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Pronouncements
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Related Expenses
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Comprehensive Loss
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Intangible Assets (Details)
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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.
Large accelerated filer
☐
iAccelerated
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 March 5, 2021 there were i56,296,036 shares of the registrant’s common stock, $0.01 par value per share, outstanding.
Current
portion of long-term debt and finance lease liabilities
i24,840
i83,378
Current
liabilities of discontinued operations
i8,313
i11,438
Total
current liabilities
i2,293,638
i2,370,074
Long-term
debt
i2,374,250
i2,426,994
Long-term
operating lease liabilities
i894,831
i873,990
Long-term
finance lease liabilities
i134,554
i143,303
Pension
and other postretirement benefit obligations
i255,071
i292,128
Other
long-term liabilities
i308,715
i336,487
Long-term
liabilities of discontinued operations
i15
i1,738
Total
liabilities
i6,261,074
i6,444,714
Commitments
and contingencies
i
i
Stockholders’ equity:
Preferred
stock, $ii0.01/ par value,
authorized ii5,000/ shares;
iiiinone///
issued or outstanding
i—
i—
Common
stock, $ii0.01/ par value, authorized ii100,000/
shares; i56,763 shares issued and i56,148 shares outstanding at January 30, 2021; i55,306
shares issued and i54,691 shares outstanding at August 1, 2020
i568
i553
Additional
paid-in capital
i581,096
i568,736
Treasury
stock at cost
(i24,231)
(i24,231)
Accumulated
other comprehensive loss
(i213,529)
(i237,946)
Retained
earnings
i886,313
i837,633
Total
United Natural Foods, Inc. stockholders’ equity
i1,230,217
i1,144,745
Noncontrolling
interests
(i1,151)
(i2,487)
Total
stockholders’ equity
i1,229,066
i1,142,258
Total
liabilities and stockholders’ equity
$
i7,490,140
$
i7,586,972
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 year ends on the Saturday closest to July 31 and contain either 52 or 53 weeks. References to the second quarter of fiscal 2021 and 2020 relate to the 13-week fiscal quarters ended January 30, 2021 and February 1, 2020, respectively. References to fiscal
2021 and 2020 year-to-date relate to the 26-week fiscal periods ended January 30, 2021 and February 1, 2020, 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, 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. Refer to Note 16—Discontinued Operations for additional information about the Company’s 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 August 1, 2020 (the “Annual Report”). There were no material changes in significant accounting policies from those described in the Company’s Annual Report.
i
Discontinued Operations
In the fourth quarter of fiscal 2020, the
Company determined it no longer met the held for sale criterion for a probable sale to be completed within 12 months for the Cub Foods business and the majority of the remaining Shoppers locations excluding Shoppers locations that are held for sale within discontinued operations (collectively “Retail”). As a result, the Company revised its Condensed Consolidated Financial Statements to reclassify Retail from discontinued operations to continuing operations. This change in financial statement presentation resulted in the inclusion of Retail’s results of operations, financial position, cash flows and related disclosures within continuing operations. Prior periods presented in these Condensed Consolidated Financial Statements have been conformed to the current period presentation, resulting in Retail being presented in continuing operations for all periods. Retail was acquired
as part of the SUPERVALU INC. (“Supervalu”) acquisition in the first quarter of fiscal 2019 on October 22, 2018.
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 January 30, 2021 and August 1,
2020, the Company had net book overdrafts of $i268.6 million and $i267.8 million, respectively.
i
Reclassifications
Within
the Condensed Consolidated Statements of Cash Flows 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
Inventories are valued at the lower of cost or market. Substantially all of the Company’s
inventories consist of finished goods and a substantial portion of its inventories have a last-in, first-out (“LIFO”) reserve applied. Interim LIFO calculations are based on the Company’s estimates of expected year end inventory levels and costs, as the actual valuation of inventory under the LIFO method is computed at the end of each fiscal year based on the inventory levels and costs at that time. If the first-in, first-out method had been used, Inventories, net would have been higher by approximately $i56.6 million and $i43.3
million at January 30, 2021 and August 1, 2020, respectively.
i
NOTE 2—RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS
i
Recently
Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU”) 2016‐13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2018‐19, ASU 2019‐04, ASU 2019‐05, and ASU 2019‐11 (collectively, “Topic 326”). Topic 326 changed the impairment model for most financial assets and certain other instruments. For trade and other receivables, guarantees and other instruments, entities are required to use a new forward‐looking expected loss model that replaces the previous incurred loss model and generally results in earlier recognition of credit losses. The
Company adopted this standard in the first quarter of fiscal 2021 on August 2, 2020, the effective and initial application date, using a modified‐retrospective basis as required by the standard by means of a cumulative‐effect adjustment to the opening balance of Retained earnings in the Company’s Condensed Consolidated Statement of Stockholders’ Equity. The difference between reserves and allowances recorded under the former incurred loss model and the amount determined under the current expected loss model, net of the deferred tax impact, was recorded as an adjustment to Retained earnings. Adoption of this standard did not have a material impact to the Company’s Condensed Consolidated Financial Statements.
In
April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326 Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825. This ASU clarifies the accounting treatment for the measurement of credit losses under ASC 326 and provides further clarification on previously issued updates including ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities and ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Since the Company adopted ASU 2017-12 in the fourth quarter of fiscal 2018, the amendments in ASU 2019-04 related to clarifications on Accounting for Hedging Activities, which were adopted by the
Company in the first quarter of fiscal 2020, with no impact to Accumulated other comprehensive loss or Retained earnings for fiscal 2020, as the Company did not have separately measured ineffectiveness related to its cash flow hedges. The remaining amendments within ASU 2019-04 were adopted in the first quarter of fiscal 2021 with the adoption of Topic 326. Adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU
2018-05 requires implementation costs incurred by customers in cloud computing arrangements (i.e. hosting arrangements) to be capitalized under the same premises as authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any optional renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The Company adopted this standard on a prospective basis in the first quarter of fiscal 2021. The Company expects to incur immaterial implementation costs in fiscal 2021. Under this standard, the Company is required to defer these costs and recognize these costs as a
service expense over future periods. Adoption of this standard did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other postretirement plans. The Company adopted this guidance in the first quarter of fiscal 2021. The provisions of the new standard do not have any effect on the
Company’s interim financial statements but will require additional disclosures in its annual consolidated financial statements.
Recently Issued 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 consistent application and simplifies its application. The Company is required to adopt this guidance in the first quarter of fiscal 2022. The Company is currently reviewing the provisions of the
new standard and evaluating its impact on the Company’s consolidated financial statements.
/
i
NOTE 3—REVENUE RECOGNITION
Disaggregation of Revenues
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 exclude stores included within the Supernatural and Other channels defined below;
•Independent retailers, which include smaller size accounts and include single store and multiple store locations, but are not classified within Chains above or Other discussed below;
•Supernatural, which consists of chain accounts that are national in scope and carry primarily natural products, and currently consists solely of Whole
Foods Market;
•Retail, which reflects our Retail segment, including the Cub Foods business and the remaining Shoppers locations, excluding Shoppers locations that are 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)In the first quarter of fiscal 2021, the presentation of net sales by customer channel was recast to present the Chains and Other channel exclusive of the intercompany eliminations and present total eliminations separately. There was no impact to the Condensed Consolidated Statements of Operations. The Company believes this modified basis better reflects its channel presentation, as it further aligns with segment presentation and how sales channel information would appear following the potential disposition of Retail, assuming all banners retain a supply agreement. In addition, during the fourth quarter of fiscal 2020, the presentation of net sales by customer channel was recast to be presented on a basis consistent with customer size. International customers other
than Canada, and alternative format sales continue to be classified within Other. The main effect of the change was to re-categorize the former Supermarkets and Independents channels, previously classified by the majority of product carried by those customers between conventional and natural products, respectively, to classify those stores by the number of customer locations we supply. There was no impact to the Condensed Consolidated Statements of Operations as a result of the reclassification of customer types. The Company believes this modified basis better reflects the nature and economic risks of cash flows from customers.
(2)Eliminations primarily includes the net sales elimination of Wholesale’s sales to the Retail segment and the elimination of sales from segments included within Other to Wholesale.
The
Company serves customers in the United States and Canada, as well as customers located in other countries. However, all of the Company’s revenue is earned in the U.S. and Canada, and international distribution occurs through freight-forwarders. The Company does not have any performance obligations on international shipments subsequent to delivery to the domestic port.
No net sales were recorded within continuing operations for retail stores within discontinued operations that the Company disposed of and expects to dispose of without a supply agreement. These net sales have been eliminated upon consolidation within the Wholesale
segment of continuing operations and amounted to $i13.4 million and $i36.1 million in the second quarters of fiscal 2021 and 2020, respectively, and $i27.8 million
and $i92.1 million in fiscal 2021 and 2020 year-to-date, respectively.
The Company has ifive goodwill reporting units: itwo
of which represent separate operating segments and are aggregated within the Wholesale reportable segment (U.S. Wholesale and Canada Wholesale); ione separate Retail operating and reportable segment and itwo
of which are separate operating segments (Woodstock Farms and Blue Marble Brands) that do not meet the criteria for being disclosed as separate reportable segments. The Canada Wholesale operating segment, which is aggregated with U.S. Wholesale, would not meet the quantitative thresholds for separate reporting if it did not meet the aggregation criteria.
During
the first quarter of fiscal 2020, the Company changed its management structure and internal financial reporting, which resulted in the requirement to combine the Supervalu Wholesale reporting unit and the legacy Company Wholesale reporting unit into one U.S. Wholesale reporting unit, and experienced a further sustained decline in market capitalization and enterprise value. As a result of the change in reporting units and the sustained decline in market capitalization and enterprise value, the Company performed an interim quantitative impairment review of goodwill for the Wholesale reporting unit, which included a determination of the fair value of all reporting units.
The
Company estimated the fair values of all reporting units using both the market approach, applying a multiple of earnings based on observable multiples for guideline publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The rates used to discount projected future cash flows under the income approach reflect a weighted average cost of capital of i8.5%,
which considered observable data about guideline publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums, including those reflected in the Company’s market capitalization. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. Based on this analysis, the Company determined that the carrying value of its U.S. Wholesale reporting unit exceeded its fair value by an amount that exceeded its assigned goodwill. As a result, the Company recorded a goodwill impairment charge of
$i421.5 million in the first quarter of fiscal 2020. The goodwill impairment charge is reflected in Goodwill and asset impairment charges in the Condensed Consolidated Statements of Operations. The goodwill impairment charge reflects the impairment of all of the U.S. Wholesale reporting unit’s goodwill.
Goodwill and Intangible Assets Changes
i
Changes
in the carrying value of Goodwill by reportable segment that have goodwill consisted of the following:
Amortization
expense was $i18.6 million and $i21.5 million for the second quarters of fiscal 2021 and 2020, respectively, and $i41.6 million
and $i43.6 million for fiscal 2021 and 2020 year-to-date, respectively. iThe
estimated future amortization expense
The fair values of interest rate swap contracts are measured using Level 2 inputs. The interest rate swap contracts are valued using an income approach interest rate swap valuation model incorporating observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. As of January 30, 2021, a 100 basis point increase in forward LIBOR interest rates would decrease the fair value of the interest rate swap liabilities by approximately $i40.6
million; a 100 basis point decrease in forward LIBOR interest rates would increase the fair value of the interest rate swap liabilities by approximately $i42.2 million. Refer to Note 7—Derivatives for further information on interest rate swap contracts.
Mutual Funds
Mutual
fund assets consist of balances held in investments to fund certain deferred compensation plans. The fair values of mutual fund assets are based on quoted market prices of the mutual funds held by the plan at each reporting period. Mutual funds traded in active markets are classified within Level 1 of the fair value hierarchy.
Fuel Supply Agreements and Derivatives
To reduce diesel price risk, the Company has entered into derivative financial instruments and/or forward purchase commitments for a portion of our projected monthly diesel fuel requirements at fixed prices. The fair values of fuel derivative agreements are measured using Level 2 inputs.
Foreign
Exchange Derivatives
To reduce foreign exchange risk, the Company has entered into derivative financial instruments for a portion of our projected monthly foreign currency requirements at fixed prices. The fair values of foreign exchange derivatives are measured using Level 2 inputs.
