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Income (Unaudited)
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Future Amortization Expense (Details)
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Recurring Fair Value Measurements (Details)
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(Address of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (i401) i528-8634
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol
Name of each exchange on which registered
iCommon stock, par value $0.01
iUNFI
iNew
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: iYes☒ 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). iYes☒ 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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☐ No ☒
As of June 3, 2022 there were i58,292,197
shares of the registrant’s common stock, $0.01 par value per share, outstanding.
Current
portion of long-term debt and finance lease liabilities
i26
i120
Current
liabilities of discontinued operations
i—
i4
Total
current liabilities
i2,389
i2,487
Long-term
debt
i2,377
i2,175
Long-term
operating lease liabilities
i1,084
i962
Long-term
finance lease liabilities
i27
i35
Pension
and other postretirement benefit obligations
i20
i53
Other
long-term liabilities
i197
i299
Total
liabilities
i6,094
i6,011
Commitments
and contingencies
i
i
Stockholders’ equity:
Preferred
stock, $ii0.01/ par value, authorized
ii5.0/ shares; iiiinone///
issued or outstanding
i—
i—
Common
stock, $ii0.01/ par value, authorized ii100.0/
shares; i59.0 shares issued and i58.4 shares outstanding at April 30, 2022; i57.0
shares issued and i56.4 shares outstanding at July 31, 2021
i1
i1
Additional
paid-in capital
i599
i599
Treasury
stock at cost
(i24)
(i24)
Accumulated
other comprehensive income (loss)
i22
(i39)
Retained
earnings
i1,187
i978
Total
United Natural Foods, Inc. stockholders’ equity
i1,785
i1,515
Noncontrolling
interests
(i1)
(i1)
Total
stockholders’ equity
i1,784
i1,514
Total
liabilities and stockholders’ equity
$
i7,878
$
i7,525
See
accompanying Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
i
NOTE
1—SIGNIFICANT ACCOUNTING POLICIES
i
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.
i
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 third quarter of fiscal 2022 and 2021 relate to the 13-week fiscal quarters ended April 30, 2022 and May 1, 2021, respectively. References to fiscal 2022 and 2021 year-to-date
relate to the 39-week fiscal periods ended April 30, 2022 and May 1, 2021, respectively.
i
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.
i
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 itwo
of the ifour stores that were previously included within discontinued operations. As a result, the Company revised its Condensed Consolidated Financial Statements to reclassify itwo
Shoppers stores from discontinued operations to continuing operations. Prior periods presented in the Condensed Consolidated Financial Statements have been conformed to the current period presentation. The remaining itwo stores included in discontinued operations were sold in the second quarter of fiscal 2022.
/
i
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.
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 April 30, 2022 and July 31, 2021, the Company had net book overdrafts of $i271 million and $i268
million, respectively.
i
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.
iInventories,
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 $i169 million and $i67
million at April 30, 2022 and July 31, 2021, respectively.
i
NOTE 2—RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS
i
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. The
Company expects to adopt the remaining applicable practical expedients of the standard in the fourth quarter of fiscal 2022 when it converts its LIBOR based contracts to Secured Overnight Financing Rate (“SOFR”) and does not expect a material impact on the Company’s Condensed Consolidated Financial Statements.
The Company records revenue to ifive
customer channels within Net sales, which are described below:
•Chains, which consists of customer accounts that typically have more than i10 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.
iThe
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.
(1)Eliminations
primarily includes the net sales elimination of Wholesale’s sales to Retail and the elimination of net sales included within Other to Wholesale.
The Company serves customers in the United States and Canada, as well as customers located in other countries. However, all 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.
Amortization
expense was $i18 million and $i18 million for the third quarters of fiscal 2022 and 2021, respectively, and $i54
million and $i60 million for fiscal 2022 and 2021 year-to-date, respectively. iThe
estimated future amortization expense for each of the next five fiscal years and thereafter on definite lived intangible assets existing as of April 30, 2022 is as follows:
Fiscal Year:
(in millions)
Remaining fiscal 2022
$
i18
2023
i72
2024
i72
2025
i70
2026
i66
Thereafter
i483
$
i781
i
NOTE
6—FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
Recurring Fair Value Measurements
i
The following tables provide the fair value hierarchy for financial assets and liabilities measured on a recurring basis:
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 April 30, 2022, a 100 basis point increase in forward LIBOR interest rates would increase the fair value of the interest rate swaps by approximately $i20
million; a 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of the interest rate swaps by approximately $i21 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. iIn
the table below, the carrying value of the Company’s long-term debt is net of original issue discounts and debt issuance costs.
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 April 30, 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.
(1)The
swap contract has an amortizing notional principal amount which is reduced by $i1 million on a quarterly basis.
(2)Subsequent to the third quarter of fiscal 2022, the Company amended the reference rate in all of its outstanding interest rate swap contracts
to replace One-Month LIBOR with One-Month Term SOFR and certain credit spread adjustments. The Company does not expect to record any gains or losses upon the conversion of the reference rates in these interest rate swap contracts, and the Company believes these amendments will not have a material impact on its Condensed Consolidated Financial Statements.
/
In the third quarter of fiscal 2021, in order to reduce its exposure to pay fixed and receive floating interest rate swap contracts
due to lower levels of debt balances with floating interest rates, the Company paid $i6 million to terminate certain outstanding interest rate swaps with a notional amount of $i250 million.
In the first quarter of fiscal 2021, in conjunction with the $i500 million fixed rate senior unsecured notes offering described below in Note 8—Long-Term Debt, the Company paid $i11 million
to terminate or novate certain outstanding interest rate swaps with a notional amount of $i504 million and certain forward starting interest rate swaps with a notional amount of $i450 million.
