conjunction with various cost saving and efficiency initiatives, including the planned opening of a shared services center.
NOTE 6—5—PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Original
Estimated
Useful Lives | | 2021 | | 2020 |
| Land | | | | $ | 138 | | | $ | 143 | |
| Buildings and improvements | | 10 - 40 years | | 1,020 | | | 971 | |
| Leasehold improvements | | 10 - 20 years | | 177 | | | 206 | |
| Equipment | | 3 - 25 years | | 980 | | | 878 | |
| Motor vehicles | | 5 - 8 years | | 70 | | | 74 | |
| Finance lease assets | | 1 - 11 years | | 144 | | | 161 | |
| Construction in progress | | | | 209 | | | 79 | |
| Property and equipment | | | | 2,738 | | | 2,512 | |
| Less accumulated depreciation and amortization | | | | 954 | | | 811 | |
| Property and equipment, net | | | | $ | 1,784 | | | $ | 1,701 | |
|
| | | | | | | | | | |
| (in thousands) | | Original Estimated Useful Lives | | 2019 | | 2018 |
| Land | | | | $ | 158,625 |
| | $ | 52,929 |
|
| Buildings and improvements | | 20-40 years | | 912,732 |
| | 431,297 |
|
| Leasehold improvements | | 5-20 years | | 123,748 |
| | 106,014 |
|
| Equipment | | 3-30 years | | 722,911 |
| | 426,732 |
|
| Motor vehicles | | 3-7 years | | 76,021 |
| | 4,884 |
|
| Capital lease assets | | 1-11 years | | 114,107 |
| | 15,368 |
|
| Construction in progress | | | | 172,702 |
| | 22,105 |
|
| | | | | 2,280,846 |
| | 1,059,329 |
|
| Less accumulated depreciation and amortization | | | | 641,587 |
| | 488,183 |
|
| Property and equipment, net | | | | $ | 1,639,259 |
| | $ | 571,146 |
|
The Company capitalized $3.3$3 million, $5 million, and $3 million of interest during fiscal 2019. The Company did not capitalize interest during fiscal 20182021, 2020 and 2017.2019, respectively.
Depreciation and amortization expense on property and equipment was $178.8$209 million, $71.5$198 million and $69.8$180 million for fiscal 2019, 20182021, 2020 and 2017,2019, respectively.
In the fourth quarter of fiscal 2019, the Company entered into an agreement to sell a distribution center for $43.2 million related to our Pacific Northwest consolidation strategy, which is expected to close in the first quarter of fiscal 2020. This facility is classified as held for sale within Prepaid expenses and other current assets of continuing operations on our Consolidated Balance Sheets.
NOTE 7—6—GOODWILL AND INTANGIBLE ASSETS, NET
The Company has seven5 goodwill reporting units, threeunits: 2 of which represent separate operating segments and are aggregated within the Wholesale reportable segment three(U.S. Wholesale and Canada Wholesale); 1 separate Retail operating and reportable segment and 2 of which are separate operating segments (Woodstock Farms and Blue Marble Brands) that do not qualifymeet the criteria for being disclosed as separate reportable segments and a single retail reporting unit,are included in the Other segment. The Canada Wholesale operating segment, which is included within discontinued operations.aggregated with U.S. Wholesale, would not meet the quantitative thresholds for separate reporting if it did not meet the aggregation criteria.
In the fourth quarter of fiscal 2021, the Company performed its annual goodwill qualitative impairment review and determined that a quantitative impairment test was not required for any of its reporting units.
Fiscal 2020 Goodwill Impairment Reviews
During the first quarter of fiscal 2019, a relative fair value allocation was performed when2020, the Canada WholesaleCompany changed its management structure and internal financial reporting, unit became a separate operating segment and reporting unit.
In conjunction withwhich resulted in the acquisition of Supervalu, goodwill resulting from the acquisition was assignedrequirement to combine the Supervalu Wholesale reporting unit and the legacy Company Wholesale reporting unit as both of these reporting units are expected to benefit from the synergies of the business combination. The assignment was based on the relative synergistic value estimated as of the acquisition date. This systematic approach utilized the relative cash flow contributions and value created from the acquisition to each reporting unit on a stand-alone basis. As of the acquisition date, approximately $82.0 million was attributed to the legacy Companyinto one U.S. Wholesale reporting unit, and experienced a further sustained decline in market capitalization and enterprise value. As a result of the change in reporting units and the sustained decline in market capitalization and enterprise value, the Company performed an interim quantitative impairment review of goodwill for the Wholesale reporting units, which is preliminary and subject to the final determinationsincluded a determination of the fair value of netall reporting units.
The Company estimated the fair values of all reporting units using both the market approach, applying a multiple of earnings based on observable multiples for guideline publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit. The calculation of the impairment charge included substantial fact-based determinations and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets acquired and liabilities. The rates used to discount projected future cash flows under the income approach reflect a proportionate assignment adjustment betweenweighted average cost of capital of 8.5%, which considered observable data about guideline publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums, including those reflected in the SupervaluCompany’s market capitalization. The Company confirmed the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. Based on this analysis, the Company determined that the carrying value of its U.S. Wholesale reporting unit and the legacy Company reporting unit.