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 at January 30, 2021. 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.
i
Details
of active swap contracts as of January 30, 2021, which are all pay fixed and receive floating, are as follows:
(2)For these swap contracts that are indexed to LIBOR, the Company is monitoring and evaluating risks related to the expected future cessation of LIBOR.
In the first quarter of fiscal 2021, in conjunction with the $i500.0 million
fixed rate senior unsecured notes offering described below in Note 8—Long-Term Debt, the Company paid $i11.3 million to terminate or novate certain outstanding interest rate swaps with a notional amount of $i504.0 million
and certain forward starting interest rate swaps with a notional amount of $i450.0 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 termination and novations. Since the hedged interest payments remain probable of occurring, the unrecognized gains and losses resulting from the early termination and novation of these interest rate swap agreements will be amortized out of Accumulated other comprehensive income and into to 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 and 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 (Loss) and subsequently reclassified to earnings in Interest expense, net in the Condensed Consolidated Statements of Operations when the hedged transactions affect earnings.
i
The location and amount of gains or losses recognized in the Condensed Consolidated Statements of Operations for interest rate swap contracts
for each of the periods, presented on a pretax basis, are as follows:
Total amounts of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
$
i50,944
$
i48,836
$
i120,077
$
i98,545
Loss
on cash flow hedging relationships:
Loss reclassified from comprehensive income into earnings
$
(i9,303)
$
(i4,251)
$
(i20,563)
$
(i6,621)
Loss
on interest rate swap contracts not designated as hedging instruments:
Subsequent to the end of the second quarter of fiscal 2021, on February 11, 2021, the Company entered into an amendment agreement (the “First Term Loan Amendment”) amending the Term Loan Agreement (as defined below). The amendment provides for, among other things, (i) the reduction of the applicable margin for LIBOR loans from i4.25%
to i3.50% and the applicable margin for base rate loans from i3.25% to i2.50%,
(ii) the appointment of a replacement administrative and collateral agent, and (iii) other administrative changes. The amendment did not change the aggregate amount or maturity date of the Term Loan Facility.
During the second quarter of fiscal 2021, the Company made a voluntary prepayment of $i150.0 million on the Term Loan Facility (as defined below) funded with incremental borrowings under the ABL
Credit Facility (as defined below) that reduces its interest costs. This prepayment will count towards any requirement from Excess Cash Flow (as defined in the Term Loan Agreement) generated during fiscal 2021, which would be due in fiscal 2022. In connection with this prepayment, the Company incurred a loss on debt extinguishment of $i5.7 million related to unamortized debt issuance costs and a loss on unamortized original issue discount, which were recorded
within Interest expense, net in the Condensed Consolidated Statements of Operations in the second quarter of fiscal 2021.
During the first quarter of fiscal 2021, the Company repaid $i500.0 million of outstanding borrowings under the Term Loan Facility funded primarily by the net proceeds from the issuance of new ieight-year
senior unsecured notes (as described below). This refinancing transaction extended the maturity of a significant portion of the Company’s outstanding debt by approximately ithree years. Also during the first quarter, the Company made $i108.0 million
of additional repayments under the Term Loan Facility, including $i72.0 million related to the material cash flow generation in fiscal 2020, as required under the Term Loan Agreement (as described below) and a voluntary prepayment of $i36.0
million with incremental borrowings under the ABL Credit Facility (as described below). In connection with the prepayments, the Company incurred a loss on debt extinguishment related to unamortized debt issuance costs and a loss on unamortized original issue discount of $i12.0 million and $i11.8 million,
respectively, which were recorded within Interest expense, net in the Condensed Consolidated Statements of Operations in the first quarter of fiscal 2021. The Company also executed a third amendment to the ABL Loan Agreement (as defined below) during the first quarter of fiscal 2021, which added certain assets to the Borrowing Base (as defined below) and increased the Company’s capacity to issue letters of credit under the facility, in addition to other administrative changes. The amendment did not change the aggregate amount or maturity date of the ABL Credit Facility.
Senior Notes
On October
22, 2020, the Company issued $i500.0 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 ABL Credit Facility or the Term Loan Facility. The net proceeds from the offering of the Senior Notes, together with borrowings under the ABL Credit Facility, were used to repay $i500.0 million
of the amounts outstanding under the Term B Tranche of the Term Loan Facility and for the payment of all financing costs related to the offering of the Senior Notes. Financing costs of $i8.9 million were paid and capitalized in fiscal 2021 year-to-date.
The Senior Notes contain covenants customary for debt securities of this type that limit the ability of the Company and its restricted subsidiaries to, among other things, incur debt, declare or pay dividends or make other distributions to stockholders of the Company, 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 assets of the Company and its subsidiaries
on a consolidated basis. The Company is in compliance with all such covenants for all periods presented.
ABL Credit Facility
On August 30, 2018, the Company entered into a loan agreement (as amended from time to time, 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 (the “ABL Administrative Agent”), Bank of America, N.A. (acting through its Canada branch), as Canadian agent for the ABL Lenders, and the other parties thereto.
During the first quarter of fiscal 2021, on August 14, 2020, the Company entered into the Third Amendment to Loan Agreement, which provides for, among other things, (i) the addition of certain perishable inventory to the calculation of the Borrowing Base (as defined in the ABL Loan Agreement), (ii) the addition of income attributable to the business associated
with the Cub Foods banner and the Shoppers banner accounted for within discontinued operations (if any) to the definition of Consolidated Net Income (as defined in the ABL Loan Agreement), (iii) an increase of the sublimit of availability for letters of credit to $i300 million which includes an increased further sublimit for the Canadian Borrower of $i25 million,
and (iv) other administrative changes.
The ABL Loan Agreement 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) $i2,050.0 million is available to the U.S. Borrowers and (ii) $i50.0
million is available to the Canadian Borrower. The ABL Loan Agreement also provides for (i) a $i300.0 million sublimit of availability for letters of credit of which there is a further $i25.0
million sublimit for the Canadian Borrower and (ii) a $i100.0 million sublimit for short-term borrowings on a swingline basis of which there is a further $i3.5
million sublimit for the Canadian Borrower. The ABL Credit Facility replaced the Company’s $i900.0 million prior asset-based revolving credit facility.
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 $i600.0
million without the consent of any ABL Lenders not participating in such increase, subject to certain customary conditions and applicable lenders committing to provide the increase in funding. There is no assurance that additional funding would be available.
The Borrowers’ obligations under the ABL Credit Facility are guaranteed by most of the Company’s wholly-owned subsidiaries who are not also Borrowers (collectively, the “ABL Guarantors”), subject to customary exceptions and limitations. The Borrowers’ obligations under the ABL Credit Facility and the ABL Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the Borrowers’ and ABL Guarantors’ accounts
receivable, inventory and certain other assets arising therefrom or related thereto (including substantially all of their deposit accounts, collectively, the “ABL Assets”) and (ii) a second-priority lien on all of the Borrowers’ and ABL Guarantors’ assets that do not constitute ABL Assets, in each case, subject to customary exceptions and limitations.
Availability under the ABL Credit Facility is subject to a borrowing base (the “Borrowing Base”), which is based on 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 scripts availability of the Borrowers, after adjusting for customary reserves. The aggregate amount of the ABL Loans made and letters of credit issued under the ABL Credit Facility shall at no time exceed the lesser of the aggregate commitments under the ABL Credit Facility (currently $i2,100.0
million or, if increased at the Borrowers’ option as described above, up to $i2,700.0 million) or the Borrowing Base. To the extent that the Borrowers’ Borrowing Base declines, the availability under the ABL Credit Facility may decrease below $i2,100.0
million.
As of January 30, 2021, the U.S. Borrowers’ Borrowing Base, net of $i208.0 million of reserves,
was $i2,216.1 million, which is above the $i2,050.0 million limit of availability to the
U.S. Borrowers under the ABL Credit Facility. As of January 30, 2021, the Canadian Borrower’s Borrowing Base, net of $i4.2 million of reserves, was $i48.6
million, which is below the $i50.0 million limit of availability to the Canadian Borrower under the ABL Credit facility, resulting in total availability of $i2,098.6
million for ABL Loans and letters of credit under the ABL Credit Facility. As of January 30, 2021, the U.S. Borrowers had $i885.0 million of ABL Loans outstanding and the Canadian Borrower had no ABL Loans outstanding under the ABL Credit Facility, which are presented net of debt issuance costs of $i9.7
million and are included in Long-term debt in the Condensed Consolidated Balance Sheets. As of January 30, 2021, the U.S. Borrowers had $i95.8 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 $i1,117.8 million as of January 30, 2021.
The ABL Loans of the U.S. Borrowers under the ABL Credit Facility bear interest at rates that, at the U.S. Borrowers’ option,
can be either: (i) a base rate and an applicable margin or (ii) a LIBOR rate and an applicable margin. As of January 30, 2021, the applicable margin for base rate loans was i0.25% and the applicable margin for LIBOR loans was i1.25%.
The ABL Loan Agreement contains provisions for the establishment of an alternative rate of interest in the event that LIBOR is no longer available. The ABL Loans of the Canadian Borrower under the ABL Credit Facility bear interest at rates that, at the Canadian Borrower’s option, can be either: (i) prime rate and an applicable margin or (ii) a Canadian dollar bankers’ acceptance equivalent rate and an applicable margin. As of January 30, 2021, the applicable margin for prime rate loans was i0.25%, and the applicable
margin for Canadian dollar bankers’ acceptance equivalent rate loans was i1.25%. Commencing on the first day of the calendar month following the ABL Administrative Agent’s receipt of the Company’s aggregate availability calculation for the prior fiscal quarter, the applicable margins for borrowings by the U.S. Borrowers and Canadian Borrower will be subject to adjustment based upon the aggregate availability under the ABL Credit Facility. Unutilized commitments under the ABL
Credit Facility are subject to a per annum fee of (i) i0.375% if the average daily total outstandings were less than i25%
of the aggregate commitments during the preceding fiscal quarter or (ii) i0.25% if such average daily total outstandings were i25%
or more of the aggregate commitments during the preceding fiscal quarter. As of January 30, 2021, the unutilized commitment fee was i0.25% per annum. The Borrowers are also required to pay a letter of credit fronting fee to each letter of credit issuer equal to i0.125%
per annum of the amount available to be drawn under each such letter of credit, as well as a fee to all lenders equal to the applicable margin for LIBOR or Canadian dollar bankers’ acceptance equivalent rate loans, as applicable, times the average daily amount available to be drawn under all outstanding letters of credit.
The ABL Loan Agreement subjects the Company to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) of at least i1.0
to 1.0 calculated at the end of each fiscal quarter on a rolling four quarter basis when the adjusted aggregate availability (as defined in the ABL Loan Agreement) is less than the greater of (i) $i235.0 million and (ii) i10%
of the aggregate borrowing base. The Company has not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement, including through the filing date of this Quarterly Report.
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 thousands)(1):
Certain inventory assets included in Inventories, net and Current assets of discontinued operations
$
i2,261,209
$
i2,270,892
Certain
receivables included in Accounts receivable, net and Current assets of discontinued operations
$
i1,104,388
$
i1,077,682
(1)The
ABL Credit Facility is also secured by all of the Company’s pharmacy scripts, which are included in Intangibles, net in the Condensed Consolidated Balance Sheets as of January 30, 2021 and August 1, 2020.
Unused credit and fees under the ABL Credit Facility (in thousands, except percentages):
The ABL Loan Agreement contains other customary affirmative and negative covenants and customary representations and warranties that must be accurate in order for the Borrowers to borrow under the ABL Credit Facility. The ABL Loan Agreement also contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the ABL Credit Facility to be in full force and effect, and a change of control. If an event of default occurs and is continuing, the Borrowers may be required to immediately repay all amounts outstanding under the ABL Loan Agreement.