The payments equaled the fair value of the interest rate swaps at the time of their termination or novation. iNo 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.
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 pre-tax basis, are as follows:
Total amounts of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
$
i37
$
i44
$
i121
$
i164
Loss
on cash flow hedging relationships:
Loss reclassified from comprehensive income into earnings
$
(i9)
$
(i11)
$
(i30)
$
(i35)
/
i
NOTE
8—LONG-TERM DEBT
i
The Company’s long-term debt consisted of the following:
Subsequent to the end of the third quarter of fiscal 2022, on June 3, 2022, the Company entered into a new loan agreement (the “2022 ABL Loan Agreement”), by and among the Company (the “2022 U.S. Borrower”) and UNFI Canada, Inc. (the “2022 Canadian Borrower” and, together with the 2022 U.S. Borrower, the “2022 Borrowers”), the financial institutions that are parties thereto as lenders (collectively, the “2022 ABL Lenders”), Wells Fargo Bank, N.A. as administrative agent for the 2022 ABL Lenders, and the other parties thereto, which provides for a secured asset-based revolving credit facility (the “2022 ABL Credit Facility”),
of which up to $i2,600 million is available to the 2022 Borrowers, including a U.S. Dollar equivalent of $i100 million
sublimit for borrowings in Canadian dollars. The 2022 ABL Credit Facility replaced the Company’s existing $i2,100 million ABL Credit Facility (defined below). Under the 2022 ABL Loan Agreement, the 2022 Borrowers may, at their option, increase the aggregate amount of the 2022 ABL Credit Facility in an amount of up to $i750 million
without the consent of any 2022 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. Effective June 3, 2022, the Company used borrowings under the 2022 ABL Loan Agreement to repay all amounts outstanding under the ABL Loan Agreement and terminated the ABL Credit Facility.
The
2022 ABL Loan Agreement utilizes Term SOFR and Prime rates as the benchmark interest rates. Borrowings under the 2022 ABL Credit Facility bear interest at rates that, at the 2022 Borrowers’ option, can be either: (i) a base rate plus a i0.00% - i0.25%
margin or (ii) a Term SOFR rate plus a i1.00% - i1.25% margin. Unutilized commitments under the 2022 ABL Credit Facility are subject to a per annum fee of i0.20%.
The 2022 ABL Credit Facility will expire at the earlier of (i) June 3, 2027, and (ii) the date that is ininety days prior to the maturity date of the Term Loan Facility (defined below) if on such date more than $i100 million
of borrowings under the Term Loan Facility remain outstanding and matures prior to June 3, 2027. The 2022 ABL Loan Agreement subjects the Company to a fixed charge coverage ratio of at least 1.0 to 1.0 calculated at the end of each of the Company’s fiscal quarters on a rolling four quarter basis, if the adjusted aggregate availability is ever less than the greater of (i) $i210 million
and (ii) i10% of the aggregate borrowing base.
The 2022 ABL Loan Agreement contains certain operational and informational covenants customary for this type of secured revolving credit facility, which limit the Company’s restricted subsidiaries’ ability to, among other things, incur
debt, declare or pay dividends or make other distributions to its 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 the Company’s and its subsidiaries’ assets on a consolidated basis. If the Company fails to comply with any of these covenants, it may be in default under the applicable debt agreement, and all amounts due thereunder may become immediately due and payable.
The 2022 Borrowers’ obligations under the 2022 ABL Credit Facility are guaranteed by most of the
Company’s wholly-owned subsidiaries (collectively, the “Guarantors”), subject to customary exceptions and limitations. The 2022 Borrowers’ obligations under the 2022 ABL Credit Facility and the Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the 2022 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 2022 Borrowers’ and Guarantors’ assets that do not constitute ABL Assets, in each case, subject to customary exceptions and limitations.
Availability under the 2022 ABL Credit Facility is subject to a borrowing base (the “2022 Borrowing
Base”), which is based on i90% of eligible accounts receivable, plus i90%
of eligible credit card receivables, plus i90.0% - i92.5%
of the net orderly liquidation value of eligible inventory, plus i90% of eligible pharmacy receivables, plus certain pharmacy prescription files availability of the 2022 Borrowers, after adjusting for customary reserves, but at no time shall exceed the lesser of the aggregate commitments under the 2022 ABL Credit Facility (currently $i2,600 million)
or the 2022 Borrowing Base.
Senior Notes
On October 22, 2020, the Company issued $i500 million of unsecured i6.750%
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 2022 ABL Credit Facility 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) $i2,050
million is available to the U.S. Borrowers and (ii) $i50 million is available to the Canadian Borrower. The ABL Loan Agreement also provides for (i) a $i300
million sublimit of availability for letters of credit of which there is a further $i25 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 $i600
million without the consent of any ABL Lenders not participating in such increase, subject to certain customary conditions and applicable lenders committing to provide the increase in funding. There is no assurance that additional funding would be available.
The Borrowers’ obligations under the ABL Credit Facility are guaranteed by the Guarantors, subject to customary exceptions and limitations. The Borrowers’ obligations under the ABL Credit Facility and the Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the Borrowers’ and Guarantors’ accounts receivable, inventory and ABL Assets and (ii) a second-priority lien on all of the Borrowers’ and Guarantors’ assets that do not constitute ABL Assets, in each case, subject to customary exceptions and limitations.