The Company reviews goodwill for impairment at least annually and more frequently if events or changes in circumstances indicate it is more likely than not that theexceeded its fair value ofby an amount that exceeded its assigned goodwill. As a reporting unit is below its carrying amount. The annual review forresult, the Company recorded a goodwill impairment charge of $422 million in the first quarter of fiscal 2020. The goodwill impairment charge is performed asreflected in Goodwill impairment charges in the Consolidated Statements of Operations. The goodwill impairment charge reflected the impairment of all of the first day ofU.S. Wholesale reporting unit’s goodwill.
In the fourth quarter of each fiscal year. The2020, the Company testsperformed its annual goodwill qualitative impairment review and determined that a quantitative impairment test was not required for goodwill impairment at theany of its reporting unit level, which is one level below the operating segment level.units.
Fiscal 2019 Goodwill Impairment Reviews
During the first quarter of fiscal 2019, the Company experienced a decline in its stock price and market capitalization. During the second quarter of fiscal 2019, the stock price continued to decline, and the decline in the stock price and market capitalization became significant and sustained. Due to this sustained decline in stock price, the Company determined that it was more likely than not that the carrying value of the Supervalu Wholesale reporting unit exceeded its fair value and performed an interim quantitative impairment test of goodwill.
The Company estimated the fair values of all reporting units using both the market approach, applying a multiple of earnings based on guidelines for publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The rates used to discount projected future cash flows under the income approach reflect a weighted average cost of capital of 10%, which considered guidelines for publicly traded companies, capital structure and risk premiums, including those reflected in the Company’s then-current market capitalization. The Company corroboratedconfirmed the reasonableness of the estimated reporting unit fair values by reconciling those fair values to its enterprise value and market capitalization. Based on this analysis, the Company determined that the carrying value
of its Supervalu Wholesale reporting unit exceeded its fair value by an amount that exceeded the assigned goodwill as of the acquisition date. As a result, the Company recorded a goodwill impairment charge of $292.8$293 million in fiscal 2019, which reflects the preliminary goodwill impairment charge recorded in the second quarter of fiscal 2019 and adjustments to the charge recorded in the third and fourth quarters of fiscal 2019. The goodwill impairment charge adjustments recorded in the third and fourth quarters of fiscal 2019 were attributable to changes in the preliminary fair value of net assets, most notably changes in tax assets and liabilities, intangible assets and property and equipment, which affected the initial goodwill resulting from the Supervalu acquisition. The goodwill impairment charge is reflected in Goodwill and asset impairment charges in the Consolidated Statements of Operations. The goodwill impairment charge reflects all of Supervalu Wholesale’s reporting unit goodwill, based on preliminary acquisition date assigned fair values. The quantitative goodwill impairment review indicated that the estimated fair value of the legacy Company Wholesale and Canada Wholesale reporting units were in excess of their carrying values by over 20%. Other continuing operations reporting units were substantially in excess of their carrying value.
The goodwill impairment charge recorded in fiscal 2019 iswas subject to change based upon the final purchase price allocation during the measurement period for estimated fair values of assets acquired and liabilities assumed from the Supervalu acquisition. There can bewere no assurance that such final assessments will not result in material increases or decreases to the recorded goodwill impairment charge based upon the preliminaryfinal purchase price allocations, due to changes in the provisional opening balance sheet estimates of goodwill. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date). Refer to Note 4—Acquisitions for further information about the preliminary purchase price allocation and provisional goodwill estimated as of the acquisition date.allocations.
In fiscal 2019, the Company performed quarterly reviews of the composition of its reporting units. Any future changes in the Company’s goodwill reporting units would require a relative fair value allocation of goodwill, and may require a quantitative impairment assessment of goodwill, which may result in material goodwill impairment charges.
In the fourth quarter of fiscal 2019, the Company performed its annual goodwill qualitative impairment test and determined that a quantitative impairment test was not required for any of its reporting units.
2018 Earth Origins Market Impairment
During the second quarter of fiscal 2018, the Company made the decision to close three non-core, under-performing stores of its total twelve stores. Based on this decision, coupled with the decline in results in the first half of fiscal 2018 and the future outlook as a result of competitive pressure, the Company determined that both a test for recoverability of long-lived assets and a goodwill impairment analysis should be performed. The determination of the need for a goodwill analysis was based on the assertion that it was more likely than not that the fair value of the reporting unit was below its carrying amount. As a result of both these analyses, the Company recorded a total impairment charge of $3.4 million on long-lived assets and $7.9 million to goodwill, respectively, during the second quarter of fiscal 2018. During the fourth quarter of fiscal 2018 the Company disposed of its Earth Origins retail business.