Term Loan Facility
On
the Supervalu acquisition date (“Closing Date”), the Company entered into a new term loan agreement (the “Term Loan Agreement”), by and among the Company and Supervalu (collectively, the “Term Borrowers”), the financial institutions that are parties thereto as lenders (collectively, the “Term Lenders”), Goldman Sachs Bank USA, as administrative agent for the Lenders, and the other parties thereto. The Term Loan Agreement provides for senior secured first lien term loans in an aggregate principal amount of $i1,950.0
million, consisting of a $i1,800.0 million iseven-year tranche (the “Term B Tranche”) and a $i150.0
million i364-day tranche (the “364-day Tranche” and, together with the Term B Tranche, collectively, the “Term Loan Facility”). The entire amount of the net proceeds from the Term Loan Facility was used to finance the Supervalu acquisition and related transaction costs.
The loans under the Term B Tranche will be payable in full on October 22, 2025; provided that, if on or prior to December 31, 2024, that certain Agreement for Distribution of Products, dated
as of October 30, 2015, by and between Whole Foods Market Distribution, Inc., a Delaware corporation, and the Company (the “Whole Foods Supply Agreement”) has not been extended until at least October 23, 2025 on terms not materially less favorable, taken as a whole, to the Company and its subsidiaries than those in effect on the Closing Date, then the loans under the Term B Tranche will be payable in full on December 31, 2024. On March 3, 2021, we entered into an amendment to the Whole Foods Supply Agreement,
which extended the term of the agreement from September 28, 2025 to September 27, 2027, and which satisfies the extension requirement in the Term Loan Agreement.
In fiscal 2021 year-to-date, the Company made prepayments on the Term B Tranche of $i758.0 million as described above.
The loans under the 364-day Tranche were paid in full on October 21, 2019. The Company funded the scheduled maturity of the $i52.8 million outstanding borrowings under the 364-day Tranche with incremental borrowings under the ABL Credit Facility on October 21, 2019.
Under
the Term Loan Agreement, the Term Borrowers may, at their option, increase the amount of the Term B Tranche, 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 $i656.3 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 Term Borrowers’ obligations under the Term Loan Facility are guaranteed by most of the Company’s wholly-owned domestic subsidiaries who are not also Term Borrowers (collectively, the “Term Guarantors”), subject to customary exceptions and limitations, including an exception for immaterial subsidiaries designated by the Company from time to time. The Term Borrowers’ obligations under the Term Loan Facility and the Term Guarantors’ obligations under the related
guarantees are secured by (i) a first-priority lien on substantially all of the Term Borrowers’ and the Term Guarantors’ assets other than the ABL Assets and (ii) a second-priority lien on substantially all of the Term Borrowers’ and the Term 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 $i10.0 million. As of January 30, 2021,
there was $i587.1 million of owned real property pledged as collateral that was included in Property and equipment, net and Prepaid expenses and Other current assets in the Condensed Consolidated Balance Sheets.
The loans under the Term Loan Facility may be voluntarily prepaid, subject to certain minimum payment thresholds and the payment of breakage or other similar costs. Under the Term Loan Facility, the Company is required, subject to certain exceptions and customary reinvestment rights, to apply i100
percent of Net Cash Proceeds (as defined in the Term Loan Agreement) from certain types of asset sales to prepay the loans outstanding under the Term Loan Facility. Commencing with the fiscal year ending August 1, 2020, the Company must also 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 defined in the Term Loan Agreement) as of the last day of such fiscal year) of Excess Cash Flow (as defined in the Term Loan Agreement) in excess of $i10
million for the fiscal year then ended, minus any voluntary prepayments of the loans under the Term Loan Facility, the ABL Credit Facility (to the extent they permanently reduce commitments under the ABL Facility) and certain other indebtedness made during such fiscal year. Based on the Company’s Excess Cash Flow in fiscal 2020, a $i72.0 million prepayment was required and paid in the quarter ending October
31, 2020. The potential amount of prepayment from Excess Cash Flow in fiscal 2021 that may be required in fiscal 2022 is not reasonably estimable as of January 30, 2021.
As of January 30, 2021, the borrowings under the Term B Tranche of the Term Loan Facility bear interest at rates that, at the Term Borrowers’ option, can be either: (i) a base rate and a margin of i3.25% or
(ii) a LIBOR rate and a margin of i4.25%; 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.
The Term Loan Agreement does not include any financial maintenance covenants but contains other customary affirmative and negative covenants and customary representations and warranties. The Term Loan Agreement also contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the Term Loan Facility to be in full force and effect, and a change of control. If an event of default occurs and is continuing, the Term Borrowers may be required to immediately repay all amounts outstanding under the Term Loan Agreement.
As of January 30,
2021, the Company had borrowings of $i1,015.0 million outstanding under the Term B Tranche, which are presented net of debt issuance costs of $i18.8
million and an original issue discount on debt of $i18.4 million. As of January 30, 2021, ino amount of the Term B Tranche
was classified as current.
i
NOTE 9—COMPREHENSIVE (LOSS) INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
i
Changes
in Accumulated other comprehensive loss by component, net of tax, for fiscal 2021 year-to-date are as follows:
Pension and postretirement benefit plan obligations:
Reclassification
of amounts included in net periodic benefit income(1)
$
(i404)
$
(i777)
$
(i713)
$
(i1,551)
Net
periodic benefit income, excluding service cost
Pension settlement charge
i—
i10,303
i—
i10,303
Net
periodic benefit income, excluding service cost
Total reclassifications
(i404)
i9,526
(i713)
i8,752
Income
tax expense (benefit)
i104
(i2,492)
i207
(i2,290)
Provision
(benefit) for income taxes
Total reclassifications, net of tax
$
(i300)
$
i7,034
$
(i506)
$
i6,462
Swap
agreements:
Reclassification of cash flow hedge
$
i11,498
$
(i4,251)
$
i23,534
$
(i6,621)
Interest
expense, net
Income tax benefit
(i3,087)
(i1,348)
(i6,317)
(i1,776)
Provision
(benefit) for income taxes
Total reclassifications, net of tax
$
i8,411
$
(i2,903)
$
i17,217
$
(i4,845)
Other
cash flow hedges:
Reclassification of cash flow hedge
$
(i5)
$
i—
$
i164
$
i—
Cost
of sales
Income tax expense (benefit)
i1
i—
(i44)
i—
Provision
(benefit) for income taxes
Total reclassifications, net of tax
$
(i4)
$
i—
$
i120
$
i—
(1)Reclassification
of amounts included in net periodic benefit income include reclassification of prior service benefit and reclassification of net actuarial loss as reflected in Note 11—Benefit Plans.
/
As of January 30, 2021, the Company expects to reclassify $i44.1 million
out of Accumulated other comprehensive loss and primarily into Interest expense, net during the following twelve-month period.
During the second quarter of fiscal 2021, the Company authorized for issuance and registered an additional i3.6 million shares of common stock under the Amended and Restated 2020 Equity Incentive Plan. In fiscal 2021 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 i2.6 million shares. As of January 30, 2021, there were i3.9
million shares available for issuance under the 2020 Equity Incentive Plan.
/
i
NOTE 11—BENEFIT PLANS
i
Net
periodic benefit income (cost) and contributions to defined benefit pension and other post-retirement benefit plans consisted of the following:
No minimum pension contributions are required to be made under either the SUPERVALU Inc. Retirement Plan or the Unified Grocers, Inc. Cash Balance Plan under the Employee Retirement Income Security Act of 1974, as amended, (“ERISA”) in fiscal 2021. The Company expects to contribute approximately $i5.3
million to its other non-qualified pension plans and postretirement benefit plans in fiscal 2021.
The Company contributed $i11.8 million
and $i12.6 million in the second quarters of fiscal 2021 and 2020, respectively, and $i23.7 million
and $i26.1 million in fiscal 2021 and 2020 year-to-date, respectively, to continuing and discontinued operations multiemployer pension plans.
In connection with the Company’s consolidation of distribution centers in the Pacific Northwest, during the second quarter of fiscal 2020, the
Company recorded a $i10.6 million multiemployer pension plan withdrawal liability, under which payments will be made over a ione-year period beginning in fiscal
2022. The withdrawal liability is included in Other long-term liabilities and the withdrawal charge was recorded within Restructuring, acquisition and integration related expenses.
Lump Sum Pension Settlement
On August 1, 2019, the Company amended the SUPERVALU Retirement Plan to provide for a lump sum settlement window. On August 2, 2019, the Company sent plan participants lump sum settlement election offerings that committed the plan to pay certain deferred vested pension plan participants and retirees, who make such an election,
a lump sum payment in exchange for their rights to receive ongoing payments from the plan. The lump sum payment amounts are equal to the present value of the participant’s pension benefits, and were made to certain former (i) retired associates and beneficiaries who are receiving their monthly pension benefit payment and (ii) terminated associates who are deferred vested in the plan, had not yet begun receiving monthly pension benefit payments and who are not eligible for any prior lump sum offerings under the plan. Benefit obligations associated with the lump sum offering have been incorporated into the funded status utilizing the actuarially determined lump sum payments based on estimated offer acceptances. The plan made aggregate lump sum settlement payments of $i664.0 million
to plan participants during the second quarter of fiscal 2020. The lump sum settlement payments resulted in a non-cash pension settlement charge of $i10.3 million in the second quarter of fiscal 2020 from the acceleration of a portion of the accumulated unrecognized actuarial loss, which was based on the fair value of SUPERVALU Retirement Plan assets and remeasured liabilities. As a result of the settlement payments, the SUPERVALU Retirement Plan obligations were remeasured using a discount rate of i3.1
percent and the MP-2019 mortality improvement scale. This remeasurement resulted in a $i1.5 million decrease to Accumulated other comprehensive loss.
i
NOTE
12—INCOME TAXES
The effective income tax rate for continuing operations was an expense of i22.4% on pre-tax income compared to a benefit of i47.8%
on pre-tax losses for the second quarters of fiscal 2021 and 2020, respectively. The change in the effective income tax rate for the second quarter of fiscal 2021 was primarily driven by a pre-tax loss of approximately $i26.8 million in the second quarter of fiscal 2020 compared to pre-tax income of approximately $i73.2
million in the second quarter of fiscal 2021. In addition, the change in the rate is partially driven by a discrete tax benefit of approximately $i2.8 million in the second quarter of fiscal 2021 related to the release of unrecognized tax positions versus a discrete tax benefit of approximately $i0.5 million
for this item in the second quarter of fiscal 2020. The tax provision had $i3.1 million and $i0.1
million of discrete tax benefits, including those mentioned above, for the second quarters of fiscal 2021 and fiscal 2020, respectively.
The effective income tax rate for continuing operations was an expense of i21.6% on pre-tax income compared to a benefit of i16.6%
on pre-tax losses for fiscal 2021 year-to-date and fiscal 2020 year-to-date, respectively. The change in the effective income tax rate was primarily driven by a discrete tax benefit in fiscal 2021 year-to-date for employee stock vestings versus a discrete tax expense for this item in fiscal 2020 year-to-date, as well as a discrete tax benefit for the release of unrecognized tax positions in fiscal 2021 year-to-date versus a discrete tax expense for this item in fiscal 2020 year-to-date. In addition, fiscal 2020 year-to-date was impacted by a goodwill impairment charge that did not repeat in fiscal 2021 year-to-date. The tax provision had $i3.5 million
and $i64.4 million of discrete tax benefits for fiscal 2021 and fiscal 2020 year-to-date, respectively.
Net
effect of dilutive stock awards based upon the treasury stock method
i3,067
i—
i3,402
i—
Diluted
weighted average shares outstanding
i59,205
i53,523
i59,119
i53,368
Basic
earnings (loss) per share:
Continuing operations
$
i0.98
$
(i0.27)
$
i0.95
$
(i7.54)
Discontinued
operations
$
i0.07
$
(i0.30)
$
i0.09
$
(i0.23)
Basic
earnings (loss) per share
$
i1.05
$
(i0.57)
$
i1.04
$
(i7.77)
Diluted
earnings (loss) per share:
Continuing operations
$
i0.93
$
(i0.27)
$
i0.89
$
(i7.54)
Discontinued
operations
$
i0.06
$
(i0.30)
$
i0.09
$
(i0.23)
Diluted
earnings (loss) per share
$
i1.00
$
(i0.57)
$
i0.98
$
(i7.77)
Anti-dilutive
stock-based awards excluded from the calculation of diluted earnings per share
i1,140
i7,413
i1,214
i7,834
//
i
NOTE
14—BUSINESS SEGMENTS
The Company has two reportable segments: Wholesale and Retail. These reportable segments are two distinct businesses, each with a different customer base, marketing strategy and management structure. The Wholesale reportable segment is the aggregation of 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.