Availability under the ABL Credit Facility is subject to a borrowing base (the “Borrowing Base”), which is based on i90% of eligible accounts receivable, plus i90%
of eligible credit card receivables, plus i90% of the net orderly liquidation value of eligible inventory, plus i90% of eligible pharmacy receivables,
plus certain pharmacy prescription files availability of the Borrowers, after adjusting for customary reserves, but at no time shall exceed the lesser of the aggregate commitments under the ABL Credit Facility ($i2,100 million at April 30, 2022) or the Borrowing Base.
i
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):
Certain
inventory assets included in Inventories, net and Current assets of discontinued operations
$
i2,696
$
i2,297
Certain
receivables included in Accounts receivable, net and Current assets of discontinued operations
$
i1,134
$
i1,041
(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 April 30, 2022, the U.S. Borrowers’ Borrowing Base, net of $i135
million of reserves, was $i2,649 million, which is above the $i2,050 million limit of availability
to the U.S. Borrowers under the ABL Credit Facility. As of April 30, 2022, the Canadian Borrower’s Borrowing Base, net of $i6 million of reserves, was $i46
million, which is below the $i50 million limit of availability to the Canadian Borrower under the ABL Credit facility, resulting in total availability of $ii2,096/
million for ABL Loans and letters of credit under the ABL Credit Facility. As of April 30, 2022, the U.S. Borrowers had $ii1,101/
million of ABL Loans and the Canadian Borrower had ino ABL Loans outstanding under the ABL Credit Facility, which are presented net of debt issuance costs of $i5 million and are included in Long-term debt on the Condensed Consolidated
Balance Sheets. As of April 30, 2022, the U.S. Borrowers had $i134 million in letters of credit and the Canadian Borrower had ino
letters of credit outstanding under the ABL Credit Facility. The Company’s resulting remaining availability under the ABL Credit Facility was $i861 million as of April 30, 2022.
Total availability for ABL Loans and letters of credit
$
ii2,096/
ABL
Loans
$
ii1,101/
Letters
of credit
$
i134
Unused credit
$
i861
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 Loan Agreement), and were as follows:
Interest rates and fees under the ABL Credit Facility:
U.S. and Canadian Borrowers’ applicable margin for base rate loans
i—%
- i0.50%
i0.25
%
U.S.
and Canadian Borrowers’ applicable margin for LIBOR and BA loans(1)
i1.00% - i1.50%
i1.25
%
Unutilized
commitment fees
i0.25% - i0.375%
i0.25
%
Letter
of credit fees
i1.125% - i1.625%
i1.375
%
(1)
The U.S. Borrowers utilize LIBOR-based loans and the Canadian Borrower utilizes bankers’ acceptance rate-based loans.
Term Loan Facility
The term loan agreement (“Term Loan Agreement”), by and among the Company and SUPERVALU INC. (“Supervalu” and collectively with the Company, 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 $i1,800
million in a iseven-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 $i656 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 $i10
million. As of April 30, 2022 and July 31, 2021, there was $i627 million and $i676 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 i130 days after the fiscal year end in an aggregate principal amount equal to a specified percentage (which percentage ranges from i0
to i75 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 April 30, 2022.
As of April 30, 2022, the Company had borrowings of $i800
million outstanding under the Term Loan Facility, which are presented in the Condensed Consolidated Balance Sheets net of debt issuance costs of $i13 million and an original issue discount on debt of $i11
million. As of April 30, 2022, ino amount of the Term Loan Facility was classified as current.
As of April 30, 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 i2.25%
or (ii) a LIBOR rate plus a margin of i3.25%; provided that the LIBOR rate shall never be less than i0.0%. 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 i3.50% to i3.25%
and the applicable margin for base rate loans from i2.50% to i2.25%, 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 $i150 million on the Term Loan Facility funded with incremental borrowings under the ABL Credit Facility that reduced its interest costs. In connection with this prepayment, the Company incurred a loss on debt extinguishment of $i5 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. On March 1, 2022, the Company made a $i44 million voluntary prepayment on the Term Loan Facility from the majority of the after-tax net proceeds from the sale-leaseback of an acquired distribution center that was previously leased. These voluntary prepayments 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.
Subsequent to the end of the third quarter of fiscal 2022, on June 3, 2022, the Company entered into an amendment (the “Third Term Loan Amendment”) to the Term Loan Agreement to amend the reference rate thereunder from LIBOR to Term SOFR. There were no other changes to the Term Loan Agreement as a result of the Third Loan Amendment. The Company does not expect to record any gains or losses on the conversion of these interest rate swap contracts
from LIBOR to SOFR.
Other
comprehensive income before reclassifications
i—
i6
i10
i16
Amortization
of amounts included in net periodic benefit income
(i1)
—
—
(i1)
Amortization
of cash flow hedges
—
—
i26
i26
Net
current period Other comprehensive (loss) income
(i1)
i6
i36
i41
Accumulated
other comprehensive loss at May 1, 2021
$
(i117)
$
(i15)
$
(i66)
$
(i198)
/
i
Items
reclassified out of Accumulated other comprehensive income (loss) had the following impact on the Condensed Consolidated Statements of Operations:
13-Week Period Ended
39-Week
Period Ended
Affected Line Item on the Condensed Consolidated Statements of Operations
(1)Reclassification of amounts included in net periodic benefit income include reclassification of prior service cost and reclassification of net actuarial loss as reflected in Note 11—Benefit Plans.
As of April 30, 2022, the Company expects to reclassify $i2 million
related to unrealized derivative gains out of Accumulated other comprehensive income (loss) and primarily into Interest expense, net during the following twelve-month period.
iNOTE 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 i1.2 million shares. As of April 30, 2022, there were i2.9
million shares available for issuance under the Amended and Restated 2020 Equity Incentive Plan.
i
NOTE 11—BENEFIT PLANS
i
Net
periodic benefit income and contributions to defined benefit pension and other post-retirement benefit plans consisted of the following:
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.