Goodwill and Intangible Assets Changes
Changes in the carrying value of Goodwill by reportable segment that have goodwill consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Wholesale | | Other | | Total |
Goodwill as of August 3, 2019(1)(2) | | $ | 432 | | | $ | 10 | | | $ | 442 | |
| Goodwill from current fiscal year business combinations | | 1 | | | — | | | 1 | |
| Impairment charge | | (424) | | | — | | | (424) | |
| Change in foreign exchange rates | | 1 | | | — | | | 1 | |
Goodwill as of August 1, 2020(1)(2) | | 10 | | | 10 | | | 20 | |
| Change in foreign exchange rates | | — | | | — | | | — | |
Goodwill as of July 31, 2021(1)(2) | | $ | 10 | | | $ | 10 | | | $ | 20 | |
|
| | | | | | | | | | | | |
| (in thousands) | | Wholesale | | Other | | Total |
Goodwill as of July 29, 2017(1)(2) | | $ | 353,234 |
| | $ | 18,025 |
| | $ | 371,259 |
|
| Impairment charge | | — |
| | (7,872 | ) | | (7,872 | ) |
| Goodwill adjustment for prior fiscal year business combinations | | 220 |
| | — |
| | 220 |
|
| Change in foreign exchange rates | | (1,112 | ) | | — |
| | (1,112 | ) |
Goodwill as of July 28, 2018(1)(2) | | 352,342 |
| | 10,153 |
| | 362,495 |
|
| Goodwill from current fiscal year business combinations | | 374,757 |
| | — |
| | 374,757 |
|
| Impairment charge | | (292,757 | ) | | — |
| | (292,757 | ) |
| Other adjustments | | (1,951 | ) | | — |
| | (1,951 | ) |
| Change in foreign exchange rates | | (288 | ) | | — |
| | (288 | ) |
Goodwill as of August 3, 2019(1)(2) | | $ | 432,103 |
| | $ | 10,153 |
| | $ | 442,256 |
|
| |
(1) | Wholesale amounts are net of accumulated goodwill impairment charges of $0.0 million, $0.0 million and $292.8 millionfor fiscal 2017, 2018 and 2019, respectively.
|
| |
(2) | Other amounts are net of accumulated goodwill impairment charges of $1.4 million, $9.3 million and $9.3 million for fiscal 2017, 2018 and 2019, respectively. |
(1) Wholesale amounts are net of accumulated goodwill impairment charges of $293 million, $717 million and $717 millionfor fiscal 2019, 2020 and 2021, respectively.
Intangible(2) Other amounts are net of accumulated goodwill impairment charges of $9 million, $10 million and $10 million for fiscal 2019, 2020 and 2021, respectively.
Identifiable intangible assets, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 |
| (in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Amortizing intangible assets: | | | | | | | | | | | |
| Customer relationships | $ | 1,007 | | | $ | 234 | | | $ | 773 | | | $ | 1,007 | | | $ | 173 | | | $ | 834 | |
| Pharmacy prescription files | 33 | | | 13 | | | 20 | | | 33 | | | 8 | | | 25 | |
| Non-compete agreements | — | | | — | | | — | | | 13 | | | 12 | | | 1 | |
| Operating lease intangibles | 7 | | | 4 | | | 3 | | | 8 | | | 4 | | | 4 | |
| Trademarks and tradenames | 84 | | | 45 | | | 39 | | | 84 | | | 34 | | | 50 | |
| Total amortizing intangible assets | 1,131 | | | 296 | | | 835 | | | 1,145 | | | 231 | | | 914 | |
| Indefinite lived intangible assets: | | | | | | | | | | | |
| Trademarks and tradenames | 56 | | | — | | | 56 | | | 56 | | | — | | | 56 | |
| Intangibles assets, net | $ | 1,187 | | | $ | 296 | | | $ | 891 | | | $ | 1,201 | | | $ | 231 | | | $ | 970 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| (in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Amortizing intangible assets: | | | | | | | | | | | |
| Customer relationships | $ | 1,007,089 |
| | $ | 111,940 |
| | $ | 895,149 |
| | $ | 197,246 |
| | $ | 61,543 |
| | $ | 135,703 |
|
| Non-compete agreements | 12,900 |
| | 6,237 |
| | 6,663 |
| | 2,900 |
| | 1,914 |
| | 986 |
|
| Operating lease intangibles | 32,103 |
| | 2,209 |
| | 29,894 |
| | — |
| | — |
| | — |
|
| Trademarks and tradenames | 67,700 |
| | 14,161 |
| | 53,539 |
| | 1,700 |
| | 981 |
| | 719 |
|
| Total amortizing intangible assets | 1,119,792 |
| | 134,547 |
| | 985,245 |
| | 201,846 |
| | 64,438 |
| | 137,408 |
|
| Indefinite lived intangible assets: | | | | | | | | | | | |
| Trademarks and tradenames | 55,813 |
| | — |
| | 55,813 |
| | 55,801 |
| | — |
| | 55,801 |
|
| Intangibles assets, net | $ | 1,175,605 |
| | $ | 134,547 |
| | $ | 1,041,058 |
| | $ | 257,647 |
| | $ | 64,438 |
| | $ | 193,209 |
|
Amortization expense was $70.3$78 million, $15.0$91 million and $15.2$70 million for fiscal 2019, 20182021, 2020 and 2017,2019, respectively. The estimated future amortization expense for each of the next five fiscal years and thereafter on definite lived intangible assets existing as of August 3, 2019July 31, 2021 is shown below:
| | | | | |
| Fiscal Year: | (In millions) |
| 2022 | $ | 72 | |
| 2023 | 72 | |
| 2024 | 72 | |
| 2025 | 70 | |
| 2026 | 66 | |
| Thereafter | 483 | |
| $ | 835 | |
|
| | | |
| Fiscal Year: | (In thousands) |
| 2020 | $ | 87,304 |
|
| 2021 | 73,192 |
|
| 2022 | 67,544 |
|
| 2023 | 67,232 |
|
| 2024 | 67,453 |
|
| Thereafter | 622,520 |
|
| | $ | 985,245 |
|
NOTE 8—7—FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
Recurring Fair Value Measurements