The Wholesale reportable segment is engaged in the national distribution of natural, organic, specialty, produce and conventional grocery and non-food products, and providing professional services in the United States and Canada. The Retail reportable segment derives revenues from the sale of groceries and other products at retail locations operated by the Company. The Company has additional operating segments that do not meet the quantitative thresholds for reportable
segments and are therefore aggregated under the caption of Other. Other includes a manufacturing division, which engages in the importing, roasting, packaging and distributing of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections, and the Company’s branded product lines. Other also includes certain corporate operating expenses that are not allocated to operating segments, which include, among other expenses, restructuring, acquisition, and integration related expenses, share-based compensation and salaries, retainers, and other related expenses of certain officers and all directors. Wholesale records revenues related to sales to Retail at gross margin rates consistent with sales to other similar wholesale customers of the acquired Supervalu business.
Segment
earnings include revenues and costs attributable to each of the respective business segments and allocated corporate overhead, based on the segment’s estimated consumption of corporately managed resources. The Company allocates certain corporate capital expenditures and identifiable assets to its business segments and retains certain depreciation expense related to those assets within Other. Non-operating expenses that are not allocated to the operating segments are included in the Other segment. In the fourth quarter of fiscal 2020, the Company updated its segment profit measure to Adjusted EBITDA. Prior period amounts have been recast to reflect this change in segment profit measure.
iThe
following table provides continuing operations net sales and Adjusted EBITDA by reportable segment and reconciles that information to Income (loss) from continuing operations before income taxes:
Net income attributable to noncontrolling interests
i1,605
i650
i2,972
i1,169
Total
other expense, net
(i32,143)
(i44,339)
(i83,445)
(i82,264)
Depreciation
and amortization
(i66,534)
(i69,219)
(i143,723)
(i144,360)
Share-based
compensation
(i12,673)
(i5,134)
(i26,822)
(i9,059)
Restructuring,
acquisition and integration related expenses
(i17,783)
(i36,522)
(i34,211)
(i51,194)
Goodwill
and asset impairment charges
i—
i—
i—
(i425,405)
Loss
on sale of assets
(i399)
(i524)
(i169)
(i434)
Notes
receivable charges
i—
i—
i—
(i12,516)
Legal
settlement income (reserve charge)
i—
i654
i—
(i1,196)
Other
retail expense
(i1,394)
i—
(i3,003)
i—
Income
(loss) from continuing operations before income taxes
$
i73,154
$
(i26,792)
$
i71,191
$
(i481,181)
Depreciation
and amortization:
Wholesale
$
i58,766
$
i65,768
$
i126,587
$
i133,761
Retail
i6,764
i843
i14,152
i2,301
Other
i1,004
i2,608
i2,984
i8,298
Total
depreciation and amortization
$
i66,534
$
i69,219
$
i143,723
$
i144,360
Capital
expenditures:
Wholesale
$
i45,882
$
i43,370
$
i83,873
$
i85,629
Retail
i4,109
i2,619
i7,310
i5,295
Other
i145
i91
i333
i204
Total
capital expenditures
$
i50,136
$
i46,080
$
i91,516
$
i91,128
(1)As
presented in Note 3—Revenue Recognition, for the second quarters of fiscal 2021 and 2020, the Company recorded $i345.3 million and $i308.1
million, respectively, and $i702.9 million and $i605.8
million in fiscal 2021 and 2020 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. Refer to Note 3—Revenue Recognition for additional information regarding Wholesale sales to discontinued operations.
NOTE
15—COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Guarantees and Contingent Liabilities
The Company has outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of January 30, 2021. 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 inine 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 January 30, 2021, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was $i28.7
million ($i25.0 million on a discounted basis). Based on the indemnification agreements, personal guarantees and results of the reviews of performance risk, a total estimated loss of $i1.0 million
is recorded in the Condensed Consolidated Balance Sheets.
The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company’s lease assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a
material amount of these obligations is remote. For leases that have been assigned, the Company has recorded the associated right of use operating lease assets and obligations within the Condensed Consolidated Balance Sheets. iNo associated lessor receivables are reflected on the Condensed Consolidated Balance Sheets; however, the Company expects its assignees to
make lease payments to its landlords. For the Company’s lease guarantee arrangements, ino amounts have been recorded within the Condensed Consolidated Balance Sheets as the fair value has been determined to be de minimis.
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.
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. We expect that services provided under the Services Agreement will wind down at or near the end of the initial term in December 2021. The Services Agreement generally requires each party to indemnify the other party against third-party claims arising out of the performance of or the provision or receipt of services under the Services Agreement. While the
Company’s aggregate indemnification obligations to Save-A-Lot and Onex, the purchaser of Save-A-Lot, could result in a material liability, the Company is not aware of any matters that are expected to result in a material liability. The Company has recorded the fair value of the guarantee in the Condensed Consolidated Balance Sheets within Other long-term liabilities.
Other Contractual Commitments
In the ordinary course of business, the Company enters into supply contracts
to purchase products for resale, and service contracts for fixed asset and information technology systems. These contracts typically include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. As of January 30, 2021, the Company had approximately $i305
million of non-cancelable future purchase obligations.
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 i42 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. 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.
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; pension plans; labor union disputes, including unfair labor practices, such as claims for back-pay in the context of labor contract negotiations; 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; real estate and environmental matters, including claims in connection with its ownership and lease of a substantial amount of real property, both retail and warehouse properties; and antitrust. Other than as described above, there are no pending material legal proceedings to which the Company is a party or to which its property is subject.
Predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. Management regularly monitors the
Company’s exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and estimates with respect to related costs and exposures. As of January 30, 2021, 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—DISCONTINUED OPERATIONS
In conjunction with the Supervalu acquisition, the
Company announced its plan to sell the remaining acquired retail operations of Supervalu. Since the acquisition, the Company sold Hornbacher’s, and sold and exited the retail operations of certain Shoppers locations, Shop ‘n Save St. Louis and Shop ‘n Save East. As discussed further in Note 1—Significant Accounting Policies, in the fourth quarter of fiscal 2020, the Company determined Retail no longer qualified for held for sale presentation and the results of operations, financial position and cash flows of Retail have been revised in order to present Retail within continuing operations. Subsequent to the presentation changes in the fourth quarter of fiscal 2020, discontinued operations contains the historical results of operations, financial position and cash flows of Hornbacher’s, certain
Shoppers locations, Shop ‘n Save St. Louis and Shop ‘n Save East. As of January 30, 2021, only ifour Shoppers locations are contained in remaining disposal groups that continue to be classified as operations held for sale as discontinued operations.
In the second quarter of fiscal 2020, the Company entered into agreements to sell i13
Shoppers stores and decided to close isix locations. During fiscal 2020 year-to-date, within discontinued operations the Company incurred approximately $i23.6
million in pre-tax aggregate costs and charges related to Shoppers stores that remain within discontinued operations, consisting of $i18.8 million of operating losses, severance costs and transaction costs during the period of wind-down and $i5.5
million of property and equipment impairment charges related to impairment reviews.
Income
(loss) from discontinued operations before income taxes
i2,905
(i20,711)
i4,727
(i15,392)
Benefit
for income taxes
(i898)
(i4,635)
(i372)
(i3,342)
Income
(loss) from discontinued operations, net of tax
$
i3,803
$
(i16,076)
$
i5,099
$
(i12,050)
/
No
net sales were recorded within continuing operations for retail stores within discontinued operations that the Company disposed of and expects to dispose of without a supply agreement. These net sales have been eliminated upon consolidation within the Wholesale segment of continuing operations and amounted to $i13.4 million and $i36.1
million in the second quarters of fiscal 2021 and 2020, respectively, and $i27.8 million and $i92.1 million in fiscal 2021 and 2020 year-to-date, respectively.
The
following table summarizes the carrying amounts of major classes of assets and liabilities that were classified as held-for-sale on the Condensed Consolidated Balance Sheets:
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;
•our dependence on principal customers;
•our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends;
•our ability to realize anticipated benefits of our acquisitions and dispositions, in particular, our acquisition of SUPERVALU INC. (“Supervalu”);
•our
reliance on the continued growth in sales of our higher margin natural and organic foods and non-food products in comparison to lower margin conventional grocery products;
•increased competition in our industry as a result of increased distribution of natural, organic and specialty products, and direct distribution of those products by large retailers and online distributors;
•the possibility that restructuring, asset impairment, and other charges and costs we may incur in connection with the sale or closure of our retail operations will exceed our current expectations;
•increased competition as a result of continuing consolidation of retailers in the natural product industry and the growth of supernatural chains;
•the
addition or loss of significant customers or material changes to our relationships with these customers;
•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;
•the relatively low margins of our business;
•moderated supplier promotional activity, including decreased forward buying opportunities;
•our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the
Company and to achieve efficiencies and cost savings from these efforts;
•the potential for additional asset impairment charges;
•our sensitivity to inflationary and deflationary pressures;
•the potential for disruptions in our supply chain or our distribution capabilities by circumstances beyond our control, including a health epidemic;
•the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise;
•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 August 1, 2020 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.
As a leading distributor of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services to retailers in the United States and Canada, we believe we are uniquely positioned to provide the broadest array of products and services to customers throughout North America. We offer more than 275,000 products consisting of national, regional and private label brands grouped into six product categories: grocery and general merchandise; produce; perishables and frozen foods; nutritional supplements and sports nutrition; bulk and food service products; and personal care items. Through our October 2018 acquisition of Supervalu,
we are transforming into North America’s premier wholesaler with 58 distribution centers and warehouses representing approximately 30 million square feet of warehouse space. Our business is classified into two reportable segments: Wholesale and Retail; and also includes a manufacturing division and a branded product line division.
Growth Drivers
A key component of our business and growth strategy has been to acquire distribution companies differentiated by product offerings, service offerings and market area. In fiscal 2019, the acquisition of Supervalu accelerated our “build out the store” strategy, diversified our customer base, enabled cross-selling opportunities, expanded our market reach and scale, enhanced our technology, capacity and systems, and is expected to continue to deliver synergies
and accelerate growth. We believe the Supervalu acquisition allows us to better serve our wholesale customers’ needs and compete in the current environment by providing additional warehouse and transportation capacity, which enabled us to provide a broader array of products to our customers. As one of the largest wholesale grocery distributors in North America, and in light of the continued expansion of our distribution network and “build out the store” strategy, we believe we are well positioned to leverage our infrastructure in the current economic and social environment to continue to serve our customers and the communities in which we operate, and are actively pursuing new customers.
We believe our significant scale and footprint will generate long-term shareholder value by positioning us to continue to grow sales of natural, organic, specialty, produce and conventional grocery
and non-food products, including our Private Brands. We also believe we have an opportunity to sell additional services to our customers to help them more efficiently operate their business while leveraging the infrastructure investments we have made. Services we sell to our customers include coupon processing, consumer marketing, retail technology and payments and consumer services. We have realized significant cost and revenue synergies from the acquisition of Supervalu by leveraging the scale and resources of the combined company, cross-selling to our customers, integrating our merchandising offerings into existing warehouses, optimizing our network footprint to lower our cost structure and eliminating redundant administrative costs. We expect to realize additional cost and revenue synergies in the future.
We expect the benefits of our significant scale, product and service offerings
and nationwide footprint to attract new customers, such as Key Food Stores co-operative, Inc. (“Key Food”). On October 6, 2020, we announced UNFI had been selected as the primary grocery wholesaler by Key Food, a Co-Operative of 315 member-owned and corporate grocery stores located in the Northeast and Florida. UNFI’s supply agreement with Key Food has a term of 10 years with expected sales over that time period of approximately $10 billion.
We have been the primary distributor to Whole Foods Market for more than 20 years. We continue to serve as the primary distributor to Whole Foods Market in all of its regions in the United States pursuant to an amended distribution agreement. On March 3, 2021, we entered into an amendment to our distribution agreement dated October
30, 2015. The Amendment extended the term of the distribution agreement from September 28, 2025 to September 27, 2027.
