UNITED NATURAL FOODS, INC.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | |
| | 13-Week Period Ended | | 26-Week Period Ended |
| | January 27, 2018 | | January 28, 2017 | | January 27, 2018 | | January 28, 2017 |
Net income | | $ | 50,486 |
| | $ | 25,482 |
| | $ | 80,991 |
| | $ | 54,699 |
|
Other comprehensive income (loss): | | |
| | |
| | |
| | |
Change in fair value of swap agreements, net of tax | | 2,256 |
| | 3,483 |
| | 2,920 |
| | 5,078 |
|
Foreign currency translation adjustments | | 3,045 |
| | 1,281 |
| | 839 |
| | (620 | ) |
Total other comprehensive income | | 5,301 |
| | 4,764 |
| | 3,759 |
| | 4,458 |
|
Total comprehensive income | | $ | 55,787 |
| | $ | 30,246 |
| | $ | 84,750 |
| | $ | 59,157 |
|
See Notes to Condensed Consolidated Financial Statements.
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive (Loss) Income | | Retained Earnings | | Total Stockholders’ Equity |
| Shares | | Amount | | Shares | | Amount | | | | |
Balances at July 29, 2017 | 50,622 |
| | $ | 506 |
| | — |
| | $ | — |
| | $ | 460,011 |
| | $ | (13,963 | ) | | $ | 1,235,367 |
| | $ | 1,681,921 |
|
Cumulative effect of change in accounting principle | |
| | |
| | | | | | 1,314 |
| | |
| | (805 | ) | | 509 |
|
Stock option exercises and restricted stock vestings, net of tax | 350 |
| | 4 |
| | | | | | (4,160 | ) | | |
| | |
| | (4,156 | ) |
Share-based compensation |
|
| | |
| | | | | | 13,846 |
| | |
| | |
| | 13,846 |
|
Repurchase of common stock | | | | | 565 |
| | (22,237 | ) | |
|
| | | | | | (22,237 | ) |
Other | |
| | |
| | | | | | 107 |
| | |
| | |
| | 107 |
|
Fair value of swap agreements, net of tax | | | | | | | | | | | 2,920 |
| | | | 2,920 |
|
Foreign currency translation | |
| | |
| | | | | | |
| | 839 |
| | |
| | 839 |
|
Net income | |
| | |
| | | | | | |
| | |
| | 80,991 |
| | 80,991 |
|
Balances at January 27, 2018 | 50,972 |
| | $ | 510 |
| | 565 |
| | $ | (22,237 | ) | | $ | 471,118 |
| | $ | (10,204 | ) | | $ | 1,315,553 |
| | $ | 1,754,740 |
|
See Notes to Condensed Consolidated Financial Statements.
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | | | | | | | | | | | | | | |
| | 26-Week Period Ended |
(in millions) | | January 29, 2022 | | January 30, 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | |
Net income including noncontrolling interests | | $ | 145 | | | $ | 61 | |
Income from discontinued operations, net of tax | | — | | | 3 | |
Net income from continuing operations | | 145 | | | 58 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 138 | | | 144 | |
Share-based compensation | | 23 | | | 23 | |
Loss on sale of assets | | 1 | | | — | |
Closed property and other restructuring charges | | 1 | | | 3 | |
Net pension and other postretirement benefit income | | (20) | | | (34) | |
Deferred income tax benefit | | — | | | (1) | |
LIFO charge | | 30 | | | 13 | |
Provision (recoveries) for losses on receivables | | 1 | | | (4) | |
Non-cash interest expense and other adjustments | | 15 | | | 39 | |
Changes in operating assets and liabilities | | (291) | | | (34) | |
| | | | |
| | | | |
Net cash provided by operating activities | | 43 | | | 207 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | |
Payments for capital expenditures | | (106) | | | (92) | |
Proceeds from dispositions of assets | | 3 | | | 41 | |
Payments for investments | | (26) | | | — | |
Net cash used in investing activities of continuing operations | | (129) | | | (51) | |
Net cash provided by investing activities of discontinued operations | | — | | | 1 | |
Net cash used in investing activities | | (129) | | | (50) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | |
Proceeds from borrowings of long-term debt | | — | | | 500 | |
Proceeds from borrowings under revolving credit line | | 2,521 | | | 2,666 | |
| | | | |
Repayments of borrowings under revolving credit line | | (2,232) | | | (2,538) | |
Repayments of long-term debt and finance leases | | (168) | | | (769) | |
Proceeds from the issuance of common stock and exercise of stock options | | 9 | | | — | |
Payment of employee restricted stock tax withholdings | | (35) | | | (10) | |
Payments for debt issuance costs | | (1) | | | (10) | |
Distributions to noncontrolling interests | | (3) | | | (1) | |
| | | | |
| | | | |
Other | | — | | | (1) | |
Net cash provided by (used in) financing activities | | 91 | | | (163) | |
EFFECT OF EXCHANGE RATE ON CASH | | — | | | — | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | 5 | | | (6) | |
Cash and cash equivalents, at beginning of period | | 40 | | | 47 | |
Cash and cash equivalents, at end of period | | $ | 45 | | | $ | 41 | |
Supplemental disclosures of cash flow information: | | | | |
Cash paid for interest | | $ | 67 | | | $ | 75 | |
Cash payments for federal, state, and foreign income taxes, net | | $ | — | | | $ | 43 | |
Leased assets obtained in exchange for new operating lease liabilities | | $ | 123 | | | $ | 117 | |
Leased assets obtained in exchange for new finance lease liabilities | | $ | 1 | | | $ | — | |
Additions of property and equipment included in Accounts payable | | $ | 16 | | | $ | 31 | |
(In thousands)
|
| | | | | | | | |
| | 26-Week Period Ended |
| | January 27, 2018 | | January 28, 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | |
| | |
|
Net income | | $ | 80,991 |
| | $ | 54,699 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | |
| | |
|
Depreciation and amortization | | 44,249 |
| | 42,458 |
|
Share-based compensation | | 13,846 |
| | 14,011 |
|
Loss on disposals of property and equipment | | 100 |
| | 395 |
|
Gain associated with disposal of investments |
| (699 | ) |
| — |
|
Excess tax deficit from share-based payment arrangements | | — |
| | 1,413 |
|
Restructuring and asset impairment | | 3,370 |
| | — |
|
Goodwill impairment | | 7,872 |
| | — |
|
Deferred income taxes | | (22,733 | ) | | — |
|
Provision for doubtful accounts | | 5,569 |
| | 3,217 |
|
Non-cash interest expense (income) | | 956 |
| | (24 | ) |
Changes in assets and liabilities, net of acquired businesses: | | |
| | |
|
Accounts receivable | | (109,097 | ) | | (26,140 | ) |
Inventories | | (108,979 | ) | | 30,759 |
|
Prepaid expenses and other assets | | (13,508 | ) | | (20,514 | ) |
Accounts payable | | 60,636 |
| | 9,363 |
|
Accrued expenses and other liabilities | | 2,308 |
| | (12,728 | ) |
Net cash (used in) provided by operating activities | | (35,119 | ) | | 96,909 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| | |
|
Capital expenditures | | (15,535 | ) | | (22,674 | ) |
Purchase of businesses, net of cash acquired | | (19 | ) | | (9,982 | ) |
Proceeds from disposals of property and equipment | | 36 |
| | 18 |
|
Proceeds from disposal of investments |
| 756 |
|
| — |
|
Long-term investment | | (3,010 | ) | | (2,000 | ) |
Net cash used in investing activities | | (17,772 | ) | | (34,638 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | |
|
Repayments of long-term debt | | (6,054 | ) | | (5,658 | ) |
Repurchase of common stock | | (22,237 | ) | | — |
|
Proceeds from borrowings under revolving credit line | | 311,061 |
| | 136,787 |
|
Repayments of borrowings under revolving credit line | | (247,632 | ) |
| (169,618 | ) |
Increase (decrease) in bank overdraft | | 31,708 |
| | (9,076 | ) |
Proceeds from exercise of stock options | | 268 |
| | 165 |
|
Payment of employee restricted stock tax withholdings | | (4,424 | ) | | (1,191 | ) |
Excess tax deficit from share-based payment arrangements | | — |
| | (1,413 | ) |
Capitalized debt issuance costs | | — |
| | (180 | ) |
Net cash provided by (used in) financing activities | | 62,690 |
| | (50,184 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | 188 |
| | (22 | ) |
NET INCREASE IN CASH AND CASH EQUIVALENTS | | 9,987 |
| | 12,065 |
|
Cash and cash equivalents at beginning of period | | 15,414 |
| | 18,593 |
|
Cash and cash equivalents at end of period | | $ | 25,401 |
| | $ | 30,658 |
|
| | | | |
Supplemental disclosures of cash flow information: | | | | |
Cash paid for interest | | $ | 7,900 |
| | $ | 8,963 |
|
Cash paid for federal and state income taxes, net of refunds | | $ | 36,929 |
| | $ | 45,944 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
January 27, 2018 (unaudited)
NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
1.SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
United Natural Foods, Inc. and its subsidiaries (the “Company”, “we”, “us”, “UNFI”, or “our”) is a leading distributor and retailer of natural, organic, specialty, produce and specialty products.conventional grocery and non-food products, and provider of support services to retailers. The Company sells its products primarily throughout the United States and Canada.
(b) Fiscal Year
The Company’s fiscal years end on the Saturday closest to July 31 and contain either 52 or 53 weeks. References to the second quarter of fiscal 2022 and 2021 relate to the 13-week fiscal quarters ended January 29, 2022 and January 30, 2021, respectively. References to fiscal 2022 and 2021 year-to-date relate to the 26-week fiscal periods ended January 29, 2022 and January 30, 2021, respectively.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Unless otherwise indicated in these Condensed Consolidated Financial Statements, references to the Condensed Consolidated Statements of Operations, the Condensed Consolidated Balance Sheets and the Notes to the Condensed Consolidated Financial Statements exclude all amounts related to discontinued operations.
The accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"“SEC”) for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally required in complete financial statements prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. In the Company’s opinion, these condensed consolidated financial statementsCondensed Consolidated Financial Statements include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. TheHowever, the results of operations for interim periods however, may not be indicative of the results that may be expected for a full year. These condensed consolidated financial statementsCondensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statementsConsolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 29, 2017.31, 2021 (the “Annual Report”). There were no material changes in significant accounting policies from those described in the Annual Report.
Net sales consist primarilyDiscontinued Operations
In the fourth quarter of sales of natural, organic and specialty products to retailers, adjusted for customer volume discounts, returns, and allowances. Net sales also include amounts charged byfiscal 2021, the Company determined it no longer met the held for sale criterion for a probable sale to customersbe completed within 12 months for shipping and handling and fuel surcharges.2 of the 4 stores that were previously included within discontinued operations. As a result, the Company revised its Condensed Consolidated Financial Statements to reclassify 2 Shoppers stores from discontinued operations to continuing operations. The principal components of cost of sales includeprior period presented in the amounts paid to suppliers for product sold, plus the cost of transportation necessary to bring the productCondensed Consolidated Financial Statements have been conformed to the Company’s distribution facilities, offset by consideration received from supplierscurrent period presentation. The remaining 2 stores included in connection with the purchase or promotion of the suppliers' products. Cost of sales also includes amounts incurred by the Company’s manufacturing subsidiary, United Natural Trading LLC, which does business as Woodstock Farms Manufacturing, for inbound transportation costs offset by consideration received from suppliersdiscontinued operations were sold in connection with the purchase or promotion of the suppliers’ products. Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation and amortization expense. Operating expenses also include depreciation expense related to the wholesale and retail divisions. Other expense (income) includes interest on outstanding indebtedness, including the financing obligation related to our Aurora, Colorado distribution center and the lease for office space for our corporate headquarters in Providence, Rhode Island, interest income and miscellaneous income and expenses.
As noted above, the Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound freight are generally recorded in cost of sales, whereas shipping and handling costs for selecting, quality assurance, and outbound transportation are recorded in operating expenses. Outbound shipping and handling costs, including allocated employee benefit expenses, totaled $146.4 million and $129.0 million for the second quarter of fiscal 20182022.
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and 2017, respectively. Outbound shippingassumptions that affect the reported amounts of assets and handling costs, including allocated employee benefitliabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses totaled $284.4during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less. The Company’s banking arrangements allow it to fund outstanding checks when presented to the financial institution for payment. The 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 Condensed Consolidated Balance Sheets and are reflected as an operating activity in the Condensed Consolidated Statements of Cash Flows. As of January 29, 2022 and July 31, 2021, the Company had net book overdrafts of $292 million and $255.9$268 million, for the first 26 weeks of fiscal 2018 and 2017, respectively.
2.
Within the Condensed Consolidated Financial Statements certain immaterial amounts have been reclassified to conform with current year presentation. These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.
Inventories, Net
Substantially all of the Company’s inventories consist of finished goods. To value discrete inventory items at lower of cost or net realizable value before application of any last-in, first-out (“LIFO”) reserve, the Company utilizes the weighted average cost method, perpetual cost method, the retail inventory method and 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. Inventory quantities are evaluated 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. If the first-in, first-out method had been used, Inventories, net would have been higher by approximately $97 million and $67 million at January 29, 2022 and July 31, 2021, respectively.
NOTE 2—RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In December 2017, the United States ("U.S.") government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cut and Jobs Act ("SAB 118"), which provides guidance on accounting for the tax effects of the TCJA. Refer to Note 8, Income Taxes, for disclosure regarding the Company’s implementation of SAB 118.
In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line item as the hedged item. The ASU also provides new alternatives for applying hedge accounting to additional hedging strategies, measuring the hedged item in fair value hedges of interest rate risk, reducing the cost and complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method and reducing the risk of a material error correction if a company applies the shortcut method inappropriately. This ASU is effective for public companies in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of the fiscal year ending August 1, 2020, with early adoption permitted. We are currently reviewing the provisions of the new standard and evaluating its impact on the Company's consolidated financial statements.
In March 2016,2019, the FASB issued ASU 2016-09, Compensation - Stock Compensation2019-12, Income Taxes (Topic 718)740): ImprovementsSimplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions to Employee Share-Based Payment Accounting, which is intended toTopic 740’s general principles. The amendments also improve the accounting for share-based payment transactions as part of the FASB's simplification initiative. This ASU has changed aspects of accounting for share-based payment award transactions including accounting for income taxes, the classification of excess tax benefitsconsistency in and the classification of employee taxes paid when shares are withheld for tax-withholding purposes on the statement of cash flows, forfeitures, and minimum statutory tax withholding requirements.simplify its application. The Company adopted the new standard in the first quarter of fiscal 2018. Accordingly, the Company will account for excess tax benefits or tax deficiencies related to share-based payments in its provision for income taxes as opposed to additional paid-in capital. The Company recognized a de minimis amount of income tax expense related to tax deficiencies for share-based payments for the 13-week period ended January 27, 2018 and $0.9 million of income tax expense related to tax deficiencies for share-based payments for the 26-week period ended January 27, 2018. In addition, the Company elected to account for forfeitures as they occur and recorded a cumulative adjustment to retained earnings and additional paid-in capital as of July 30, 2017, the first day of fiscal 2018, of approximately $0.8 million and $1.3 million, respectively.
In February 2016, the FASB issued ASU No. 2016-2, Leases(Topic 842). 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. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. In addition, this ASU expands the disclosure requirements of lease arrangements. This ASU 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 leases, which the Company believes will result in a significant impact to its consolidated balance sheets. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The ASU is effective for public companies with interim and annual periods in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of the fiscal year ending August 1, 2020, with early adoption permitted. The Company expects to adopt this standard in the first quarter of fiscal 2020 and has begun an initial assessment plan to determine the impacts2022. The adoption of this ASUstandard did not have a material impact on the Company's consolidated financial statements and any necessary changes to our accounting policies, processes and controls, and, if required, our systems.Company’s Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In November 2015,March 2020, the FASB issued ASU No. 2015-17, Balance Sheet Classification2020-04, Reference Rate Reform (Topic 848): Facilitation of Deferred Taxesthe Effects of Reference Rate Reform on Financial Reporting. The temporary guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. ASU 2020-04 is effective from March 12, 2020 and may be applied prospectively through December 31, 2022. In fiscal 2020, the Company elected the initial expedient to assert probability of its hedged interest rate transactions and is currently evaluating the impact the remaining elements of the standard will have on the future cessation of LIBOR rates applicable to the Company.
NOTE 3—REVENUE RECOGNITION
Disaggregation of Revenues
The Company records revenue to 5 customer channels within Net sales, which are described below:
•Chains, which requiresconsists of customer accounts that typically have more than 10 operating stores and excludes stores included within the Supernatural and Other channels defined below;
•Independent retailers, which includes smaller size accounts, including single store and multiple store locations, and group purchasing entities with athat are not classified balance sheetwithin Chains above or Other discussed below;
•Supernatural, which consists of chain accounts that are national in scope and carry primarily natural products, and currently consists solely of Whole Foods Market;
•Retail, which reflects our Retail segment, including Cub Foods and Shoppers stores, excluding Shoppers stores that were held for sale within discontinued operations; and
•Other, which includes international customers outside of Canada, 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 Wholesale reportable segment for financial reporting purposes by product group, and it is therefore impracticable for it to presentreport them accordingly.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Net Sales for the 13-Week Period Ended |
(in millions) | | January 29, 2022 |
Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(1) | | Consolidated |
Chains | | $ | 3,243 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,243 | |
Independent retailers | | 1,905 | | | — | | | — | | | — | | | 1,905 | |
Supernatural | | 1,453 | | | — | | | — | | | — | | | 1,453 | |
Retail | | — | | | 643 | | | — | | | — | | | 643 | |
Other | | 531 | | | — | | | 50 | | | — | | | 581 | |
Eliminations | | — | | | — | | | — | | | (409) | | | (409) | |
Total | | $ | 7,132 | | | $ | 643 | | | $ | 50 | | | $ | (409) | | | $ | 7,416 | |
| | | | | | | | | | |
| | Net Sales for the 13-Week Period Ended |
(in millions) | | January 30, 2021 |
Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(1) | | Consolidated |
Chains | | $ | 3,106 | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,106 | |
Independent retailers | | 1,701 | | | — | | | — | | | — | | | 1,701 | |
Supernatural | | 1,298 | | | — | | | — | | | — | | | 1,298 | |
Retail | | — | | | 633 | | | — | | | — | | | 633 | |
Other | | 513 | | | — | | | 55 | | | — | | | 568 | |
Eliminations | | — | | | — | | | — | | | (406) | | | (406) | |
Total | | $ | 6,618 | | | $ | 633 | | | $ | 55 | | | $ | (406) | | | $ | 6,900 | |
| | | | | | | | | | |
| | Net Sales for the 26-Week Period Ended |
(in millions) | | January 29, 2022 |
Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(1) | | Consolidated |
Chains | | $ | 6,325 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,325 | |
Independent retailers | | 3,655 | | | — | | | — | | | — | | | 3,655 | |
Supernatural | | 2,831 | | | — | | | — | | | — | | | 2,831 | |
Retail | | — | | | 1,245 | | | — | | | — | | | 1,245 | |
Other | | 1,055 | | | — | | | 106 | | | — | | | 1,161 | |
Eliminations | | — | | | — | | | — | | | (804) | | | (804) | |
Total | | $ | 13,866 | | | $ | 1,245 | | | $ | 106 | | | $ | (804) | | | $ | 14,413 | |
| | | | | | | | | | |
| | Net Sales for the 26-Week Period Ended |
(in millions) | | January 30, 2021 |
Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(1) | | Consolidated |
Chains | | $ | 6,133 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,133 | |
Independent retailers | | 3,373 | | | — | | | — | | | — | | | 3,373 | |
Supernatural | | 2,512 | | | — | | | — | | | — | | | 2,512 | |
Retail | | — | | | 1,239 | | | — | | | — | | | 1,239 | |
Other | | 1,038 | | | — | | | 111 | | | — | | | 1,149 | |
Eliminations | | — | | | — | | | — | | | (822) | | | (822) | |
Total | | $ | 13,056 | | | $ | 1,239 | | | $ | 111 | | | $ | (822) | | | $ | 13,584 | |
(1)Eliminations primarily includes the net sales elimination of Wholesale’s sales to the Retail segment and the elimination of sales from segments included within Other to Wholesale.
The Company serves customers in the United States and Canada, as well as customers located in other countries. However, all deferred taxof the Company’s revenue is earned in the United States 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.
Accounts and Notes Receivable Balances
Accounts and notes receivable are as follows:
| | | | | | | | | | | | | | |
(in millions) | | January 29, 2022 | | July 31, 2021 |
Customer accounts receivable | | $ | 1,254 | | | $ | 1,115 | |
Allowance for uncollectible receivables | | (29) | | | (28) | |
Other receivables, net | | 16 | | | 16 | |
Accounts receivable, net | | $ | 1,241 | | | $ | 1,103 | |
| | | | |
Notes receivable, net, included within Prepaid expenses and other current assets | | $ | 7 | | | $ | 7 | |
Long-term notes receivable, net, included within Other long-term assets | | $ | 13 | | | $ | 15 | |
NOTE 4—RESTRUCTURING, ACQUISITION AND INTEGRATION RELATED EXPENSES
Restructuring, acquisition and integration related expenses were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| 13-Week Period Ended | | 26-Week Period Ended |
(in millions) | January 29, 2022 | | January 30, 2021 | | January 29, 2022 | | January 30, 2021 |
Restructuring and integration costs | $ | 4 | | | $ | 14 | | | $ | 7 | | | $ | 29 | |
Closed property charges and costs | 1 | | | 4 | | | 1 | | | 5 | |
Total | $ | 5 | | | $ | 18 | | | $ | 8 | | | $ | 34 | |
NOTE 5—GOODWILL AND INTANGIBLE ASSETS, NET
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 July 31, 2021 | $ | 10 | | (1) | $ | 10 | | (2) | $ | 20 | |
| | | | | |
| | | | | |
| | | | | |
Change in foreign exchange rates | — | | | — | | | — | |
Goodwill as of January 29, 2022 | $ | 10 | | (1) | $ | 10 | | (2) | $ | 20 | |
| | | | | |
(1)Wholesale amounts are net of accumulated goodwill impairment charges of $717 million as of July 31, 2021 and January 29, 2022.