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 $i2 million
and $i3 million, respectively, to its other non-qualified pension plans and postretirement benefit plans in fiscal 2022.
Multiemployer Pension Plans
The Company contributed $i12 million
and $i12 million in the third quarters of fiscal 2022 and 2021, respectively, and $i34 million and
$i36 million in fiscal 2022 and 2021 year-to-date, respectively, to multiemployer pension plans, which are included within Operating expenses.
i
NOTE
12—INCOME TAXES
The effective tax rate for the third quarter of fiscal 2022 was i29.9% compared to i24.2%
for the third quarter of fiscal 2021. The change in the effective tax rate was primarily driven by limitations on the deductibility of certain share-based compensation expenses in the third quarter of fiscal 2022 and a discrete benefit for the vesting of employee stock awards in the third quarter of fiscal 2021 that was not material to the effective tax rate in the third quarter of fiscal 2022.
The effective tax rate for fiscal 2022 year-to-date was i19.9% compared to i22.9%
for fiscal 2021 year-to-date. The change in the effective tax rate was 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.
/
i
NOTE 13—EARNINGS
PER SHARE
i
The following is a reconciliation of the basic and diluted number of shares used in computing earnings per share:
Net
effect of dilutive stock awards based upon the treasury stock method
i2.5
i4.0
i3.1
i3.7
Diluted
weighted average shares outstanding
i60.9
i60.5
i61.0
i59.7
Basic
earnings per share:
Continuing operations
$
i1.15
$
i0.85
$
i3.62
$
i1.84
Discontinued
operations
$
i—
$
i0.01
$
i—
$
i0.06
Basic
earnings per share
$
i1.15
$
i0.86
$
i3.62
$
i1.90
Diluted
earnings per share:
Continuing operations
$
i1.10
$
i0.79
$
i3.44
$
i1.73
Discontinued
operations
$
i—
$
i0.01
$
i—
$
i0.05
Diluted
earnings per share
$
i1.10
$
i0.80
$
i3.44
$
i1.78
Anti-dilutive
share-based awards excluded from the calculation of diluted earnings per share
i0.5
i0.8
i0.5
i1.2
//
i
NOTE
14—BUSINESS SEGMENTS
The Company has itwo 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 itwo
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.
In the third quarter of fiscal 2022, the
Company changed its measure of segment profit to exclude the non-cash LIFO charge or benefit from Adjusted EBITDA. Prior period Adjusted EBITDA amounts and the reconciliation to Income from continuing operations before income taxes have been recast to reflect this change in the measure of segment profit.
i
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:
Net income attributable to noncontrolling interests
i1
i2
i4
i5
Net
periodic benefit income, excluding service cost
i10
i17
i30
i51
Interest
expense, net
(i37)
(i44)
(i121)
(i164)
Other,
net
i1
i1
i2
i4
Depreciation
and amortization
(i72)
(i66)
(i210)
(i210)
Share-based
compensation
(i10)
(i11)
(i33)
(i38)
LIFO
charge(2)
(i72)
(i5)
(i102)
(i19)
Restructuring,
acquisition and integration related expenses
(i8)
(i10)
(i16)
(i44)
Gain
on sale of assets
i88
i—
i87
i—
Multi-employer
pension plan withdrawal benefit
i—
i—
i8
i—
Other
retail expense
i—
(i2)
i1
(i5)
Income
from continuing operations before income taxes
$
i97
$
i66
$
i266
$
i140
Depreciation
and amortization:
Wholesale
$
i64
$
i58
$
i186
$
i185
Retail
i7
i7
i22
i21
Other
i1
i1
i2
i4
Total
depreciation and amortization
$
i72
$
i66
$
i210
$
i210
Payments
for capital expenditures:
Wholesale
$
i47
$
i66
$
i145
$
i150
Retail
i5
i7
i13
i15
Total
capital expenditures
$
i52
$
i73
$
i158
$
i165
(1)As
presented in Note 3—Revenue Recognition, for the third quarters of fiscal 2022 and 2021, the Company recorded $i337 million and $i331
million, respectively, and $i1,032 million and $i1,050
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.
(2)As a result of the segment profit measurement revision discussed above, previously reported Adjusted EBITDA disclosures by segment and the reconciliation to Income from continuing operations before income taxes has been recast to exclude the impact of the non-cash LIFO charge or benefit.
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 April 30, 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 ione
year to ieight years, with a weighted average remaining term of approximately ifive 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 April 30, 2022, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was $i23
million ($i20 million on a discounted basis). Based on the indemnification agreements, personal guarantees and results of the reviews of performance risk, as of April 30, 2022, a total estimated loss of $i1 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. iNo
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.
Sale-Leaseback
Arrangement
During the third quarter of fiscal 2022, the Company acquired the real property of a previously leased distribution center for approximately $i153 million. Immediately following this acquisition, the Company monetized this property through a sale-leaseback transaction, pursuant to which the
Company received $i225 million in aggregate proceeds for the sale of the property, which reflected the fair value 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 i15
years. The Company recorded a pre-tax gain on sale of approximately $i87 million in the third quarter of fiscal 2022 as a result of the transactions, which primarily represented the pre-tax net proceeds.
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 ifive years, subject to termination provisions
that can be exercised by each party. The initial annual base charge under the Services Agreement is $i30 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 April 30, 2022, the Company had approximately $i300
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 i43 suits
pending in the United States District Court for the Northern District of Ohio where over i1,800 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 isix 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.
