UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 29, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-15723
UNITED NATURAL FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 05-0376157 (I.R.S. Employer Identification No.) | |||||||
313 Iron Horse Way, Providence, RI 02908 | ||||||||
| (Address of principal executive offices) (Zip Code) | ||||||||
Registrant’s telephone number, including area code: (401) 528-8634
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
| Common stock, par value $0.01 | UNFI | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of March 4, 2022 there were 58,265,075 shares of the registrant’s common stock, $0.01 par value per share, outstanding.
TABLE OF CONTENTS
Part I. | Financial Information | |||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except for par amounts)
| January 29, 2022 | July 31, 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Cash and cash equivalents | $ | 45 | $ | 41 | ||||||||||
| Accounts receivable, net | 1,241 | 1,103 | ||||||||||||
| Inventories, net | 2,426 | 2,247 | ||||||||||||
| Prepaid expenses and other current assets | 152 | 157 | ||||||||||||
| Current assets of discontinued operations | — | 2 | ||||||||||||
| Total current assets | 3,864 | 3,550 | ||||||||||||
| Property and equipment, net | 1,764 | 1,784 | ||||||||||||
| Operating lease assets | 1,097 | 1,064 | ||||||||||||
| Goodwill | 20 | 20 | ||||||||||||
| Intangible assets, net | 855 | 891 | ||||||||||||
| Deferred income taxes | 42 | 57 | ||||||||||||
| Other long-term assets | 159 | 157 | ||||||||||||
| Long-term assets of discontinued operations | — | 2 | ||||||||||||
| Total assets | $ | 7,801 | $ | 7,525 | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Accounts payable | $ | 1,737 | $ | 1,644 | ||||||||||
| Accrued expenses and other current liabilities | 328 | 341 | ||||||||||||
| Accrued compensation and benefits | 223 | 243 | ||||||||||||
| Current portion of operating lease liabilities | 145 | 135 | ||||||||||||
| Current portion of long-term debt and finance lease liabilities | 122 | 120 | ||||||||||||
| Current liabilities of discontinued operations | — | 4 | ||||||||||||
| Total current liabilities | 2,555 | 2,487 | ||||||||||||
| Long-term debt | 2,309 | 2,175 | ||||||||||||
| Long-term operating lease liabilities | 988 | 962 | ||||||||||||
| Long-term finance lease liabilities | 30 | 35 | ||||||||||||
| Pension and other postretirement benefit obligations | 21 | 53 | ||||||||||||
| Other long-term liabilities | 215 | 299 | ||||||||||||
| Total liabilities | 6,118 | 6,011 | ||||||||||||
| Commitments and contingencies | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
Preferred stock, $0.01 par value, authorized 5.0 shares; none issued or outstanding | — | — | ||||||||||||
Common stock, $0.01 par value, authorized 100.0 shares; 58.8 shares issued and 58.2 shares outstanding at January 29, 2022; 57.0 shares issued and 56.4 shares outstanding at July 31, 2021 | 1 | 1 | ||||||||||||
| Additional paid-in capital | 596 | 599 | ||||||||||||
| Treasury stock at cost | (24) | (24) | ||||||||||||
| Accumulated other comprehensive loss | (9) | (39) | ||||||||||||
| Retained earnings | 1,120 | 978 | ||||||||||||
| Total United Natural Foods, Inc. stockholders’ equity | 1,684 | 1,515 | ||||||||||||
| Noncontrolling interests | (1) | (1) | ||||||||||||
| Total stockholders’ equity | 1,683 | 1,514 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 7,801 | $ | 7,525 | ||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in millions, except for per share data)
| 13-Week Period Ended | 26-Week Period Ended | |||||||||||||||||||||||||
| January 29, 2022 | January 30, 2021 | January 29, 2022 | January 30, 2021 | |||||||||||||||||||||||
| Net sales | $ | 7,416 | $ | 6,900 | $ | 14,413 | $ | 13,584 | ||||||||||||||||||
| Cost of sales | 6,341 | 5,905 | 12,296 | 11,619 | ||||||||||||||||||||||
| Gross profit | 1,075 | 995 | 2,117 | 1,965 | ||||||||||||||||||||||
| Operating expenses | 944 | 870 | 1,876 | 1,774 | ||||||||||||||||||||||
| Restructuring, acquisition and integration related expenses | 5 | 18 | 8 | 34 | ||||||||||||||||||||||
| Loss on sale of assets | 1 | — | 1 | — | ||||||||||||||||||||||
| Operating income | 125 | 107 | 232 | 157 | ||||||||||||||||||||||
| Net periodic benefit income, excluding service cost | (10) | (17) | (20) | (34) | ||||||||||||||||||||||
| Interest expense, net | 44 | 51 | 84 | 120 | ||||||||||||||||||||||
| Other, net | (2) | (2) | (1) | (3) | ||||||||||||||||||||||
| Income from continuing operations before income taxes | 93 | 75 | 169 | 74 | ||||||||||||||||||||||
| Provision for income taxes | 25 | 17 | 24 | 16 | ||||||||||||||||||||||
| Net income from continuing operations | 68 | 58 | 145 | 58 | ||||||||||||||||||||||
| Income from discontinued operations, net of tax | — | 3 | — | 3 | ||||||||||||||||||||||
| Net income including noncontrolling interests | 68 | 61 | 145 | 61 | ||||||||||||||||||||||
| Less net income attributable to noncontrolling interests | (2) | (2) | (3) | (3) | ||||||||||||||||||||||
| Net income attributable to United Natural Foods, Inc. | $ | 66 | $ | 59 | $ | 142 | $ | 58 | ||||||||||||||||||
| 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 | ||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||
| Basic | 58.3 | 56.1 | 57.6 | 55.7 | ||||||||||||||||||||||
| Diluted | 61.0 | 59.2 | 61.0 | 59.1 | ||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(in millions)