(2)Other amounts are net of accumulated goodwill impairment charges of $10 million as of July 31, 2021 and January 29, 2022.
Identifiable intangible assets, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 29, 2022 | | July 31, 2021 |
(in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Amortizing intangible assets: | | | | | | | | | | | |
Customer relationships | $ | 1,007 | | | $ | 264 | | | $ | 743 | | | $ | 1,007 | | | $ | 234 | | | $ | 773 | |
Pharmacy prescription files | 33 | | | 15 | | | 18 | | | 33 | | | 13 | | | 20 | |
Operating lease intangibles | 7 | | | 5 | | | 2 | | | 7 | | | 4 | | | 3 | |
Trademarks and tradenames | 84 | | | 48 | | | 36 | | | 84 | | | 45 | | | 39 | |
Total amortizing intangible assets | 1,131 | | | 332 | | | 799 | | | 1,131 | | | 296 | | | 835 | |
Indefinite lived intangible assets: | | | | | | | | | | | |
Trademarks and tradenames | 56 | | | — | | | 56 | | | 56 | | | — | | | 56 | |
Intangibles assets, net | $ | 1,187 | | | $ | 332 | | | $ | 855 | | | $ | 1,187 | | | $ | 296 | | | $ | 891 | |
Amortization expense was $18 million and $19 million for the second quarters of fiscal 2022 and 2021, respectively, and $36 million and $42 million for fiscal 2022 and 2021 year-to-date, respectively. The estimated future amortization expense for each of the next five fiscal years and thereafter on definite lived intangible assets existing as of January 29, 2022 is as follows:
| | | | | |
Fiscal Year: | (in millions) |
Remaining fiscal 2022 | $ | 36 | |
2023 | 72 | |
2024 | 72 | |
2025 | 70 | |
2026 | 66 | |
Thereafter | 483 | |
| $ | 799 | |
NOTE 6—FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
Recurring Fair Value Measurements
The following tables provide the fair value hierarchy for financial assets and liabilities as noncurrent. The new pronouncement is effective for public companies with annual periods, and interim periods within those annual periods, beginning after December 15, 2016, which for the Company was the first quarter of fiscal 2018. The Company adopted this guidancemeasured on a prospective basis in the first quarterrecurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Condensed Consolidated Balance Sheets Location | | Fair Value at January 29, 2022 |
(in millions) | | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Fuel derivatives designated as hedging instruments | | Prepaid expenses and other current assets | | $ | — | | | $ | 2 | | | $ | — | |
Foreign currency derivatives designated as hedging instruments | | Prepaid expenses and other current assets | | $ | — | | | $ | 1 | | | $ | — | |
Mutual funds | | Other long-term assets | | $ | 1 | | | $ | — | | | $ | — | |
| | | | | | | | |
Liabilities: | | | | | | | | |
| | | | | | | | |
Interest rate swaps designated as hedging instruments | | Accrued expenses and other current liabilities | | $ | — | | | $ | 24 | | | $ | — | |
Interest rate swaps designated as hedging instruments | | Other long-term liabilities | | $ | — | | | $ | 15 | | | $ | — | |
In May 2014, the FASB issued ASU No. 2014-09, Revenue from | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Condensed Consolidated Balance Sheets Location | | Fair Value at July 31, 2021 |
(in millions) | | | 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 | | | $ | — | |
Interest Rate Swap Contracts with Customers, (Topic 606), which has been updated by multiple amending ASUs and supersedes existing revenue recognition requirements. 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, which for the Company will be the first quarter of the fiscal year ending August 3, 2019. 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 (“modified retrospective method”).
The Company will adopt this new guidance in the first quarterfair values of fiscal 2019 and preliminarily expects to use the modified retrospective method.interest rate swap contracts are measured using Level 2 inputs. The Company's evaluation of the impact of the adoption of the ASU on the consolidated financial statements, footnote disclosures and accounting policies is ongoing and the impact cannot be reasonably estimated at this time. The Company continues to progress through its implementation plan and expects to complete its impact assessment in the third quarter of fiscal 2018. As part of our assessment work to-date, we have completed our scoping of revenue streams, began reviewinginterest rate swap contracts with customers and began documenting the impacts of the ASU on our wholesale distribution and other segments. After we have finalized our assessment, we will implement new policies, processes and controls to support revenue recognition under the new standard throughout the remainder of fiscal 2018.
3.ACQUISITIONS
Wholesale Segment - Wholesale Distribution Acquisition
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. The fair value of identifiable intangible assets acquired was determined byare valued using an income approach. The identifiable intangible asset recorded based onapproach interest rate swap valuation model incorporating observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. As of January 29, 2022, a provisional valuation consisted of customer lists of $1.0 million, which are being amortized on a straight-line100 basis over an estimated useful life of approximately two years. During the first quarter of fiscal 2018, the Company recorded anpoint 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. During the first quarter of fiscal 2018, the Company finalized its purchase accounting related to the Gourmet Guru acquisition. Operations 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.
4.RESTRUCTURING ACTIVITIES AND ASSET IMPAIRMENTS
2018 Earth Origins Market. During the second quarter of fiscal 2018, the Company recorded restructuring and asset impairment expenses of $11.4 million related to the Company's Earth Origins Market retail business. The Company made the decision in the second quarter of fiscal 2018 to close three non-core, under-performing stores of its total twelve stores which resulted in restructuring costs of $0.2 million related to severance and closure costs.
Based on the decision to close these stores, 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 thatforward LIBOR interest rates would increase the fair value of the reporting unit was below its carrying amount. Asinterest rate swaps by approximately $24 million; a result100 basis point decrease in forward LIBOR interest rates would decrease the fair value of both these analyses, the Company recorded a total impairment chargeinterest rate swaps by approximately $25 million. Refer to Note 7—Derivatives for further information on interest rate swap contracts.
Fair Value Estimates
For certain of $3.3 million on long-livedthe Company’s financial instruments including cash and cash equivalents, receivables, accounts payable, accrued vacation, compensation and benefits, and other current assets and $7.9 million to goodwill, respectively. Both of these charges are recorded inliabilities the Company's "Other" segment. The Company expects to incur additional restructuring charges primarily related to future exit costs of approximately $2.6 million during the second half of fiscal 2018.
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. The Company recorded total restructuring costs of $6.9 million during the fiscal year ended July 29, 2017, all of which was recorded in the second half of fiscal 2017. Of the total restructuring costs recorded, $6.6 million was primarily related to severance and other employee separation and transition costs and $0.3 million wasfair values approximate carrying amounts due to an early lease terminationtheir short maturities. The fair value of notes receivable is estimated by using a discounted cash flow approach prior to consideration for uncollectible amounts and facility closing costsis calculated by applying a market rate for the Company's Gourmet Guru facility in Bronx, New York. During the second quartersimilar instruments using Level 3 inputs. The fair value of fiscal 2018 the Company performed an analysisdebt is estimated based on the remaining restructuring cost liabilitymarket quotes, where available, or market values for similar instruments, using Level 2 and as a result, recorded a benefit of $0.2 million. This is included in "payments and other adjustments" in3 inputs. In the table below.
The following is a summarybelow, the carrying value of the restructuring costs the Company recorded in fiscal 2017, as well as the remaining liability asCompany’s long-term debt is net of January 27, 2018 (in thousands):original issue discounts and debt issuance costs.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | January 29, 2022 | | July 31, 2021 |
(in millions) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Notes receivable, including current portion | | $ | 25 | | | $ | 22 | | | $ | 29 | | | $ | 26 | |
Long-term debt, including current portion | | $ | 2,323 | | | $ | 2,394 | | | $ | 2,188 | | | $ | 2,278 | |
| | | | | | | | |
NOTE 7—DERIVATIVES
|
| | | | | | | | | | | | |
| | Restructuring Costs Recorded in Fiscal 2017 | | Payments and Other Adjustments | | Restructuring Cost Liability as of January 27, 2018 |
Severance and other employee separation and transition costs | | $ | 6,606 |
| | $ | (5,428 | ) | | $ | 1,178 |
|
Early lease termination and facility closing costs | | 258 |
| | (258 | ) | | — |
|
Total | | $ | 6,864 |
| | $ | (5,686 | ) | | $ | 1,178 |
|
5.EARNINGS PER SHARE
The following is a reconciliation of the basic and diluted number of shares used in computing earnings per share (in thousands):
|
| | | | | | | | | | | | |
| | 13-Week Period Ended | | 26-Week Period Ended |
| | January 27, 2018 | | January 28, 2017 | | January 27, 2018 | | January 28, 2017 |
Basic weighted average shares outstanding | | 50,449 |
| | 50,587 |
| | 50,633 |
| | 50,531 |
|
Net effect of dilutive stock awards based upon the treasury stock method | | 292 |
| | 168 |
| | 216 |
| | 146 |
|
Diluted weighted average shares outstanding | | 50,741 |
| | 50,755 |
| | 50,849 |
| | 50,677 |
|
For the second quarters of fiscal 2018 and fiscal 2017, there were 292,703 and 36,986 anti-dilutive share-based awards outstanding, respectively. For the first 26 weeks of fiscal 2018 and 2017, there were 581,618 and 40,862 anti-dilutive share-based awards outstanding, respectively. These anti-dilutive share-based awards were excluded from the calculation of diluted earnings per share.
6.FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
HedgingManagement of Interest Rate Risk
The Company manages its debt portfolio withenters into interest rate swapsswap 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. Details of outstanding swap agreements as of January 27, 2018, which are all pay fixed and receive floating, are as follows:
|
| | | | | | | | | | | |
Swap Maturity | | Notional Value (in millions) | | Pay Fixed Rate | | Receive Floating Rate | | Floating Rate Reset Terms |
June 9, 2019 | | $ | 50.0 |
| | 0.8725 | % | | One-Month LIBOR | | Monthly |
June 24, 2019 | | $ | 50.0 |
| | 0.7265 | % | | One-Month LIBOR | | Monthly |
April 29, 2021 | | $ | 25.0 |
| | 1.0650 | % | | One-Month LIBOR | | Monthly |
April 29, 2021 | | $ | 25.0 |
| | 0.9260 | % | | One-Month LIBOR | | Monthly |
August 3, 2022 | | $ | 117.5 |
| | 1.7950 | % | | One-Month LIBOR | | Monthly |
Interest rate swap agreementscontracts 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 agreementscontracts are designated as cash flow hedges atas of January 27, 2018 and29, 2022. Interest rate swap contracts are reflected at their fair value of $6.4 million included in "Other Assets"values in the Condensed Consolidated Balance Sheet.Sheets. Refer to Note 6—Fair Value Measurements of Financial Instruments for further information on the fair value of interest rate swap contracts.
Details of active swap contracts as of January 29, 2022, which are all pay fixed and receive floating, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | $ | 31 | | | 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 |
| | | | $ | 1,231 | | | | | | | |
(1)The swap contract has an amortizing notional principal amount which is reduced by $1 million on a quarterly basis.
(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.
In fiscal 2021 year-to-date, in conjunction with the $500 million fixed rate senior unsecured notes offering described below in Note 8—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 terminations 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 usesperforms an initial quantitative assessment of hedge effectiveness using the “Hypothetical Derivative Method” described in Accounting Standards Codification ("ASC") 815 for quarterly prospective and retrospective assessments of hedge effectiveness, as well as for measurements of hedge ineffectiveness.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. The effective portionIn future reporting periods, the Company performs a qualitative analysis for quarterly prospective and retrospective assessments of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings in interest income when the hedged transactions affect earnings. Ineffectiveness resulting from the hedge is recorded as a gain or loss in the condensed consolidated statement of income as part of other income. The Company did not have any hedge ineffectiveness recognized in earnings during the second quarter and first 26 weeks of fiscal 2018.effectiveness. The Company also monitors the risk of counterparty default on an ongoing basis and noted that the counterparties are reputable financial institutions.
Financial Instruments
The following table providesentire change in the fair value hierarchy for financial assets and liabilities measured on a recurring basis as of January 27, 2018 and July 29, 2017:
|
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value at January 27, 2018 | | Fair Value at July 29, 2017 |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | | |
Interest Rate Swap | | — |
| | $ | 6,394 |
| | — |
| | — |
| | $ | 2,491 |
| | — |
|
Liabilities: | | | | | | | | | | | | |
Interest Rate Swap | | — |
| | — |
| | — |
| | — |
| | (308 | ) | | — |
|
The fair value of the Company's other financial instruments including accounts receivable, notes receivable, accounts payablederivative is initially reported in Other comprehensive income (outside of earnings) in the Condensed Consolidated Statements of Comprehensive Income and certain accrued expenses are derived using Level 2 inputssubsequently reclassified to earnings in Interest expense, net in the Condensed Consolidated Statements of Operations when the hedged transactions affect earnings.
The location and approximate carrying amounts due to the short-term nature of these instruments. The fair value of notes payable approximate carrying amounts as they are variable rate instruments. The carrying amount of notes payable approximates fair valuegains or losses recognized in the Condensed Consolidated Statements of Operations for interest rate swap contracts for each of the periods, presented on a pretax basis, are as interest rates on the credit facility approximates current market rates (Level 2 criteria).follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13-Week Period Ended | | 26-Week Period Ended |
| | January 29, 2022 | | January 30, 2021 | | January 29, 2022 | | January 30, 2021 |
(in millions) | | Interest expense, net | | Interest expense, net |
Total amounts of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded | | $ | 44 | | | $ | 51 | | | $ | 84 | | | $ | 120 | |
Loss on cash flow hedging relationships: | | | | | | | | |
Loss reclassified from comprehensive income into earnings | | $ | (10) | | | $ | (12) | | | $ | (21) | | | $ | (24) | |
| | | | | | | | |
| | | | | | | | |
NOTE 8—LONG-TERM DEBT
The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies taking into account the instruments' interest rate, terms, maturity date and collateral, if any, in comparison to the Company's incremental borrowing rate for similar financial instruments and are therefore deemed Level 2 inputs. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicativeCompany’s long-term debt consisted of the amounts that the Company could realize in a current market exchange.following:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Average Interest Rate at January 29, 2022 | | Fiscal Maturity Year | | January 29, 2022 | | July 31, 2021 |
Term Loan Facility | 3.35% | | 2026 | | $ | 844 | | | $ | 1,002 | |
ABL Credit Facility | 1.54% | | 2024 | | 990 | | | 701 | |
Senior Notes | 6.75% | | 2029 | | 500 | | | 500 | |
Other secured loans | 5.14% | | 2024-2025 | | 30 | | | 37 | |
Debt issuance costs, net | | | | | (28) | | | (35) | |
Original issue discount on debt | | | | | (13) | | | (17) | |
Long-term debt, including current portion | | | | | 2,323 | | | 2,188 | |
Less: current portion of long-term debt | | | | | (14) | | | (13) | |
Long-term debt | | | | | $ | 2,309 | | | $ | 2,175 | |
|
| | | | | | | | | | | | | | | | |
| | January 27, 2018 | | July 29, 2017 |
(In thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Liabilities: | | |
| | |
| | |
| | |
|
Long-term debt, including current portion | | $ | 156,118 |
| | $ | 162,406 |
| | $ | 161,991 |
| | $ | 169,058 |
|
Senior Notes
7.TREASURY STOCK
On October 6, 2017,22, 2020, the Company announced that its Boardissued $500 million of Directors authorized a share repurchase program for up to $200.0 millionunsecured 6.750% Senior Notes due October 15, 2028 (the “Senior Notes”). The Senior Notes are guaranteed by each of the Company’s outstanding common stock. subsidiaries that are borrowers under or that guarantee the ABL Credit Facility (defined below) or the Term Loan Facility (defined below).
ABL Credit Facility
The repurchase programABL Loan Agreement by and among the Company and United Natural Foods West, Inc. (together with the Company, the “U.S. Borrowers”) and UNFI Canada, Inc. (the “Canadian Borrower” and, together with the U.S. Borrowers, the “Borrowers”), the financial institutions that are parties thereto as lenders (collectively, the “ABL Lenders”), Bank of America, N.A. as administrative agent for the ABL Lenders, Bank of America, N.A. (acting through its Canada branch), as Canadian agent for the ABL Lenders, and the other parties thereto, provides for a secured asset-based revolving credit facility (the “ABL Credit Facility” and the loans thereunder, the “ABL Loans”), of which up to (i) $2,050 million is scheduledavailable to expire upon the Company’s repurchaseU.S. Borrowers and (ii) $50 million is available to the Canadian Borrower. The ABL Loan Agreement also provides for (i) a $300 million sublimit of sharesavailability for letters of credit of which there is a further $25 million sublimit for the Canadian Borrower. 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 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 common stock havingwholly-owned subsidiaries (collectively, the “Guarantors”), subject to customary exceptions and limitations. The Borrowers’ obligations under the ABL Credit Facility and the Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the Borrowers’ and 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 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 prescription files availability of the Borrowers, after adjusting for customary reserves, but at no time shall exceed the lesser of the aggregate commitments under the ABL Credit Facility (currently $2,100 million) or the Borrowing Base.
The assets included in the Condensed Consolidated Balance Sheets securing the outstanding obligations under the ABL Credit Facility on a first-priority basis, and the unused credit and fees under the ABL Credit Facility, were as follows:
| | | | | | | | | | | |
Assets securing the ABL Credit Facility (in millions)(1): | January 29, 2022 | | July 31, 2021 |
Certain inventory assets included in Inventories, net and Current assets of discontinued operations | $ | 2,454 | | | $ | 2,297 | |
Certain receivables included in Accounts receivable, net and Current assets of discontinued operations | $ | 1,158 | | | $ | 1,041 | |
(1)The ABL Credit Facility is also secured by all of the Company’s pharmacy prescription files, which are included in Intangibles, net in the Condensed Consolidated Balance Sheets. Refer to Note 5—Goodwill and Intangible Assets, Net for additional information.
As of January 29, 2022, the U.S. Borrowers’ Borrowing Base, net of $178 million of reserves, was $2,439 million, which is above the $2,050 million limit of availability to the U.S. Borrowers under the ABL Credit Facility. As of January 29, 2022, the Canadian Borrower’s Borrowing Base, net of $5 million of reserves, was $46 million, which is below the $50 million limit of availability to the Canadian Borrower under the ABL Credit facility, resulting in total availability of $2,096 million for ABL Loans and letters of credit under the ABL Credit Facility. As of January 29, 2022, the U.S. Borrowers had $990 million of ABL Loans and the Canadian Borrower had no ABL Loans outstanding under the ABL Credit Facility, which are presented net of debt issuance costs of $6 million and are included in Long-term debt on the Condensed Consolidated Balance Sheets. As of January 29, 2022, the U.S. Borrowers had $115 million in letters of credit and the Canadian Borrower had no letters of credit outstanding under the ABL Credit Facility. The Company’s resulting remaining availability under the ABL Credit Facility was $991 million as of January 29, 2022.
| | | | | |
ABL availability (in millions): | January 29, 2022 |
Total availability for ABL Loans and letters of credit | $ | 2,096 | |
ABL Loans | $ | 990 | |
Letters of credit | $ | 115 | |
Unused credit | $ | 991 | |
The applicable interest rates, letter of credit fees and unutilized commitment fees under the ABL Credit Facility are variable and are dependent upon the prior fiscal quarter’s daily Average Availability (as defined in the ABL Agreement), and were as follows:
| | | | | | | | |
Interest rates and fees under the ABL Credit Facility: | Range of Facility Rates and Fees (per annum) | January 29, 2022 |
U.S. and Canadian Borrowers’ applicable margin for base rate loans | —% - 0.50% | 0.25 | % |
U.S. and Canadian Borrowers’ applicable margin for LIBOR and BA loans(1) | 1.00% - 1.50% | 1.25 | % |
Unutilized commitment fees | 0.25% - 0.375% | 0.25 | % |
Letter of credit fees | 1.125% - 1.625% | 1.375 | % |
(1) The U.S. Borrowers utilize LIBOR-based loans and the Canadian Borrower utilizes bankers’ acceptance rate-based loans.
The ABL Loan Agreement contains provisions for the transition to an alternative rate of interest in the event that LIBOR is no longer available.
Term Loan Facility
The Term Loan Agreement, by and among the Company and Supervalu (collectively, the “Term Borrowers”), the financial institutions that are parties thereto as lenders, Credit Suisse, as administrative agent for the Lenders, and the other parties thereto, provides for senior secured first lien term loans in an initial aggregate principal amount of $1,800 million in a seven-year tranche (the “Term Loan Facility”). The loans under the Term Loan Facility will be payable in full on October 22, 2025.