We currently operate 71 Retail grocery stores acquired in the Supervalu acquisition. We intend to maximize the value of these assets while, over time, thoughtfully and economically divesting these stores. However, we no longer expect to divest Retail within one year and, as a result, beginning in the fourth quarter of fiscal 2020, prior period information in our Condensed Consolidated Financial Statements included in this Quarterly Report has been revised to reclassify Retail from discontinued operations to continuing operations from information previously presented in our Quarterly Reports. This change in financial statement presentation resulted in the inclusion of
Retail’s results of operations, financial position, cash flows and related disclosures within continuing operations. Prior periods presented in the Condensed Consolidated Financial Statements have been conformed to the current period presentation, resulting in Retail being presented in continuing operations for all periods.
Our results are impacted by macroeconomic and demographic trends, and changes in the food distribution market structure. Changes in trends
in consumer behavior could impact our results. Over the past several decades, total food expenditures on a constant dollar basis within the United States has continued to increase in total, and the focus in recent decades on natural, organic and specialty foods has benefited the Company; however, consumer spending in the food-away-from-home industry had increased steadily as a percentage of total food expenditures. This trend paused during the 2008 recession, and then continued to increase.
In fiscal 2020, the COVID-19 pandemic, which we refer to as the pandemic, caused a significant increase in food-at-home expenditures as a percentage of total food expenditures. We experienced year-over-year increases in sales and gross profit due to higher Wholesale customer purchases. We expect that food-at-home
expenditures as a percentage of total food expenditures will remain higher than recent years until consumer behaviors return to pre-pandemic patterns. We believe that changes in work being done outside of the traditional office setting will contribute to more food being consumed at home. In addition, the elevated levels of unemployment and underemployment due to the pandemic are expected to persist for some time and even after the near-term impact of the pandemic has passed. In general, economic recessions usually result in higher food-at-home expenditures, which would be expected to continue to benefit our customers and result in higher sales. 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 EasyOptions, a business-verified buyer’s site for retailers, which directly services non-traditional
customers, such as bakeries or yoga studios, and through customers adopting our turnkey eCommerce platform.
Beginning in the third quarter of fiscal 2020, in response to the outbreak of the pandemic, we took actions to respond to the pandemic, support our associates’ safety and well-being and maximize our logistics network to serve the communities we supply. Our business model allows us to leverage sales increases, and provides growth in operating earnings margin. We have been able to leverage the fixed and variable costs of our supply chain network and administrative expenses. We have incurred incremental costs related to the pandemic, including additional costs for safety protocols and procedures at our distribution centers and retail stores. Despite incremental labor and operating costs, additional volume experienced by our distribution network and retail stores drove higher leverage
on fixed facility costs, semi-variable costs and general and administrative expenses.
We expect to continue to benefit from elevated sales and margin buying activity as compared to historical periods prior to the pandemic while food-at-home expenditures as a percentage of total food expenditures remains higher than recent historical periods, and higher on a year-over-year basis. Trends in increased sales and gross margin benefits have lessened since the initial onset of the pandemic. The ultimate impact on our results is dependent upon the severity and duration of the pandemic and any economic downturn, food-at-home purchasing levels and actions taken by governmental authorities and other third parties in response to the pandemic, each of which is uncertain and rapidly changing. Any of these disruptions could adversely impact our business and results of operations. Considerable uncertainty
remains regarding the future impact of the pandemic on our business, which is discussed further in Part I. Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended August 1, 2020.
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.
Within the Pacific Northwest, we completed the consolidation of the volume of five distribution centers and their related supporting off-site storage facilities into two distribution centers during fiscal 2020. We expect to achieve synergies and cost savings through eliminating inefficiencies, including incurring lower operating, shrink and off-site
storage expenses. We also expect that the optimization of the Pacific Northwest distribution network will help deliver meaningful synergies contemplated in the Supervalu acquisition. We expanded the Ridgefield, WA distribution center to enhance customer product offerings, create more efficient inventory management, streamline operations and incorporate greater technology to deliver a better customer experience. We are now supplying customers served by former Pacific Northwest locations from our Centralia, WA, Ridgefield, WA and Gilroy, CA distribution centers. In order to maintain service levels of these higher volume Pacific Northwest distribution centers, we incurred incremental operating costs in the first quarter of fiscal 2021 that we believe temporarily reduced the realization of synergy benefits from this network consolidation.
To support our continued growth on the East coast,
we entered into a new lease agreement for approximately 1.3 million square foot facility. The lease agreement commenced in the third quarter of fiscal 2021 when we took control of the facility to make our tenant improvements. We expect to recognize an operating lease asset and an operating lease liability for this distribution center in the third quarter of fiscal 2021 and expect to begin distribution out of this facility in the second half of calendar 2021.
To support our continued growth within southern California, we began operating a newly leased facility with approximately 1.2 million square feet upon completion of its construction in the fourth quarter of fiscal 2020. This facility provides significant capacity to service our customers in this market. On February 24, 2020, we executed a purchase option with a delayed purchase provision
to acquire the real property of this distribution center, agreeing to pay approximately $151.9 million for the facility, subject to finalization. We expect to engage a real estate partner to monetize the real property of this location, including through a sale-leaseback transaction that would ultimately reduce rents paid for this property compared to current levels, which we expect would occur on or before June 2022.
We continue to evaluate our distribution center network to optimize its performance and expect to incur incremental expenses related to any future network realignment and are working to both minimize these costs and obtain new business to further improve the efficiency of our transforming distribution network.
Distribution Center Sales
In
the second quarter of fiscal 2021, we received $35.1 million from the collection of a short-term note receivable, representing the remaining proceeds related to the fiscal 2020 sale of a distribution center. As we consolidate our distribution network, we may sell additional owned facilities or exit leased facilities.
Operating Efficiency
As part of our “one company” approach, we are in the process of converting to a single national warehouse management and procurement system to integrate our existing facilities, including acquired Supervalu facilities, onto one nationalized platform across the organization. We continue to focus on the automation of our new or expanded distribution centers that are at different stages of construction and implementation. These steps and others are intended to promote
operational efficiencies and improve operating expenses as a percentage of net sales.
Divestiture of Retail Operations
We have announced our intention to thoughtfully and economically divest our retail businesses acquired as part of the Supervalu acquisition in an efficient and economic manner in order to focus on our core wholesale distribution business. During the fourth quarter of fiscal 2020, we determined we no longer met the held for sale criterion for a probable sale to be completed within 12 months for the Cub Foods business and the majority of the remaining Shoppers locations, collectively referred to as the Retail segment. The Retail segment excludes retail banners and stores previously sold or closed. We reviewed our reportable segments and determined we were required to report Retail as a separate
segment. As a result, we revised our Condensed Consolidated Financial Statements to reclassify Retail from discontinued operations to continuing operations. This change in financial statement presentation resulted in the inclusion of Retail’s results of operations, financial position, cash flows and related disclosures within continuing operations. Prior periods presented in the Condensed Consolidated Financial Statements have been conformed to the current period presentation, resulting in Retail being presented in continuing operations for all periods.
The revision of our Condensed Consolidated Statements
of Operations to present Retail within continuing operations resulted in an increase in our consolidated net sales, gross profit and operating expenses, and an increase in consolidated gross profit as a percentage of net sales, which was partially offset by an increase in operating expenses as a percent of net sales. In order to present Retail’s results of operations within continuing operations, Wholesale sales to Retail have been eliminated upon consolidation. The Wholesale segment’s net sales to discontinued operations retail stores are eliminated within the Wholesale segment.
Our strategy remains unchanged and we expect to divest all of our Retail operations in the future. As part of that process we plan to maximize value as part of the divestiture process, including limiting liabilities and stranded costs associated with these divestitures. We expect to obtain ongoing supply relationships with
the purchasers of some of these retail operations, but some reductions in supply volume may result from the divestiture of certain of these retail operations. Actions associated with retail divestitures and potential resulting adjustments to our core cost structure for our wholesale food distribution business, are expected to generate headcount reductions and other costs and charges. These costs and charges, which may be material, include multiemployer plan charges, severance costs, store closure charges, and related costs. A withdrawal from a multiemployer pension plan may result in an obligation to make material payments over an extended period of time, or one-time lump sum payments on a net present value basis. In addition, we are evaluating various options to address our off-balance sheet liability under certain of our multiemployer pension plans, irrespective of the retail divestiture process, which actions may result in significant costs or charges. The extent
of these costs and charges will be determined based on outcomes achieved under the process undertaken to minimize or eliminate the liability for the respective multiemployer pension plan. At this time, however, we are unable to make an estimate with reasonable certainty of the amount or type of costs and charges expected to be incurred in connection with the foregoing actions.
Our discontinued operations as of the end of the second quarter of fiscal 2021 include four Shoppers stores, and for historical periods, results of discontinued operations include the Hornbacher’s and Shop ‘n Save and Shop ‘n Save East retail banners, which were divested in fiscal 2019, and Shoppers stores that were sold or closed in fiscal 2020 and fiscal 2021. In addition, cash flows from discontinued operations include real estate sales related to those historical retail operations. These retail assets have been
classified as held for sale as of the Supervalu acquisition date, and the results of operations, financial position and cash flows directly attributable to these operations are reported within discontinued operations in our Condensed Consolidated Financial Statements for all periods presented. As of the Supervalu acquisition date, retail assets and liabilities were recorded at their estimated fair value less costs to sell, and subsequent to that date, we reviewed the fair value, less cost to sell, of these disposal groups.
We may incur additional costs and charges in the future related to the divestiture of Retail if these locations are subsequently sold, indicators exist that the business may be impaired, or if we incur employee-related charges or wind-down costs.
Professional Services Agreements
In
connection with the sale of Save-A-Lot on December 5, 2016, Supervalu entered into a services agreement (the “Services Agreement”) with Moran Foods, LLC, the entity that operates the Save-A-Lot business. Pursuant to the Services Agreement, we provide certain technical, human resources, finance and other operational services to Save-A-Lot for a term of five years, on the terms and subject to the conditions set forth therein. The initial annual base charge under the Services Agreement is $30 million, subject to adjustments. During fiscal 2021, we expect to earn less than $20 million under this agreement. We expect that services provided under the Services Agreement will wind down at or near the end of the initial term in December 2021. At that time, we would lose the revenue associated with this agreement, and if we are not able to eliminate fixed or variable costs associated with servicing this agreement concurrent
with the decline in revenue, we would incur a decrease in operating profit.
Impact of Inflation or Deflation
We monitor product cost inflation and deflation and evaluate whether to absorb cost increases or decreases, or pass on pricing changes to our customers. We experienced a mix of inflation and deflation across product categories during the second quarter of fiscal 2021. In the aggregate across all of our legacy businesses and taking into account the mix of products, management estimates our businesses experienced cost inflation of less than one percent in the second quarter of fiscal 2021. Cost inflation and deflation estimates are based on individual like items sold during the periods being compared. Changes in merchandising, customer buying habits and competitive pressures create inherent difficulties
in measuring the impact of inflation and deflation on Net sales and Gross profit. Absent any changes in units sold or the mix of units sold, deflation has the effect of decreasing sales. Under the 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.
Business Performance Assessment and Composition of Condensed Consolidated Statements of Operations
Net
sales
Our net sales consist primarily of sales of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services to retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue. Net sales also include amounts charged by us to customers for shipping and handling and fuel surcharges.
Cost of sales and Gross profit
The principal components of our cost of sales include the amounts paid to suppliers for product sold, plus the cost of transportation necessary to bring the product to, or move product between, our various distribution centers, partially offset by consideration received from
suppliers in connection with the purchase or promotion of the suppliers’ products. Cost of sales also includes amounts incurred by us at our manufacturing subsidiary, Woodstock Farms Manufacturing, for inbound transportation costs. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses.
Operating expenses
Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation, and amortization expense. These expenses relate to warehousing and delivery expenses including purchasing, receiving, selecting and outbound transportation expenses.
Restructuring,
acquisition and integration expenses
Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, change-in-control related charges, facility closure asset impairment charges and costs, stock-based compensation acceleration charges, and acquisition and integration expenses. Integration expenses include 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, interest expense on finance and direct finance lease obligations, and amortization of financing
costs and discounts.