| 13-Week Period Ended | 26-Week Period Ended | |||||||||||||||||||||||||
| January 29, 2022 | January 30, 2021 | January 29, 2022 | January 30, 2021 | |||||||||||||||||||||||
| Net income including noncontrolling interests | $ | 68 | $ | 61 | $ | 145 | $ | 61 | ||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Recognition of pension and other postretirement benefit obligations, net of tax | 1 | (1) | 2 | (1) | ||||||||||||||||||||||
Recognition of interest rate swap cash flow hedges, net of tax(1) | 15 | 10 | 28 | 22 | ||||||||||||||||||||||
| Foreign currency translation adjustments | (2) | 3 | (2) | 3 | ||||||||||||||||||||||
Recognition of other cash flow derivatives, net of tax(2) | 1 | — | 2 | — | ||||||||||||||||||||||
| Total other comprehensive income | 15 | 12 | 30 | 24 | ||||||||||||||||||||||
| Less comprehensive income attributable to noncontrolling interests | (2) | (2) | (3) | (3) | ||||||||||||||||||||||
| Total comprehensive income attributable to United Natural Foods, Inc. | $ | 81 | $ | 71 | $ | 172 | $ | 82 | ||||||||||||||||||
(1)Amounts are net of tax expense of $6 million, $3 million, $10 million and $7 million, respectively.
(2)Amounts are net of tax expense of $1 million, $0 million, $1 million and $0 million, respectively.
See accompanying Notes to Condensed Consolidated Financial Statements.
5
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
For the 13-week periods ended January 29, 2022 and January 30, 2021
(in millions)
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total United Natural Foods, Inc. Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at October 30, 2021 | 58.7 | $ | 1 | 0.6 | $ | (24) | $ | 582 | $ | (24) | $ | 1,054 | $ | 1,589 | $ | (2) | $ | 1,587 | |||||||||||||||||||||||||||||||||||||||||
| Restricted stock vestings | 0.1 | — | — | — | (2) | — | — | (2) | — | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 12 | — | — | 12 | — | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 15 | — | 15 | — | 15 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from issuance of common stock, net | — | — | — | — | 4 | — | — | 4 | — | 4 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 66 | 66 | 2 | 68 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at January 29, 2022 | 58.8 | $ | 1 | 0.6 | $ | (24) | $ | 596 | $ | (9) | $ | 1,120 | $ | 1,684 | $ | (1) | $ | 1,683 | |||||||||||||||||||||||||||||||||||||||||
| Balances at October 31, 2020 | 56.7 | $ | 1 | 0.6 | $ | (24) | $ | 572 | $ | (227) | $ | 828 | $ | 1,150 | $ | (2) | $ | 1,148 | |||||||||||||||||||||||||||||||||||||||||
| Restricted stock vestings | 0.1 | — | — | — | (2) | — | — | (2) | — | (2) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 11 | — | — | 11 | — | 11 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 12 | — | 12 | — | 12 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 59 | 59 | 2 | 61 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at January 30, 2021 | 56.8 | $ | 1 | 0.6 | $ | (24) | $ | 581 | $ | (215) | $ | 887 | $ | 1,230 | $ | (1) | $ | 1,229 | |||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
6
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
For the 26-week periods ended January 29, 2022 and January 30, 2021
(in millions)
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Total United Natural Foods, Inc. Stockholders’ Equity | Noncontrolling Interests | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at July 31, 2021 | 57.0 | $ | 1 | 0.6 | $ | (24) | $ | 599 | $ | (39) | $ | 978 | $ | 1,515 | $ | (1) | $ | 1,514 | |||||||||||||||||||||||||||||||||||||||||
| Restricted stock vestings | 1.8 | — | — | — | (35) | — | — | (35) | — | (35) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 23 | — | — | 23 | — | 23 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 30 | — | 30 | — | 30 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | (3) | (3) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Proceeds from issuance of common stock, net | — | — | — | — | 9 | — | — | 9 | — | 9 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 142 | 142 | 3 | 145 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at January 29, 2022 | 58.8 | $ | 1 | 0.6 | $ | (24) | $ | 596 | $ | (9) | $ | 1,120 | $ | 1,684 | $ | (1) | $ | 1,683 | |||||||||||||||||||||||||||||||||||||||||
| Balances at August 1, 2020 | 55.3 | $ | 1 | 0.6 | $ | (24) | $ | 569 | $ | (239) | $ | 838 | $ | 1,145 | $ | (3) | $ | 1,142 | |||||||||||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle | — | — | — | — | — | — | (9) | (9) | — | (9) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted stock vestings | 1.5 | — | — | — | (11) | — | — | (11) | — | (11) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 23 | — | — | 23 | — | 23 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 24 | — | 24 | — | 24 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | — | — | — | — | — | — | — | — | (1) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 58 | 58 | 3 | 61 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at January 30, 2021 | 56.8 | $ | 1 | 0.6 | $ | (24) | $ | 581 | $ | (215) | $ | 887 | $ | 1,230 | $ | (1) | $ | 1,229 | |||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
7
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
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 | ||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
8