Under the Term Loan Agreement, the Company may, at its option, increase the amount of the Term Loan Facility, add one or more additional tranches of term loans or add one or more additional tranches of revolving credit commitments, without the consent of any Term Lenders not participating in such additional borrowings, up to an aggregate purchase priceamount of $200.0$656 million plus 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 obligations under the Term Loan Facility are guaranteed by the Guarantors, subject to customary exceptions and limitations. The Term Borrowers’ obligations under the Term Loan Facility and the Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on substantially all of the Term Borrowers’ and the Guarantors’ assets other than the ABL Assets and (ii) a second-priority lien on substantially all of the Term Borrowers’ and the Guarantors’ ABL Assets, in each case, subject to customary exceptions and limitations, including an exception for owned real property with net book values of less than $10 million. Repurchases willAs of January 29, 2022 and July 31, 2021, there was $668 million and $676 million, respectively, of owned real property pledged as collateral that was included in Property and equipment, net in the Condensed Consolidated Balance Sheets.
The Company must 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 the Consolidated First Lien Net Leverage Ratio as of the last day of such fiscal year) of Excess Cash Flow (as defined in the Term Loan Agreement), minus certain types of voluntary prepayments of indebtedness made during such fiscal year. 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 in accordance with applicable securities lawsfiscal 2022. The potential amount of prepayment from time to timeExcess Cash Flow in fiscal 2022 that may be required in fiscal 2023 is not reasonably estimable as of January 29, 2022.
As of January 29, 2022, the Company had borrowings of $844 million outstanding under the Term Loan Facility, which are presented in the open market, through privately negotiated transactions, or otherwise. The Company may also implement all or partCondensed Consolidated Balance Sheets net of debt issuance costs of $15 million and an original issue discount on debt of $12 million. As of January 29, 2022, no amount of the repurchase program pursuant to a plan or plans meetingTerm Loan Facility was classified as current.
As of January 29, 2022, the conditions of Rule 10b5-1borrowings under the Securities Exchange ActTerm Loan Facility bear interest at rates that, at the Term Borrowers’ option, can be either: (i) a base rate plus a margin of 1934, as amended.2.25% or (ii) a LIBOR rate plus a margin of 3.25%; provided that the LIBOR rate shall never be less than 0.0%. The Term Loan Agreement contains provisions for the establishment of an alternative rate of interest in the event that LIBOR is no longer available.
Under this program,On November 10, 2021, the Company purchased 402,587 sharesentered into an amendment (the “Second Term Loan Amendment”) amending the Term Loan Agreement. The amendment provides for (i) the reduction of the Company's common stock at anapplicable margin for LIBOR loans from 3.50% to 3.25% and the applicable margin for base rate loans from 2.50% to 2.25%, and (ii) other administrative changes. The amendment did not change the aggregate costamount or maturity date of $15.8the Term Loan Facility. In conjunction with the Second Term Loan Amendment, the Company made a voluntary prepayment of $150 million on the Term Loan Facility funded with incremental borrowings under the ABL Credit Facility that reduces its interest costs. This prepayment will count towards any requirement to prepay the Term Loan Facility from Excess Cash Flow (as defined in the Term Loan Agreement) generated during fiscal 2022, which would be due in fiscal 2023. In connection with this prepayment, the Company incurred a loss on debt extinguishment of $5 million related to unamortized debt issuance costs and a loss on unamortized original issue discount, which was recorded within Interest expense, net in the second quarter of fiscal 2018 and 564,660 shares of the Company's common stock at an aggregate cost of $22.2 million in the 26-week period ended January 27, 2018. 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.2022.
8.INCOME TAXES
Effects of the Tax Cuts and Jobs Act
New tax legislation, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), was enacted on December 22, 2017. ASC 740, Accounting for Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most TCJA provisions is for tax years beginning after December 31, 2017. Though certain key aspects of the new law are effective January 1, 2018 and have an immediate accounting effect, other significant provisions are not effective or may not result in accounting effects for the Company until our fiscal year beginning August 2018.
Given the significance of the legislation, the SEC staff issued SAB 118, which allows registrants to record provisional amounts concerning TCJA impacts during a one year “measurement period” similar to that used when accounting for business combinations. The measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
SAB 118 summarizes a process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with law priorSubsequent to the enactmentend of the TCJA.
Provisional estimates have been recorded during the second quarter of fiscal 20182022, in March 2022, the Company made a $44 million voluntary prepayment on the Term Loan Facility from the majority of the anticipated after-tax net proceeds from the transactions described further in Note 16—Subsequent Events.
NOTE 9—COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in Accumulated other comprehensive loss by component, net of tax, for fiscal 2022 year-to-date are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Other Cash Flow Derivatives | | Benefit Plans | | Foreign Currency Translation | | Swap Agreements | | Total |
Accumulated other comprehensive income (loss) at July 31, 2021 | $ | — | | | $ | 37 | | | $ | (16) | | | $ | (60) | | | $ | (39) | |
Other comprehensive income (loss) before reclassifications | 1 | | | — | | | (2) | | | 13 | | | 12 | |
Amortization of amounts included in net periodic benefit income | — | | | 2 | | | — | | | — | | | 2 | |
Amortization of cash flow hedges | 1 | | | — | | | — | | | 15 | | | 16 | |
Net current period Other comprehensive income (loss) | 2 | | | 2 | | | (2) | | | 28 | | | 30 | |
Accumulated other comprehensive income (loss) at January 29, 2022 | $ | 2 | | | $ | 39 | | | $ | (18) | | | $ | (32) | | | $ | (9) | |
Changes in Accumulated other comprehensive loss by component, net of tax, for fiscal 2021 year-to-date are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Benefit Plans | | Foreign Currency Translation | | Swap Agreements | | Total |
Accumulated other comprehensive loss at August 1, 2020 | | $ | (116) | | | $ | (21) | | | $ | (102) | | | $ | (239) | |
Other comprehensive income before reclassifications | | — | | | 3 | | | 5 | | | 8 | |
Amortization of amounts included in net periodic benefit income | | (1) | | | — | | | — | | | (1) | |
Amortization of cash flow hedges | | — | | | — | | | 17 | | | 17 | |
| | | | | | | | |
Net current period Other comprehensive (loss) income | | (1) | | | 3 | | | 22 | | | 24 | |
Accumulated other comprehensive loss at January 30, 2021 | | $ | (117) | | | $ | (18) | | | $ | (80) | | | $ | (215) | |
Items reclassified out of Accumulated other comprehensive loss had the following impact on the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13-Week Period Ended | | 26-Week Period Ended | | Affected Line Item on the Condensed Consolidated Statements of Operations |
(in millions) | | January 29, 2022 | | January 30, 2021 | | January 29, 2022 | | January 30, 2021 | |
Pension and postretirement benefit plan net assets: | | | | | | | | | | |
Amortization of amounts included in net periodic benefit income(1) | | $ | 1 | | | $ | (1) | | | $ | 2 | | | $ | (1) | | | Net periodic benefit income, excluding service cost |
Income tax (benefit) expense | | — | | | — | | | — | | | — | | | Provision for income taxes |
Total reclassifications, net of tax | | $ | 1 | | | $ | (1) | | | $ | 2 | | | $ | (1) | | | |
| | | | | | | | | | |
Swap agreements: | | | | | | | | | | |
Reclassification of cash flow hedges | | $ | 10 | | | $ | 12 | | | $ | 21 | | | $ | 24 | | | Interest expense, net |
Income tax benefit | | (3) | | | (4) | | | (6) | | | (7) | | | Provision for income taxes |
Total reclassifications, net of tax | | $ | 7 | | | $ | 8 | | | $ | 15 | | | $ | 17 | | | |
| | | | | | | | | | |
Other cash flow hedges: | | | | | | | | | | |
Reclassification of cash flow hedge | | $ | 2 | | | $ | — | | | $ | 2 | | | $ | — | | | Cost of sales |
Income tax benefit | | (1) | | | — | | | (1) | | | — | | | Provision for income taxes |
Total reclassification, net of tax | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | | | |
(1)Reclassification of amounts included in net periodic benefit income include reclassification of prior service cost and reclassification of net actuarial loss as reflected in Note 11—Benefit Plans.
As of January 29, 2022, the Company expects to reclassify $24 million related to unrealized derivative losses out of Accumulated other comprehensive loss and primarily into Interest expense, net during the following twelve-month period.
NOTE 10—SHARE-BASED AWARDS
In fiscal 2022 year-to-date, the Company granted restricted stock units and performance share units to its directors, executive officers and certain employees representing a right to receive an aggregate of 1.1 million shares. As of January 29, 2022, there were 2.9 million shares available for issuance under the Amended and Restated 2020 Equity Incentive Plan.
NOTE 11—BENEFIT PLANS
Net periodic benefit income and contributions to defined benefit pension and other post-retirement benefit plans consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| 13-Week Period Ended |
| Pension Benefits | | Other Postretirement Benefits |
(in millions) | January 29, 2022 | | January 30, 2021 | | January 29, 2022 | | January 30, 2021 |
Net Periodic Benefit (Income) Cost | | | | | | | |
| | | | | | | |
Interest cost | $ | 9 | | | $ | 9 | | | $ | — | | | $ | 1 | |
Expected return on plan assets | (20) | | | (26) | | | — | | | — | |
Amortization of prior service cost (credit) | — | | | — | | | 1 | | | (1) | |
Amortization of net actuarial loss (gain) | — | | | 1 | | | — | | | (1) | |
| | | | | | | |
Net periodic benefit (income) cost | $ | (11) | | | $ | (16) | | | $ | 1 | | | $ | (1) | |
| | | | | | | |
Contributions to benefit plans | $ | — | | | $ | (1) | | | $ | (1) | | | $ | (1) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 26-Week Period Ended |
| Pension Benefits | | Other Postretirement Benefits |
(in thousands) | January 29, 2022 | | January 30, 2021 | | January 29, 2022 | | January 30, 2021 |
Net Periodic Benefit (Income) Cost | | | | | | | |
| | | | | | | |
Interest cost | $ | 19 | | | $ | 18 | | | $ | — | | | $ | 1 | |
Expected return on plan assets | (41) | | | (52) | | | — | | | — | |
Amortization of prior service cost (credit) | — | | | — | | | 2 | | | (1) | |
Amortization of net actuarial loss (gain) | — | | | 1 | | | — | | | (1) | |
Net periodic benefit (income) cost | $ | (22) | | | $ | (33) | | | $ | 2 | | | $ | (1) | |
| | | | | | | |
Contributions to benefit plans | $ | — | | | $ | (1) | | | $ | (2) | | | $ | (2) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Defined Benefit Plan Merger
In the second quarter of fiscal 2022, the Company merged the Unified Grocers, Inc. Cash Balance Plan into the SUPERVALU INC. Retirement Plan. The merger did not impact the amount of plan assets and accumulated benefit plan obligations; however, as a result of the merger, former Unified Grocers, Inc. Cash Balance Plan participants will receive all benefits from the SUPERVALU INC. Retirement Plan. As such, the funded status of the remaining plan in the Condensed Consolidated Balance Sheets has been presented within a single asset balance within Other long-term assets.
Pension Contributions
No minimum pension contributions are required to be made under the SUPERVALU INC. Retirement Plan under the Employee Retirement Income Security Act of 1974, as amended, (“ERISA”) in fiscal 2022. The Company expects to contribute approximately $2 million and $3 million, respectively, to its other non-qualified pension plans and postretirement benefit plans in fiscal 2022.
Multiemployer Pension Plans
The Company contributed $11 million and $12 million in the second quarters of fiscal 2022 and 2021, respectively, and $22 million and $24 million in fiscal 2022 and 2021 year-to-date, respectively, to multiemployer pension plans.
NOTE 12—INCOME TAXES
The effective tax rate for the estimated impactsecond quarter of fiscal 2022 was 26.9% compared to 22.7% for the second quarter of fiscal 2021. The change in the effective tax rate was primarily driven by a tax benefit in the second quarter of fiscal 2021 from the release of reserves for unrecognized tax positions.
The effective tax rate for fiscal 2022 year-to-date was 14.2% compared to 21.6% for fiscal 2021 year-to-date primarily driven by discrete tax benefits from employee stock award vestings that occurred in fiscal 2022 year-to-date. The impacts from the release of unrecognized tax positions in fiscal 2022 year-to-date were comparable to fiscal 2021 year-to-date.
NOTE 13—EARNINGS PER SHARE
The following is a reconciliation of the TCJA based on information that is currently available to the Company. These provisional estimates are comprisedbasic and diluted number of amounts (including the tax basis of assets and liabilities) that will be finalizedshares used in connection with the Company's July 2017 tax returns, a rate reduction for fiscal 2018 to a 27% blended federal tax rate, a re-measurement of deferred tax balances to the new statutory 21% rate and the one-time mandatory repatriation transition tax. The Company estimates that the re-measurement of deferred taxes resulted in a provisional $21.9 million net benefit and the repatriation transition tax has an immaterial impact because of foreign tax credits available to the Company. As the Company completes its analysis of the TCJA, changes may be made to provisional estimates, and such changes will be reflected in the period in which the related adjustments are made.computing earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13-Week Period Ended | | 26-Week Period Ended |
(in millions, except per share data) | | January 29, 2022 | | January 30, 2021 | | January 29, 2022 | | January 30, 2021 |
Basic weighted average shares outstanding | | 58.3 | | | 56.1 | | | 57.6 | | | 55.7 | |
Net effect of dilutive stock awards based upon the treasury stock method | | 2.7 | | | 3.1 | | | 3.4 | | | 3.4 | |
Diluted weighted average shares outstanding | | 61.0 | | | 59.2 | | | 61.0 | | | 59.1 | |
| | | | | | | | |
Basic earnings per share: | | | | | | | | |
Continuing operations | | $ | 1.13 | | | $ | 1.01 | | | $ | 2.47 | | | $ | 0.99 | |
Discontinued operations | | $ | — | | | $ | 0.04 | | | $ | — | | | $ | 0.05 | |
Basic earnings per share | | $ | 1.13 | | | $ | 1.05 | | | $ | 2.47 | | | $ | 1.04 | |
Diluted earnings per share: | | | | | | | | |
Continuing operations | | $ | 1.08 | | | $ | 0.96 | | | $ | 2.33 | | | $ | 0.93 | |
Discontinued operations | | $ | — | | | $ | 0.04 | | | $ | — | | | $ | 0.05 | |
Diluted earnings per share | | $ | 1.08 | | | $ | 1.00 | | | $ | 2.33 | | | $ | 0.98 | |
| | | | | | | | |
Anti-dilutive stock-based awards excluded from the calculation of diluted earnings per share | | 0.4 | | | 1.1 | | | 0.9 | | | 1.2 | |
9.
NOTE 14—BUSINESS SEGMENTS
The Company has several operating divisions aggregated under the wholesale2 reportable segments: Wholesale and Retail. These reportable segments are two distinct businesses, each with a different customer base, marketing strategy and management structure. The Wholesale reportable segment which is the Company’s only reportable segment. Theseaggregation of 2 operating divisionssegments: U.S. Wholesale and Canada Wholesale. The U.S. Wholesale and Canada Wholesale operating segments have similar products and services, customer channels, distribution methods and historical margins. economic characteristics. Reportable segments are reviewed on an annual basis, or more frequently if events or circumstances indicate a change in reportable segments has occurred.
The following table provides continuing operations information by reportable segment, including Net sales, Adjusted EBITDA with a reconciliation to Income from continuing operations before income taxes, depreciation and amortization, and payments for capital expenditures:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13-Week Period Ended | | 26-Week Period Ended |
(in millions) | | January 29, 2022 | | January 30, 2021 | | January 29, 2022 | | January 30, 2021 |
Net sales: | | | | | | | | |
Wholesale(1) | | $ | 7,132 | | | $ | 6,618 | | | $ | 13,866 | | | $ | 13,056 | |
Retail | | 643 | | | 633 | | | 1,245 | | | 1,239 | |
Other | | 50 | | | 55 | | | 106 | | | 111 | |
Eliminations | | (409) | | | (406) | | | (804) | | | (822) | |
Total Net sales | | $ | 7,416 | | | $ | 6,900 | | | $ | 14,413 | | | $ | 13,584 | |
Continuing Operations Adjusted EBITDA: | | | | | | | | |
Wholesale | | $ | 159 | | | $ | 188 | | | $ | 323 | | | $ | 311 | |
Retail | | 30 | | | 26 | | | 52 | | | 51 | |
Other | | 12 | | | (8) | | | 16 | | | (4) | |
Eliminations | | — | | | (2) | | | (1) | | | 4 | |
Adjustments: | | | | | | | | |
Net income attributable to noncontrolling interests | | 2 | | | 2 | | | 3 | | | 3 | |
Net periodic benefit income, excluding service cost | | 10 | | | 17 | | | 20 | | | 34 | |
Interest expense, net | | (44) | | | (51) | | | (84) | | | (120) | |
Other, net | | 2 | | | 2 | | | 1 | | | 3 | |
Depreciation and amortization | | (69) | | | (67) | | | (138) | | | (144) | |
Share-based compensation | | (12) | | | (13) | | | (23) | | | (27) | |
Restructuring, acquisition and integration related expenses | | (5) | | | (18) | | | (8) | | | (34) | |
Loss on sale of assets | | (1) | | | — | | | (1) | | | — | |
Multi-employer pension plan withdrawal benefit | | 8 | | | — | | | 8 | | | — | |
| | | | | | | | |
| | | | | | | | |
Other retail benefit (expense) | | 1 | | | (1) | | | 1 | | | (3) | |
Income from continuing operations before income taxes | | $ | 93 | | | $ | 75 | | | $ | 169 | | | $ | 74 | |
Depreciation and amortization: | | | | | | | | |
Wholesale | | $ | 61 | | | $ | 59 | | | $ | 122 | | | $ | 127 | |
Retail | | 8 | | | 7 | | | 15 | | | 14 | |
Other | | — | | | 1 | | | 1 | | | 3 | |
Total depreciation and amortization | | $ | 69 | | | $ | 67 | | | $ | 138 | | | $ | 144 | |
Payments for capital expenditures: | | | | | | | | |
Wholesale | | $ | 46 | | | $ | 46 | | | $ | 98 | | | $ | 84 | |
Retail | | 4 | | | 5 | | | 8 | | | 8 | |
| | | | | | | | |
Total capital expenditures | | $ | 50 | | | $ | 51 | | | $ | 106 | | | $ | 92 | |
(1)As presented in Note 3—Revenue Recognition, for the second quarters of fiscal 2022 and 2021, the Company recorded $356 million and $354 million, respectively, and $695 million and $719 million in fiscal 2022 and 2021 year-to-date, respectively, within Net sales in its Wholesale reportable segment attributable to Wholesale sales to its Retail segment that have been eliminated upon consolidation.
Total assets of continuing operations by reportable segment were as follows:
| | | | | | | | | | | | | | |
(in millions) | | January 29, 2022 | | July 31, 2021 |
Assets: | | | | |
Wholesale | | $ | 6,851 | | | $ | 6,536 | |
Retail | | 597 | | | 566 | |
Other | | 397 | | | 462 | |
Eliminations | | (44) | | | (43) | |
Total assets of continuing operations | | $ | 7,801 | | | $ | 7,521 | |
NOTE 15—COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Guarantees and Contingent Liabilities
The Company has outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of January 29, 2022. These guarantees were generally made to support the business growth of wholesale segment is engagedcustomers. The guarantees are generally for the entire terms of the leases, fixture financing loans or other debt obligations with remaining terms that range from less than one year to eight years, with a weighted average remaining term of approximately five years. For each guarantee issued, if the wholesale customer or other third-party defaults on a payment, the Company would be required to make payments under its guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees. The Company reviews performance risk related to its guarantee obligations based on internal measures of credit performance. As of January 29, 2022, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was $25 million ($22 million on a discounted basis). Based on the indemnification agreements, personal guarantees and results of the reviews of performance risk, as of January 29, 2022, a total estimated loss of $1 million is recorded in the Condensed Consolidated Balance Sheets.
The Company is a party to a variety of contractual agreements under which it 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. These agreements primarily relate to the Company’s commercial contracts, service agreements, contracts entered into for the purchase and sale of stock or assets, operating leases and other real estate contracts, financial agreements, agreements to provide services to the Company and agreements to indemnify officers, directors and employees in the performance of their work. While the Company’s aggregate indemnification obligations could result in a material liability, the Company is not aware of any matters that are expected to result in a material liability. No amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations as the fair value has been determined to be de minimis.
In connection with Supervalu’s sale of New Albertson’s, Inc. (“NAI”) on March 21, 2013, the Company remains contingently liable with respect to certain self-insurance commitments and other guarantees as a result of parental guarantees issued by Supervalu with respect to the obligations of NAI that were incurred while NAI was Supervalu’s subsidiary. Based on the expected settlement of the self-insurance claims that underlie the Company’s commitments, the Company believes that such contingent liabilities will continue to decline. Subsequent to the sale of NAI, NAI collateralized most of these obligations with letters of credit and surety bonds to numerous state governmental authorities. Because NAI remains a primary obligor on these self-insurance and other obligations and has collateralized most of the self-insurance obligations for which the Company remains contingently liable, the Company believes that the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these guarantees, as the fair value has been determined to be de minimis.
Agreements with Save-A-Lot and Onex
The Agreement and Plan of Merger pursuant to which Supervalu sold the Save-A-Lot business in 2016 (the “SAL Merger Agreement”) contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters, on the terms and subject to the limitations set forth in the SAL Merger Agreement. Similarly, Supervalu entered into a Separation Agreement (the “Separation Agreement”) with Moran Foods, LLC d/b/a Save-A-Lot (“Moran Foods”), which contains indemnification obligations and covenants related to the separation of the assets and liabilities of the Save-A-Lot business from the Company. The Company also entered into a Services Agreement with Moran Foods (the “Services Agreement”), pursuant to which the Company is providing Save-A-Lot with various technical, human resources, finance and other operational services for a term of five years, subject to termination provisions that can be exercised by each party. The initial annual base charge under the Services Agreement is $30 million, subject to adjustments. The Company expects that services provided under the Services Agreement will wind down in 2022. The Services Agreement generally requires each party to indemnify the other party against third-party claims arising out of the performance of or the provision or receipt of services under the Services Agreement. While the Company’s aggregate indemnification obligations to Save-A-Lot and Onex, the purchaser of Save-A-Lot, could result in a material liability, the Company is not aware of any matters that are expected to result in a material liability. The Company has recorded the fair value of the guarantee in the Condensed Consolidated Balance Sheets within Other long-term liabilities.