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 $i100
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 $i24 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. On April 1, 2022, the Relators filed a petition for a writ of certiorari with the United States Supreme Court. The Company’s response is due June 20, 2022.
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 April 30, 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.
i
NOTE 16—SUBSEQUENT EVENTS
Refer to Note 8—Long-Term Debt for disclosure of the ABL Credit Facility’s refinancing and Term Loan Facility’s amendment.
Refer to Note 7—Derivatives for disclosure of the outstanding
interest rate swap contract amendments from LIBOR to SOFR.
Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
CAUTIONARY STATEMENTS FOR
PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
This Quarterly Report 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.
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 50 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 helping to make 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.
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 implement mitigation measures to protect our associates and workplaces, including 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 continue to take 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
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 start-up costs and operating losses, and expect to continue to incur operating losses for 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 expect to 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 76 continuing operations Retail grocery stores, including 56 Cub Foods corporate stores and 20 Shoppers Food Warehouse stores. In addition, we supply another 27 Cub Foods stores operated by our Wholesale customers through franchise and equity ownership arrangements. We operate 81 pharmacies primarily within the stores we operate and the stores of our franchisees. In addition, we operate 23 “Cub Wine and Spirit” and “Cub Liquor” stores.
In 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 third quarter of fiscal 2022. In the aggregate across our businesses, including the mix of products, management estimates our business experienced cost inflation of
approximately seven percent in the third 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.
Our pricing to our customers is determined at the time of sale primarily based on the then prevailing vendor listed base cost, and include discounts we offer to our customers. Generally in an inflationary environment as a wholesaler, rising vendor costs result in higher Net sales driven by higher vendor prices when other variables such as quantities sold and vendor promotions are constant.
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 distribution expenses of warehousing, delivery, purchasing, receiving, selecting, and outbound transportation expenses, and selling and administrative expenses. These expenses include salaries and wages, employee benefits, occupancy, insurance, depreciation and amortization expense and share-based compensation expense.
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, share-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.
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, non-cash LIFO charge
or benefit, 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.
During the third quarter of fiscal 2022, the Company revised its definition of Adjusted EBITDA to exclude the impact of the non-cash LIFO charge or benefit. The Company believes that this change provides a better indicator of its underlying operating performance and permits better comparability between periods. Refer to footnote one in the
table below and Note 14—Business Segments in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the impact of the change in definition of Adjusted EBITDA. In the fourth quarter of fiscal 2021, we made changes to line item references in our Condensed Consolidated Financial Statements, for which the definition and reconciliation of Adjusted EBITDA has been recast for consistency, such that all periods presented reflect the same reconciliation. This change in the fourth quarter of fiscal 2021 did not impact the calculation of Adjusted EBITDA.
The following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods indicated. We have revised the following tables 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 and with respect to Adjusted EBITDA for prior period presentation of the change in segment profit measurement discussed in Note 14—Business Segments within Part I, Item 1 of this Quarterly Report on Form 10-Q.
Less net income attributable to noncontrolling interests
(1)
(2)
(4)
(5)
Net periodic benefit income, excluding service cost
(10)
(17)
(30)
(51)
Interest
expense, net
37
44
121
164
Other, net
(1)
(1)
(2)
(4)
Provision for income taxes
29
16
53
32
Depreciation
and amortization
72
66
210
210
Share-based compensation
10
11
33
38
LIFO
charge(1)
72
5
102
19
Restructuring, acquisition and integration related expenses(2)
8
10
16
44
Gain
on sale of assets(3)
(88)
—
(87)
—
Multi-employer pension plan withdrawal benefit(4)
—
—
(8)
—
Other
retail expense(5)
—
2
(1)
5
Adjusted EBITDA of continuing operations
196
184
616
560
Adjusted
EBITDA of discontinued operations(6)
—
1
—
4
Adjusted EBITDA
$
196
$
185
$
616
$
564
Income
from discontinued operations, net of tax
$
—
$
—
$
—
$
3
Adjustments to discontinued operations net income:
Provision for income
taxes
—
1
—
—
Restructuring, store closure and other charges, net
—
—
—
1
Adjusted
EBITDA of discontinued operations
$
—
$
1
$
—
$
4
(1)During the third quarter of fiscal 2022, the Company revised its definition of Adjusted EBITDA to exclude the impact of the non-cash LIFO charge or benefit. The following illustrates the impact of the revised definition on previously
reported periods to show the effect of this change:
Adjusted EBITDA of continuing operations (previously
reported definition)
$
179
$
541
LIFO Charge
5
19
Adjusted EBITDA of continuing operations (revised definition)
184
560
Adjusted EBITDA of discontinued operations
1
4
Adjusted
EBITDA (revised definition)
$
185
$
564
(2)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.
(3)Fiscal 2022 primarily reflects the gain on sale of our Riverside, California distribution center in the third quarter of fiscal 2022. Refer to the gain on sale of assets discussion below for
additional information.
(4)Reflects an adjustment to multi-employer withdrawal charge estimates.
(5)Reflects expenses associated with event-specific damages to certain retail stores and store closure costs.
(6)The two remaining retail stores in discontinued operations were sold in the second quarter of fiscal 2022.
(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.
Third Quarter
Our net sales for the third quarter of fiscal 2022 increased approximately 9.2% from the third 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, which drove higher wholesale selling prices to our customers.
Independent
retailers net sales increased primarily due to sales under a new supply agreement with a new customer for East Coast locations commencing in the first quarter of fiscal 2022 and growth in sales to existing customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers.
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 2.4% 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 7.1% 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, which drove higher wholesale selling prices to our customers.