Net periodic benefit income, excluding service cost
Net periodic benefit income, excluding service cost reflects the recognition of expected returns on benefit plan assets in excess of interest costs.
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 are items that do not reflect management’s assessment of on-going business performance.
We believe Adjusted EBITDA is useful to investors and financial institutions because it provides additional understanding of 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 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 Total other expense, net and (Benefit) provision for income taxes, plus Depreciation and
amortization calculated in accordance with GAAP, plus non-GAAP adjustments for Share-based compensation, Restructuring, acquisition and integration related expenses, Goodwill and asset impairment charges, Loss (gain) on sale of assets, certain legal charges and gains, certain other non-cash charges or items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in a manner consistent with the results of continuing operations, outlined above.
The
following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods indicated. We have revised the following table for the presentation of Retail within continuing operations discussed in Note 1—Significant Accounting Policies in Part II, Item 8 of the Annual Report on Form 10-K.
The following table reconciles Adjusted EBITDA to Net income (loss) from continuing operations and to Income (loss) from discontinued operations, net of tax.
Adjustments
to continuing operations net income (loss):
Less net income attributable to noncontrolling interests
(1,605)
(650)
(2,972)
(1,169)
Total other expense, net
32,143
44,339
83,445
82,264
Provision
(benefit) for income taxes
16,392
(12,808)
15,401
(79,763)
Depreciation and amortization
66,534
69,219
143,723
144,360
Share-based
compensation
12,673
5,134
26,822
9,059
Goodwill and asset impairment charges(1)
—
—
—
425,405
Restructuring,
acquisition and integration related expenses(2)
17,783
36,522
34,211
51,194
Loss on sale of assets
399
524
169
434
Note
receivable charges(3)
—
—
—
12,516
Legal (settlement income) reserve charge(4)
—
(654)
—
1,196
Other
retail expense(5)
1,394
—
3,003
—
Adjusted EBITDA of continuing operations
202,475
127,642
359,592
244,078
Adjusted
EBITDA of discontinued operations(6)
3,820
3,468
5,660
8,726
Adjusted EBITDA
$
206,295
$
131,110
$
365,252
$
252,804
Income
(loss) from discontinued operations, net of tax
$
3,803
$
(16,076)
$
5,099
$
(12,050)
Adjustments to discontinued operations net income:
Total
other expense, net
—
(3)
—
(64)
Benefit for income taxes
(898)
(4,635)
(372)
(3,342)
Restructuring,
store closure and other charges, net
915
24,182
933
24,182
Adjusted EBITDA of discontinued operations
$
3,820
$
3,468
$
5,660
$
8,726
(1)Fiscal
2020 reflects a goodwill impairment charge attributable to a reorganization of our reporting units and a sustained decrease in market capitalization and enterprise value of the Company, resulting in a decline in the estimated fair value of the U.S. Wholesale reporting unit. In addition, this charge includes a goodwill finalization charge attributable to the Supervalu acquisition and an asset impairment charge.
(2)Fiscal 2021 primarily reflects costs associated with advisory and transformational activities as we position our business for further value-creation post Supervalu acquisition. Fiscal 2020 primarily reflects integration charges, closed property reserve charges and administrative and operational restructuring costs. 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)Reflects reserves and charges for notes receivable issued by the Supervalu business prior to its acquisition to finance the purchase of stores by its customers.
(4)Reflects a charge to settle a legal proceeding, net of income received to settle a separate legal proceeding.
(5)Reflects expenses associated with event-specific damages to certain retail stores.
(6)We believe the inclusion of discontinued operations results within Adjusted EBITDA provides investors a meaningful measure of total performance.
(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 for information regarding the recast of sales by customer channel to align with the current period presentation.
Second Quarter
Our net sales for the second quarter of fiscal 2021 increased approximately 7.1% from the second quarter of fiscal 2020. The increase in net sales was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Chains net sales increased primarily due
to growth in sales to existing customers, including demand for center store and natural products driven by customers’ response to the pandemic, partially offset by lower sales from customers and stores lost prior to the pandemic.
Independent retailers net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers response to the pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Supernatural net sales increased primarily due to increased sales related to the pandemic, growth in existing and new product categories, and increased sales to existing and new stores, partially offset by the impact of categories that have been adversely impacted by the pandemic, such
as bulk and ingredients used for prepared foods. 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’s net sales increased primarily due to a 15.3% increase in identical store sales from higher average basket sizes related to the pandemic. 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. The increase in Retail sales included the benefit of a 187% increase in eCommerce sales at
Cub Foods.
Other net sales increased primarily due to higher eCommerce sales, which were primarily offset by a 41% (or $42 million) decline in sales to food service customers resulting from the lower purchases due to the pandemic.
Year-to-Date
Our net sales for fiscal 2021 year-to-date increased approximately 6.5% from fiscal 2020 year-to-date. The increase in net sales was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Chains
net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers’ response to the pandemic, partially offset by lower sales from customers and stores lost prior to the pandemic.
Independent retailers net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers response to the pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Supernatural
net sales increased primarily due to increased sales related to the pandemic, growth in existing and new product categories, and increased sales to existing and new stores, partially offset by the impact of categories that have been adversely impacted by the pandemic, such as bulk and ingredients used for prepared foods.
Retail’s net sales increased primarily due to a 15.5% increase in identical store sales from higher average basket sizes related to the pandemic. The increase in Retail sales included the benefit of a 191% increase in eCommerce sales at Cub Foods.
Other net sales decreased primarily due to a 41% (or $90 million) decline in sales to food service customers resulting from the lower purchases due to the pandemic, which were partially offset by higher eCommerce sales.
Cost
of Sales and Gross Profit
Our gross profit increased $73.0 million, or 8.0%, to $990.4 million for the second quarter of fiscal 2021, from $917.3 million for the second quarter of fiscal 2020. Our gross profit as a percentage of net sales increased to 14.38% for the second quarter of fiscal 2021 compared to 14.26% for the second quarter of fiscal 2020. The increase in gross profit dollar growth was primarily driven by higher Wholesale and Retail sales volume. The 12 basis point increase in gross profit rate was driven by an increase from Retail, which contributed approximately 0.13% to the growth in the consolidated gross margin rate as a result of lower Retail promotional spending and the Retail segment representing a greater percentage of total net sales. Wholesale and the remaining business’s gross margin rate was approximately flat and included the benefits of lower shrink offset
by lower levels of supplier-related income. Included in gross margin for the second quarter of fiscal 2020 was inventory shrink expense of approximately $4.2 million, or 0.07% of net sales, associated with customer bankruptcies.
Our gross profit increased $132.3 million, or 7.3%, to $1,956.9 million for fiscal 2021 year-to-date, from $1,824.5 million for fiscal 2020 year-to-date. Our gross profit as a percentage of net sales increased to 14.43% for fiscal 2021 year-to-date compared to 14.33% for fiscal 2020 year-to-date. The increase in gross profit dollar growth for fiscal 2021 year-to-date when compared to fiscal 2020 year-to-date was primarily driven by higher Wholesale and Retail sales volume. The increase in gross profit rate was driven by a mix increase from Retail resulting from lower promotional spending, and the Retail segment representing a greater percentage of total net sales.
In addition, gross profit included lower levels of supplier-related income, partially offset by the benefits of lower shrink.
Operating Expenses
Operating expenses increased $4.1 million, or 0.5%, to $866.9 million, or 12.59% of net sales, for the second quarter of fiscal 2021 compared to $862.7 million, or 13.41% of net sales, for the second quarter of fiscal 2020. Operating expenses in the second quarter of fiscal 2020 included $28.9 million of bad debt expense associated with customer bankruptcies. The remaining decrease in operating expenses as a percent of net sales resulted from leveraging fixed operating expenses over higher net sales and lower benefit costs. Total operating expenses also included share-based compensation expense of $12.7 million and $5.1 million for the second quarters of fiscal
2021 and 2020, respectively.
Operating expenses increased $21.4 million, or 1.2%, to $1,767.8 million, or 13.04% of net sales, for fiscal 2021 year-to-date compared to $1,746.4 million, or 13.72% of net sales, for fiscal 2020 year-to-date. Operating expenses in fiscal 2020 year-to-date included $28.9 million of bad debt expense associated with customer bankruptcies, and $18.8 million of charges and expenses, primarily related to customer notes receivable, surplus property depreciation and a legal reserve charge. The remaining decrease in operating expenses as a percent of net sales was driven by leveraging fixed operating expenses over higher net sales and lower benefit costs, which was partially offset by higher operating costs related to starting up three distribution centers. Total operating expenses also included share-based compensation expense of $26.8 million and $9.1 million for
fiscal 2021 and 2020 year-to-date, respectively.
Goodwill and asset impairment charges of $425.4 million were recorded for fiscal 2020 year-to-date, which reflects $421.5 million from an impairment charge on the remaining goodwill attributable to the U.S. Wholesale goodwill reporting unit, $2.5 million related to purchase accounting adjustments to finalize the opening balance sheet goodwill and $1.4 million of other asset impairment charges.
Restructuring,
Acquisition and Integration Related Expenses
Restructuring, acquisition and integration related expenses were $17.8 million for the second quarter of fiscal 2021, which included $14.7 million of restructuring and integration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value creation post Supervalu acquisition and $3.1 million of closed property charges and costs. Expenses for the second quarter of fiscal 2020 were $36.5 million, which included $20.4 million of closed property charges and costs primarily related to lease asset impairments on Shoppers store and surplus properties exits, $15.4 million of integration related costs primarily related to a multiemployer pension plan withdrawal obligation resulting from distribution center consolidation and $0.7 million of restructuring costs.
Restructuring,
acquisition and integration related expenses were $34.2 million for fiscal 2021 year-to-date, which included $29.4 million of restructuring and integration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value creation post Supervalu acquisition and $4.8 million of closed property charges and costs. Expenses for fiscal 2020 year-to-date were $51.2 million, which included $24.7 million of integration costs including a multiemployer pension plan withdrawal obligation resulting from distribution center consolidation and a charge for an off-site storage contract, $24.0 million closed property charges and costs primarily related to lease asset impairments on surplus properties and Shoppers store lease exits and $2.5 million of restructuring costs.
We
expect to incur additional costs associated with advisory and integration activities, and distribution center integration costs throughout fiscal 2021 related to our operational restructuring to achieve cost synergies and supply chain efficiencies within continuing operations.
Operating Income (Loss)
Reflecting the factors described above, operating income increased $87.8 million to $105.3 million for the second quarter of fiscal 2021, compared to $17.5 million for the second quarter of fiscal 2020. The operating income increase was primarily driven by an increase in gross profit in excess of operating expenses and lower Restructuring, acquisition and integration related expenses discussed above.
Reflecting the factors
described above, operating income increased $553.6 million, to $154.6 million for fiscal 2021 year-to-date, from an operating loss of $398.9 million for fiscal 2020 year-to-date. The increase in operating income was primarily driven by the fiscal 2020 goodwill impairment charge, an increase in gross profit in excess of operating expenses and lower Restructuring, acquisition and integration related expenses discussed above.
The increase in net periodic benefit income, excluding service costs in the second quarter of fiscal 2021 and year-to-date fiscal 2021 reflects the recognition of lower interest costs due to a lower discount rate utilized in the measurement of pension liabilities.
The decrease in interest expense on long-term debt, net of capitalized interest, in the second quarter of fiscal 2021 and year-to-date fiscal 2021 was driven by lower amounts of outstanding debt.
The increase in loss on debt extinguishment costs primarily reflects the acceleration of unamortized debt issuance costs and original issue discounts related to mandatory and voluntary prepayments on the Term Loan Facility made in the second quarter of fiscal
2021 and fiscal 2021 year-to-date. Refer to Note 8—Long-Term Debt for further information.
The increase in interest expense on finance leases in the second quarter of fiscal 2021 and year-to-date fiscal 2021 primarily reflects interest related to a distribution center for which we executed a purchase option with a delayed purchase provision.