Other Contractual Commitments
In the ordinary course of business, the Company enters into supply contracts to purchase products for resale, and service contracts for fixed asset and information technology systems. These contracts typically include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. As of January 29, 2022, the Company had approximately $225 million of non-cancelable future purchase obligations, most of which will be paid and utilized in the ordinary course within one year.
Legal Proceedings
The Company is one of dozens of companies that have been named in various lawsuits alleging that drug manufacturers, retailers and distributors contributed to the national distribution of natural, organic and specialty foods, produce and related productsopioid epidemic. Currently, UNFI, primarily through its subsidiary, Advantage Logistics, is named in approximately 43 suits pending in the United States District Court for the Northern District of Ohio where over 1,800 cases have been consolidated as Multi-District Litigation (“MDL”). In accordance with the Stock Purchase Agreement dated January 10, 2013, between New Albertson’s Inc. (“New Albertson’s”) and Canada.the Company (the “Stock Purchase Agreement”), New Albertson’s is defending and indemnifying UNFI in a majority of the cases under a reservation of rights as those cases relate to New Albertson’s pharmacies. In one of the MDL cases, MDL No. 2804 filed by The Blackfeet Tribe of the Blackfeet Indian Reservation, all defendants were ordered to Answer the Complaint, which UNFI did on July 26, 2019. To date, no discovery has been conducted against UNFI in any of the actions. UNFI is vigorously defending these matters, which it believes are without merit.
On January 21, 2021, various health plans filed a complaint in Minnesota state court against the Company, Albertson’s Companies, LLC (“Albertson’s”) and Safeway, Inc. alleging the defendants committed fraud by improperly reporting inflated prices for prescription drugs for members of health plans. The Plaintiffs assert 6 causes of action against the defendants: common law fraud, fraudulent nondisclosure, negligent misrepresentation, unjust enrichment, violation of the Minnesota Uniform Deceptive Trade Practices Act and violation of the Minnesota Prevention of Consumer Fraud Act. The plaintiffs allege that between 2006 and 2016, Supervalu overcharged the health plans by not providing the health plans, as part of usual and customary prices, the benefit of discounts given to customers purchasing prescription medication who requested that Supervalu match competitor prices. Plaintiffs seek an unspecified amount of damages. Similar to the above case, for the majority of the relevant period Supervalu and Albertson’s operated as a combined company. In March 2013, Supervalu divested Albertson’s and pursuant to the Stock Purchase Agreement, Albertson’s is responsible for any claims regarding its pharmacies. On February 19, 2021, Albertson’s and Safeway removed the case to Minnesota Federal District Court and on March 22, 2021 plaintiffs’ filed a motion to remand to state court. On February 26, 2021, defendants filed a motion to dismiss. The hearing on the remand motion and motions to dismiss occurred on May 20, 2021. On September 21, 2021, the Federal District Court remanded the case to Minnesota state court and did not rule on the motion to dismiss, which was refiled in state court. On February 1, 2022, the state court denied the motion to dismiss. The Company has additional operating divisions that do not meetbelieves these claims are without merit and intends to vigorously defend this matter.
UNFI is currently subject to a qui tam action alleging violations of the quantitative thresholds for reportable segmentsFalse Claims Act (“FCA”). In United States ex rel. Schutte and are therefore aggregated under the caption of “Other.” “Other” includes a retail division,Yarberry v. Supervalu, New Albertson’s, Inc., et al, which engagesis pending in the saleU.S. District Court for the Central District of natural foodsIllinois, the relators allege that defendants overcharged government healthcare programs by not providing the government, as a part of usual and customary prices, the benefit of discounts given to customers purchasing prescription medication who requested that defendants match competitor prices. The complaint was originally filed under seal and amended on November 30, 2015. The government previously investigated the relators’ allegations and declined to intervene. Violations of the FCA are subject to treble damages and penalties of up to a specified dollar amount per false claim. Relators elected to pursue the case on their own and have alleged FCA damages against Supervalu and New Albertson’s in excess of $100 million, not including trebling and statutory penalties. For the majority of the relevant period Supervalu and New Albertson’s operated as a combined company. In March 2013, Supervalu divested New Albertson’s (and related productsassets) pursuant to the general public through retail storefrontsStock Purchase Agreement. Based on the east coastclaims that are currently pending and the Stock Purchase Agreement, Supervalu’s share of a potential award (at the currently claimed value by relators) would be approximately $24 million, not including trebling and statutory penalties. Both sides moved for summary judgment. On August 5, 2019, the Court granted one of the United States,relators’ summary judgment motions finding that the defendants’ lower matched prices are the usual and customary prices and that Medicare Part D and Medicaid were entitled to those prices. On July 2, 2020 the Court granted the defendants’ summary judgment motion and denied the relators’ motion, dismissing the case. On July 9, 2020 the relators filed a manufacturing division, which engagesnotice of appeal with the 7th Circuit Court of Appeals, and on September 30, 2020 filed an appellate brief. On November 30, 2020, the Company filed its response. The hearing before the 7th Circuit Court of Appeals occurred on January 19, 2021. On August 12, 2021, the 7th Circuit affirmed the District Court’s decision granting summary judgment in defendants’ favor. On September 23, 2021, the Relators filed a petition for rehearing and defendants filed a response on November 9, 2021. On December 3, 2021, the 7th Circuit denied the petition for rehearing.
From time to time, the Company receives notice of claims or potential claims or becomes involved in litigation, alternative dispute resolution, such as arbitration, or other legal and regulatory proceedings that arise in the importing, roasting, packaging,ordinary course of its business, including investigations and distributingclaims regarding employment law, including wage and hour (including class actions); pension plans; labor union disputes, including unfair labor practices, such as claims for back-pay in the context of nuts, dried fruit, seeds, trail mixes, granola, naturallabor contract negotiations and organic snack itemsother matters; supplier, customer and confections,service provider contract terms and claims, including matters related to supplier or customer insolvency or general inability to pay obligations as they become due; product liability claims, including those where the supplier may be insolvent and customers or consumers are seeking recovery against the Company; real estate and environmental matters, including claims in connection with its ownership and lease of a substantial amount of real property, both retail and warehouse properties; and antitrust. Other than as described above, there are no pending material legal proceedings to which the Company is a party or to which its property is subject.
Predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. Management regularly monitors the Company’s branded product lines, and the Company's brokerage business, which markets various products on behalf of food vendors directly and exclusivelyexposure to the Company's customers. “Other” also includes certain corporate operating expenses that are not allocatedloss contingencies associated with these matters and may from time to operating divisions, which include, among other expenses, stock based compensation,time change its predictions with respect to outcomes and salaries, retainers,estimates with respect to related costs and other related expenses of certain officers and all directors. Non-operating expenses that are not allocated to the operating divisions are under the caption of “Unallocated (Income)/Expenses.” The Company does not record its revenues for financial reporting purposes by product group, and it is therefore impracticable for the Company to report them accordingly.
The following table reflects business segment information for the periods indicated (in thousands): |
| | | | | | | | | | | | | | | | | | | | |
| | Wholesale | | Other | | Eliminations | | Unallocated (Income)/Expenses | | Consolidated |
13-Week Period Ended January 27, 2018: | | |
| | |
| | |
| | |
| | |
|
Net sales | | $ | 2,514,670 |
| | $ | 55,493 |
| | $ | (42,152 | ) | | $ | — |
| | $ | 2,528,011 |
|
Restructuring and asset impairment expenses | | 67 |
| | 11,175 |
| | — |
| | — |
| | 11,242 |
|
Operating income (loss) | | 53,941 |
| | (16,549 | ) | | 2,812 |
| | — |
| | 40,204 |
|
Interest expense | | — |
| | — |
| | — |
| | 4,233 |
| | 4,233 |
|
Interest income | | — |
| | — |
| | — |
| | (96 | ) | | (96 | ) |
Other, net | | — |
| | — |
| | — |
| | (418 | ) | | (418 | ) |
Income before income taxes | | |
| | |
| | |
| | |
| | 36,485 |
|
Depreciation and amortization | | 21,437 |
| | 370 |
| | — |
| | — |
| | 21,807 |
|
Capital expenditures | | 9,426 |
| | 852 |
| | — |
| | — |
| | 10,278 |
|
Goodwill | | 353,688 |
| | 10,153 |
| | — |
| | — |
| | 363,841 |
|
Total assets | | 2,909,175 |
| | 183,180 |
| | (42,675 | ) | | — |
| | 3,049,680 |
|
| | | | | | | | | | |
13-Week Period Ended January 28, 2017: | | |
| | |
| | |
| | |
| | |
|
Net sales | | $ | 2,271,289 |
| | $ | 51,377 |
| | $ | (37,148 | ) | | $ | — |
| | $ | 2,285,518 |
|
Operating income (loss) | | 52,562 |
| | (6,518 | ) | | 227 |
| | — |
| | 46,271 |
|
Interest expense | | — |
| | — |
| | — |
| | 4,441 |
| | 4,441 |
|
Interest income | | — |
| | — |
| | — |
| | (97 | ) | | (97 | ) |
Other, net | | — |
| | — |
| | — |
| | (101 | ) | | (101 | ) |
Income before income taxes | | |
| | |
| | |
| | |
| | 42,028 |
|
Depreciation and amortization | | 20,587 |
| | 656 |
| | — |
| | — |
| | 21,243 |
|
Capital expenditures | | 12,374 |
| | 1,102 |
| | — |
| | — |
| | 13,476 |
|
Goodwill | | 352,369 |
| | 18,024 |
| | — |
| | — |
| | 370,393 |
|
Total assets | | 2,677,578 |
| | 220,598 |
| | (28,173 | ) | | — |
| | 2,870,003 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Wholesale | | Other | | Eliminations | | Unallocated (Income)/Expenses | | Consolidated |
26-Week Period Ended January 27, 2018: | | |
| | |
| | |
| | |
| | |
|
Net sales | | $ | 4,959,328 |
| | $ | 112,925 |
| | $ | (86,697 | ) | | $ | — |
| | $ | 4,985,556 |
|
Restructuring and asset impairment expenses | | 67 |
| | 11,175 |
| | — |
| | — |
| | 11,242 |
|
Operating income (loss) | | 113,897 |
| | (21,140 | ) | | 2,554 |
| | — |
| | 95,311 |
|
Interest expense | | — |
| | — |
| | — |
| | 7,900 |
| | 7,900 |
|
Interest income | | — |
| | — |
| | — |
| | (187 | ) | | (187 | ) |
Other, net | | — |
| | — |
| | — |
| | (1,281 | ) | | (1,281 | ) |
Income before income taxes | | | | |
| | |
| | |
| | 88,879 |
|
Depreciation and amortization | | 42,976 |
| | 1,273 |
| | — |
| | — |
| | 44,249 |
|
Capital expenditures | | 13,607 |
| | 1,928 |
| | — |
| | — |
| | 15,535 |
|
Goodwill | | 353,688 |
| | 10,153 |
| | — |
| | — |
| | 363,841 |
|
Total assets | | 2,909,175 |
| | 183,180 |
| | (42,675 | ) | | — |
| | 3,049,680 |
|
| | | | | | | | | | |
26-Week Period Ended January 28, 2017: | | |
| | | | |
| | |
| | |
Net sales | | $ | 4,532,189 |
| | $ | 109,117 |
| | $ | (77,424 | ) | | $ | — |
| | $ | 4,563,882 |
|
Operating income (loss) | | 111,225 |
| | (11,686 | ) | | 71 |
| | — |
| | 99,610 |
|
Interest expense | | — |
| | — |
| | — |
| | 8,963 |
| | 8,963 |
|
Interest income | | — |
| | — |
| | — |
| | (196 | ) | | (196 | ) |
Other, net | | — |
| | — |
| | — |
| | 282 |
| | 282 |
|
Income before income taxes | | |
| | |
| | |
| | |
| | 90,561 |
|
Depreciation and amortization | | 41,278 |
| | 1,180 |
| | — |
| | — |
| | 42,458 |
|
Capital expenditures | | 20,729 |
| | 1,945 |
| | — |
| | — |
| | 22,674 |
|
Goodwill | | 352,369 |
| | 18,024 |
| | — |
| | — |
| | 370,393 |
|
Total assets | | 2,677,578 |
| | 220,598 |
| | (28,173 | ) | | — |
| | 2,870,003 |
|
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities asexposures. As of January 27, 2018 and July 29, 2017 consisted of the following (in thousands):
|
| | | | | | | |
| January 27, 2018 | | July 29, 2017 |
Accrued salaries and employee benefits | $ | 61,040 |
| | $ | 63,937 |
|
Workers' compensation and automobile liabilities | 23,613 |
| | 22,774 |
|
Interest rate swap liability | — |
| | 308 |
|
Other | 74,648 |
| | 70,224 |
|
Total accrued expenses and other current liabilities | $ | 159,301 |
| | $ | 157,243 |
|
11.NOTES PAYABLE
On April 29, 2016, the Company entered into the Third Amended and Restated Loan and Security Agreement (the "Third A&R Credit Agreement") amending and restating certain terms and provisions of its revolving credit facility which increased the maximum borrowings under the amended and restated revolving credit facility and extended the maturity date to April 29, 2021. Up to $850.0 million is available to the Company's U.S. subsidiaries and up to $50.0 million is available to UNFI Canada. After giving effect to the Third A&R Credit Agreement, the amended and restated revolving credit facility provides an option to increase the U.S.2022, no material accrued obligations, individually or Canadian revolving commitments by up to an additional $600.0 million in the aggregate, (buthave been recorded for these legal proceedings.
Although management believes it has made appropriate assessments of potential and contingent loss in each of these cases based on current facts and circumstances, and application of prevailing legal principles, there can be no assurance that material differences in actual outcomes from management’s current assessments, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates will not less than $10.0 million increments) subject to certain customary conditions and the lenders committing to provide the increase in funding.
occur. The borrowingsoccurrence of any of the U.S. portionforegoing, could have a material adverse effect on our financial condition, results of the amended and restated revolving credit facility, after giving effectoperations or cash flows.
NOTE 16—SUBSEQUENT EVENTS
Subsequent to the Third A&R Credit Agreement, accrued interest at the base rate plus an applicable margin of 0.25% or LIBOR rate plus an applicable margin of 1.25% for the twelve-month period ended April 29, 2017. After this period, the interest on the U.S. borrowings is accrued at
the Company's option, at either (i) a base rate (generally defined as the highest of (x) the Bank of America Business Capital prime rate, (y) the average overnight federal funds effective rate plus one-half percent (0.50%) per annum and (z) one-month LIBOR plus one percent (1%) per annum) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) the LIBOR rate plus an applicable margin that varies depending on daily average aggregate availability. The borrowings on the Canadian portion of the credit facility accrued interest at the Canadian prime rate plus an applicable margin of 0.25% or a bankers' acceptance equivalent rate plus an applicable margin of 1.25% for the twelve-month period ended April 29, 2017. After this period, the borrowings on the Canadian portion of the credit facility accrue interest, at the Company's option, at either (i) a Canadian prime rate (generally defined as the highest of (x) 0.50% over 30-day Reuters Canadian Deposit Offering Rate ("CDOR") for bankers' acceptances, (y) the prime rate of Bank of America, N.A.'s Canada branch, and (z) a bankers' acceptance equivalent rate for a one month interest period plus 1.00%) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) a bankers' acceptance equivalent rate of the rate of interest per annum equal to the annual rates applicable to Canadian Dollar bankers' acceptances on the "CDOR Page" of Reuter Monitor Money Rates Service, plus five basis points, and an applicable margin that varies depending on daily average aggregate availability. Unutilized commitments are subject to an annual fee in the amount of 0.30% if the total outstanding borrowings are less than 25% of the aggregate commitments, or a per annum fee of 0.25% if such total outstanding borrowings are 25% or more of the aggregate commitments. The Company is also required to pay a letter of credit fronting fee to each letter of credit issuer equal to 0.125% per annum of the stated amount of each such letter of credit (or such other amount as may be mutually agreed by the borrowers under the facility and the applicable letter of credit issuer), as well as a fee to all lenders equal to the applicable margin for LIBOR or bankers’ acceptance equivalent rate loans, as applicable, times the average daily stated amount of all outstanding letters of credit.
As of January 27, 2018, the Company's borrowing base, which is calculated based on eligible accounts receivable and inventory levels, net of $4.2 million of reserves, was $882.4 million. As of January 27, 2018, the Company had $287.0 million of borrowings outstanding under the Company's amended and restated revolving credit facility and $30.3 million in letter of credit commitments which reduced the Company's available borrowing capacity under its revolving credit facility on a dollar for dollar basis. The Company's resulting remaining availability was $565.0 million as of January 27, 2018.
The revolving credit facility, as amended and restated, subjects the Company to a springing minimum fixed charge coverage ratio (as defined in the Third A&R Credit Agreement) of 1.0 to 1.0 calculated at the end of each of our fiscal quarters on a rolling four quarter basis when the adjusted aggregate availability (as defined in the Third A&R Credit Agreement) is less than the greater of (i) $60.0 million and (ii) 10% of the aggregate borrowing base. The Company was not subject to the fixed charge coverage ratio covenant under the Third A&R Credit Agreement during the second quarter of fiscal 2018.
The revolving credit facility also allows2022, in February 2022, the Company acquired the real property of a previously leased distribution center for approximately $153 million. Immediately following this acquisition, the Company monetized this property through a sale-leaseback transaction, pursuant to which the Company received $225 million in aggregate proceeds for the lenders thereunder to syndicate the credit facility to other banks and lending institutions. The Company has pledged the majority of its and its subsidiaries' accounts receivable and inventory for its obligations under the amended and restated revolving credit facility.
12.LONG-TERM DEBT
On August 14, 2014, the Company and certain of its subsidiaries entered into a real estate backed term loan agreement (the "Term Loan Agreement"). The total initial borrowings under the Term Loan Agreement were $150.0 million. The Company is required to make $2.5 million principal payments quarterly, which began on November 1, 2014. Under the Term Loan Agreement, the Company at its option may request the establishment of one or more new term loan commitments in increments of at least $10.0 million, but not to exceed $50.0 million in total, subject to the approvalsale of the lenders electing to participate in such incremental loans and the satisfaction of the conditions required by the Term Loan Agreement. The Company will be required to make quarterly principal payments on these incremental borrowings in accordance withproperty. Under the terms of the Term Loan Agreement. Proceeds from this Term Loan Agreement were used to pay down borrowings on the Company's amended and restated revolving credit facility.
On April 29, 2016, the Company entered into a First Amendment Agreement (the “Term Loan Amendment”) to the Term Loan Agreement which amends the Term Loan Agreement. The Term Loan Amendment was entered into to reflect the changes to the amended and restated revolving credit facility reflected in the Third A&R Credit Agreement. The Term Loan Agreement will terminate on the earlier of (a) August 14, 2022 and (b) the date that is ninety days prior to the termination date of the Company’s amended and restated revolving creditsale-leaseback agreement, as amended.
On September 1, 2016, the Company entered into a Second Amendment Agreement (the "Second Amendment") to the Term Loan Agreement which amends the Term Loan Agreement. The Second Amendment was entered into to adjust the applicable margin charged to borrowings under the Term Loan Agreement. As amended by the Second Amendment, borrowings under the Term Loan Agreement bear interest at rates that, at the Company's option, can be either: (1) a base rate generally defined as the sum of (i) the highest of (x) the administrative agent's prime rate, (y) the average overnight federal funds effective rate plus 0.50% and (z) one-month LIBOR plus one percent (1%) per annum and (ii) a margin of 0.75%; or, (2) a LIBOR rate generally defined as the
sum of (i) LIBOR (as published by Reuters or other commercially available sources) for one, two, three or six months or, if approved by all affected lenders, nine months (all as selected by the Company), and (ii) a margin of 1.75%. Interest accrued on borrowings under the Term Loan Agreement is payable in arrears. Interest accrued on any LIBOR loan is payable on the last day of the interest period applicable to the loan and, with respect to any LIBOR loan of more than three (3) months, on the last day of every three (3) months of such interest period. Interest accrued on base rate loans is payable on the first day of every month. The Company is also required to pay certain customary fees to the administrative agent. The borrowers' obligations under the Term Loan Agreement are secured by certain parcels of the borrowers' real property.
The Term Loan Agreement includes financial covenants that require (i) the ratio of the Company’s consolidated EBITDA (as defined in the Term Loan Agreement) minus the unfinanced portion of Capital Expenditures (as defined in the Term Loan Agreement) to the Company’s consolidated Fixed Charges (as defined in the Term Loan Agreement) to be at least 1.20 to 1.00 as of the end of any period of four fiscal quarters, (ii) the ratio of the Company’s Consolidated Funded Debt (as defined in the Term Loan Agreement) to the Company’s EBITDA for the four fiscal quarters most recently ended to be not more than 3.00 to 1.00 as of the end of any fiscal quarter and (iii) the ratio, expressed as a percentage, of the Company’s outstanding principal balance under the Loans (as defined in the Term Loan Agreement), divided by the Mortgaged Property Value (as defined in the Term Loan Agreement) to be not more than 75% at any time. As of January 27, 2018, the Company was in compliance with the financial covenants of its Term Loan Agreement.