The following table providestables provide the fair value hierarchy for financial assets and liabilities measured on a recurring basis as of August 3, 2019 and July 28, 2018:basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value at July 31, 2021 |
| (In millions) | | Consolidated Balance Sheets Location | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
| | | | | | | | |
| Fuel derivatives designated as hedging instruments | | Prepaid expenses and other current assets | | $ | — | | | $ | 1 | | | $ | — | |
| | | | | | | | |
| Mutual funds | | Other long-term assets | | $ | 2 | | | $ | — | | | $ | — | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Foreign currency derivatives designated as hedging instruments | | Accrued expenses and other current liabilities | | $ | — | | | $ | 1 | | | $ | — | |
| Interest rate swaps designated as hedging instruments | | Accrued expenses and other current liabilities | | $ | — | | | $ | 33 | | | $ | — | |
| Interest rate swaps designated as hedging instruments | | Other long-term liabilities | | $ | — | | | $ | 42 | | | $ | — | |
|
| | | | | | | | | | | | | | |
| | | | | Fair Value at August 3, 2019 |
| (In thousands) | | Consolidated Balance Sheets Location | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
| Interest rate swaps designated as hedging instruments | | Prepaid expenses and other current assets | | $ | — |
| | $ | 389 |
| | $ | — |
|
| Mutual funds | | Prepaid expenses and other current assets | | $ | 7 |
| | $ | — |
| | $ | — |
|
| Interest rate swaps designated as hedging instruments | | Other assets | | $ | — |
| | $ | 145 |
| | $ | — |
|
| Mutual funds | | Other assets | | $ | 1,799 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Interest rate swaps designated as hedging instruments | | Accrued expenses and other current liabilities | | $ | — |
| | $ | 16,360 |
| | $ | — |
|
| Interest rate swaps designated as hedging instruments | | Other long-term liabilities | | $ | — |
| | $ | 60,737 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value at August 1, 2020 |
| (In millions) | | Consolidated Balance Sheets Location | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Mutual funds | | Other long-term assets | | $ | 2 | | | $ | — | | | $ | — | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Interest rate swaps designated as hedging instruments | | Accrued expenses and other current liabilities | | $ | — | | | $ | 47 | | | $ | — | |
| Interest rate swaps designated as hedging instruments | | Other long-term liabilities | | $ | — | | | $ | 92 | | | $ | — | |
|
| | | | | | | | | | | | | | |
| | | | | Fair Value at July 28, 2018 |
| (In thousands) | | Consolidated Balance Sheets Location | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | |
| Interest rate swaps designated as hedging instruments | | Prepaid expenses and other current assets | | $ | — |
| | $ | 1,459 |
| | $ | — |
|
| Interest rate swaps designated as hedging instruments | | Other assets | | $ | — |
| | $ | 5,860 |
| | $ | — |
|
Interest Rate Swap Contracts
The fair values of interest rate swap contracts are measured using Level 2 inputs. The interest rate swap contracts are valued using an income approach interest rate swap valuation model incorporating observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. As of August 3, 2019,July 31, 2021, a 100 basis point increase in forward LIBOR interest rates would increase the fair value of the interest rate swaps by approximately $69.7$31 million; a 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of the interest rate swaps by approximately $73.0$32 million. Refer to Note 9—8—Derivatives for further information on interest rate swap contracts.
Mutual Funds
Mutual fund assets consist of balances held in investments to fund certain deferred compensation plans. The fair values of mutual fund assets are based on quoted market prices of the mutual funds held by the plan at each reporting period. Mutual funds traded in active markets are classified within Level 1 of the fair value hierarchy.
Fuel Supply Agreements and Derivatives
To reduce diesel price risk, the Company has entered into derivative financial instruments and/or forward purchase commitments for a portion of our projected monthly diesel fuel requirements at fixed prices. The fair values of fuel derivative agreements are measured using Level 2 inputs.
Foreign Exchange Derivatives
To reduce foreign exchange risk, the Company has entered into derivative financial instruments for a portion of our projected monthly foreign currency requirements at fixed prices. The fair values of foreign exchange derivatives are measured using Level 2 inputs.
Fair Value Estimates
For certain of the Company’s financial instruments including cash and cash equivalents, receivables, accounts payable, accrued vacation, compensation and benefits, and other current assets and liabilities the fair values approximate carrying amounts due to their short maturities.