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United Natural Foods, Inc. and its subsidiaries (the “Company”, “we”, “us”, “UNFI”, or “our”) is a leading distributor of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services to retailers. The Company sells its products primarily throughout the United States and Canada.
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 Statements include the accounts of the Company and its 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 Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “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 Statements include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. However, the results of operations for interim periods may not be indicative of the results that may be expected for a full year. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021 (the “Annual Report”). There were no material changes in significant accounting policies from those described in the Annual Report.
Discontinued Operations
In the fourth quarter of fiscal 2021, the Company determined it no longer met the held for sale criterion for a probable sale to be completed within 12 months for two of the four stores that were previously included within discontinued operations. As a result, the Company revised its Condensed Consolidated Financial Statements to reclassify two Shoppers stores from discontinued operations to continuing operations. The prior period presented in the Condensed Consolidated Financial Statements have been conformed to the current period presentation. The remaining two stores included in discontinued operations were sold in the second quarter of fiscal 2022.
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
9
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 $268 million, respectively.
Reclassifications
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 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions to Topic 740’s general principles. The amendments also improve consistency in and simplify its application. The Company adopted this standard in the first quarter of fiscal 2022. The adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the 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.
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NOTE 3—REVENUE RECOGNITION
Disaggregation of Revenues
The Company records revenue to five customer channels within Net sales, which are described below:
•Chains, which consists 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 that are not classified within Chains above or Other discussed below;
•Supernatural, which consists of chain accounts that are national in scope and carry primarily natural products, and 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 report them accordingly.
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| 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.
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The Company serves customers in the United States and Canada, as well as customers located in other countries. However, all of the Company’s revenue is earned in the 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.
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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 measured on a recurring 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 | $ | — | |||||||||||||||||||
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| 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
The fair values of interest rate swap contracts are measured using Level 2 inputs. The interest rate swap contracts are valued using an income approach interest rate swap valuation model incorporating observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. As of January 29, 2022, a 100 basis point increase in forward LIBOR interest rates would increase the fair value of the interest rate swaps by approximately $24 million; a 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of the interest 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 the Company’s financial instruments including cash and cash equivalents, receivables, accounts payable, accrued vacation, compensation and benefits, and other current assets and liabilities the fair values approximate carrying amounts due to their short maturities. The fair value of notes receivable is estimated by using a discounted cash flow approach prior to consideration for uncollectible amounts and is calculated by applying a market rate for similar instruments using Level 3 inputs. The fair value of debt is estimated based on market quotes, where available, or market values for similar instruments, using Level 2 and 3 inputs. In the table below, the carrying value of the Company’s long-term debt is net of 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
Management of Interest Rate Risk
The Company enters into interest rate swap contracts from time to time to mitigate its exposure to changes in market interest rates as part of its overall strategy to manage its debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates. Interest rate swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company’s interest rate swap contracts are designated as cash flow hedges as of January 29, 2022. Interest rate swap contracts are reflected at their fair values in the Condensed Consolidated Balance Sheets. Refer to Note 6—Fair Value Measurements of Financial Instruments for further information on the fair value of interest rate swap contracts.