As of January 27, 2018, the Company had borrowings of $113.7 million under the Term Loan Agreement which is included in "Long-term debt" on the Condensed Consolidated Balance Sheet.
During the fiscal year ended August 1, 2015, the Company entered into an amendment to an existing lease agreement for the office space utilized as the Company's corporate headquarters in Providence, Rhode Island. The amendment provides for additional office space to be utilized by the Company and extends the lease term for an additional 10 years. The lease qualifies for capital lease treatment pursuant to ASC 840, Leases, and the estimated fair value of the building is recorded on the balance sheet with the capital lease obligation included in long-term debt. A portion of each lease payment reduces the amount of the lease obligation, and a portion is recorded as interest expense at an effective rate of approximately 12.05%. The capital lease obligation as of January 27, 2018 was $12.7 million. The Company recorded $0.4 million of interest expense during each of the second quarters of fiscal 2018 and 2017 and $0.8 million during each of the first 26 weeks of fiscal 2018 and 2017.
During the fiscal year ended July 28, 2012, the Company entered into a lease agreementfor the distribution center for a new distribution facilityterm of 15 years. The Company expects to record a pre-tax gain on sale in Aurora, Colorado. At the conclusion of the fiscal year ended August 3, 2013, actual construction costs exceeded the construction allowance as defined by the lease agreement, and therefore, the Company determined it met the criteria for continuing involvement pursuant to FASB ASC 840, Leases, and applied the financing method to account for this transaction during the fourththird quarter of fiscal 2013. Under the financing method, the book value2022 currently estimated to be approximately $85 million as a result of the distribution facility and related accumulated depreciation remains ontransactions, which primarily reflects the Condensed Consolidated Balance Sheet. The construction allowance is recorded as a financing obligation in "Long-term debt." A portion of each lease payment reduces the amountpre-tax net proceeds of the financing obligation, andtransactions.
Refer to Note 8—Long-Term Debt for discussion on a portion is recorded as interest expense at an effective ratevoluntary prepayment made under the Term Loan Facility subsequent to the end of approximately 7.32%. The financing obligation as of January 27, 2018 was $29.8 million. The Company recorded $0.5 million and $0.6 million of interest expense related to this lease during the second quartersquarter of fiscal 2018 and 2017, respectively. During each2022.
Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act, of 1933, as amended, and Section 21E of the Securities Exchange Act, of 1934, as amended, 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,” “plans,” “planned,“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 addition or loss of significant customers or material changes to our relationships with these customers;
•our sensitivity to general economic conditions including the current economic environment;
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 reducerealize anticipated benefits of our expenses in amounts sufficient to offsetacquisitions and strategic initiatives, including, our increased focus on sales to conventional supermarkets and supermarket chains and the resulting lower gross margins on those sales;acquisition of Supervalu;
our reliance on the continued growth in sales of natural and organic foods and non-food products in comparison to conventional 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;
•our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company;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 result 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;
consumer demand for natural and organic products outpacing suppliers'•our ability to produce those productsmaintain food quality and challenges we may experiencesafety;
•volatility in obtaining sufficient amounts of products to meet our customers' demands;fuel costs;
moderated supplier promotional activity, including decreased forward buying opportunities;•volatility in foreign exchange rates; and
union-organizing activities that could cause labor relations difficulties and increased costs;
the•our ability to identify and successfully complete acquisitions of other natural, organic and specialty food and non-food products distributors;asset or business acquisitions.
management’s allocation of capital and the timing of capital expenditures;
our ability to realize the anticipated benefits from our decision to close certain of our Earth Origins Market (“Earth Origins”) stores and for the restructuring costs related to Earth Origins to be within our current estimates;
the possibility that we may recognize restructuring charges with respect to our Earth Origins business in excess of those estimated for the second half of fiscal 2018;
changes in interpretations, assumptions and expectations regarding the Tax Cuts and Jobs Act ("TCJA"), including additional guidance that may be issued by federal and state taxing authorities.
This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended to be exhaustive. You should carefully review the risks described under “Part I. Item 1A.1A Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended July 29, 2017, and31, 2021 (the “Annual Report”) as well as any other cautionary language in this Quarterly Report, on Form 10-Q or our other reports filed with the Securities and Exchange Commission (the "SEC") from time to time, 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
This Management’s Discussion and Analysis of financial condition.condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto contained in this Quarterly Report on Form 10-Q, the information contained under the caption “Forward-Looking Statements,” and the information in the Annual Report.
Business Overview
We believe we areAs a leading distributor based on sales of natural, organic, specialty, produce and specialty foodsconventional 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 that our thirty-three distribution centers, representing approximately 8.7 million square feet of warehouse space, provide us with the largest capacity of anyservices to customers throughout North American-based distributor focused primarily on the natural, organic and specialty products industry.America. We offer more than 110,000 high-quality natural, organic and specialty foods and non-foodnearly 300,000 products consisting of national, brands, regional brands,and private label and master distribution products, inbrands grouped into six product categories: grocery and general merchandise, produce,merchandise; produce; perishables and frozen foods,foods; nutritional supplements and sports nutrition,nutrition; bulk and food service productsproducts; and personal care items. We serve more than 43,000 customer locations primarily located across the United Statesbelieve we are North America’s premier wholesaler with 56 distribution centers and warehouses representing approximately 30 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, the majority of which can bemaking 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 with independent retailers who operate diverse formats, regional and national chains, as well as international customers with wide-ranging needs. Our business is classified into onetwo reportable segments: Wholesale and Retail; and also includes a manufacturing division and a branded product line division.
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 following categories: independently owned natural products retailers,Future is composed of six strategic pillars, which include buying clubs; supernatural chains, which consist solely of Whole Foods Market Inc. ("Whole Foods Market"); conventional supermarkets, which include mass market chains; and other which includes e-commerce, foodservice and international customers outside of Canada.
Our operations are generally comprised of three principal operating divisions. These operating divisions are:
our wholesale division, which includes:
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◦ | our broadline natural, organic and specialty distribution business in the United States, which includes our recent acquisitions of Haddon House Food Products, Inc. ("Haddon") and Gourmet Guru, Inc. ("Gourmet Guru"); |
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◦ | Tony's Fine Foods ("Tony's"), which is a leading distributor of a wide array of specialty protein, cheese, deli, foodservice and bakery goods, principally throughout the Western United States; |
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◦ | Albert's Organics, Inc. ("Albert's"), which is a leading distributor of organically grown produce and non-produce perishable items within the United States, which includes the operations of Global Organic/Specialty Source, Inc. ("Global Organic") and Nor-Cal Produce, Inc. ("Nor-Cal"), a distributor of organic and conventional produce and non-produce perishable items principally in Northern California; |
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◦ | UNFI Canada, Inc. ("UNFI Canada"), which is our natural, organic and specialty distribution business in Canada; and |
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◦ | Select Nutrition, which distributes vitamins, minerals and supplements. |
our retail division, consisting of Earth Origins, which operates our twelve natural products retail stores within the United States; and
our manufacturing and branded products divisions, consisting of:
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◦ | Woodstock Farms Manufacturing, which specializes in the importing, roasting, packaging and the distribution of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections; and |
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◦ | our Blue Marble Brands branded product lines. |
In recent years, our sales to existing and new customers have increased through the continued growth of the natural and organic products industrydetailed in general, increased market share as a result“Part I. Item 1. Business” of our high quality serviceAnnual Report. Collectively, the actions and a broader product selection,plans behind each pillar are meant to capitalize on our unique position in the food distribution industry, including specialty products,the number and location of distribution centers we operate, the array of services and the acquisition of, or merger with, natural and specialty products distributors; the expansiondata driven insights that we are able to customize for each of our existing distribution centers; the construction of new distribution centers; the introduction of new productscustomers, our innovation platforms and the developmentgrowth potential we see in each, our commitment to our people and the planet, the positioning of our own line of naturalretail operations and organic branded products. Through these efforts,our focus on delivering returns for our shareholders.
We also introduced our ValuePath initiative early in fiscal 2021, pursuant to which we believe that we have been ableplan to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. Our strategic plan is focused on increasing the type of products we distributeimprove operating performance through various initiatives to our customers, including perishable products and conventional produce. As part of our “one company” approach, 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 ("WMS"). We have successfullybe implemented the WMS system at fifteen of our facilities including most recently in Chesterfield, New Hampshire, Iowa City, Iowa, Greenwood, Indiana, Dayville, Connecticut, Gilroy, California, Richburg, South Carolina, Howell, New Jersey, and Atlanta, Georgia. We expect to complete the roll-out to all of our existing U.S. broadline facilities bythrough the end of fiscal 2019. These steps2023. We intend to re-invest a portion of these operating savings in the business to drive market share gains, accelerate innovation, invest in automation and othersmaintain competitive wage scales for our frontline workers.
We will continue to use free cash flow to reduce outstanding debt and are intendedcommitted to promote operational efficienciesimproving our financial leverage.
We believe our Fuel the Future strategy will further accelerate our growth through increasing sales of products and improve operating expensesservices, 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, which we believe were demonstrated by recent developments in our relationships with certain large customers.
Trends and Other Factors Affecting our Business
Our results are impacted by macroeconomic and demographic trends, changes in the food distribution market structure and changes in trends in consumer behavior. We expect that food-at-home expenditures as a percentage of net salestotal food expenditures will remain elevated in the near term compared to levels prior to the COVID-19 pandemic, which we refer to as we attemptthe pandemic. We believe that changes in work being done outside of the traditional office setting will continue to offset the lower gross marginscontribute 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 generatecontinue. 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.
Considerable uncertainty remains regarding the future impact of the pandemic on our business. The pandemic continues to evolve and affect global economies, markets and supply chains. The continued impact on our results is uncertain and dependent upon future developments, including any resurgence of infection rates and new variants with higher transmissibility, any economic downturn, the availability and efficacy of vaccines and treatments, actions taken by increased salesgovernmental authorities and other third parties in response to the supernaturalpandemic such as social distancing orders, vaccine mandates or companies’ remote work policies, the impact on capital and conventional supermarket channelsfinancial markets, food-at-home purchasing levels and as a resultother consumer trends, each of additional competition inwhich is uncertain. Any of these disruptions could adversely impact our business.
We have been the primary distributor to Whole Foods Market for more than nineteen years.business and results of operations. We continue to servemonitor rule making and guidance regarding vaccine and testing mandates, which, if implemented, could result in disruptions to our current and potential future workforce and our vendors’ abilities to deliver product and maintain pricing, could impact our ability to supply products to our customers and could result in increases in costs and turnover in our workforce. We continue to implement mitigation measures to protect our associates and workplaces, including masks, safety protocols and strongly encouraging vaccinations/boosters.
We are experiencing a tighter operating labor market for our warehouse and driver associates in fiscal 2022 than we have in recent years, which has caused additional reliance on 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.
We are also impacted by changes in food distribution trends 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 some customers. The magnitude of these risks increases as the primary distributor to Whole Foods Marketsize of our Wholesale customers increases.
Distribution Center Network
Network Optimization and Construction
To support our continued growth within southern California, we began operating a newly leased facility in allRiverside, California with approximately 1.2 million square feet upon completion of its regionsconstruction in the United States pursuantfourth quarter of fiscal 2020. Subsequent to a distribution agreement that expires on September 28, 2025. Whole Foods Market accounted for approximately 37% and 34%the end of our net sales for the second quarter of fiscal 2018 and 2017, respectively. For2022, in February 2022, we acquired the real property of this distribution center for approximately $153 million. Immediately following this acquisition, we monetized this property through a sale-leaseback transaction, pursuant to which we received $225 million in aggregate proceeds for the sale of the property. Under the terms of the sale-leaseback agreement, we entered into a lease for the distribution center for a term of 15 years. We expect to record a pre-tax gain on sale of approximately $85 million in the third quarter of fiscal 2022 as a result of the transactions, which primarily reflects the pre-tax net proceeds.
In the first 26 weeksquarter of fiscal 20182022, we started shipping from our Allentown, Pennsylvania distribution center, which has a capacity of 1.3 million square feet and 2017, Whole Foods Market accounted for approximately 36%is being utilized to service customers in that geographical area. We incurred and 33%expect to continue to incur start-up costs and operating losses throughout fiscal 2022 as the volume in this facility ramps up to its expected full operating capacity.
We evaluate our distribution center network to optimize its performance and may incur incremental expenses related to any future network realignment, expansion or improvements and are working to both minimize these costs and obtain new business to further improve the efficiency of our net sales, respectively.transforming distribution network.
Retail Operations
We currently operate 75 continuing operations Retail grocery stores, including 55 Cub Foods corporate stores and 20 Shoppers Food Warehouse stores. In addition, we supply another 27 Cub Foods stores operated by our Wholesale customers through franchise and equity ownership arrangements. We operate 81 pharmacies primarily within the stores we operate and the stores of our franchisees. In addition, we operate 23 “Cub Wine and Spirit” and “Cub Liquor” stores.
In March 2016,the fourth quarter of fiscal 2021, we determined that the Company acquired certain assetsno longer met the held for sale criterion for a probable sale to be completed within 12 months for two of Global Organic through its wholly owned subsidiary Albert's,the four stores that were previously included within discontinued operations. As a result, we revised the Condensed Consolidated Financial Statements to reclassify two Shoppers stores from discontinued operations to continuing operations. The prior period presented in a cash transaction for approximately $20.6 million. Global Organic is located in Sarasota, Florida serving customer locations (many of which are independent retailers) across the Southeastern United States. Global Organic's operationsCondensed Consolidated Financial Statements have been fully integrated intoconformed to the existing Albert's businesscurrent period presentation. The remaining two stores in the Southeastern United States.
In March 2016, the Company acquired all of the outstanding equity securities of Nor-Cal and an affiliated entity as well as certain real estate,discontinued operations were sold in a cash transaction for approximately $67.8 million. Nor-Cal is a distributor with its primary operations located in West Sacramento, California. Our acquisition of Nor-Cal has aided us in our efforts to expand our fresh offering, particularly within conventional produce. Nor-Cal's operations have been combined with the existing Albert's business.
In May 2016, the Company acquired all outstanding equity securities of Haddon and certain affiliated entities and real estate for total cash consideration of approximately $217.5 million. Haddon is a distributor and merchandiser of natural and organic and gourmet ethnic products primarily throughout the Eastern United States. Haddon has a history of providing quality high-touch merchandising services to its customers. Haddon has a diverse, multi-channel customer base including conventional supermarkets, gourmet food stores and independently owned product retailers. Our acquisition of Haddon has expanded the product and service offering that we expect to play an important role in our ongoing strategy to build out our gourmet and ethnic product categories. Haddon's operations have been combined with the Company's existing broadline natural, organic and specialty distribution business in the United States.
In August 2016, the Company acquired all of the outstanding equity securities of Gourmet Guru in a cash transaction for approximately $10.0 million. Gourmet Guru is a distributor and merchandiser of fresh and organic food focusing on new and emerging brands. We believe that our acquisition of Gourmet Guru enhances our strength in finding and cultivating emerging fresh and organic brands and further expands our presence in key urban markets. Gourmet Guru's operations have been combined with the Company's existing broadline natural, organic and specialty distribution business in the United States.
The ability to distribute specialty food items (including ethnic, kosher and gourmet products) has accelerated our expansion into a number of high-growth business markets and allowed us to establish immediate market share in the fast-growing specialty foods market. We have now integrated specialty food products and natural and organic specialty non-food products into all of our broadline distribution centers across the United States and Canada. Due to our expansion into specialty foods, over the past several fiscal years we have been awarded new business with a number of conventional supermarkets that we previously had not done business with because we did not distribute specialty products. We believe our acquisition of Haddon has expanded our capabilities in the specialty category and we have expanded our offerings of specialty products to include those products distributed by Haddon that we did not previously distribute to our customers. We believe that distribution of these products enhances our conventional supermarket business channel and that our complementary product lines continue to present opportunities for cross-selling.
To maintain our market position and improve our operating efficiencies, we seek to continually:
expand our marketing and customer service programs across regions;
expand our national purchasing opportunities;
offer a broader product selection than our competitors;
offer operational excellence with high service levels and a higher percentage of on-time deliveries than our competitors;
centralize general and administrative functions to reduce expenses;
consolidate systems applications among physical locations and regions;
increase our investment in people, facilities, equipment and technology;
integrate administrative and accounting functions; and
reduce the geographic overlap between regions.
Our continued growth has allowed us to expand our existing facilities and open new facilities in an effort to achieve increasing operating efficiencies. We have made significant capital expenditures and incurred considerable expenses in connection with the opening and expansion of our facilities. As of January 27, 2018, our distribution capacity totaled approximately 8.7 million square feet. We have completed our multi-year expansion plan, which included new distribution centers in Racine, Wisconsin, Hudson Valley, New York, Prescott, Wisconsin, and Gilroy, California from which we began operations in June 2014, September 2014, April 2015 and February 2016, respectively. Based on our current operations, sales trends, customers and estimates of future sales growth, we believe that we are likely to commence construction and open new distribution center capacity in fiscal 2019.
During the second quarter of fiscal 2018, the Company recorded restructuring and asset impairment expenses2022.
Impact of $11.2 million which was primarily driven by charges related to our Earth Origins retail businessInflation
We experienced a mix of approximately $11.4 million, offset by a benefit of $0.2 million related to an adjustment for our fiscal 2017 restructuring program.
Duringinflation across product categories during the second quarter of fiscal 2018,2022. In the Company madeaggregate across our businesses, including the decision to close three non-core, under-performing Earth Origins storesmix of its total twelve stores which resulted in restructuring costsproducts, management estimates our business experienced cost inflation of $0.2 million related to severance and closure costs.
Based on the decision to close these stores, coupled with the decline in resultsapproximately five percent in the first halfsecond quarter of fiscal 20182022. Cost inflation 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 on Net sales and Gross profit. Absent any changes in units sold or the mix of units sold, inflation generally has the effect of increasing sales. Under the last-in, first out (“LIFO”) method of inventory accounting, product cost increases are recognized within Cost of sales based on expected year-end inventory quantities and costs, which has the effect of decreasing Gross profit 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 faircarrying value of the reporting unit was below its carrying amount. As a resultinventory during periods of both these analyses, the Company recorded a total impairment chargeinflation.
Composition of $3.3 million on long-lived assetsCondensed Consolidated Statements of Operations and $7.9 million to goodwill, respectively. Both of these charges are recorded in the Company's "Other" segment. The Company expects to incur additional restructuring charges primarily related to future exit costs of approximately $2.6 million during the second half of fiscal 2018.Business Performance Assessment
Net sales
Our net sales consist primarily of product sales of natural, organic, specialty, produce and specialtyconventional grocery and non-food products, toand support services revenue from retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances.allowances, and professional services revenue. Net sales also consist ofinclude 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. We include purchasing, receiving, selecting and outbound transportation
Operating expenses within our operating expenses rather than in our cost of sales. Total operating
Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation and amortization expense. OtherThese expenses (income) include interest on our outstanding indebtedness,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 the financing obligationseverance costs, 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 Aurora, Colorado distribution centernetwork as a result of acquisitions.
Interest expense, net
Interest expense, net includes primarily interest expense on long-term debt, net of capitalized interest, loss on debt extinguishment, interest expense on finance lease obligations, amortization of financing costs and discounts and interest income.
Net periodic benefit income, excluding service cost
Net periodic benefit income, excluding service cost reflects the lease for office space for our corporate headquartersrecognition of expected returns on benefit plan assets and interest costs on plan liabilities.
Adjusted EBITDA
Our Condensed Consolidated Financial Statements are prepared and presented in Providence, Rhode Island, interest income and miscellaneous income and expenses.
Critical Accounting Policies
The preparationaccordance 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 condensed consolidated financial statements requires usbusiness and understand underlying operating performance and core business trends, which we use to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayalfacilitate operating performance comparisons of our financial condition andbusiness on a consistent basis over time. Adjusted EBITDA is provided as a supplement to our results of operations and requirerelated 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 items that do not reflect management’s assessment of ongoing business performance.
We believe Adjusted EBITDA is useful to investors and financial institutions because it provides additional information regarding factors and trends affecting our most difficult, complex or subjective judgments or estimates. Basedbusiness, 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 a measure of underlying operating performance, as the primary compensation performance measure under certain compensation programs and plans. We believe Adjusted EBITDA is reflective of factors that affect our underlying operating performance and facilitate operating performance comparisons of our business on this definitiona 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 as further describedmay be reflected in our Annual Report on Form 10-Kfinancial results for the fiscal year ended July 29, 2017,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 Quarterly 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, finance 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 believe our critical accounting policies include the following: (i) determining our reservesreconcile by adding Net income (loss) from continuing operations, less net income attributable to noncontrolling interests, plus non-operating income and expenses, including Net periodic benefit income, excluding service cost, Interest expense, net and Other, net, plus Provision (benefit) for the self-insured portions of our workers’income taxes and Depreciation and amortization all calculated in accordance with GAAP, plus adjustments for Share-based compensation, Restructuring, acquisition and automobile liabilities, (ii) valuationintegration related expenses, Goodwill impairment charges, (Gain) loss on sale of assets, certain legal charges and liabilities acquiredgains, certain other non-cash charges or other items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in business combinations, (iii) valuationa manner consistent with the results of goodwill and intangible assets, and (iv) income taxes. For all financial statement periods presented, there have been no material modificationscontinuing operations, outlined above. The changes to the applicationdefinition of these critical accounting policies or estimates sinceAdjusted EBITDA from prior-year periods reflect changes to line item references in our most recently filed Annual Report on Form 10-K.Condensed Consolidated Financial Statements, which do not impact the calculation of Adjusted EBITDA.