Independent retailers net sales increased primarily due to sales under a new supply agreement with a new customer for East Coast locations commencing in the first quarter of fiscal 2022 and growth in sales to existing customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers.
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 1.1% increase in identical store sales from higher average basket sizes.
Cost of Sales and Gross Profit
Our gross profit increased $42 million, or 4.3%, to $1,012 million for the third quarter of fiscal 2022, from $970 million for the third quarter of
fiscal 2021. Our gross profit as a percentage of net sales decreased to 14.0% for the third quarter of fiscal 2022 compared to 14.6% for the third quarter of fiscal 2021. The LIFO charge was $72 million and $5 million in the third quarter of fiscal 2022 and 2021, respectively. Excluding the non-cash LIFO charge, gross margin rate was 15.0% of net sales and 14.7% of net sales for the third quarter of fiscal 2022 and 2021, respectively. The increase in gross margin rate, excluding the LIFO charge, 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.
Our gross
profit increased $194 million, or 6.6%, to $3,129 million for fiscal 2022 year-to-date, from $2,935 million for fiscal 2021 year-to-date. Our gross profit as a percentage of net sales decreased to 14.4% for fiscal 2022 year-to-date compared to 14.5% for fiscal 2021 year-to-date. The LIFO charge was $102 million and $19 million for fiscal 2022 year-to-date and for fiscal 2021 year-to-date, respectively. Excluding the non-cash LIFO charge, gross margin rate was 14.9% of net sales and 14.6% of net sales for fiscal 2022 year-to-date and fiscal 2021 year-to-date, respectively.The increase in gross margin rate, excluding the LIFO charge, 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.
Operating Expenses
Operating expenses increased $101 million, or 11.6%, to $969 million, or 13.4% of net sales, for the third quarter of fiscal 2022 compared to $868 million, or 13.1% of net sales, for the third quarter of fiscal 2021. The increase in operating expenses as a percent of net sales resulted from continued investments in servicing our customers, which led to approximately 50 basis points of higher transportation and distribution center labor costs in the third quarter of fiscal 2022, and occupancy-related inflation, which were partially offset by leveraging fixed costs and benefits of the
Company’s ValuePath initiative.
Operating expenses increased $203 million, or 7.7%, to $2,845 million, or 13.1% of net sales, for fiscal 2022 year-to-date compared to $2,642 million, or 13.1% of net sales, for fiscal 2021 year-to-date. Operating expenses were approximately flat as a percent of net sales. Changes in operating expenses as a percentage of net sales included continued investments in servicing our customers, which led to approximately 50 basis points of higher transportation expenses and distribution labor costs in fiscal 2022 year-to-date, occupancy-related inflation, and the temporary, voluntary closure of a distribution center in the first quarter of fiscal 2022. These increases were partially offset by leveraging fixed expenses and lower year-over-year distribution center
start-up and consolidation costs.
Restructuring, Acquisition and Integration Related Expenses
Restructuring, acquisition and integration related expenses were $8 million for the third quarter of fiscal 2022 and $10 million for the third quarter of fiscal 2021.
Restructuring, acquisition and integration related expenses were $16 million for fiscal 2022 year-to-date. Expenses for fiscal 2021 year-to-date were $44 million, which included $41 million of restructuring and integration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value creation following the Supervalu acquisition and $3 million of closed property charges and costs.
Gain
on Sale of Assets
During the third quarter of fiscal 2022, we acquired the real property of our Riverside, California 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, which represented the fair value 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 recorded a pre-tax gain on sale of approximately $87 million in the third quarter of fiscal 2022 as a result of the transactions, which primarily reflects the pre-tax net proceeds.
Reflecting the factors described above, operating income increased $31 million to $123 million for the third quarter of fiscal 2022, compared to $92 million for the third quarter of fiscal 2021. The increase in operating income was primarily driven by an increase in gain on sale of assets and gross profit, partially offset by an increase in operating expenses, all of which are described above.
Reflecting the factors described above, operating income increased $106 million to $355 million for fiscal 2022 year-to-date, from operating income of $249 million for fiscal 2021 year-to-date. The increase in operating income was primarily driven by an increase
in gross profit and gain on sale of assets, and lower restructuring, acquisition and integration expenses, partially offset by an increase in operating expenses, all of which are described above.
Net Periodic Benefit Income, Excluding Service Cost
Net periodic benefit income, excluding service cost decreased $7 million to $10 million for the third quarter of fiscal 2022, from $17 million for the third quarter of fiscal 2021. Net periodic benefit income, excluding service cost decreased $21 million to $30 million for fiscal 2022 year-to-date, from $51 million for fiscal 2021 year-to-date. The decrease in Net periodic benefit income, excluding service cost for the third 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 driven by a higher target investment allocation to fixed income assets.
Interest expense on long-term debt, net of capitalized interest
$
32
$
35
$
95
$
110
Interest
expense on finance lease obligations
1
4
10
14
Amortization of financing costs and discounts
3
3
9
10
Loss
on debt extinguishment
1
2
7
31
Interest income
—
—
—
(1)
Interest
expense, net
$
37
$
44
$
121
$
164
The decrease in interest expense on long-term debt, net of capitalized interest, in the third quarter of fiscal 2022 compared to the third 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 third quarter of fiscal 2022 was 29.9% compared to 24.2% for the third quarter of fiscal 2021. The change in the effective tax rate was primarily driven by limitations on the deductibility of certain share-based compensation expenses in
the third quarter of fiscal 2022 and a discrete benefit for the vesting of employee stock awards in the third quarter of fiscal 2021 that was not material to the effective tax rate in the third quarter of fiscal 2022.