Provision (Benefit) for Income Taxes
The effective income tax rate for continuing operations was an expense of 22.4% on pre-tax income compared to a benefit of 47.8% on pre-tax losses for the second quarters of fiscal 2021 and 2020, respectively. The change in the effective income tax rate for the second quarter of fiscal 2021 was primarily driven by a pre-tax loss of approximately
$26.8 million in the second quarter of fiscal 2020 compared to pre-tax income of approximately $73.2 million in the second quarter of fiscal 2021. In addition, the change in the rate is partially driven by a discrete tax benefit of approximately $2.8 million in the second quarter of fiscal 2021 related to the release of unrecognized tax positions versus a discrete tax benefit of approximately $0.5 million for this item in the second quarter of fiscal 2020. The tax provision had $3.1 million and $0.1 million of discrete tax benefits, including those mentioned above, for the second quarters of fiscal 2021 and fiscal 2020, respectively.
The effective income tax rate for continuing operations was an expense of 21.6% on pre-tax income compared to a benefit of 16.6% on pre-tax losses for fiscal 2021 year-to-date and fiscal 2020 year-to-date, respectively. The change in the effective income
tax rate was primarily driven by a discrete tax benefit in fiscal 2021 year-to-date for employee stock vestings versus a discrete tax expense for this item in fiscal 2020 year-to-date, as well as a discrete tax benefit for the release of unrecognized tax positions in fiscal 2021 year-to-date versus a discrete tax expense for this item in fiscal 2020 year-to-date. In addition, fiscal 2020 year-to-date was impacted by a goodwill impairment charge that did not repeat in fiscal 2021 year-to-date. The tax provision had $3.5 million and $64.4 million of discrete tax benefits for fiscal 2021 and fiscal 2020 year-to-date, respectively.
Income (Loss) from Discontinued Operations, Net of Tax
The results of operations for the second quarter of fiscal 2021 reflect net sales of $23.0 million for which we recognized
$7.2 million of gross profit and Income (loss) from discontinued operations, net of tax of $3.8 million. Net sales and gross profit of discontinued operations decreased $52.1 million and $11.3 million, respectively, for the second quarter of fiscal 2021 as compared to the second quarter of fiscal 2020 primarily due to a lower operating store base due to closures and sales that occurred in fiscal 2020, which was partially offset by an increase in identical store sales results driven by the impacts of the pandemic.
The results of operations for fiscal 2021 year-to-date reflect net sales of $47.8 million for which we recognized $15.3 million of gross profit and Income (loss) from discontinued operations, net of tax of $5.1 million. Net sales and gross profit of discontinued operations decreased $122.9 million and $33.8 million, respectively, for the fiscal 2021 year-to-date as compared
to fiscal 2020 year-to-date primarily due to a lower operating store base due to closures and sales that occurred in fiscal 2020 year-to-date, which was partially offset by an increase in identical store sales results driven by the impacts of the pandemic. Discontinued operations for fiscal 2020 year-to-date included $24.2 million of charges and costs primarily related to store closures charges and expenses, and asset impairment charges related to exited locations.
Refer to the section above Executive Overview—Divestiture of Retail Operations and to Note 16—Discontinued Operations in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional financial information regarding these discontinued operations.
Net Income (Loss) Attributable to United Natural Foods, Inc.
Reflecting
the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $59.0 million, or $1.00 per diluted common share, for the second quarter of fiscal 2021, compared to a net loss of $30.7 million, or $0.57 loss per diluted common share, for the second quarter of fiscal 2020.
Reflecting the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $57.9 million, or $0.98 per diluted common share, for fiscal 2021 year-to-date, compared to a net loss of 414.6 million, or $7.77 loss per diluted common share, for fiscal
2020 year-to-date, which was driven lower due to goodwill impairment charges.
As described in more detail in Note 10—Share-Based Awards in Part I, Item I of this Quarterly Report on Form 10-Q, in fiscal 2021 year-to-date, we granted restricted stock units and performance share units representing a right to receive an aggregate of 2.6 million shares of common stock under our 2020 Equity Incentive Plan.
LIQUIDITY AND CAPITAL RESOURCES
Highlights
•Total liquidity as of January 30,
2021 was $1.16 billion and consisted of the following:
◦Unused credit under our ABL Credit Facility was $1,117.8 million, which decreased $117.0 million from $1,234.8 million as of August 1, 2020, primarily due to an incremental borrowing under the ABL Credit Facility in the second quarter of fiscal 2021 to fund the voluntary prepayment of $150.0 million on the Term Loan Facility.
◦Cash and cash equivalents was $40.5 million, which decreased $6.5 million from $47.0 million as of August 1, 2020.
•Our total debt decreased $110.4 million to $2,387.2 million as of January 30, 2021 from $2,497.6 million as of
August 1, 2020, primarily driven by net positive cash flows from operating activities, partially offset by cash capital expenditures, during fiscal 2021 year-to-date.
•Subsequent to the end of the second quarter of fiscal 2021, we amended our Term Loan Agreement which, among other things, reduced the applicable margin for LIBOR and base rate loans under the Term Loan Facility by 75 basis points.
•In the second quarter of fiscal 2021, we made a voluntary prepayment of $150.0 million on the Term Loan Facility funded with incremental borrowings under the ABL Credit Facility that will reduce 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 2021,
if any, which would be due in fiscal 2022.
•In the first quarter of fiscal 2021, we issued $500.0 million of unsecured 6.750% Senior Notes due October 15, 2028 (the “Senior Notes”) and utilized the net proceeds and borrowings under the ABL Credit Facility to make a $500.0 million prepayment on our Term Loan Facility. In addition, during the first quarter of fiscal 2021, the Company made $108.0 million of additional repayments under the Term Loan Facility, including $72.0 million related to cash flow generated in fiscal 2020, as required under the Term Loan Agreement and a voluntary prepayment of $36.0 million with incremental borrowings under the ABL Credit Facility. Other debt maturities are expected to be $6.5 million in fiscal 2021. We are also obligated
to make payments to reduce finance lease obligations. 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.
•We expect to be able to fund near-term debt maturities through fiscal 2023 with internally generated funds, proceeds from asset sales or borrowings under the ABL Credit Facility, which expires in fiscal 2024.
•Working capital increased $20.2 million to $1,355.1 million as of January 30, 2021 from $1,334.8 million as of August 1, 2020, primarily due to a reduction of the current portion of long-term debt resulting from the Term Loan Facility Excess Cash Flow prepayment described above.
Sources
and Uses of Cash
We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds and sale of surplus and/or non-core assets. A significant reduction in operating earnings or the incurrence of operating losses could have a negative impact on our operating cash flow, which may limit our ability to pay down our outstanding indebtedness as planned. Our credit facilities are secured by a substantial portion of our total assets.
Our primary sources of liquidity are from internally generated funds and from borrowing capacity under our credit facilities. Our short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to satisfy debt obligations and fund capital expenditures as opportunities arise.
Our continued access to short-term and long-term financing through credit markets depends on numerous factors, including the condition of the credit markets and our results of operations, cash flows, financial position and credit ratings.
Primary uses of cash include debt service, capital expenditures, working capital maintenance and income tax payments. We typically finance working capital needs with cash provided from operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories.
We
currently do not pay a dividend on our common stock, and have no current plans to do so. In addition, we are limited in the aggregate amount of dividends that we may pay under the terms of our Term Loan Facility, 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.
Long-Term Debt
During fiscal 2021 year-to-date, we borrowed a net $128.3 million under the ABL Credit Facility, repaid $758.0 million on the Term Loan Facility related to mandatory prepayments and voluntary prepayments, and issued $500.0 million of
Senior Notes. Refer to Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for a detailed discussion of the provisions of our credit facilities and certain long-term debt agreements and additional information.
Our Term Loan Agreement and Senior Notes do not include any financial maintenance covenants. Our ABL Loan Agreement subjects us to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) of at least 1.0 to 1.0 calculated at the end of each of our fiscal quarters on a rolling four quarter basis, if the adjusted aggregate availability (as defined in the ABL Loan Agreement) is ever less than the greater of (i) $235.0 million and (ii) 10% of the aggregate borrowing base. We have not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement, including through the filing date of this Quarterly Report. The Term Loan Agreement,
ABL Loan Agreement and Senior Notes contain certain operational and informational covenants customary for debt securities of these types that limit the ability of the Company and its restricted subsidiaries to, among other things, incur debt, declare or pay dividends or make other distributions to stockholders of the Company, 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 assets of the Company and its subsidiaries 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 loan agreement, and all amounts due thereunder may become immediately due and payable.
Derivatives and Hedging Activity
We enter into interest rate swap contracts from time to time to mitigate our exposure to changes in market interest rates as part of our overall strategy to manage our debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates. Interest rate swap contracts are entered into
for periods consistent with related underlying exposures and do not constitute positions independent of those exposures.
As of January 30, 2021, we had an aggregate of $1,485.0 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 April 2022 and October 2025. The fair value of these interest rate derivatives represents a total net liability of $101.2 million and are subject to volatility based on changes in market interest rates. See Note 7—Derivatives in Part I, Item 1 of this Quarterly Report on Form
10-Q for additional information.
In the first quarter of fiscal 2021, we paid $11.3 million to terminate $954.0 million of notional value interest rate swaps, $504.0 million of which were effective interest swaps and $450.0 million of which were forward starting. The termination payment reflects 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.
From time to time, we enter into fixed price fuel supply agreements and foreign currency hedges. As of January 30, 2021, we had fixed
price fuel contracts outstanding and foreign currency forward agreements outstanding. Gains and losses and the outstanding net liability from these arrangements are insignificant.
Our capital expenditures for fiscal 2021 year-to-date were $91.5 million, compared to $91.1 million for fiscal 2020 year-to-date, an increase of $0.4 million. In fiscal
2021 year-to-date, our capital expenditures principally included information technology and supply chain expenditures. Fiscal 2021 capital spending is expected to be in the range of $250 million to $300 million and include projects that optimize and expand our distribution network and our technology platform. Longer term, capital spending is expected to be at or below 1.0% of net sales. We expect to finance requirements with cash generated from operations and borrowings under our ABL Credit Facility. Future investments may be financed through long-term debt or borrowings under our ABL Credit Facility.
Cash Flow Information
The following summarizes our Condensed Consolidated Statements of Cash Flows:
Net cash provided by operating activities of continuing operations
$
205,675
$
34,730
$
170,945
Net
cash used in investing activities of continuing operations
(51,705)
(80,270)
28,565
Net cash (used in) provided by financing activities of continuing operations
(163,492)
15,649
(179,141)
Net cash provided by discontinued operations
2,791
26,937
(24,146)
Effect
of exchange rate on cash
265
19
246
Net decrease in cash and cash equivalents
(6,466)
(2,935)
(3,531)
Cash and cash equivalents, at beginning of period
47,117
45,263
1,854
Cash
and cash equivalents, at end of period
$
40,651
$
42,328
$
(1,677)
The increase in net cash provided by operating activities of continuing operations for fiscal 2021 year-to-date compared to fiscal 2020 year-to-date was primarily due to lower cash utilized to build inventories, and higher earnings before taxes, depreciation and amortization, and impairments.
The decrease in net cash used in investing activities
of continuing operations for fiscal 2021 year-to-date compared to fiscal 2020 year-to-date was primarily due to higher cash proceeds for the sale of property and equipment.
The increase in net cash used in financing activities of continuing operations for fiscal 2021 year-to-date compared to fiscal 2020 year-to-date was primarily due to higher payments of long-term debt attributable to the mandatory and voluntary prepayments on the Term Loan Facility, partially offset by new borrowings from the Senior Notes.
The decrease in cash flows from discontinued operations for fiscal 2021 year-to-date compared to fiscal 2020 year-to-date was primarily due to lower investing activities cash flow from the sale of property.
Other
On
October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200.0 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 $200.0 million. We did not purchase any shares of our common stock in fiscal 2021 and 2020 year-to-date pursuant to the share repurchase program. As of January 30, 2021, we have $175.8 million remaining authorized under the share repurchase program. We do not expect to purchase shares under the share repurchase program during fiscal 2021. Additionally, our ABL Credit Facility, Term Loan Facility, and Senior Notes contain terms that limit our ability to repurchase shares of common stock above certain levels unless certain conditions and financial tests are met.