Assessment of OperationsOur Business Results
The following table presents,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 the Annual Report.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 13-Week Period Ended | | | | 26-Week Period Ended | | |
(in millions) | January 29, 2022 | | January 30, 2021 | | Change | | January 29, 2022 | | January 30, 2021 | | Change |
Net sales | $ | 7,416 | | | $ | 6,900 | | | $ | 516 | | | $ | 14,413 | | | $ | 13,584 | | | $ | 829 | |
Cost of sales | 6,341 | | | 5,905 | | | 436 | | | 12,296 | | | 11,619 | | | 677 | |
Gross profit | 1,075 | | | 995 | | | 80 | | | 2,117 | | | 1,965 | | | 152 | |
Operating expenses | 944 | | | 870 | | | 74 | | | 1,876 | | | 1,774 | | | 102 | |
Restructuring, acquisition and integration related expenses | 5 | | | 18 | | | (13) | | | 8 | | | 34 | | | (26) | |
Loss on sale of assets | 1 | | | — | | | 1 | | | 1 | | | — | | | 1 | |
Operating income | 125 | | | 107 | | | 18 | | | 232 | | | 157 | | | 75 | |
Net periodic benefit income, excluding service cost | (10) | | | (17) | | | 7 | | | (20) | | | (34) | | | 14 | |
Interest expense, net | 44 | | | 51 | | | (7) | | | 84 | | | 120 | | | (36) | |
Other, net | (2) | | | (2) | | | — | | | (1) | | | (3) | | | 2 | |
Income from continuing operations before income taxes | 93 | | | 75 | | | 18 | | | 169 | | | 74 | | | 95 | |
Provision for income taxes | 25 | | | 17 | | | 8 | | | 24 | | | 16 | | | 8 | |
Net income from continuing operations | 68 | | | 58 | | | 10 | | | 145 | | | 58 | | | 87 | |
Income from discontinued operations, net of tax | — | | | 3 | | | (3) | | | — | | | 3 | | | (3) | |
Net income including noncontrolling interests | 68 | | | 61 | | | 7 | | | 145 | | | 61 | | | 84 | |
Less net income attributable to noncontrolling interests | (2) | | | (2) | | | — | | | (3) | | | (3) | | | — | |
Net income attributable to United Natural Foods, Inc. | $ | 66 | | | $ | 59 | | | $ | 7 | | | $ | 142 | | | $ | 58 | | | $ | 84 | |
| | | | | | | | | | | |
Adjusted EBITDA | $ | 201 | | | $ | 206 | | | $ | (5) | | | $ | 390 | | | $ | 365 | | | $ | 25 | |
The following table reconciles Adjusted EBITDA to Net income from continuing operations and to Income from discontinued operations, net of tax.
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| 13-Week Period Ended | | 26-Week Period Ended |
(in millions) | January 29, 2022 | | January 30, 2021 | | January 29, 2022 | | January 30, 2021 |
Net income from continuing operations | $ | 68 | | | $ | 58 | | | $ | 145 | | | $ | 58 | |
Adjustments to continuing operations net income: | | | | | | | |
Less net income attributable to noncontrolling interests | (2) | | | (2) | | | (3) | | | (3) | |
Net periodic benefit income, excluding service cost | (10) | | | (17) | | | (20) | | | (34) | |
Interest expense, net | 44 | | | 51 | | | 84 | | | 120 | |
Other, net | (2) | | | (2) | | | (1) | | | (3) | |
Provision for income taxes | 25 | | | 17 | | | 24 | | | 16 | |
Depreciation and amortization | 69 | | | 67 | | | 138 | | | 144 | |
Share-based compensation | 12 | | | 13 | | | 23 | | | 27 | |
Restructuring, acquisition and integration related expenses(1) | 5 | | | 18 | | | 8 | | | 34 | |
Loss on sale of assets | 1 | | | — | | | 1 | | | — | |
Multi-employer pension plan withdrawal benefit(2) | (8) | | | — | | | (8) | | | — | |
Other retail (benefit) expense(3) | (1) | | | 1 | | | (1) | | | 3 | |
Adjusted EBITDA of continuing operations | 201 | | | 204 | | | 390 | | | 362 | |
Adjusted EBITDA of discontinued operations(4) | — | | | 2 | | | — | | | 3 | |
Adjusted EBITDA | $ | 201 | | | $ | 206 | | | $ | 390 | | | $ | 365 | |
| | | | | | | |
Income from discontinued operations, net of tax | $ | — | | | $ | 3 | | | $ | — | | | $ | 3 | |
Adjustments to discontinued operations net income: | | | | | | | |
Benefit for income taxes | — | | | (2) | | | — | | | (1) | |
Restructuring, store closure and other charges, net | — | | | 1 | | | — | | | 1 | |
Adjusted EBITDA of discontinued operations | $ | — | | | $ | 2 | | | $ | — | | | $ | 3 | |
(1)Fiscal 2021 primarily reflects costs associated with advisory and transformational activities as we position our business for further value-creation following the Supervalu acquisition. Refer to Note 4—Restructuring, Acquisition and Integration Related Expenses in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
(2)Reflects an adjustment to multi-employer withdrawal charge estimates.
(3)Reflects expenses associated with event-specific damages to certain incomeretail stores and expense items expressed as a percentagestore closure costs.
(4)The last two remaining retail stores in discontinued operations were sold in the second quarter of net sales:fiscal 2022.
|
| | | | | | | | | | | | | |
| | 13-Week Period Ended | | 26-Week Period Ended | |
| | January 27, 2018 | | January 28, 2017 | | January 27, 2018 | | January 28, 2017 | |
Net sales | | 100.0 | % |
| 100.0 | % |
| 100.0 | % |
| 100.0 | % |
|
Cost of sales | | 85.3 | % |
| 84.9 | % |
| 85.2 | % |
| 84.8 | % |
|
Gross profit | | 14.7 | % |
| 15.1 | % |
| 14.8 | % |
| 15.2 | % |
|
Operating expenses | | 12.7 | % | | 13.1 | % | | 12.7 | % | | 13.0 | % | |
Restructuring and asset impairment expenses | | 0.4 | % | | — | % | | 0.2 | % | | — | % | |
Total operating expenses | | 13.1 | % |
| 13.1 | % |
| 12.9 | % |
| 13.0 | % |
|
Operating income | | 1.6 | % |
| 2.0 | % |
| 1.9 | % |
| 2.2 | % |
|
Other expense (income): | | |
| | |
| | | | | |
Interest expense | | 0.2 | % |
| 0.2 | % |
| 0.2 | % |
| 0.2 | % |
|
Interest income | | — | % |
| — | % |
| — | % |
| — | % |
|
Other, net | | — | % |
| — | % |
| — | % |
| — | % |
|
Total other expense, net | | 0.1 | % | * | 0.2 | % |
| 0.1 | % | * | 0.2 | % |
|
Income before income taxes | | 1.4 | % | * | 1.8 | % |
| 1.8 | % |
| 2.0 | % |
|
Provision for income taxes (benefit) | | (0.6 | )% |
| 0.7 | % |
| 0.2 | % |
| 0.8 | % |
|
Net income | | 2.0 | % |
| 1.1 | % |
| 1.6 | % |
| 1.2 | % |
|
* Total reflects rounding
RESULTS OF OPERATIONS
Second Quarter of Fiscal 2018 Compared To Second Quarter of Fiscal 2017
Net Sales
Our net sales by customer channel were as follows (in millions except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13-Week Period Ended | | Increase (Decrease) | | 26-Week Period Ended | | Increase (Decrease) | | |
Customer Channel(1) | | January 29, 2022 | | January 30, 2021 | | $ | | % | | January 29, 2022 | | January 30, 2021 | | $ | | % | | | | |
Chains | | $ | 3,243 | | | $ | 3,106 | | | $ | 137 | | | 4.4 | % | | $ | 6,325 | | | $ | 6,133 | | | $ | 192 | | | 3.1 | % | | | | |
Independent retailers | | 1,905 | | | 1,701 | | | 204 | | | 12.0 | % | | 3,655 | | | 3,373 | | | 282 | | | 8.4 | % | | | | |
Supernatural | | 1,453 | | | 1,298 | | | 155 | | | 11.9 | % | | 2,831 | | | 2,512 | | | 319 | | | 12.7 | % | | | | |
Retail | | 643 | | | 633 | | | 10 | | | 1.6 | % | | 1,245 | | | 1,239 | | | 6 | | | 0.5 | % | | | | |
Other | | 581 | | | 568 | | | 13 | | | 2.3 | % | | 1,161 | | | 1,149 | | | 12 | | | 1.0 | % | | | | |
Eliminations | | (409) | | | (406) | | | (3) | | | 0.7 | % | | (804) | | | (822) | | | 18 | | | (2.2) | % | | | | |
Total net sales | | $ | 7,416 | | | $ | 6,900 | | | $ | 516 | | | 7.5 | % | | $ | 14,413 | | | $ | 13,584 | | | $ | 829 | | | 6.1 | % | | | | |
(1)Refer to Note 3—Revenue Recognition in Part 1, Item 1 of this Quarterly Report on Form 10-Q for our channel definitions and additional information.
Second Quarter
Our net sales for the second quarter of fiscal 20182022 increased approximately 10.6%, or $242.5 million, to $2.53 billion7.5% from $2.29 billion for the second quarter of fiscal 2017. Our2021. The increase in net sales was primarily driven by customer channels forinflation and new business from both existing and new customers, including the second quarterbenefit of fiscal 2018cross selling, partially offset by supply chain challenges and 2017 were as follows (in millions):modest market contraction.
|
| | | | | | | | | | | | | | |
| | Net Sales for the 13-Week Period Ended |
Customer Channel | | January 27, 2018 | | % of Net Sales | | January 28, 2017 | | % of Net Sales |
Supernatural chains | | $ | 931 |
| | 37 | % |
| $ | 781 |
| | 34 | % |
Independently owned natural products retailers | | 619 |
| | 24 | % |
| 586 |
| | 26 | % |
Conventional supermarkets | | 728 |
| | 29 | % |
| 684 |
| | 30 | % |
Other | | 250 |
| | 10 | % |
| 235 |
| | 10 | % |
Total | | $ | 2,528 |
| | 100 | % | | $ | 2,286 |
| | 100 | % |
During fiscal 2017, ourChains net sales by channel were adjustedincreased primarily due to reflect changesgrowth in the classification ofsales to existing customers, including an increase from higher product costs.
Independent retailers net sales increased primarily due to sales under a new supply agreement with a new customer types from acquisitions we consummatedfor East Coast locations in the third and fourth quarters of fiscal 2016 and the first quarter of fiscal 2017. There was no financial statement impact as a result of revising the classification of customer types. As a result of this adjustment,2022.
Supernatural net sales to our conventional supermarket channel for the second quarter of fiscal 2017 increased approximately $18 million, compared to the previously reported amounts, while net sales to the independent retailer channel for the second quarter of fiscal 2017 decreased approximately $18 million compared to the previously reported amounts.
Whole Foods Market is our only supernatural chain customer, and net sales to Whole Foods Market for the second quarter of fiscal 2018 increased by approximately $150 million, or 19%, as compared to the second quarter of fiscal 2017, and accounted for approximately 37% and 34% of our total net sales for the second quarter of fiscal 2018 and 2017, respectively. The increase in net sales to Whole Foods Market is primarily due to an increasegrowth in sameexisting store sales, that Whole Foods Market experienced following its acquisitionincluding the supply of new product categories previously impacted by Amazon.com, Inc. in August 2017. the pandemic, such as bulk and ingredients used for prepared foods, and increased sales to new stores. Net sales within our supernatural chainSupernatural 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.channel.
Retail net sales increased primarily due to a 2.1% increase in identical store sales from higher average basket sizes. Retail identical store sales are defined as net product sales from stores operating since the beginning of the prior-year period, including store expansions and excluding fuel costs and announced planned store dispositions. Identical store sales is a common metric used to understand the sales performance of retail stores as it removes the impact of new and closed stores.
Net sales to our independent retailer channel increased by approximately $33 million, or 6%, during the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017, and accounted for approximately 24% and 26% of our totalYear-to-Date
Our net sales for the second quarter of fiscal 2018 and 2017, respectively.2022 year-to-date increased approximately 6.1% from fiscal 2021 year-to-date. The increase in net sales in this channel is primarily due to growth in our wholesale division, which includes our broadline distribution business.
Net sales to conventional supermarkets for the second quarter of fiscal 2018 increased by approximately $44 million, or 6%, compared to the second quarter of fiscal 2017, and represented approximately 29% and 30% of our total net sales for the second quarter of fiscal 2018 and 2017, respectively. The increase in net sales to conventional supermarkets was primarily driven by growth in our wholesale division, which includes our broadline distribution business.
Other net sales, which include sales to foodservice customers and sales from the United States to other countries, as well as sales through our e-commerce division, branded product lines, retail division, manufacturing division, and our brokerage business, increased by approximately $15 million, or 6%, for the second quarter of fiscal 2018 compared to the second quarter of fiscal 2017, and accounted for approximately 10% of our total net sales for each of the second quarters of fiscal 2018 and 2017. The increase in other net sales was primarily driven by inflation and new business from both existing and new customers, including the benefit of cross selling, partially offset by supply chain challenges and modest market contraction.
Chains net sales increased primarily due to growth in our e-commerce business.
As we continuesales to aggressively pursue new customers, expand relationships with existing customers, and pursue opportunistic acquisitions, we expectincluding an increase from higher product costs.
Independent retailers net sales increased primarily due to sales under a new supply agreement with a new customer for East Coast locations in the first quarter of fiscal 2018 to grow over fiscal 2017 levels. We believe that the integration of our specialty business into our national platform has allowed us to attract customers that we would not have been able to attract without that business and will continue to allow us to pursue a broader array of customers as many customers seek a single source for their natural, organic and specialty products. We believe that our acquisitions of Haddon, Nor-Cal, Global Organic and Gourmet Guru have also enhanced our ability to offer our customers a more comprehensive set of products than many of our competitors. We believe that our projected2022.
Supernatural net sales increased primarily due to growth will come from bothin existing store sales, including the supply of new product categories previously impacted by the pandemic, such as bulk and ingredients used for prepared foods, and increased sales to new customers and sales to existing customers. We expect that most of thisstores.
Retail net sales growth will occurincreased primarily due to a 0.3% increase in our lower gross margin supernaturalidentical store sales from higher average basket sizes.
Cost of Sales and conventional supermarket channels. Although sales to these customers typically generate lower gross margins than sales to customers within our independent retailer channel, they also typically carry a lower average cost to serve than sales to our independent customers.
Gross Profit
Our gross profit increased approximately 7.7%$80 million, or 8.0%, or $26.6 million, to $371.5$1,075 million for the second quarter of fiscal 2018,2022, from $344.9$995 million for the second quarter of fiscal 2017.2021. Our gross profit as a percentage of net sales was 14.70%increased to 14.50% for the second quarter of fiscal 20182022 compared to 15.09%14.42% for the second quarter of fiscal 2017.2021. The declineincrease in gross profit rate was primarily driven by improvements in the Wholesale segment margin rate, including the impact of inflation and the Company’s ValuePath initiative, partially offset by changes in customer mix and a higher LIFO charge. Retail gross margin rate increased modestly compared to last year.
Our gross profit increased $152 million, or 7.7%, to $2,117 million for fiscal 2022 year-to-date, from $1,965 million for fiscal 2021 year-to-date. Our gross profit as a percentage of net sales increased to 14.69% for fiscal 2022 year-to-date compared to 14.47% for fiscal 2021 year-to-date. The increase in gross profit rate was driven by improvements in the Wholesale segment margin rate, including the impact of inflation and the Company’s ValuePath initiative, partially offset by changes in customer mix and a higher LIFO charge. Retail gross margin rate declined modestly compared to last year.
Operating Expenses
Operating expenses increased $74 million, or 8.5%, to $944 million, or 12.73% of net sales, for the second quarter of fiscal 2022 compared to $870 million, or 12.61% of net sales, for the second quarter of fiscal 2021. The increase in operating expenses as a percent of net sales resulted from prioritizing customer service investments in a complex operating environment which led to approximately 60 basis points of higher transportation and distribution center labor costs in the second quarter of fiscal 20182022, which were partially offset by leveraging fixed costs. The second quarter of fiscal 2021 included lower benefit costs.
Operating expenses increased $102 million, or 5.7%, to $1,876 million, or 13.02% of net sales, for fiscal 2022 year-to-date compared to $1,774 million, or 13.06% of net sales, for fiscal 2021 year-to-date. The decrease in operating expenses as a percent of net sales was primarily due to leveraging fixed expenses and lower year-over-year distribution center start-up and consolidation costs, partially offset by prioritizing customer service investments in a shiftcomplex operating environment which led to higher transportation expenses and distribution labor costs in customer mix where sales growth with lower margin customers outpaced growth with other customers coupled with an increase in inbound freight costs.fiscal 2022 year-to-date, and the temporary, voluntary closure of a distribution center.
OperatingRestructuring, Acquisition and Integration Related Expenses
Our total operatingRestructuring, acquisition and integration related expenses increased approximately 10.9%, or $32.6 million, to $331.3were $5 million for the second quarter of fiscal 2018, from $298.7 million2022. Expenses for the second quarter of fiscal 2017. As a percentage2021 were $18 million, which included $14 million of net sales, total operatingrestructuring and integration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value creation post Supervalu acquisition and $4 million of closed property charges and costs.
Restructuring, acquisition and integration related expenses were 13.11%$8 million for the second quarterfiscal 2022 year-to-date. Expenses for fiscal 2021 year-to-date were $34 million, which included $29 million of fiscal 2018 compared to 13.07% for the second quarter of fiscal 2017. The increase in operating expenses in the second quarter of fiscal 2018 was driven by increased costs incurred to fulfill the increased demand for our products and restructuring and impairmentintegration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value creation post Supervalu acquisition and $5 million of closed property charges of $11.2 million primarily related to our Earth Origins retail business. Total operating expenses also included share-based compensation expense of $6.6 million and $7.4 million for the second quarter of fiscal 2018 and 2017, respectively. This decrease is primarily due to a decrease in performance-based compensation expense related to our long-term incentive plan for members of our executive leadership team.costs.
Operating Income
Reflecting the factors described above, operating income decreased approximately 13.1%, or $6.1increased $18 million to $40.2$125 million for the second quarter of fiscal 2018, from $46.32022, compared to $107 million for the second quarter of fiscal 2017. As a percentage of net sales,2021. The increase in operating income was 1.59% forprimarily driven by an increase in gross profit, lower restructuring, acquisition and integration expenses, partially offset by an increase in operating expenses as described above.
Reflecting the second quarter of fiscal 2018 compared to 2.02% for the second quarter of fiscal 2017.
Other Expense (Income)
Other expense, net decreased approximately $0.5factors described above, operating income increased $75 million, to $3.7$232 million for fiscal 2022 year-to-date, from an operating loss of $157 million for fiscal 2021 year-to-date. The increase in operating income was primarily driven by an increase in gross profit, lower restructuring, acquisition and integration expenses, partially offset by an increase in operating expenses as described above.
Net Periodic Benefit Income, Excluding Service Cost
Net periodic benefit income, excluding service cost decreased $7 million to $10 million for the second quarter of fiscal 2018 compared to $4.22022, from $17 million for the second quarter of fiscal 2017. Interest expense was $4.22021. Net periodic benefit income, excluding service cost decreased $14 million to $20 million for fiscal 2022 year-to-date, from $34 million for fiscal 2021 year-to-date. The decrease in Net periodic benefit income, excluding service cost for the second quarter ofand fiscal 20182022 year-to-date as compared to $4.4 million for the second quarterrespective comparative periods was primarily driven by lower expected rates of fiscal 2017. return on plan assets.
Interest Expense, Net
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13-Week Period Ended | | | 26-Week Period Ended |
(in millions) | | January 29, 2022 | | January 30, 2021 | | | January 29, 2022 | | January 30, 2021 |
Interest expense on long-term debt, net of capitalized interest | | $ | 30 | | | $ | 38 | | | | $ | 63 | | | $ | 75 | |
Interest expense on finance lease obligations | | 5 | | | 5 | | | | 9 | | | 10 | |
Amortization of financing costs and discounts | | 3 | | | 3 | | | | 6 | | | 7 | |
Loss on debt extinguishment | | 6 | | | 5 | | | | 6 | | | 29 | |
Interest income | | — | | | — | | | | — | | | (1) | |
Interest expense, net | | $ | 44 | | | $ | 51 | | | | $ | 84 | | | $ | 120 | |
The decrease in interest expense was due to a reduction in outstandingon long-term debt, net of capitalized interest, in the second quarter of fiscal 20182022 compared to the second quarter of fiscal 2017. Interest income2021 and in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was $0.1 millionprimarily driven by lower outstanding debt balances and lower average interest rates.
The decrease in eachloss on debt extinguishment costs in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date primarily reflects the acceleration of unamortized debt issuance costs and original issue discounts related to higher mandatory and voluntary prepayments on the second quarters ofTerm Loan Facility made in fiscal 2018 and 2017. Other income was $0.4 million2021 year-to-date. Refer to Note 8—Long-Term Debt for further information.
Provision for Income Taxes
The effective tax rate for the second quarter of fiscal 2018, 2022 was 26.9% compared to $0.1 million of other income22.7% for the second quarter of fiscal 2017.