The effective tax rate for fiscal 2022 year-to-date was 19.9% compared to 22.9% for fiscal 2021 year-to-date. The change in the effective tax rate was 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 $67 million, or $1.10 per diluted common share, for the third quarter of fiscal 2022, compared to $48 million, or $0.80 per diluted common share, for the third quarter of fiscal 2021.
Reflecting the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $209 million, or $3.44 per diluted common share, for fiscal 2022 year-to-date, compared to $106 million, or $1.78 per diluted common share, for fiscal 2021 year-to-date.
Segment
Results of Operations
In evaluating financial performance in each business segment, management primarily uses Net sales and Adjusted EBITDA of its business segments as discussed and reconciled within Note 14—Business Segments within Part I, Item 1 of this Quarterly Report on Form 10-Q and the above table within the Executive Overview section. The following tables set forth Net sales and Adjusted EBITDA by segment for the periods indicated.
(1)Adjusted
EBITDA amounts as previously reported by segment have been recast to conform with the revised segment profit measure of Adjusted EBITDA, which excludes the non-cash LIFO charge or benefit recorded by segment. The effect of the revision increased Adjusted EBITDA for Wholesale and Retail by $4 million and $1 million for the third quarter of fiscal 2021, respectively, and increased Adjusted EBITDA for Wholesale and Retail by $18 million and $1 million for fiscal 2021 year-to-date, respectively.
Net Sales
Third 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 2.4% increase in identical store sales from higher average basket sizes.
The increase in eliminations net sales was driven by higher sales from Other to Wholesale.
Year-to-Date
Wholesale’s net sales increased primarily due to growth in sales to existing customers in the Independent retailers, Supernatural and Chains, as discussed in the Net Sales section above.
Retail’s net sales increased primarily due to a 1.1% increase in identical store sales from higher average basket sizes.
Wholesale’s Adjusted EBITDA increased 3.0% for the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021. The increase was driven by gross profit expansion excluding the LIFO charge, in excess of higher operating costs. Wholesale’s gross profit increase excluding the LIFO charge for the third quarter of fiscal 2022 was $105 million with a gross profit rate increase of approximately 41 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. Wholesale’s
operating expense increased $101 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 14—Business Segments. Wholesale’s operating expense rate increased 58 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 third quarter, partially offset by leveraging fixed expenses. Wholesale’s depreciation expense increased $6 million compared to last year.
Retail’s Adjusted EBITDA decreased 39.1% for the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021. The decrease was driven by higher Retail operating expenses from higher employee and occupancy costs, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 14—Business Segments. Retail’s depreciation
and amortization expense was approximately flat compared to last year.
Year-To-Date
Wholesale’s Adjusted EBITDA increased 6.5% for fiscal 2022 year-to-date as compared to fiscal 2021 year-to-date. The increase was driven by gross profit expansion excluding the LIFO charge, in excess of higher operating costs. Wholesale’s gross profit increase excluding the LIFO charge for fiscal 2022 year-to-date was $284 million and gross profit rate increased approximately 52 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. Wholesale’s operating expense increased $252 million, which excludes depreciation and amortization,
share-based compensation and other adjustments as outlined in Note 14—Business Segments. Wholesale’s operating expense rate increased 54 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’s depreciation expense increased $1 million.
Retail’s Adjusted EBITDA decreased 9.3% for fiscal 2022 year-to-date as compared to fiscal 2021 year-to-date, driven by higher Retail operating expenses from higher employee and occupancy costs, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 14—Business Segments.
LIQUIDITY
AND CAPITAL RESOURCES
Highlights
•Total liquidity as of April 30, 2022 was $909 million and consisted of the following:
◦Unused credit under our $2,100 million secured asset-based revolving credit facility (the “ABL Credit Facility”) was $861 million, which decreased $419 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 $48 million, which increased $7 million
from $41 million as of July 31, 2021.
•Our total debt increased $203 million to $2,391 million as of April 30, 2022 from $2,188 million as of July 31, 2021, primarily related to additional borrowings under the ABL Credit Facility, to fund working capital increases.
•Working capital increased $528 million to $1,591 million as of April 30, 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 $4 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 million term loan facility (the “Term Loan Facility”) funded with incremental borrowings under the ABL Credit Facility that 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.
•In the third 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 after-tax net proceeds from the transactions. This prepayment will also 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.
•Subsequent to the end of the third quarter of fiscal 2022, we entered into a new loan agreement (the “2022 ABL Loan Agreement”), which provides for a $2,600 million secured asset-based revolving credit facility (“2022 ABL Credit Facility”), and we used borrowings thereunder to repay all amounts outstanding under the ABL Credit Facility and terminated the ABL Credit Facility. Our total available liquidity increased by $500 million in connection with this refinancing, which reflects borrowing base levels at closing. The 2022 ABL Loan Agreement utilizes Term Secured Overnight Financing Rate (“SOFR”) and Prime rates as the benchmark interest rates. Borrowings under the 2022 ABL Loan Agreement
bear interest at rates that, at the applicable borrowers’ option, can be either: (i) a base rate plus a 0.00% - 0.25% margin or (ii) a Term SOFR rate plus a 1.00% - 1.25% margin. Refer to Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
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 and borrowings under the 2022 ABL Credit Facility.
Our primary sources of liquidity are from internally generated funds and from borrowing capacity under the 2022 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, 2022 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 $400 million under the ABL Credit Facility and repaid $202 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 2022 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) $210 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 or 2022 ABL Loan Agreement, including through the filing date of this Quarterly Report on Form 10-Q. The Term Loan Agreement, Senior Notes and 2022
ABL Loan Agreement 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.