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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 performs an initial quantitative assessment of hedge effectiveness using the “Hypothetical Derivative Method” in the period in which the hedging transaction is entered. Under this method, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. In future reporting periods, the Company performs a qualitative analysis for quarterly prospective and retrospective assessments of hedge effectiveness. The Company also monitors the risk of counterparty default on an ongoing basis and noted that the counterparties are reputable financial institutions. The entire change in the fair value of the derivative is initially reported in Other comprehensive income (outside of earnings) in the Condensed Consolidated Statements of Comprehensive Income and subsequently reclassified to earnings in Interest expense, net in the Condensed Consolidated Statements of Operations when the hedged transactions affect earnings.
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The location and amount of gains 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 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 Company’s long-term debt consisted of the 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 | |||||||||||||||||||
Senior Notes
On October 22, 2020, the Company issued $500 million of unsecured 6.750% Senior Notes due October 15, 2028 (the “Senior Notes”). The Senior Notes are guaranteed by each of the Company’s 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 ABL 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 available to the U.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 availability 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.
17
The Borrowers’ obligations under the ABL Credit Facility are guaranteed by most of the Company’s wholly-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.
18
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 amount of $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. As 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 fiscal 2022. The potential amount of prepayment from Excess 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 Condensed 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 Term Loan Facility was classified as current.
As of January 29, 2022, the borrowings under the Term Loan Facility bear interest at rates that, at the Term Borrowers’ option, can be either: (i) a base rate plus a margin of 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.
On November 10, 2021, the Company entered into an amendment (the “Second Term Loan Amendment”) amending the Term Loan Agreement. The amendment provides for (i) the reduction of the applicable 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 amount or maturity date of the 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 2022.
Subsequent to the end of the second quarter of fiscal 2022, 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.
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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.
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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.
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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 second 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 basic and diluted number of shares used in 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 | ||||||||||||||||||||||
NOTE 14—BUSINESS SEGMENTS
The Company has two 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 is the aggregation of two operating segments: 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 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.
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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.
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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 customers. 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.
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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 opioid 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 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 six 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 believes these claims are without merit and intends to vigorously defend this matter.
25
UNFI is currently subject to a qui tam action alleging violations of the False Claims Act (“FCA”). In United States ex rel. Schutte and Yarberry v. Supervalu, New Albertson’s, Inc., et al, which is pending in the U.S. District Court for the Central District of Illinois, 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 assets) pursuant to the Stock Purchase Agreement. Based on the claims 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 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 notice 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 ordinary course of its business, including investigations and claims 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 labor contract negotiations and other matters; supplier, customer and 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 exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and estimates with respect to related costs and exposures. As of January 29, 2022, no material accrued obligations, individually or in the aggregate, have 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 occur. The occurrence of any of the foregoing, could have a material adverse effect on our financial condition, results of operations or cash flows.
NOTE 16—SUBSEQUENT EVENTS
Subsequent to the end of the second quarter of fiscal 2022, 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 sale of the property. Under the terms of the sale-leaseback agreement, the Company entered into a lease for the distribution center for a term of 15 years. The Company expects to record a pre-tax gain on sale in the third quarter of fiscal 2022 currently estimated to be approximately $85 million as a result of the transactions, which primarily reflects the pre-tax net proceeds of the transactions.
Refer to Note 8—Long-Term Debt for discussion on a voluntary prepayment made under the Term Loan Facility subsequent to the end of the second quarter of fiscal 2022.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information.