Provision for Income Taxes
Our2021. The change in the effective income tax rate was primarily driven by a tax benefit of 38.4% forin the second quarter of fiscal 2018,2021 from the release of reserves for unrecognized tax positions.
The effective tax rate for fiscal 2022 year-to-date was 14.2% compared to an expense of 39.4%21.6% for the second quarter of fiscal 2017. The decrease in the effective income tax rate was2021 year-to-date primarily driven by a $6.5 milliondiscrete tax benefit which was recorded as resultbenefits from employee stock award vestings that occurred in fiscal 2022 year-to-date. The impacts from the release of the new lower federalunrecognized tax rate, as well as a net tax benefit of approximately $21.9 million as a result of the impact of the re-measurement of U.S. net deferred tax liabilities at the new lower corporate income tax rate.positions in fiscal 2022 year-to-date were comparable to fiscal 2021 year-to-date.
Net Income Attributable to United Natural Foods, Inc.
Reflecting the factors described in more detail above, netNet income increased $25.0 millionattributable to $50.5United Natural Foods, Inc. was $66 million, or $0.99$1.08 per diluted common share, for the second quarter of fiscal 2018,2022, compared to $25.5$59 million, or $0.50$1.00 per diluted common share, for the second quarter of fiscal 2017.2021.
26-Week Period Ended January 27, 2018 Compared To 26-Week Period Ended January 28, 2017
Net Sales
Our net sales increased approximately 9.2%, or $421.7 million, to $4.99 billion for the 26-week period ended January 27, 2018, from $4.56 billion for the 26-week period ended January 28, 2017. Our net sales by customer channel for the 26-week period ended January 27, 2018 and January 28, 2017 were as follows (in millions):
|
| | | | | | | | | | | | | | |
| | Net Sales for the 26-Week Period Ended |
Customer Channel | | January 27, 2018 | | % of Net Sales | | January 28, 2017 | | % of Net Sales |
Supernatural chains | | $ | 1,784 |
| | 36 | % |
| $ | 1,528 |
| | 33 | % |
Independently owned natural products retailers | | 1,258 |
| | 25 | % |
| 1,185 |
| | 26 | % |
Conventional supermarket | | 1,432 |
| | 29 | % |
| 1,356 |
| | 30 | % |
Other | | 512 |
| | 10 | % |
| 495 |
| | 11 | % |
Total | | $ | 4,986 |
| | 100 | % | | $ | 4,564 |
| | 100 | % |
During fiscal 2017, our net sales by channel were adjusted to reflect changes in the classification of customer types from acquisitions we consummated in the third and fourth quarters of fiscal 2016 and the first quarter of fiscal 2017. There was no financial statement impact as a result of revising the classification of customer types. As a result of this adjustment, net sales to our conventional supermarket channel and other channel for the 26-week period ended January 28, 2017 increased approximately $38 million and $3 million, respectively, compared to the previously reported amounts, while net sales to the independent retailer channel for the 26-week period ended January 28, 2017 decreased approximately $41 million compared to the previously reported amounts.
Net sales to the supernatural chain channel for the 26-week period ended January 27, 2018 increased by approximately $256 million, or 17%, as compared to the prior fiscal year's comparable period, and accounted for approximately 36% of our total net sales for the 26-week period ended January 27, 2018 compared to 33% for the 26-week period ended January 28, 2017. The increase in net sales to Whole Foods Market is primarily due to an increase in same store sales that Whole Foods Market experienced following its acquisition by Amazon.com, Inc. in August 2017. Net sales within our supernatural chain 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.
Net sales to our independent retailer channel increased by approximately $73 million, or 6%, during the 26-week period ended January 27, 2018 compared to the 26-week period ended January 28, 2017, and accounted for 25% and 26% of our total net sales for the first 26 weeks of fiscal 2018 and 2017, respectively. The increase in net sales in this channel is primarily due to growth in our wholesale division, which includes our broadline distribution business.
Net sales to conventional supermarkets for the 26-week period ended January 27, 2018 increased by approximately $76 million, or 6%, from the 26-week period ended January 28, 2017, and represented approximately 29% and 30% of total net sales for the 26-week period ended January 27, 2018 and January 28, 2017, respectively. The increase in net sales in this channel is primarily due to growth in our wholesale division, which includes our broadline distribution business.
Other net sales, which include sales to foodservice customers and sales from the United States to other countries, as well as sales through our e-commerce division, branded product lines, retail division, manufacturing division, and our brokerage business, increased by approximately $17 million, or 3%, during the 26-week period ended January 27, 2018 compared to the 26-week period ended January 28, 2017 and accounted for approximately 10% and 11% of total net sales for the first 26 weeks of fiscal 2018 and 2017, respectively. The increase in other net sales was primarily driven by growth in our e-commerce business.
Gross Profit
Our gross profit increased approximately 6.5%, or $44.8 million, to $738.7 million for the 26-week period ended January 27, 2018, from $694.0 million for the 26-week period ended January 28, 2017. Our gross profit as a percentage of net sales decreased to 14.82% for the 26-week period ended January 27, 2018 compared to 15.21% for the 26-week period ended January 28, 2017. The decline in gross profit as a percentage of net sales in fiscal 2018 was primarily due to a shift in customer mix where sales growth with lower margin customers outpaced growth with other customers coupled with an increase in inbound freight costs.
Operating Expenses
Our total operating expenses increased approximately 8.3%, or $49.1 million, to $643.4 million for the 26-week period ended January 27, 2018, from $594.4 million for the 26-week period ended January 28, 2017. As a percentage of net sales, total operating expenses decreased to approximately 12.91% for the 26-week period ended January 27, 2018, from approximately 13.02% for the 26-week period ended January 28, 2017. During the second quarter of fiscal 2018, the Company recorded restructuring and impairment charges of $11.2 million primarily related to charges recorded for our Earth Origins retail business. The year-over-year decrease in operating expenses as a percentage of net sales was primarily driven by leveraging of fixed costs on increased net sales. This was partially offset by restructuring and impairment charges and increased costs incurred to fulfill the increased demand for our products.Total operating expenses for the 26-week period ended January 27, 2018 also included share-based compensation expense of $13.8 million compared to $14.0 million in the 26-week period ended January 28, 2017.
Operating Income
Reflecting the factors described above, operating income decreased approximately 4.3%, or $4.3 million, to $95.3 million for the 26-week period ended January 27, 2018, from $99.6 million for the 26-week period ended January 28, 2017. As a percentage of net sales, operating income was 1.91% for the 26-week period ended January 27, 2018 as compared to 2.18% for the 26-week period ended January 28, 2017.
Other Expense (Income)
Other expense, net was $6.4 million and $9.0 million for the 26-week periods ended January 27, 2018 and January 28, 2017, respectively. Interest expense was $7.9 million for the 26-week period ended January 27, 2018 compared to $9.0 million for the 26-week period ended January 28, 2017. The decrease in interest expense was primarily due to a reduction in outstanding debt in year-over-year. Interest income was $0.2 million for each of the first 26 weeks of fiscal 2018 and 2017. Other income was $1.3 million for the 26-week period ended January 27, 2018 compared to other expense of $0.3 million for the 26-week period ended January 28, 2017. This increase to other income was driven by positive returns on the Company's company owned life insurance and equity method investment.
Provision for Income Taxes
Our effective income tax rate was 8.9% and 39.6% for the 26-week periods ended January 27, 2018 and January 28, 2017, respectively. The decrease in the effective income tax rate was driven by a $6.5 million tax benefit which was recorded as result of the new lower federal tax rate, as well as a net tax benefit of approximately $21.9 million as a result of the impact of the re-measurement of U.S. net deferred tax liabilities at the new lower corporate income tax rate.
Net Income
Reflecting the factors described in more detail above, netNet income increased approximately $26.3 millionattributable to $81.0United Natural Foods, Inc. was $142 million, or $1.59$2.33 per diluted common share, for the 26-week period ended January 27, 2018,fiscal 2022 year-to-date, compared to $54.7$58 million, or $1.08$0.98 per diluted common share, for fiscal 2021 year-to-date.
Segment Results of Operations
In evaluating financial performance in each business segment, management primarily uses Net sales and Adjusted EBITDA of its business segments as discussed and reconciled within Note 14—Business Segments within Part I, Item 1 of this Quarterly Report on Form 10-Q and the 26-week period endedabove table within the Executive Overview section. The following tables set forth Net sales and Adjusted EBITDA by segment for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 13-Week Period Ended | | | | 26-Week Period Ended | | |
(in millions) | | January 29, 2022 | | January 30, 2021 | | Change | | January 29, 2022 | | January 30, 2021 | | Change |
Net sales: | | | | | | | | | | | | |
Wholesale | | $ | 7,132 | | | $ | 6,618 | | | $ | 514 | | | $ | 13,866 | | | $ | 13,056 | | | $ | 810 | |
Retail | | 643 | | | 633 | | | 10 | | | 1,245 | | | 1,239 | | | 6 | |
Other | | 50 | | | 55 | | | (5) | | | 106 | | | 111 | | | (5) | |
Eliminations | | (409) | | | (406) | | | (3) | | | (804) | | | (822) | | | 18 | |
Total Net sales | | $ | 7,416 | | | $ | 6,900 | | | $ | 516 | | | $ | 14,413 | | | $ | 13,584 | | | $ | 829 | |
Continuing operations Adjusted EBITDA: | | | | | | | | | | | | |
Wholesale | | $ | 159 | | | $ | 188 | | | $ | (29) | | | $ | 323 | | | $ | 311 | | | $ | 12 | |
Retail | | 30 | | | 26 | | | 4 | | | 52 | | | 51 | | | 1 | |
Other | | 12 | | | (8) | | | 20 | | | 16 | | | (4) | | | 20 | |
Eliminations | | — | | | (2) | | | 2 | | | (1) | | | 4 | | | (5) | |
Total continuing operations Adjusted EBITDA | | $ | 201 | | | $ | 204 | | | $ | (3) | | | $ | 390 | | | $ | 362 | | | $ | 28 | |
Net Sales
Second Quarter
Wholesale’s net sales increased primarily due to growth in the Independent retailers, Supernatural and Chains channels, as discussed in the Net Sales section above.
Retail’s net sales increased primarily due to a 2.1% increase in identical store sales from higher average basket sizes.
Year-to-Date
Wholesale’s net sales increased primarily due to growth in sales to existing customers in the Supernatural, Independent retailers and Chains, as discussed in the Net Sales section above.
Retail’s net sales increased primarily due to a 0.3% increase in identical store sales from higher average basket sizes.
The decrease in eliminations net sales was driven by lower Wholesale sales to Retail to support Retail’s continued sales growth.
Adjusted EBITDA
Second Quarter
Wholesale’s Adjusted EBITDA decreased 15.4% for the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021. The decrease was driven by decisions to invest in operations that drove higher expenses in excess of margin growth from higher sales. Wholesale’s gross profit dollars increased for the second quarter of fiscal 2022 was $80 million with a gross profit rate increase of approximately 24 basis points primarily driven by margin rate expansion from the benefits of inflation and the Company’s ValuePath initiative, which was partially offset by changes in customer mix and a higher LIFO charge. Wholesale’s operating expense increased $110 million, which excludes depreciation and amortization, stock-based compensation and other adjustments as outlined in Note 14—Business Segments. Wholesale’s operating expense rate increased 85 basis points driven by the decision to invest in higher transportation expenses and distribution center labor to better support our customers in this year’s second quarter, and lower benefit costs in last year’s second quarter, partially offset by leveraging fixed expenses. Wholesale’s depreciation expense increased $2 million compared to last year.
Retail’s Adjusted EBITDA increased 15.4% for the second quarter of fiscal 2022 from the second quarter of fiscal 2021. The increase was driven by a slightly higher gross margin rate. Retail operating expenses, which excludes depreciation and amortization, stock-based compensation and other adjustments as outlined in Note 14—Business Segments, was approximately flat. Retail’s depreciation and amortization expense was approximately flat compared to last year.
Year-To-Date
Wholesale’s Adjusted EBITDA increased 3.9% for fiscal 2022 year-to-date from fiscal 2021 year-to-date. The increase was driven by leveraged sales growth, which was partially offset by higher operating costs. Gross profit dollar growth for fiscal 2022 year-to-date was $162 million and gross profit rate increased 46 basis points driven by margin rate expansion from the benefits of inflation and the Company’s ValuePath initiative, which was partially offset by changes in customer mix and a higher LIFO charge. Wholesale’s operating expense increased $151 million, which excludes depreciation and amortization, stock-based compensation and other adjustments as outlined in Note 14—Business Segments. Wholesale’s operating expense rate increased 51 basis points primarily driven by the decision to invest in higher transportation expenses and distribution labor to better support our customers in fiscal 2022 year-to-date, and the temporary, voluntary closure of a distribution center, partially offset by leveraging fixed expenses and lower year-over-year distribution center start-up and consolidation costs. Wholesale depreciation expense decreased $5 million.
Retail’s Adjusted EBITDA increased 2.0% for fiscal 2022 year-to-date from fiscal 2021 year-to-date.
LIQUIDITY AND CAPITAL RESOURCES
Highlights
•Total liquidity as of January 28, 2017.29, 2022 was $1,036 million and consisted of the following:
◦Unused credit under our revolving line of credit was $991 million, which decreased $289 million from $1,280 million as of July 31, 2021, primarily due to increased cash utilized to fund working capital increases and a voluntary prepayment on the Term Loan Facility described below.
◦Cash and cash equivalents was $45 million, which increased $4 million from $41 million as of July 31, 2021. Liquidity and Capital Resources
We finance our day•Our total debt increased $135 million to day operations and growth$2,323 million as of January 29, 2022 from $2,188 million as of July 31, 2021, primarily with cash flows from operations,related to additional borrowings under our amended and restatedthe $2,100 million asset-based revolving credit facility operating leases, a capital lease, a finance lease, trade payables and bank indebtedness. In addition, from time to time, we may issue equity and debt securities to finance our operations and acquisitions. We believe that our cash(the “ABL Credit Facility”) entered into on hand and available credit through ourAugust 30, 2018, as amended, and restated revolving credit facility as discussed below is sufficient for our operations and planned capital expenditures over the next twelve months. We intend to continue to utilize cash generated from operations to fund acquisitions, fund investment in working capital increases.
•Working capital increased $246 million to $1,309 million as of January 29, 2022 from $1,063 million as of July 31, 2021, primarily due to increases in inventory and capital expenditure needsaccounts receivable levels related to new customers and reduce our debt levels. During the quarter ended October 28, 2017, we announced our intent to repurchase up to $200.0 million of shares of our common stock. Purchases under this program will be financed with cash generated from our operations and borrowings under our amended and restated revolving credit facility. To the extent that we borrow funds to purchase these shares, our debt levels and interest expense will rise. We intend to manage capital expenditures to approximately 0.6% to 0.7% of net sales for fiscal 2018. We expect to finance requirements with cash generated from operations and borrowings under our amended and restated revolving credit facility. Our planned capital projects for fiscal 2018 will be focused on continuing the implementation of our information technology projects across the Company that we believe will provide us with increased efficiency and the capacity to continue to support the growth of existing customers, partially offset by an increase in accounts payable related to inventories. In the remainder of fiscal 2022, scheduled debt maturities are expected to be $7 million.
•In the second quarter of fiscal 2022, we made a voluntary prepayment of $150 million on the term loan agreement (the “Term Loan Agreement”) related to our customer base. Future investments and acquisitions may be financed through equity issuances, long-term debt or borrowings under our amended and restated revolving credit facility.
The Company has estimated an immaterial impact of the repatriation provision on earnings due to the foreign tax credits available to the Company. The Company has not recorded a tax provision for U.S. tax purposes on UNFI Canada's profits as it has no assessable profits arising in or derived from the United States and still intends to indefinitely reinvest accumulated earnings in the UNFI Canada operations.
On April 29, 2016, we$1,950.0 million term loan facility (the “Term Loan Facility”) entered into the Third Amended and Restated Loan and Security Agreement (the “Third A&R Credit Agreement”) amending and restating certain terms and provisions of our revolving credit facility, which increased the maximumin October 2018, as amended, funded with incremental borrowings under the amended and restated revolving credit facility and extended the maturity dateABL Credit Facility that will reduced our interest costs. This prepayment will count towards satisfying any requirement to April 29, 2021. Up to $850.0 million is available to our U.S. subsidiaries and up to $50.0 million is available to UNFI Canada. After giving effect to the Third A&R Credit Agreement, the amended and restated revolving credit facility provides an option to increase the U.S. or Canadian revolving commitments by up to an additional $600.0 millionmake a mandatory prepayment with Excess Cash Flow (as defined in the aggregate (butTerm Loan Agreement) generated during fiscal 2022, if any, which would be due in not less than $10.0 million increments) subject to certain customary conditions and the lenders committing to provide the increase in funding.
The borrowings of the U.S. portion of the amended and restated revolving credit facility, after giving effect to the Third A&R Credit Agreement, accrued interest, at the base rate plus an applicable margin of 0.25% or LIBOR rate plus an applicable margin of 1.25% for the twelve month period ended April 29, 2017. After this period, the interest on the U.S. borrowings is accrued at the Company's option, at either (i) a base rate (generally defined as the highest of (x) the Bank of America Business Capital prime rate, (y) the average overnight federal funds effective rate plus one-half percent (0.50%) per annum and (z) one-month LIBOR plus one percent (1%) per annum) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) the LIBOR rate plus an applicable margin that varies depending on daily average aggregate availability. The borrowings on the Canadian portion of the credit facility accrued interest at the Canadian prime rate plus an applicable margin of 0.25% or a bankers' acceptance equivalent rate plus an applicable margin of 1.25% for the twelve month period ended April 29, 2017. After this period, the borrowings on the Canadian portion of the credit facility accrue interest, at the Company's option, at either (i) a Canadian prime rate (generally defined as the highest of (x) 0.50% over 30-day Reuters Canadian Deposit Offering Rate ("CDOR") for bankers' acceptances, (y) the prime rate of Bank of America, N.A.'s Canada branch, and (z) a bankers' acceptance equivalent rate for a one month interest period plus 1.00%) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) a bankers' acceptance equivalent rate of the rate of interest per annum equal to the annual rates applicable to Canadian Dollar bankers' acceptances on the "CDOR Page" of Reuter Monitor Money Rates Service, plus five basis points, and an applicable margin that varies depending on daily average aggregate availability. Unutilized commitments are subject to an annual feefiscal 2023. Also in the amountsecond quarter of 0.30% if the total outstanding borrowings are less than 25% of the aggregate commitments, or a per annum fee of 0.25% if such total outstanding borrowings are 25% or more of the aggregate commitments. The Company is also requiredfiscal 2022, we amended our Term Loan Agreement to pay a letter of credit fronting fee to each letter of credit issuer equal to 0.125% per annum of the stated amount of each such letter of credit (or such other amount as may be mutually agreed by the borrowers under the facility and the applicable letter of credit issuer), as well as a fee to all lenders equal toreduce the applicable margin for LIBOR or bankers’ acceptance equivalentand base rate loans as applicable, times the average daily stated amount of all outstanding letters of credit.
As of January 27, 2018, the Company's borrowing base, which is calculated based on eligible accounts receivable and inventory levels, net of $4.2 million of reserves, was $882.4 million. As of January 27, 2018, the Company had $287.0 million of borrowings outstanding under the Company's amendedTerm Loan Facility by 25 basis points.
•Subsequent to the end of the second quarter fiscal 2022, we paid $153 million to acquire the Riverside, California distribution center, which reduced our Current portion of long-term debt and restated revolving credit facilityfinance lease liabilities by $96 million with the remainder primarily reducing our Accrued expenses and $30.3other current liabilities. Immediately following this acquisition, we monetized this property through a sale-leaseback transaction, pursuant to which we received $225 million in letteraggregate proceeds for the sale of the property. In March 2022, we made a $44 million voluntary prepayment on the Term Loan Facility from the majority of the anticipated after-tax net proceeds from the transactions.
Sources and Uses of Cash
We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds. 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 commitments which reducedfacilities are secured by a substantial portion of our total assets. We expect to be able to fund debt maturities and finance lease liabilities through fiscal 2022 with internally generated funds, proceeds from asset sales or borrowings under the Company's availableABL Credit Facility.
Our primary sources of liquidity are from internally generated funds and from borrowing capacity under the facilityABL Credit Facility. We believe our short-term and long-term financing abilities are 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 dollardividend on our common stock, and have no 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, 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 are required to be used to make additional Term Loan Facility payments or to be reinvested in the business.
Long-Term Debt
During fiscal 2022 year-to-date, we borrowed a net $289 million under the ABL Credit Facility and repaid $158 million on the Term Loan Facility related to voluntary prepayments. We entered into a second amendment to the Term Loan Facility to, among other things, reduce the applicable margin by 0.25%. Refer to Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for dollar basis. The Company's resulting remaining availability was $565.0 million asadditional information, including a detailed discussion of January 27, 2018.the provisions of our credit facilities and certain long-term debt agreements.
The revolving credit facility, as amendedOur Term Loan Agreement and restated,the indenture governing our unsecured 6.75% Senior Notes due October 15, 2028 (the “Senior
Notes”) do not include any financial maintenance covenants. Our ABL Loan Agreement subjects us to a springing minimum fixed charge coverage ratio (as defined in the Third A&R Credit 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 Third A&R Credit Agreement) is ever less than the greater of (i) $60.0$235 million and (ii) 10% of the aggregate borrowing base. We werehave not been subject to the fixed charge coverage ratio covenant under the Third A&R Credit Agreement during the second quarter of fiscal 2018.