Pension and Other Postretirement Benefit Obligations
In fiscal 2021, no pension contributions are required to be made under either the SUPERVALU Inc. Retirement Plan or the Unified Grocers, Inc. Cash Balance Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”). We anticipate fiscal 2021 non-qualified pension contributions and other postretirement benefit plan contributions to be approximately $5.3 million. 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.
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.
Wholesale’s net sales increased primarily due to growth in sales to existing customers in the Chains, Independent retailers and Supernatural channels. Sales growth was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Retail’s net sales increased primarily due to a 15.3% increase in identical store sales from higher average basket sizes related to the pandemic.
The increase in eliminations net sales was
driven by higher Wholesale sales to Retail to support Retail’s continued sales growth.
Year-to-Date
Wholesale’s net sales increased primarily due to growth in sales to existing customers in the Chains, Independent retailers and Supernatural channels. Sales growth was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Retail’s
net sales increased primarily due to a 15.5% increase in identical store sales from higher average basket sizes related to the pandemic.
The increase in eliminations net sales was driven by higher Wholesale sales to Retail to support Retail’s continued sales growth.
Adjusted EBITDA
Second Quarter
Wholesale’s Adjusted EBITDA increased 82.3% for the second quarter of fiscal 2021 from the second quarter of fiscal 2020. The increase was driven by leveraged sales growth. Wholesale’s gross profit dollar growth for the second quarter of fiscal 2021 was $49.5 million and gross profit rate was flat to the second quarter of fiscal 2020; however,
it included the benefits of lower shrink offset by lower levels of supplier-related income. Wholesale’s operating expense, excluding depreciation and amortization and stock-based compensation, decreased $34.8 million driven by $28.9 million of lower bad debt expense associated with customer bankruptcies. Wholesale’s operating expense rate decreased 117 basis points primarily driven by leveraging fixed and variable costs, and lower bad debt expense. Wholesale depreciation expense decreased $7.0 million compared to last year.
Retail’s Adjusted EBITDA increased 121.6% for the second quarter of fiscal 2021 from the second quarter of fiscal 2020. The increase was driven by leveraged sales growth from increases in food-at-home purchases that drove sales at our stores. Wholesale’s gross profit dollar growth for the second quarter of fiscal 2021 was $26.3 million and gross profit rate increased
76 basis points from lower promotional activity. Retail’s operating expense increased $11.4 million, excluding depreciation and amortization and stock-based compensation, and operating expense rate decreased 133 basis points driven by fixed and variable cost leveraging. Retail’s depreciation and amortization expense increased $5.9 million primarily related to assets previously classified as held for sale that were moved to continuing operations in the fourth quarter of fiscal 2020 for which we are required to begin recording depreciation and amortization expense.
Year-To-Date
Wholesale’s Adjusted EBITDA increased 48.4% for fiscal 2021 year-to-date from fiscal 2020 year-to-date. The increase was driven by leveraged sales growth, which was partially offset by higher operating costs related to starting up
three distribution centers. Gross profit dollar growth for fiscal 2021 year-to-date was $77.8 million and gross profit rate decreased 13 basis points driven by lower supplier income, partially offset by lower shrink. Wholesale’s operating expense increased $23.2 million, excluding depreciation and amortization and stock-based compensation. Wholesale’s operating expense rate decreased 80 basis points primarily driven by leveraging fixed and variable costs, and lower bad debt expense, which was partially offset by higher operating costs related to starting up three distribution centers. Wholesale depreciation expense decreased $7.2 million.
Retail’s Adjusted EBITDA increased 125.6% for fiscal 2021 year-to-date from fiscal 2020 year-to-date. The increase was driven by leveraged sales growth from increases in food-at-home purchases that drove sales at our stores. Gross profit dollar growth
for fiscal 2021 year-to-date was $53.4 million and gross profit rate increased 87 basis points from lower promotional activity. Retail’s operating expense increased $23.9 million, excluding depreciation and amortization and stock-based compensation, and operating expense rate decreased 125 basis points driven by fixed and variable cost leveraging. Retail’s depreciation and amortization expense increased $11.9 million primarily related to assets previously classified as held for sale that were moved to continuing operations in the fourth quarter of fiscal 2020 for which we are required to begin recording depreciation and amortization expense.
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Off-Balance Sheet Arrangements
Guarantees and Contingent Liabilities
We have outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of January 30, 2021. We are contingently liable for leases that have been assigned to various parties in connection with facility closings and dispositions. We are also a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters in the ordinary course
of business, which indemnities may be secured by operation of law or otherwise. Refer to Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements under the caption Guarantees and Contingent Liabilities in Part I, Item I of this Quarterly Report on Form 10-Q for further information regarding our outstanding guarantees and contingent liabilities.
Multiemployer Benefit Plans
We contribute to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining
the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Trustees are appointed in equal number by employers and unions that are parties to the collective bargaining agreement. Based on the assessment of the most recent information available from the multiemployer plans, we believe that most of the plans to which we contribute are underfunded. We are only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability to us.
Our contributions can fluctuate from year to year due to store closures, employer participation within the respective plans and reductions in headcount. Our contributions to these plans could increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of our collective
bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, we could trigger a partial or complete withdrawal that would require us to record a withdrawal liability. 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 $52 million in fiscal 2020. In fiscal 2021, we expect to contribute approximately $45 million related to continuing and discontinued operations contributions to the multiemployer pension plans, subject to the outcome of collective bargaining and capital market
conditions. Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP. Any triggered withdrawal obligation could result in a material charge and payment obligations that would be required to be made over an extended period of time.
We also make contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating expenses could increase in the future.
Refer to
Note 14—Benefit Plans in Part II, Item 8 of the Annual Report on Form 10-K for the fiscal year ended August 1, 2020 for additional information regarding the plans in which we participate.
Contractual Obligations
Except as otherwise disclosed in Note 8—Long-Term Debt 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 2020. Refer to Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended August 1, 2020 for additional
information regarding the Company’s contractual obligations.
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 on Form 10-K for the fiscal year ended August 1, 2020.
Seasonality
Generally, we do not experience any material seasonality. However, our inventory levels and related demand for certain products of a seasonal nature may be influenced by holidays, changes in seasons or other annual events. In addition, 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.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk results primarily from fluctuations in interest rates on our borrowings and our interest rate swap agreements, and price increases in diesel fuel. Except as described in Note 7—Derivatives and Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q, which are incorporated herein, there have been no other material changes to our exposure to market risks from those disclosed in our Annual Report on Form 10-K for the fiscal year ended August 1, 2020.
Item 4. Controls and Procedures
(a) Evaluation
of disclosure controls and procedures. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective.
(b) Changes in internal controls. There has been no change in our internal control over financial reporting that occurred during the second quarter of fiscal 2021 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, pension plans, unfair labor practices, labor union disputes, supplier, customer and service provider contract
terms, real estate and antitrust. Other than as set forth below and 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.
In 2016, as part of a hazardous waste enforcement campaign by the California Attorney General’s Office and local district attorneys, Unified Grocers received a subpoena from the Yolo County District Attorney regarding hazardous waste management and storage at its Stockton and Commerce, California distribution centers. We have provided requested documents and cooperated fully with the investigation. On May 24, 2018, the District Attorney toured the Stockton distribution center and generally found the distribution
center to be in compliance, and minor items noted regarding labeling have been addressed. In the second quarter of fiscal 2021, we negotiated a settlement with the District Attorney, which includes the payment of an immaterial amount for penalties and costs as well as certain agreed upon additional reporting and compliance obligations. The settlement is memorialized in a Stipulation for Entry of Final Judgment and Permanent Injunction signed by all parties. The Court entered the order approving the final judgment and injunction on December 10, 2020.
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 on Form 10-K for the fiscal year ended August 1, 2020.
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 $200.0 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 $200.0 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 do not expect to purchase shares under the share repurchase program during fiscal 2021. We may also implement all or part of the repurchase program pursuant to a plan or plans meeting the conditions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
(in
millions, except shares and per share amounts)
Total Number of Shares Purchased(2)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs(3)
(1)The
reported periods conform to our fiscal calendar.
(2)These amounts represent the deemed surrender by participants in our compensatory stock plans of 2,322 shares of our common stock to cover taxes from the vesting of restricted stock awards and restricted stock units granted under such plans.
(3)As of January 30, 2021, there was approximately $175.8 million that may yet be purchased under the share repurchase program. There were no share repurchases under the share repurchase program in the second quarter of fiscal 2021.
Item 5. Other Information
On
March 9, 2021, we entered into the Second Amendment to Mr. Spinner’s Amended and Restated Employment Agreement (“Employment Agreement”), which had been amended pursuant to the First Amendment entered into on February 6, 2020 (“First Amendment”). In the First Amendment, Mr. Spinner agreed to serve as the Company’s CEO until the earlier of July 31, 2021, or the appointment of a new CEO as his successor. The First Amendment set forth certain payments to Mr. Spinner in connection with his agreement to extend the Employment Agreement significantly beyond Mr. Spinner’s desired retirement date.
With the active continuation of the
Company’s search for a CEO to replace Mr. Spinner, which, as previously announced, includes both internal and external candidates, the Board requested and Mr. Spinner has agreed, to extend the date of his services as either CEO, or after a new CEO is appointed, to provide consultancy services, as applicable, for an additional three months from the end of his current Employment Agreement (July 31, 2021), to October 31, 2021.
In particular, the Second Amendment provides that Mr. Spinner will continue to serve as CEO until his successor is appointed (the “Transition Date”), but no later than October 31, 2021; and, Mr. Spinner will, at the Company’s
discretion, continue to serve as an executive management and board advisor for twelve months after the Transition Date. In exchange for Mr. Spinner agreeing to serve as the Company’s CEO until the Transition Date, and thereafter to provide consultancy services to the Company, if applicable, until at least October 31, 2021, and, at the Company’s discretion, for up to twelve months after the Transition Date, the Company has agreed, that:
a.with respect to the
Company’s 2021 fiscal year, Mr. Spinner’s annual cash incentive compensation (short-term bonus) that otherwise would be prorated under the First Amendment if Mr. Spinner ceased being CEO prior to July 31, 2021, will not be prorated regardless of when the Transition Date occurs;
b.with respect to the Company’s 2022 fiscal year, provided that Mr. Spinner is serving as CEO on or after August 1, 2021, Mr. Spinner’s 2022 cash incentive compensation shall be prorated, on an annual basis based on the number of full calendar months elapsed in the fiscal year between August 1, 2021 and the Transition Date (three months maximum to October
31, 2021), based on Mr. Spinner’s cash incentive target of $1,800,000;
c.Mr. Spinner’s fiscal 2021 equity award under the long-term incentive plan, granted in October of 2020, that otherwise would be prorated under the First Amendment if Mr. Spinner ceased being CEO prior to October 12, 2021, will not be prorated regardless of when the Transition Date occurs; and
d.as of the Transition Date, when Mr. Spinner ceases to be CEO, and begins to provide consultant services, his compensation as CEO shall end, except as described above, and he will receive, on an annualized basis, $250,000 in consideration for the consultant services.
The Second Amendment also expressly provides that Mr. Spinner shall not be eligible for any additional equity grants under the long-term incentive plan whatsoever, for fiscal year 2022 or otherwise, even if he remains the Company’s CEO after the fiscal year 2022 equity grant date on or about October 15, 2021. Except as described above, all of the other material terms of Mr. Spinner’s Amended and Restated Employment Agreement remain substantially unchanged and in full force and effect. A copy of the Second Amendment to Amended and Restated Employment Agreement is filed herewith as Exhibit 10.11.
On
March 8, 2021, in connection with the Company’s ongoing CEO search, we entered into a Retention Agreement with Christopher Testa, our President. Pursuant to the agreement, Mr. Testa will be entitled to a retention payment of $675,000, provided that he continues his service with the Company through February 1, 2022, or upon his earlier termination by the Company other than for Cause (as defined in the Retention Agreement). A copy of the Retention Agreement is filed herewith as Exhibit 10.10.
The following materials from the United Natural Foods, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended January 30, 2021, 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 (Loss), (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
104
The cover page from our Quarterly Report on Form 10-Q for the second quarter of fiscal 2021, filed with the SEC on March 10, 2021, 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.