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:
•the impact and duration of the COVID-19 pandemic;
•labor and other workforce shortages and challenges;
•our dependence on principal customers;
•the addition or loss of significant customers or material changes to our relationships with these customers;
•our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends;
•the relatively low margins of our business, which are sensitive to inflationary and deflationary pressures;
•our ability to realize anticipated benefits of our acquisitions and strategic initiatives, including, our acquisition of Supervalu;
•our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company and to achieve efficiencies and cost savings from these efforts;
•our ability to continue to grow sales, including of our 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, 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;
•our ability to maintain food quality and safety;
•volatility in fuel costs;
•volatility in foreign exchange rates; and
•our ability to identify and successfully complete asset or business acquisitions.
You should carefully review the risks described under “Part I. Item 1A Risk Factors” of our Annual Report on Form 10-K for the year ended July 31, 2021 (the “Annual Report”) as well as any other cautionary language in this Quarterly Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.
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EXECUTIVE OVERVIEW
This Management’s Discussion and Analysis of financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements 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
As a leading distributor of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services to retailers in the United States and Canada, we believe we are uniquely positioned to provide the broadest array of products and services to customers throughout North America. We offer nearly 300,000 products consisting of national, regional and private label brands grouped into six product categories: grocery and general merchandise; produce; perishables and frozen foods; nutritional supplements and sports nutrition; bulk and food service products; and personal care items. We believe 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, making us a desirable partner for retailers and consumer product manufacturers. We believe our total product assortment and service offerings are unmatched by our wholesale competitors. We plan to aggressively pursue new business opportunities 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 two 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 Future is composed of six strategic pillars, which are detailed in “Part I. Item 1. Business” of our Annual Report. Collectively, the actions and plans behind each pillar are meant to capitalize on our unique position in the food distribution industry, including the number and location of distribution centers we operate, the array of services and the data driven insights that we are able to customize for each of our customers, our innovation platforms and the growth potential we see in each, our commitment to our people and the planet, the positioning of our retail operations and our focus on delivering returns for our shareholders.
We also introduced our ValuePath initiative early in fiscal 2021, pursuant to which we plan to improve operating performance through various initiatives to be implemented through the end of fiscal 2023. 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 maintain competitive wage scales for our frontline workers.
We will continue to use free cash flow to reduce outstanding debt and are committed to improving our financial leverage.
We believe our Fuel the Future strategy will further accelerate our growth through increasing sales of products and services, providing tailored, data-driven solutions to help our existing customers run their business more efficiently and contributing to new customer acquisitions. We believe the key drivers for growth through new customers will come from the benefits of our significant scale, product and service offerings, and nationwide footprint, 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 total food expenditures will remain elevated in the near term compared to levels prior to the COVID-19 pandemic, which we refer to as the pandemic. We believe that changes in work being done outside of the traditional office setting will continue to contribute to more food being consumed at home. The pandemic also drove significant growth in eCommerce utilization by grocery consumers, and we expect that trend to continue. We expect to benefit from this trend through the growth of our traditional eCommerce customers, our Community Marketplace, an online marketplace connecting suppliers and retailers, and EasyOptions, which directly services non-traditional customers, such as bakeries or yoga studios, and through customers adopting our turnkey eCommerce platform.
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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 governmental authorities and other third parties in response to the pandemic such as social distancing orders, vaccine mandates or companies’ remote work policies, the impact on capital and financial markets, food-at-home purchasing levels and other consumer trends, each of which is uncertain. Any of these disruptions could adversely impact our business and results of operations. We continue to monitor 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 size 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 Riverside, California with approximately 1.2 million square feet upon completion of its construction in the fourth quarter of fiscal 2020. Subsequent to the end of the second quarter of fiscal 2022, 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 quarter of fiscal 2022, we started shipping from our Allentown, Pennsylvania distribution center, which has a capacity of 1.3 million square feet and is being utilized to service customers in that geographical area. We incurred and 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 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.
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In the fourth quarter of fiscal 2021, we determined that the Company no longer met the held for sale criterion for a probable sale to be completed within 12 months for two of 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 the Condensed Consolidated Financial Statements have been conformed to the current period presentation. The remaining two stores in discontinued operations were sold in the second quarter of fiscal 2022.
Impact of Inflation
We experienced a mix of inflation across product categories during the second quarter of fiscal 2022. In the aggregate across our businesses, including the mix of products, management estimates our business experienced cost inflation of approximately five percent in the second quarter of fiscal 2022. 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 carrying value of inventory during periods of inflation.
Composition of Condensed Consolidated Statements of Operations and Business Performance Assessment
Net sales
Our net sales consist primarily of product sales of natural, organic, specialty, produce and conventional grocery and non-food products, and support services revenue from retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue. Net sales also include amounts charged by us to customers for shipping and handling and fuel surcharges.