The revolving credit facility also allows for the lenders thereunder to syndicate the credit facility to other banks and lending institutions. The Company has pledged the majority of its and its subsidiaries’ accounts receivable and inventory for its obligations under the amended and restated revolving credit facility.
On August 14, 2014, we and certain of our subsidiaries entered into a real estate backed term loan agreement (the "Term Loan Agreement"). The total initial borrowings under our term loan facility were $150.0 million. We are required to make $2.5 million principal payments quarterly. Under the TermABL Loan Agreement, we at our option may requestincluding through the establishmentfiling date of one or more new term loan commitments in increments of at least $10.0 million, but not to exceed $50.0 million in total, subject to the approval of the Lenders electing to participate in such incremental loans and the satisfaction of the conditions required by the Term Loan Agreement. We will be required to make quarterly principal payments on these incremental borrowings in accordance with the terms of the Term Loan Agreement. Proceeds from this Term Loan Agreement were used to pay down borrowings on our amended and restated revolving credit facility.
On April 29, 2016, the Company entered into a First Amendment Agreement (the “Term Loan Amendment”) to the Term Loan Agreement. The Term Loan Amendment was entered into to reflect the changes to the amended and restated revolving credit facility reflected in the Third A&R Credit Agreement.Quarterly Report. The Term Loan Agreement, will terminateABL Loan Agreement and Senior Notes contain certain operational and informational 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 the earlier of (a) August 14, 2022our assets, engage in transactions with affiliates, and (b) the date that is ninety days prior to the termination datemerge, consolidate or sell all or substantially all of our amended and restated revolving credit facility.
On September 1, 2016, the Company entered intoour subsidiaries’ assets on a Second Amendment Agreement (the "Second Amendment") to the Term Loan Agreement which amended the Term Loan Agreement to adjust the applicable margin charged to borrowings thereunder. As amended by the Second Amendment, borrowings under the Term Loan Agreement bear interest at rates that, at the Company's option, can be either: (1) a base rate generally defined as the sum of (i) the highest of (x) the Administrative Agent's prime rate, (y) the average overnight federal funds effective rate plus 0.50% and (z) one-month LIBOR plus one percent (1%) per annum and (ii) a margin of 0.75%; or, (2) a LIBOR rate generally defined as the sum of (i) LIBOR (as published by Reuters or other commercially available source) for one, two, three or six months or, if approved by all affected lenders, nine months (all as selected by the Company), and (ii) a margin of 1.75%. Interest accrued on borrowings under the Term Loan Agreement is payable in arrears. Interest accrued on any LIBOR loan is payable on the last day of the interest period applicable to the loan and, with respect to any LIBOR loan of more than three (3) months, on the last day of every three (3) months of such interest period. Interest accrued on base rate loans is payable on the first day of every month. The Company is also required to pay certain customary fees to the Administrative Agent. The borrowers’ obligations under the Term Loan Agreement are secured by certain parcels of the borrowers’ real property.
The Term Loan Agreement includes financial covenants that require (i) the ratio of our consolidated EBITDA (as defined in the Term Loan Agreement) minus the unfinanced portion of Capital Expenditures (as defined in the Term Loan Agreement) to our consolidated Fixed Charges (as defined in the Term Loan Agreement) to be at least 1.20 to 1.00 as of the end of any period of four fiscal quarters, (ii) the ratio of our Consolidated Funded Debt (as defined in the Term Loan Agreement) to our EBITDA for the four fiscal quarters most recently ended to be not more than 3.00 to 1.00 as of the end of any fiscal quarter and (iii) the ratio, expressed as a percentage, of our outstanding principal balance under the Loans (as defined in the Term Loan Agreement), divided by the Mortgaged Property Value (as defined in the Term Loan Agreement) to be not more than 75% at any time. As of January 27, 2018, the Company wasbasis. 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 financial covenantsapplicable debt agreement, and all amounts due thereunder may become immediately due and payable.
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 the Term Loan Agreement.our 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 January 27, 2018, the Company29, 2022, we had borrowingsan aggregate of $113.7$1,231 million under the Term Loan Agreement which is included in “Long-term debt” in the Condensed Consolidated Balance Sheet.
On January 23, 2015, the Company entered into a forward startingof floating rate notional debt subject to active interest rate swap agreement with an effective date of August 3, 2015,contracts, which expires in August 2022 concurrent witheffectively hedge the scheduled maturityLIBOR component of our Term Loan Agreement. This interest rate
swap agreement has a notional amount of $117.5 million and provides for the Company to pay interest for a seven-year period at a fixed rate of 1.795% while receiving interest for the same period at the one-month LIBOR on the same notional principal amount. The interest rate swap agreement has an amortizing notional amount which adjusts down on the dates payments are due on the underlying term loan. The interest rate swap has been entered into as a hedge against LIBOR movements on $117.5 million of the variable rate indebtedness under the Term Loan Agreement at one-month LIBOR plus 1.00% and a margin of 1.50%, thereby fixing our effective rate on the notional amount at 4.295%. The swap agreement qualifies as an “effective” hedge under Accounting Standard Codification ("ASC") 815, Derivatives and Hedging.
On June 7, 2016, the Company entered into twothrough pay fixed and receive floating interest rate swap agreementsagreements. These fixed rates range from 1.795% to effectively fix the underlying variable2.959%, with maturities between August 2022 and October 2025. The fair value of these interest rate debtderivatives represents a total net liability of $39 million and are subject to volatility based on the Company’s amended and restated revolving credit facility. The first agreement has an effective datechanges in market interest rates. In fiscal 2021 year-to-date, we paid $11 million to terminate or novate $954 million of June 9, 2016 and expires in June of 2019. This interest rate swap agreement has acontracts over our floating rate notional principaldebt. The termination payments reflect the amount of $50.0 million and provides foraccumulated other comprehensive loss that will continue to be amortized into interest expense over the Company to pay interest for a three-year period at a fixed annual rate of 0.8725% while receiving interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the amended and restated revolving credit facility, effectively fixes the interest rate on the $50.0 million notional amount. The second agreement has an effective date of June 9, 2016 and expires concurrent with the scheduled maturity of our amended and restated revolving credit facility in April of 2021. Thisoriginal interest rate swap agreement has a notional principal amount of $25.0 million and provides forcontract terms as long as the Company to pay interest for a five-year period at a fixed rate of 1.065% while receiving interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the amended and restated revolving credit facility, effectively fixes thehedged interest rate transactions are still probable of occurring. See Note 7—Derivatives in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
From time to time, we enter into fixed price fuel supply agreements and foreign currency hedges. As of January 29, 2022, we had fixed price fuel contracts outstanding and foreign currency forward agreements outstanding. Gains and losses and the $25.0 million notional amount.outstanding assets and liabilities from these arrangements are insignificant.
On June 24, 2016, the Company entered into two additional pay fixed and receive floating interest rate swap agreements to effectively fix the underlying variable rate debt on the Company’s amended and restated revolving credit facility. The first agreement has an effective date of July 24, 2016 and expires in June of 2019. This interest rate swap agreement has a notional principal amount of $50.0 million and provides
Payments for the Company to pay interest for a three year period at a fixed annual rate of 0.7265% while receiving interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the amended and restated revolving credit facility, effectively fixes the interest rate on the $50.0 million notional amount. The second agreement has an effective date of July 24, 2016 and expires concurrent with the scheduled maturity of our amended and restated revolving credit facility in April of 2021. This interest rate swap agreement has a notional principal amount of $25.0 million and provides for the Company to pay interest for a five year period at a fixed rate of 0.926% while receiving interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the amended and restated revolving credit facility, effectively fixes the interest rate on the $25.0 million notional amount.Capital Expenditures
Our capital expenditures for the 26-week period ended January 27, 2018fiscal 2022 year-to-date were $15.5$106 million, compared to $22.7$92 million for fiscal 2021 year-to-date, an increase of $14 million, primarily due investments in our new Allentown, Pennsylvania distribution center in fiscal 2022 year-to-date. Fiscal 2022 capital spending is expected to be approximately $250 million and include projects that optimize and expand our distribution network, technology platform investments and the 26-week period ended January 28, 2017, a decrease of $7.1 million. We believe that our capital requirements for fiscal 2018 will be between 0.6% and 0.7% of net sales.remaining investments in the Allentown, PA distribution center. We expect to finance thesefiscal 2022 capital expenditures requirements with cash generated from operations and borrowings under our amended and restated revolving credit facility. Our plannedABL Credit Facility. Longer term, capital projects will provide technology that we believe will provide us with increased efficiency and the capacityspending is expected to continue to support the growthbe at or below 1.0% of net sales. Future investments may be financed through long-term debt or borrowings under our customer base and also relate to the buildoutABL Credit Facility.
Cash Flow Information
The following summarizes our Condensed Consolidated Statements of our shared services center. Based on our currentCash Flows:
| | | | | | | | | | | | | | | | | |
| 26-Week Period Ended | | |
(in millions) | January 29, 2022 | | January 30, 2021 | | Change |
Net cash provided by operating activities of continuing operations | $ | 43 | | | $ | 207 | | | $ | (164) | |
Net cash used in investing activities of continuing operations | (129) | | | (51) | | | (78) | |
Net cash provided by (used in) financing activities of continuing operations | 91 | | | (163) | | | 254 | |
Net cash provided by discontinued operations | — | | | 1 | | | (1) | |
Effect of exchange rate on cash | — | | | — | | | — | |
Net increase (decrease) in cash and cash equivalents | 5 | | | (6) | | | 11 | |
Cash and cash equivalents, at beginning of period | 40 | | | 47 | | | (7) | |
Cash and cash equivalents, at end of period | $ | 45 | | | $ | 41 | | | $ | 4 | |
The decrease in net cash provided by operating activities of continuing operations and customers and estimates of future demand for our products, we believe that we are likely to commence construction and open new distribution center capacity afterin fiscal 2018, which would increase our capital requirements when2022 year-to-date compared to fiscal 2018 estimates. We anticipate that future investments2021 year-to-date was primarily due to higher levels of cash utilized to build inventories driven by supplier limitations and acquisitions will be financedcredit extended through our amendedaccounts receivable driven by new customers and restated revolving credit facility, or with the issuance of equity or long-term debt, negotiated at the time of the potential acquisition.continued sales growth, partially offset by an increase in cash provided from higher accounts payable related to inventory increases.
Net cash usedThe increase in operations was $35.1 million for the 26-week period ended January 27, 2018, a change of $132.0 million from the $96.9 million provided by operations for the 26-week period ended January 28, 2017. The primary reasons for the net cash used in investing activities of continuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily due to lower proceeds from asset sales, and increased payments for the 26-week period ended January 27, 2018 were aninvestments and capital expenditures.
The increase in accounts receivablenet cash provided by (used in) financing activities of $109.1 millioncontinuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was due to an increase in net sales and the timing of collections and an increaseborrowings resulting from increases in inventories of $109.0 million, offset by an increase in accounts payable of $60.6 million, net income of $81.0 million and depreciation and amortization of $44.2 million.
The primary reasons for the net cash provided by operations for the 26-week period ended January 28, 2017 were net income of $54.7 million, depreciation and amortization of $42.5 million, share-based compensation expense of $14.0 million, and a decrease in inventories of $30.8 million, offset by an increase in accounts receivable of $26.1 million, and an increase in prepaid expenses and other assets of $20.5 million.
Days in inventory was 49 days as of January 27, 2018 compared to 48 days as of July 29, 2017. Days sales outstanding increased to 22 days as of January 27, 2018 from 21 days at July 29, 2017. Working capital increased by $99.8 million, or 10.4%, from $958.7 million at July 29, 2017 to $1.06 billion at January 27, 2018.
Net cash used in operating activities and investing activities, decreased $16.9 million to $17.8 million for the 26-week period ended January 27, 2018, compared to $34.6 million for the 26-week period ended January 28, 2017. This change was primarily due to a decreaseas described above.
Other Obligations and Commitments
Except as otherwise disclosed in cash paid for acquisitionsNote 8—Long-Term Debt and Note 16—Subsequent Events in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes in the 26-week period ended January 27, 2018 comparedCompany’s contractual obligations since the end of fiscal 2021. Refer to Item 7 of the 26-week period ended January 28, 2017Annual Report for additional information regarding the Company’s contractual obligations.
Pension and a $7.1 million decreaseOther Postretirement Benefit Obligations
As described in capital spending between periods.further detail in Note 11—Benefit Plans, in the second quarter of fiscal 2022, we merged the Unified Grocers, Inc. Cash Balance Plan into the SUPERVALU INC. Retirement Plan.
In fiscal 2022, no minimum pension contributions were required to be made under the previous Unified Grocers, Inc. Cash Balance Plan or are required under the SUPERVALU INC. Retirement Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”). An insignificant amount of contributions are expected to be made to defined benefit pension plans and postretirement benefit plans in fiscal 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 financing activities was $62.7 million for the 26-week period ended January 27, 2018. The net cash provided by financing activities was primarily due to borrowings onus, including our amendedexternal actuarial consultant, and restated revolving credit facility of $311.1 million and increases in checks outstandingadditional contributions made at our discretion. We may accelerate contributions or undertake contributions in excess of depositsthe minimum requirements from time to time subject to the availability of $31.7 million, offsetcash 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.
Off-Balance Sheet Multiemployer Pension Arrangements
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 gross repaymentsemployers and unions that are parties to the collective bargaining agreement. Based on our amendedthe 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 restated revolving credit facility of $247.6 million, share repurchases of $22.2 million and repayments of long term debt of $6.1 million. Net cash used in financing activities was $50.2 million for the 26-week period ended January 28, 2017, primarilyunderfunding is not a direct obligation or liability to us.
Our contributions can fluctuate from year to year due to repaymentsstore 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 amendedcollective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and restated revolving credit facilityrequirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and long-term debtSection 412(e) of $169.6the 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 in fiscal 2021. In fiscal 2022, we expect to contribute approximately $46 million to multiemployer plans related to continuing operations, subject to the outcome of collective bargaining and $5.7 million, respectively,capital market conditions. We expect required cash payments to fund multiemployer pension plans from which we have withdrawn to be immaterial in any one fiscal year, which would exclude any payments that may be agreed to on a lump sum basis to satisfy existing withdrawal liabilities. Any future withdrawal liability would be recorded when it is probable that a liability exists and decreasescan be reasonably estimated, in bank overdraftsaccordance 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 $9.1 million, offset by gross borrowings undertime.
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 amended and restated revolving credit facilityOperating expenses could increase in the future.
Refer to Note 13—Benefit Plans in Part II, Item 8 of $136.8 million.the Annual Report for additional information regarding the plans in which we participate.
Share Repurchases
On October 6, 2017, the Companywe announced that itsour Board of Directors authorized a share repurchase program for up to $200.0$200 million of the Company’sour outstanding common stock. The repurchase program is scheduled to expire upon the Company’sour repurchase of shares of the Company’sour common stock having an aggregate purchase price of $200.0$200 million. During the 26-week period ended January 27, 2018, the Company has repurchased 564,660We did not repurchase any shares of the Company'sour common stock at an aggregate cost of $22.2 million.
From time-to-time, we enter into fixed price fuel supply agreements.in fiscal 2022 year-to-date or fiscal 2021 year-to-date pursuant to the share repurchase program. As of January 27, 2018 and January 28, 2017,29, 2022, we werehave $176 million remaining authorized under the share repurchase program. We do not a partyexpect to any such agreements. We were party to a contractpurchase shares under the share repurchase program during fiscal 2017, which required us2022. Additionally, our ABL Credit Facility, Term Loan Facility and Senior Notes contain terms that limit our ability to purchase a totalrepurchase common stock above certain levels unless certain conditions and financial tests are met.
Critical Accounting Policies and were accounted for using the “normal purchase” exception under ASC 815, Derivatives and Hedging, as physical deliveries occurred rather than net settlements, and therefore the fuel purchases under these contracts have been expensed as incurred and included within operating expenses.Estimates
Contractual Obligations
There have beenwere no material changes to our contractual obligations and commercial commitments from those disclosed in our Annualcritical accounting policies during the period covered by this Quarterly Report on Form 10-K for10-Q. Refer to the year ended July 29, 2017.description of critical accounting policies included in Item 7 of our Annual Report.
Seasonality
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'smanagement’s ability to execute our operating and growth strategies, personnel changes, demand for naturalour 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk results primarily from fluctuations in interest rates on our borrowings and our interest rate swap agreements, and price increases in diesel fuel. As discussed in more detailExcept as described in Note 67—Derivatives and Note 8—Long-Term Debt in Part I, Item 1 of the condensed consolidated financial statements, we have entered into interest rate swap agreements to fix our effective interest rate for a portion of the borrowings under our term loan. Therethis Quarterly Report on Form 10-Q, which are incorporated herein, there have been no other material changes to our exposure to market risks from those disclosed in our Annual Report on Form 10-K for the year ended July 29, 2017.10-K.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures.We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly reportQuarterly Report on Form 10-Q (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.
(b)Changes in internal controls.There has been no change in our internal control over financial reporting that occurred during the second quarter of fiscal 20182022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. 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. Therebusiness, including investigations and claims regarding employment law including wage and hour, pension plans, unfair labor practices, labor union disputes, supplier, customer and service provider contract terms, products liability, real estate and antitrust. Other than as set forth in Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part I, Item I of this Quarterly Report on Form 10-Q, which is incorporated herein, there are no pending material legal proceedings to which we are a party or to which our property is subject.
Item 1A. Risk Factors
There have been no material changes to our risk factors contained in Part I, Item 1A, “Risk1A. Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended July 29, 2017.Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 6, 2017, the Companywe announced that itsour Board of Directors had authorized a share repurchase program for up to $200.0$200 million of the Company’sour outstanding common stock. The repurchase program is scheduled to expire upon the Company’sour repurchase of shares of the Company’sour common stock having an aggregate purchase price of $200.0$200 million. RepurchasesAny repurchases will be made in accordance with applicable securities laws from time to time in the open market, through privately negotiated transactions, or otherwise. The CompanyWe 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. We do not expect to purchase shares under the share repurchase program during fiscal 2022.
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(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): | | | | | | | | |
October 31, 2021 to December 4, 2021 | | 10,062 | | $ | 49.54 | | | — | | | $ | — | |
December 5, 2021 to January 1, 2022 | | 22,249 | | 49.79 | | | — | | | — | |
January 2, 2022 to January 29, 2022 | | 157 | | 46.25 | | | — | | | 176 | |
Total | | 32,468 | | $ | 49.69 | | | — | | | $ | — | |
(1)The following table presents purchasesreported periods conform to our fiscal calendar.
(2)These amounts represent the deemed surrender by participants in our compensatory stock plans of 32,468 shares of our common stock to cover taxes from the vesting of restricted stock awards and related information for eachrestricted stock units granted under such plans.
(3)As of January 29, 2022, there was approximately $176 million that may yet be purchased under the monthsshare repurchase program. There were no share repurchases under the share repurchase program in the second quarter of fiscal quarter ended January 27, 2018:2022.
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(In thousands, except share and per share amounts) | | Total Number of Shares Purchased | | 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 |
Period: | | | | | | | | |
October 29, 2017 to December 2, 2017 | | 402,587 |
| | $ | 39.21 |
| | 402,587 |
| | $ | 177,763 |
|
December 3, 2017 to December 30, 2017 | | — |
| | — |
| | — |
| | 177,763 |
|
December 31, 2017 to January 27, 2018 | | — |
| | — |
| | — |
| | 177,763 |
|
Total | | 402,587 |
| | $ | 39.21 |
| | 402,587 |
| | $ | 177,763 |
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Item 3.Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Index
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Exhibit No. | | Description |
10.1** | |
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2.1 | United Natural Foods, Inc. Second AmendedAgreement and Restated 2012 Equity Incentive Plan of Merger, dated July 25, 2018, by and among SUPERVALU INC., SUPERVALU Enterprises, Inc., the Registrant and Jedi Merger Sub, Inc. (incorporated by reference to Appendix Athe Registrant’s Current Report on Form 8-K, filed on July 26, 2018 (File No. 001-15723)). |
2.2 | First Amendment to Agreement and Plan of Merger, dated as of October 10, 2018, by and among United Natural Foods, Inc., Jedi Merger Sub, Inc., SUPERVALU INC. and SUPERVALU Enterprises, Inc. (incorporated by reference to Registrant’s Current Report on Form 8-K, filed on October 10, 2018 (File No. 001-15723)). |
3.1 | |
3.2 |
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31.1* | 10.1* ** | |
10.2 | |
31.1* | |
31.2* | | |
32.1* | | |
32.2* | | |
101* | | The following materials from the United Natural Foods, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended January 27, 2018,29, 2022, formatted in Inline XBRL (eXtensible(Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income,Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated StatementStatements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements. |
104 | The cover page from our Quarterly Report on Form 10-Q for the second quarter of fiscal 2022, filed with the SEC on March 9, 2022, formatted in Inline XBRL (included as Exhibit 101). |
*Filed herewith.
** Denotes a management contract or compensatory plan or arrangement.
* * *
44
We would be pleased to furnish a copy of this Form 10-Q to any stockholder who requests it by writing to:
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United Natural Foods, Inc. |
Investor Relations |
313 Iron Horse Way |
Providence, RI 02908 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| UNITED NATURAL FOODS, INC. |
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| /s/ Michael P. ZechmeisterJOHN W. HOWARD |
| Michael P. ZechmeisterJohn W. Howard |
| Chief Financial Officer |
| (Principal Financial Officer and Accounting Officer)duly authorized officer) |
Dated: March 8, 20189, 2022