Notes receivable estimated The fair value of notes receivable is determinedestimated by using a discounted cash flow approach prior to consideration for uncollectible amounts and is calculated by applying a market rate for similar instruments that is determined using Level 3 inputs. Refer to Note 1—Significant Accounting Policies for additional information regarding the fair value hierarchy.
The estimated fair value of our long-term debt was $176.2 million less than the carrying value as of August 3, 2019. There was no difference in theis estimated fair value and carrying value of our long-term debt as of July 28, 2018. The estimated fair values are based on market quotes, where available, or market values for similar instruments, using Level 2 and 3 inputs. In the table below, the carrying value of ourthe Company’s long-term debt is net of original issue discounts and debt issuance costs. Refer to Note 1—Significant Accounting Policies for additional information regarding the fair value hierarchy.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | July 31, 2021 | | August 1, 2020 |
| (in millions) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Notes receivable, including current portion | | $ | 29 | | | $ | 26 | | | $ | 78 | | | $ | 79 | |
| Long-term debt, including current portion | | $ | 2,188 | | | $ | 2,278 | | | $ | 2,498 | | | $ | 2,536 | |
NOTE 8—DERIVATIVES
|
| | | | | | | | | | | | | | | | |
| | | August 3, 2019 | | July 28, 2018 |
| (in thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Notes receivable, including current portion | | $ | 46,320 |
| | $ | 45,232 |
| | $ | 1,930 |
| | $ | 1,930 |
|
| Long-term debt, including current portion | | $ | 2,906,483 |
| | $ | 2,730,271 |
| | $ | 320,000 |
| | $ | 320,000 |
|
Fuel Supply Agreements and Derivatives
To reduce diesel price risk, we have in the past, and may in the future, periodically enter in to derivative financial instruments and/or forward purchase commitments for a portion of our projected monthly diesel fuel requirements at fixed prices. During the fiscal years ended August 3, 2019 and July 28, 2018, the Company did not enter into any such agreements or derivatives.
Foreign Exchange Derivatives
To reduce foreign exchange risk, we have in the past, and may in the future, periodically enter in to derivative financial instruments for a portion of our projected monthly foreign currency requirements at fixed prices. As of August 3, 2019 and July 28, 2018, our outstanding foreign currency forward contracts were immaterial.
NOTE 9—DERIVATIVES
Management of Interest Rate Risk
The Company enters into interest rate swap contracts from time to time to mitigate its exposure to changes in market interest rates as part of its overall strategy to manage its debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates. Interest rate swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company’s interest rate swap contracts are designated as cash flow hedges at August 3, 2019.hedges. Interest rate swap contracts are reflected at their fair values in the Consolidated Balance Sheets. Refer to Note 8—7—Fair Value Measurements of Financial Instruments for further information on the fair value of interest rate swap contracts.
Details of outstandingactive swap contracts as of August 3, 2019,July 31, 2021, which are all pay fixed and receive floating, are as follows:
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| Effective Date | Swap Maturity | | Notional Value (in millions) | | Pay Fixed Rate | | Receive Floating Rate(2) | | Floating Rate Reset Terms |
August 3, 2015(1) | August 15, 2022 | | $ | 33 | | | 1.7950 | % | | One-Month LIBOR | | Monthly |
| October 26, 2018 | October 31, 2022 | | 100 | | | 2.8915 | % | | One-Month LIBOR | | Monthly |
| January 11, 2019 | October 31, 2022 | | 50 | | | 2.4678 | % | | One-Month LIBOR | | Monthly |
| January 23, 2019 | October 31, 2022 | | 50 | | | 2.5255 | % | | One-Month LIBOR | | Monthly |