Cost of sales and Gross profit
The principal components of our cost of sales include the amounts paid to suppliers for product sold, plus transportation costs necessary to bring the product to, or move product between, our distribution centers and retail stores, partially offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses.
Operating expenses
Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation and amortization expense. These expenses include warehousing, delivery, purchasing, receiving, selecting and outbound transportation expenses.
Restructuring, acquisition and integration expenses
Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, facility closure asset impairment charges and costs, stock-based compensation acceleration charges and acquisition and integration expenses. Integration expenses include certain professional consulting expenses related to business transformation and incremental expenses related to combining facilities required to optimize our distribution network as a result of acquisitions.
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 recognition of expected returns on benefit plan assets and interest costs on plan liabilities.
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Adjusted EBITDA
Our Condensed Consolidated Financial Statements are prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). In addition to the GAAP results, we consider certain non-GAAP financial measures to assess the performance of our business and understand underlying operating performance and core business trends, which we use to facilitate operating performance comparisons of our business on a consistent basis over time. Adjusted EBITDA is provided as a supplement to our results of operations and related analysis, and should not be considered superior to, a substitute for or an alternative to, any financial measure of performance prepared and presented in accordance with GAAP. Adjusted EBITDA excludes certain items because they are non-cash items or 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 business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and because of its importance as 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 a consistent basis over time. Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Certain adjustments to our GAAP financial measures reflected below exclude items that may be considered recurring in nature and may be reflected in our financial results for the foreseeable future. These measurements and items may be different from non-GAAP financial measures used by other companies. Adjusted EBITDA should be reviewed in conjunction with our results reported in accordance with GAAP in this 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 reconcile 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 income taxes and Depreciation and amortization all calculated in accordance with GAAP, plus adjustments for Share-based compensation, Restructuring, acquisition and integration related expenses, Goodwill impairment charges, (Gain) loss on sale of assets, certain legal charges and gains, certain other non-cash charges or other items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in a manner consistent with the results of continuing operations, outlined above. The changes to the definition of Adjusted EBITDA from prior-year periods reflect changes to line item references in our Condensed Consolidated Financial Statements, which do not impact the calculation of Adjusted EBITDA.
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Assessment of Our Business Results
The following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods 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 | |||||||||||||||||||||||
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The following table reconciles Adjusted EBITDA to Net income from continuing operations and to Income from discontinued operations, net of tax.
| 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 retail stores and store closure costs.
(4)The last two remaining retail stores in discontinued operations were sold in the second quarter of fiscal 2022.
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RESULTS OF OPERATIONS
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 2022 increased approximately 7.5% from the second quarter of fiscal 2021. The increase in 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 sales 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 for East Coast locations in the first quarter of fiscal 2022.
Supernatural net sales increased primarily due to growth in 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 stores. Net sales within our Supernatural channel do not include net sales to Amazon.com, Inc. in either the current period or the prior period, as these net sales are reported in our other channel.
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.
Year-to-Date
Our net sales for fiscal 2022 year-to-date increased approximately 6.1% from fiscal 2021 year-to-date. The increase in 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 sales 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 for East Coast locations in the first quarter of fiscal 2022.
Supernatural net sales increased primarily due to growth in 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 stores.
Retail net sales increased primarily due to a 0.3% increase in identical store sales from higher average basket sizes.
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Cost of Sales and Gross Profit
Our gross profit increased $80 million, or 8.0%, to $1,075 million for the second quarter of fiscal 2022, from $995 million for the second quarter of fiscal 2021. Our gross profit as a percentage of net sales increased to 14.50% for the second quarter of fiscal 2022 compared to 14.42% for the second quarter of fiscal 2021. The increase 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 2022, 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 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 complex operating environment which led to higher transportation expenses and distribution labor costs in fiscal 2022 year-to-date, and the temporary, voluntary closure of a distribution center.
Restructuring, Acquisition and Integration Related Expenses
Restructuring, acquisition and integration related expenses were $5 million for the second quarter of fiscal 2022. Expenses for the second quarter of fiscal 2021 were $18 million, which included $14 million of restructuring 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 $8 million for fiscal 2022 year-to-date. Expenses for fiscal 2021 year-to-date were $34 million, which included $29 million of restructuring 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 $5 million of closed property charges and costs.
Operating Income
Reflecting the factors described above, operating income increased $18 million to $125 million for the second quarter of fiscal 2022, compared to $107 million for the second quarter of fiscal 2021. 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.