Subsequent
to the end of the third quarter of fiscal 2022, on June 3, 2022, we entered into an amendment ( the “Third Term Loan Amendment”) to the Term Loan Agreement to amend the reference rate thereunder from LIBOR to Term SOFR. There were no other changes to the Term Loan Agreement as a result of the Third Loan Amendment. We do not expect to record any gains or losses on the conversion of these interest rate swap contracts from LIBOR to SOFR.
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 April 30, 2022, we had an aggregate of $1,230 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 represent a long-term asset of $5 million and a current liability of $5 million as of April 30, 2022, and are subject to volatility based on changes in market interest rates. In fiscal 2021 year-to-date, we paid $17 million to terminate or novate $1,204 million of interest rate swap contracts over our floating rate notional debt. The termination payments reflect the amount of accumulated other comprehensive loss that will continue to be amortized into interest expense over the original interest rate swap contract terms as long as the hedged interest rate transactions are still probable of occurring. See Note 7—Derivatives
in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
As discussed above, subsequent to the end of the third quarter of fiscal 2022, we (i) entered into the 2022 ABL Loan Agreement, (ii) amended the Term Loan Agreement to change the Term Loan Facility reference rate from LIBOR to Term SOFR and (iii) amended our outstanding interest rate swap contracts to replace One-Month LIBOR with One-Month Term SOFR. We do not expect to record any gains or losses upon the conversion of the reference rates in these interest rate swap contracts, and we believe these amendments will not have a material impact on our Condensed Consolidated Financial Statements. The cumulative effect of these
changes includes the replacement of LIBOR with Term SOFR as the benchmark interest rate from all remaining credit facilities. As such, we expect to adopt ASU 2020-04, as discussed in Note 2—Recently Adopted and Issued Accounting Pronouncements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which will allow us to continue to apply hedge accounting to our outstanding interest rate swap contracts and terminated or novated interest rate swap contracts for which the hedged interest rate transactions are still probable of occurring.
From time to time, we enter into fixed price fuel supply agreements and foreign currency hedges. As of April 30, 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.
Our capital expenditures for fiscal 2022 year-to-date were $158 million compared to $165 million for fiscal 2021 year-to-date, a decrease of $7 million. Our capital spending for fiscal
2022 and 2021 year-to-date principally included information technology and supply chain expenditures, including continued investment in the new Allentown, Pennsylvania distribution center. Fiscal 2022 capital spending is expected to be approximately $250 million and includes projects that optimize and expand our distribution network, technology platform investments and the remaining investments in the Allentown, Pennsylvania distribution center. We expect to finance fiscal 2022 capital expenditures requirements with cash generated from operations and borrowings under our 2022 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 2022 ABL Credit Facility.
Cash Flow Information
The
following summarizes our Condensed Consolidated Statements of Cash Flows:
Net
cash (used in) provided by operating activities of continuing operations
$
(31)
$
338
$
(369)
Net cash provided by (used in) investing activities of continuing operations
45
(112)
157
Net
cash used in financing activities
(7)
(232)
225
Net cash used in discontinued operations
—
(1)
1
Effect of exchange rate on cash
—
—
—
Net
increase (decrease) in cash and cash equivalents
7
(7)
14
Cash and cash equivalents, at beginning of period
41
47
(6)
Cash and cash equivalents, at end of period
$
48
$
40
$
8
The
increase in net cash used in operating activities of continuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily due to increases in inventory driven by higher purchasing levels intended to offset supply chain limitations 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.
The increase in net cash provided by investing activities of continuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily due to proceeds received from the sale of the Riverside, California distribution center discussed above, partially offset by higher cash payments for investments.
The decrease in net cash used in financing activities
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, partially offset by an increase in net cash provided by investing activities, as described above.
Other Obligations and Commitments
Except as otherwise disclosed in Note 8—Long-Term Debt and in Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements for the sale-leaseback transaction 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. 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.
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.
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 April 30, 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, the 2022 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.
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. In the third quarter of fiscal 2022, we experienced an increase in product cost inflation and also raised our expectation of the year end inflation rate in ending LIFO-based inventory. When holding inventory levels and mix constant, we estimate a 50 basis point increase in the inflation rate in our ending LIFO-based inventory results in an increase in the non-cash LIFO charge of approximately $10 million on an annual basis.
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.
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 third 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.
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)
(1)The
reported periods conform to our fiscal calendar.
(2)These amounts represent the deemed surrender by participants in our compensatory stock plans of 157,117 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 April 30, 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 third quarter of fiscal 2022.
Item 5. Other Information
On
June 3, 2022, we entered into the 2022 ABL Loan Agreement, by and among United Naturals Foods, Inc., and UNFI Canada, Inc., as borrowers, Wells Fargo Bank, N.A. as administrative agent, and the other parties thereto, which provides for a secured asset-based revolving credit facility, with up to $2,600 million of availability, including a U.S. Dollar equivalent of $100 million sublimit for borrowings in Canadian dollars. Effective June 3, 2022, we used borrowings under the 2022 ABL Loan Agreement to repay all amounts outstanding under the ABL Credit Facility and terminated such credit facility. See the information under “Refinancing Activities” in Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information about the 2022 ABL Loan Agreement, which is incorporated herein by reference.
On
June 3, 2022, we also entered into an amendment (the “Third Term Loan Amendment”) to our term loan agreement to amend the reference rate thereunder from LIBOR to Term SOFR. There were no other changes to the Term Loan Agreement as a result of the Third Loan Amendment.
The
following materials from the United Natural Foods, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 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 third quarter of fiscal 2022, filed with the SEC on June 7, 2022, formatted in Inline XBRL (included as Exhibit 101).
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.