| November 16, 2018 | March 31, 2023 | | 150 | | | 2.8950 | % | | One-Month LIBOR | | Monthly |
| January 23, 2019 | March 31, 2023 | | 50 | | | 2.5292 | % | | One-Month LIBOR | | Monthly |
| November 30, 2018 | September 30, 2023 | | 50 | | | 2.8315 | % | | One-Month LIBOR | | Monthly |
| October 26, 2018 | October 31, 2023 | | 100 | | | 2.9210 | % | | One-Month LIBOR | | Monthly |
| January 11, 2019 | March 28, 2024 | | 100 | | | 2.4770 | % | | One-Month LIBOR | | Monthly |
| January 23, 2019 | March 28, 2024 | | 100 | | | 2.5420 | % | | One-Month LIBOR | | Monthly |
| November 30, 2018 | October 31, 2024 | | 100 | | | 2.8480 | % | | One-Month LIBOR | | Monthly |
| January 11, 2019 | October 31, 2024 | | 100 | | | 2.5010 | % | | One-Month LIBOR | | Monthly |
| January 24, 2019 | October 31, 2024 | | 50 | | | 2.5210 | % | | One-Month LIBOR | | Monthly |
| October 26, 2018 | October 22, 2025 | | 50 | | | 2.9550 | % | | One-Month LIBOR | | Monthly |
| November 16, 2018 | October 22, 2025 | | 50 | | | 2.9590 | % | | One-Month LIBOR | | Monthly |
| November 16, 2018 | October 22, 2025 | | 50 | | | 2.9580 | % | | One-Month LIBOR | | Monthly |
| January 24, 2019 | October 22, 2025 | | 50 | | | 2.5558 | % | | One-Month LIBOR | | Monthly |
| | | $ | 1,233 | | | | | | | |
|
| | | | | | | | | | | |
| Swap Maturity | | Notional Value (in millions) | | Pay Fixed Rate | | Receive Floating Rate | | Floating Rate Reset Terms |
April 29, 2021(1) | | $ | 25.0 |
| | 1.0650 | % | | One-Month LIBOR | | Monthly |
April 29, 2021(2) | | 25.0 |
| | 0.9260 | % | | One-Month LIBOR | | Monthly |
August 15, 2022(3) | | 60.0 |
| | 1.7950 | % | | One-Month LIBOR | | Monthly |
August 15, 2022(4) | | 40.0 |
| | 1.7950 | % | | One-Month LIBOR | | Monthly |
October 31, 2020(5) | | 100.0 |
| | 2.8240 | % | | One-Month LIBOR | | Monthly |
October 31, 2022(5) | | 100.0 |
| | 2.8915 | % | | One-Month LIBOR | | Monthly |
October 31, 2023(5) | | 100.0 |
| | 2.9210 | % | | One-Month LIBOR | | Monthly |
October 22, 2025(5) | | 50.0 |
| | 2.9550 | % | | One-Month LIBOR | | Monthly |
March 31, 2023(6) | | 150.0 |
| | 2.8950 | % | | One-Month LIBOR | | Monthly |
October 22, 2025(6) | | 50.0 |
| | 2.9580 | % | | One-Month LIBOR | | Monthly |
October 22, 2025(6) | | 50.0 |
| | 2.9590 | % | | One-Month LIBOR | | Monthly |
October 29, 2021(7) | | 100.0 |
| | 2.8084 | % | | One-Month LIBOR | | Monthly |
September 30, 2023(7) | | 50.0 |
| | 2.8315 | % | | One-Month LIBOR | | Monthly |
October 31, 2024(7) | | 100.0 |
| | 2.8480 | % | | One-Month LIBOR | | Monthly |
October 31, 2022(8) | | 50.0 |
| | 2.4678 | % | | One-Month LIBOR | | Monthly |
March 28, 2024(8) | | 100.0 |
| | 2.4770 | % | | One-Month LIBOR | | Monthly |
October 31, 2024(8) | | 100.0 |
| | 2.5010 | % | | One-Month LIBOR | | Monthly |
April 29, 2021(9) | | 50.0 |
| | 2.5500 | % | | One-Month LIBOR | | Monthly |
October 31, 2022(9) | | 50.0 |
| | 2.5255 | % | | One-Month LIBOR | | Monthly |
March 31, 2023(9) | | 50.0 |
| | 2.5292 | % | | One-Month LIBOR | | Monthly |
March 28, 2024(9) | | 100.0 |
| | 2.5420 | % | | One-Month LIBOR | | Monthly |
October 31, 2024(10) | | 50.0 |
| | 2.5210 | % | | One-Month LIBOR | | Monthly |
October 22, 2025(10) | | 50.0 |
| | 2.5558 | % | | One-Month LIBOR | | Monthly |
April 15, 2022(11) | | 100.0 |
| | 2.3645 | % | | One-Month LIBOR | | Monthly |
December 13, 2019(12) | | 100.0 |
| | 2.4925 | % | | One-Month LIBOR | | Monthly |
May 15, 2020(12) | | 100.0 |
| | 2.4490 | % | | One-Month LIBOR | | Monthly |
June 30, 2021(13) | | 100.0 |
| | 2.2520 | % | | One-Month LIBOR | | Monthly |
June 30, 2022(13) | | 100.0 |
| | 2.2170 | % | | One-Month LIBOR | | Monthly |
June 30, 2021(14) | | 50.0 |
| | 2.2290 | % | | One-Month LIBOR | | Monthly |
June 30, 2022(14) | | 50.0 |
| | 2.1840 | % | | One-Month LIBOR | | Monthly |
| | | $ | 2,200.0 |
| | | | | | |
(2)For these swap contracts that are indexed to LIBOR, the Company is monitoring and evaluating risks related to the expected future cessation of LIBOR.