Reflecting the factors described above, operating income increased $75 million, to $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.
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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 2022, from $17 million for the second quarter of fiscal 2021. 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 and fiscal 2022 year-to-date as compared to the respective comparative periods was primarily driven by lower expected rates of 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 on long-term debt, net of capitalized interest, in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 and in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily driven by lower outstanding debt balances and lower average interest rates.
The decrease in loss 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 Term Loan Facility made in fiscal 2021 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 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.
Net Income Attributable to United Natural Foods, Inc.
Reflecting the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $66 million, or $1.08 per diluted common share, for the second quarter of fiscal 2022, compared to $59 million, or $1.00 per diluted common share, for the second quarter of fiscal 2021.
Reflecting the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $142 million, or $2.33 per diluted common share, for fiscal 2022 year-to-date, compared to $58 million, or $0.98 per diluted common share, for fiscal 2021 year-to-date.
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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 above 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.
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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 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.
•Our total debt increased $135 million to $2,323 million as of January 29, 2022 from $2,188 million as of July 31, 2021, primarily related to additional borrowings under the $2,100 million asset-based revolving credit facility (the “ABL Credit Facility”) entered into on August 30, 2018, as amended, to fund 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 accounts receivable levels related to new customers and sales 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 $1,950.0 million term loan facility (the “Term Loan Facility”) entered into in October 2018, as amended, funded with incremental borrowings under the ABL Credit Facility that will reduced our interest costs. This prepayment will count towards satisfying any requirement to make a mandatory prepayment with Excess Cash Flow (as defined in the Term Loan Agreement) generated during fiscal 2022, if any, which would be due in fiscal 2023. Also in the second quarter of fiscal 2022, we amended our Term Loan Agreement to reduce the applicable margin for LIBOR and base rate loans under the Term 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 finance lease liabilities by $96 million with the remainder primarily reducing our Accrued expenses and other current liabilities. 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. 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 facilities 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 ABL Credit Facility.
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Our primary sources of liquidity are from internally generated funds and from borrowing capacity under the ABL 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 dividend 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 additional information, including a detailed discussion of the provisions of our credit facilities and certain long-term debt agreements.
Our Term Loan Agreement and 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 fixed charge coverage ratio of at least 1.0 to 1.0 calculated at the end of each of our fiscal quarters on a rolling four quarter basis, if the adjusted aggregate availability is ever less than the greater of (i) $235 million and (ii) 10% of the aggregate borrowing base. We have not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement, including through the filing date of this Quarterly Report. The Term Loan Agreement, ABL 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 our assets, engage in transactions with affiliates, and merge, consolidate or sell all or substantially all of our and our subsidiaries’ assets on a consolidated basis. We were in compliance with all such covenants for all periods presented. If we fail to comply with any of these covenants, we may be in default under the applicable 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 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 29, 2022, we had an aggregate of $1,231 million of floating rate notional debt subject to active interest rate swap contracts, which effectively hedge the LIBOR component of our interest rate payments through pay fixed and receive floating interest rate swap agreements. These fixed rates range from 1.795% to 2.959%, with maturities between August 2022 and October 2025. The fair value of these interest rate derivatives represents a total net liability of $39 million and are subject to volatility based on changes in market interest rates. In fiscal 2021 year-to-date, we paid $11 million to terminate or novate $954 million of interest rate swap contracts over our floating rate notional debt. The termination payments reflect the amount of accumulated other comprehensive loss that will continue to be amortized into interest expense over the original interest rate swap contract terms as long as the hedged interest rate transactions are still probable of occurring. See Note 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 outstanding assets and liabilities from these arrangements are insignificant.
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Payments for Capital Expenditures
Our capital expenditures for fiscal 2022 year-to-date were $106 million, compared to $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 remaining investments in the Allentown, PA distribution center. We expect to finance fiscal 2022 capital expenditures requirements with cash generated from operations and borrowings under our ABL Credit Facility. Longer term, capital spending is expected to be at or below 1.0% of net sales. Future investments may be financed through long-term debt or borrowings under our ABL Credit Facility.
Cash Flow Information
The following summarizes our Condensed Consolidated Statements of Cash 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 in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily due to higher levels of cash utilized to build inventories driven by supplier limitations and credit extended through accounts receivable driven by new customers and continued sales growth, partially offset by an increase in cash provided from higher accounts payable related to inventory increases.
The increase in 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 investments and capital expenditures.