| |
(1) | On June 7, 2016, the Company entered into a pay fixed and receive floating interest rate swap contract to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreement has an effective date of June 9, 2016 and expires in April 2021. The interest rate swap contract has a notional principal amount of $25 million and requires the Company to pay interest payments during the duration of the contract at a fixed annual rate of 1.0650%, while receiving interest for the same contract period at one-month LIBOR on the same notional principal amount. |
| |
(2) | On June 24, 2016, the Company entered into a pay fixed and receive floating interest rate swap contract to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreement has an effective date of June 24, 2016 and expires in April 2021. The interest rate swap contract has a notional principal amount of $25 million and requires the Company to pay interest payments during the duration of the contract at a fixed annual rate of 0.9260%, while receiving interest for the same contract period at one-month LIBOR on the same notional principal amount. |
| |
(3) | On January 23, 2015, the Company entered into a pay fixed and receive floating interest rate swap contract to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreement has an effective date of August 3, 2015 and expires in August 2022. On March 31, 2015, the Company amended the original contract to reduce the beginning notional principal amount from $140 million to $84 million. The interest rate swap contract has an amortizing notional principal amount which adjusts down on a quarterly basis and requires the Company to pay interest payments during the duration of the contract at a fixed annual rate of 1.7950%, while receiving interest for the same respective contract period at one-month LIBOR on the same notional principal amount. |
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(4) | On March 31, 2015, the Company entered into a pay fixed and receive floating interest rate swap contract to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreement has an effective date of August 3, 2015 and expires in August 2022. The interest rate swap contract has an amortizing notional principal amount which adjusts down on a quarterly basis and requires the Company to pay interest payments during the duration of the contract at a fixed annual rate of 1.7950%, while receiving interest for the same respective contract period at one-month LIBOR on the same notional principal amount. |
| |
(5) | On October 26, 2018, the Company entered into four pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of October 26, 2018 and expire at varied dates between October 2020 and October 2025. These interest rate swap contracts have an aggregate notional principal amount of $350 million and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between 2.8240% and 2.9550%, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts. |
| |
(6) | On November 16, 2018, the Company entered into three pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of November 16, 2018 and expire at varied dates between March 2023 and October 2025. These interest rate swap contracts have an aggregate notional principal amount of $250 million and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between 2.8950% and 2.9590%, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts. |
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(7) | On November 30, 2018, the Company entered into three pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of November 30, 2018 and expire at varied dates between October 2021 and October 2024. These interest rate swap contracts have an aggregate notional principal amount of $250 million and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between 2.8084% and 2.8480%, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts. |
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(8) | On January 11, 2019, the Company entered into three pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of January 11, 2019 and expire at varied dates between October 2022 and October 2024. These interest rate swap contracts have an aggregate notional principal amount of $250 million and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between 2.4678% and 2.5010%, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts. |
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(9) | On January 23, 2019, the Company entered into four pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of January 23, 2019 and expire at varied dates between April 2021 and March 2024. These interest rate swap contracts have an aggregate notional principal amount of $250 million and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between 2.5255% and 2.5500%, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts. |
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(10) | On January 24, 2019, the Company entered into two pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of January 24, 2019 and expire at varied dates between October 2024 and October 2025. These interest rate swap contracts have an aggregate notional principal amount of $100 million and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between 2.5210% and 2.5558%, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts. |
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(11) | On March 18, 2019, the Company entered into a pay fixed and receive floating interest rate swap contract to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreement has an effective date of March 21, 2019 and expires in April 2022. The interest rate swap contract has a notional principal amount of $100.0 million and requires the Company to pay interest payments during the duration of the contract at a fixed annual rate of 2.3645%, while receiving interest for the same contract period at one-month LIBOR on the same notional principal amount. |
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(12) | On March 21, 2019, the Company entered into two pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of March 21, 2019 and expire at varied dates between December 2019 and May 2020. These interest rate swap contracts have an aggregate notional principal amount of $200 million and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between 2.4490% and 2.4925%, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts. |
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(13) | On April 2, 2019, the Company entered into two pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of April 2, 2019 and expire at varied dates between June 2021 and June 2022. These interest rate swap contracts have an aggregate notional principal amount of $200 million and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between 2.2170% and 2.2520%, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts. |
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(14) | On April 2, 2019, the Company entered into two pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of June 10, 2019 and June 28, 2019 and expire at varied dates between June 2021 and June 2022. These interest rate swap contracts have an aggregate notional principal amount of $100 million and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between 2.1840% and 2.2290%, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts. |
In fiscal 2021, in order to reduce its exposure to pay fixed and receive floating interest rate swap contracts due to lower levels of debt balances with floating interest rates, the Company paid $6 million to terminate certain outstanding interest rate swaps with a notional amount of $250 million. In addition, in fiscal 2021, in conjunction with the $500 million fixed rate senior unsecured notes offering described below in Note 9—Long-Term Debt, the Company paid $11 million to terminate or novate certain outstanding interest rate swaps with a notional amount of $504 million and certain forward starting interest rate swaps with a notional amount of $450 million. The payments equaled the fair value of the interest rate swaps at the time of their termination or novation. No gain or loss was recorded as a result of the swap termination and novations. Since the hedged interest payments remain probable of occurring, the unrecognized gains and losses that existed as of the early termination or novation of these interest rate swap agreements will be amortized out of Accumulated other comprehensive loss and into Interest expense, net over the remaining period of the original terminated or novated interest rate swap agreements. If any of the hedged interest payments were not probable of occurring, then a charge representing an accelerated amortization of the unrecognized gains and losses would be recorded. Cash payments resulting from the termination or novation of interest rate swaps are classified as operating activities in the Company’s Condensed Consolidated Statements of Cash Flows.
The Company performs an initial quantitative assessment of hedge effectiveness using the “Hypothetical Derivative Method” in the period in which the hedging transaction is entered. Under this method, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. In future reporting periods, the Company performs a qualitative analysis for quarterly prospective and retrospective assessments of hedge effectiveness. The Company also monitors the risk of counterparty default on an ongoing basis and noted that the counterparties are reputable financial institutions. The entire change in the fair value of the derivative is initially reported in Other comprehensive income (outside of earnings) in the Consolidated Statements of Comprehensive Income and subsequently reclassified to earnings in Interest expense, net in the Consolidated Statements of Operations when the hedged transactions affect earnings.