The increase in net cash provided by (used in) financing activities of continuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was due to an increase in net borrowings resulting from increases in net cash used in operating activities and investing activities, as described above.
Other Obligations and Commitments
Except as otherwise disclosed in Note 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 Company’s contractual obligations since the end of fiscal 2021. Refer to Item 7 of the Annual Report for additional information regarding the Company’s contractual obligations.
Pension and Other Postretirement Benefit Obligations
As described in 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.
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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 us, including our external actuarial consultant, and additional contributions made at our discretion. We may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable. We assess the relative attractiveness of the use of cash to accelerate contributions considering such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required Pension Benefit Guaranty Corporation variable rate premiums, or in order to achieve exemption from participant notices of underfunding.
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 employers and unions that are parties to the collective bargaining agreement. Based on the assessment of the most recent information available from the multiemployer plans, we believe that most of the plans to which we contribute are underfunded. We are only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability to us.
Our contributions can fluctuate from year to year due to store closures, employer participation within the respective plans and reductions in headcount. Our contributions to these plans could increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of our collective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, we could trigger a partial or complete withdrawal that could require us to record a withdrawal liability obligation and make withdrawal liability payments to the fund. Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized continuing and discontinued operations expense of $48 million 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 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 can be reasonably estimated, in accordance with GAAP. Any triggered withdrawal obligation could result in a material charge and payment obligations that would be required to be made over an extended period of time.
We also make contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating expenses could increase in the future.
Refer to Note 13—Benefit Plans in Part II, Item 8 of the Annual Report for additional information regarding the plans in which we participate.
Share Repurchases
On October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200 million of our outstanding common stock. The repurchase program is scheduled to expire upon our repurchase of shares of our common stock having an aggregate purchase price of $200 million. We did not repurchase any shares of our common stock in fiscal 2022 year-to-date or fiscal 2021 year-to-date pursuant to the share repurchase program. As of January 29, 2022, we have $176 million remaining authorized under the share repurchase program. We do not expect to purchase shares under the share repurchase program during fiscal 2022. Additionally, our ABL Credit Facility, Term Loan Facility and Senior Notes contain terms that limit our ability to repurchase common stock above certain levels unless certain conditions and financial tests are met.
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Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies during the period covered by this Quarterly Report on Form 10-Q. Refer to the description of critical accounting policies included in Item 7 of our Annual Report.
Seasonality
Generally, we do not experience material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management’s ability to execute our operating and growth strategies, demand for our products, supply shortages and general economic conditions. Our working capital needs are generally greater during the months leading up to high sales periods, such as the build up in inventory during the time period leading to the calendar year-end holidays. Our inventory, accounts payable and accounts receivable levels may be impacted by macroeconomic impacts and changes in food-at-home purchasing rates. These effects can result in normal operating fluctuations in working capital balances, which in turn can result in changes to cash flow from operations that are not necessarily indicative of long-term operating trends.
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. Except as described in Note 7—Derivatives and Note 8—Long-Term Debt in Part I, Item 1 of this 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.
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 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 2022 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, 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. Risk Factors, of our Annual Report.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200 million of our outstanding common stock. The repurchase program is scheduled to expire upon our repurchase of shares of our common stock having an aggregate purchase price of $200 million. Any repurchases will be made in accordance with applicable securities laws from time to time in the open market, through privately negotiated transactions, or otherwise. We may also implement all or part of the repurchase program pursuant to a plan or plans meeting the conditions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We do not expect to purchase shares under the share repurchase program during fiscal 2022.
| (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 reported 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 restricted stock units granted under such plans.
(3)As of January 29, 2022, there was approximately $176 million that may yet be purchased under the share repurchase program. There were no share repurchases under the share repurchase program in the second quarter of fiscal 2022.
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Item 6. Exhibits
| Exhibit No. | Description | ||||
| 2.1 | |||||
| 2.2 | |||||
| 3.1 | |||||
| 3.2 | |||||
| 10.1* ** | |||||
| 10.2 | Amendment No. 2 to Term Loan Agreement, dated as of November 10, 2021, by and among the Registrant and SUPERVALU INC., Credit Suisse AG, Cayman Islands Branch and the other lender parties thereto (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 30, 2021 (File No. 001-15723)). | ||||
| 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 29, 2022, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statements 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.
* * *
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| UNITED NATURAL FOODS, INC. | |||||
| /s/ JOHN W. HOWARD | |||||
| John W. Howard | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer and duly authorized officer) | |||||
Dated: March 9, 2022
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