The location and amount of gains or losses recognized in the Consolidated Statements of Operations for interest rate swap contracts for each of the periods, presented on a pretax basis, are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Interest Expense, net |
| (In millions) | | 2021 | | 2020 | | 2019 |
| Total amounts of expense line items presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded | | $ | 204 | | | $ | 192 | | | $ | 181 | |
| Loss on cash flow hedging relationships: | | | | | | |
| Loss reclassified from comprehensive income into earnings | | $ | (46) | | | $ | (25) | | | $ | — | |
| (Loss) gain on interest rate swap contracts not designated as hedging instruments: | | | | | | |
| (Loss) gain recognized in earnings | | $ | — | | | $ | — | | | $ | — | |
Future maturities of long-term debt, excluding debt issuance costs and original issue and purchase accounting discounts on debt, and contractual interest payments based on the face value and applicable interest rate as of July 31, 2021, consist of the following (in millions):
Under the ABL Loan Agreement, the Borrowers may, at their option, increase the aggregate amount of the ABL Credit Facility in an amount of up to $600.0$600 million without the consent of any ABL Lenders not participating in such increase, subject to certain customary conditions and applicable lenders committing to provide the increase in funding. There is no assurance that additional funding would be available.
The Borrowers’ obligations under the ABL Credit Facility are guaranteed by most of the Company’s wholly-owned subsidiaries who are not also Borrowers (collectively, the “ABL Guarantors”“Guarantors”), subject to customary exceptions and limitations. The Borrowers’ obligations under the ABL Credit Facility and the ABL Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the Borrowers’ and ABL Guarantors’ accounts receivable, inventory and certain other assets arising therefrom or related thereto (including substantially all of their deposit accounts, collectively, the “ABL Assets”) and (ii) a second-priority lien on all of the Borrowers’ and ABL Guarantors’ assets that do not constitute ABL Assets, in each case, subject to customary exceptions and limitations.
Availability under the ABL Credit Facility is subject to a borrowing base (the “Borrowing Base”), which is based on 90% of eligible accounts receivable, plus 90% of eligible credit card receivables, plus 90% of the net orderly liquidation value of eligible inventory, plus 90% of eligible pharmacy receivables, plus certain pharmacy scriptsprescription files availability of the Borrowers, after adjusting for customary reserves. The aggregate amount of the ABL Loans made and letters of credit issued under the ABL Credit Facility shallreserves, but at no time shall exceed the lesser of the aggregate commitments under the ABL Credit Facility (currently $2,100.0 million or, if increased at the Borrowers’ option as described above, up to $2,700.0$2,100 million) or the Borrowing Base. To
The ABL Loan Agreement subjects the Company to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) of at least 1.0 to 1.0 calculated at the end of each of our fiscal quartersquarter on a rolling four quarter basis when the adjusted aggregate availability (as defined in the ABL Loan Agreement) is less than the greater of (i) $235.0$235 million and (ii) 10% of the aggregate borrowing base. We wereThe Company has not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement, duringincluding through the fourth quarterfiling date of fiscal 2019.this Annual Report.
additional amounts based on satisfaction of certain leverage ratio tests, subject to certain customary conditions and applicable lenders committing to provide the additional funding. There can be no assurance that additional funding would be available.
The loans under the Term Loan Facility may be voluntarily prepaid, subject to certain minimum payment thresholds and the payment of breakage or other similar costs. Under the Term Loan Facility, we arethe Company is required, to, subject to certain exceptions and customary reinvestment rights, to apply 100 percent of Net Cash Proceeds (as defined in the Term Loan Agreement) from certain types of asset sales to prepay the loans outstanding under the Term Loan Facility. Commencing with the fiscal year ending August 1, 2020, wethe Company must also prepay loans outstanding under the Term Loan Facility no later than 130 days after the fiscal year end in an aggregate principal amount equal to a specified percentage (which percentage ranges from 0 to 75 percent depending on ourthe Consolidated First Lien Net Leverage Ratio (as defined in the Term Loan Agreement) as of the last day of such fiscal year) of Excess Cash Flow (as defined in the Term Loan Agreement) in excessAgreement as of $10 million for the last day of such fiscal year then ended,year), minus any voluntary prepayments made during such fiscal year of the loans under the Term Loan Facility, the ABL Credit Facility (to the extent they permanently reduce commitments under the ABL Facility) and certain other indebtednessindebtedness. Based on the Company’s Excess Cash Flow in fiscal 2020, a $72 million prepayment was required and paid in fiscal 2021 (as described above). Based on the Company’s Consolidated First Lien Net Leverage Ratio at the end of fiscal 2021, no prepayment from Excess Cash Flow in fiscal 2021 is required to be made during suchin fiscal year.2022.
Items reclassified out of Accumulated other comprehensive loss had the following impact on the Consolidated Statements of Operations:
