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.funds. A significant reduction in operating earnings or the incurrence of operating losses could have a negative impact on our operating cash flow, which may limit our ability to pay down our outstanding indebtedness as planned. Our credit facilities are secured by a substantial portion of our total assets. We expect to be able to fund debt maturities and finance lease liabilities through fiscal 2023 with internally generated funds and borrowings under the ABL Credit Facility.
Our primary sources of liquidity are from internally generated funds and from borrowing capacity under the ABL Credit Facility. We believe our credit facilities. Our short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to satisfy debt obligations and fund capital expenditures as opportunities arise. Our continued access to short-term and long-term financing through credit markets depends on numerous factors, including the condition of the credit markets and our results of operations, cash flows, financial position and credit ratings.
Primary uses of cash include debt service, capital expenditures, working capital maintenance and income tax payments. We typically finance working capital needs with cash provided from operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories.
The following chart outlines our scheduled debt maturities by fiscal year, which excludes debt prepayments whichthat may be required from Excess Cash Flow (as defined in the Term Loan Agreement) generated or proceeds from sales of mortgaged properties.properties in fiscal 2023 or beyond. Based on our Consolidated First Lien Net Leverage Ratio (as defined in the Term Loan Agreement) at the end of fiscal 2022, no prepayment from Excess Cash Flow in fiscal 2022 is required to be made in fiscal 2023.
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.
The following chart outlines our capital expenditures by type over the last three fiscal years.
|
| | | | | | | | | | | | | | | | | | | |
(in thousands) | 2019 (53 weeks) | | 2018 (52 weeks) | | 2017 (52 weeks) | | 2019 Change | | 2018 Change |
Net cash provided by operating activities of continuing operations | $ | 175,122 |
| | $ | 109,038 |
| | $ | 273,331 |
| | $ | 66,084 |
| | $ | (164,293 | ) |
Net cash used in investing activities of continuing operations | (2,326,785 | ) | | (47,005 | ) | | (59,959 | ) | | (2,279,780 | ) | | 12,954 |
|
Net cash provided by (used in) financing activities of continuing operations | 1,997,564 |
| | (53,557 | ) | | (217,116 | ) | | 2,051,121 |
| | 163,559 |
|
Net cash flows from discontinued operations | 176,194 |
| | — |
| | — |
| | 176,194 |
| | — |
|
Effect of exchange rate on cash | (143 | ) | | (575 | ) | | 565 |
| | 432 |
| | (1,140 | ) |
Net increase (decrease) in cash and cash equivalents | 21,952 |
| | 7,901 |
| | (3,179 | ) | | 14,051 |
| | 11,080 |
|
Cash and cash equivalents at beginning of period | 23,315 |
| | 15,414 |
| | 18,593 |
| | 7,901 |
| | (3,179 | ) |
Cash and cash equivalents at end of period, including discontinued operations | $ | 45,267 |
| | $ | 23,315 |
| | $ | 15,414 |
| | $ | 21,952 |
| | $ | 7,901 |
|
Fiscal 20192022 compared to Fiscal 20182021
The increasedecrease in netNet cash provided by operating activities of continuing operations was primarily due to higher levels of cash invested in net working capital due to higher costs of inventory on hand in excess of Accounts payable increases, and credit extended on continued sales growth, partially offset by higher amounts of cash utilizedprovided from higher earnings in fiscal 2018 in inventory acquisition and credit extension to meet increased product demand and our service level agreements and cash provided in fiscal 2019 by the reduction of inventory, including cash inflows from the reduction of Supervalu inventory since the acquisition date, as the acquisition occurred at a time when inventories were seasonally high. These increases were offset in part by cash utilized in payments of assumed liabilities from the Supervalu acquisition, including transaction-related expenses, accrued employee costs, and restructuring costs associated with reductions in force, higher cash paid for interest expense, higher cash utilized to reduce accounts2022. Our Accounts payable primarily related to merchandise inventory reductions, and higherprovide cash paid for taxes including a $59 million cash tax payment related toflow leverage against the Supervalu acquisition.majority, but not all, of our inventory on hand.
The increasedecrease in netNet cash used in investing activities of continuing operations was primarily due to $2,292.4 million paid for the Supervalu acquisition and an increase of $163.2 million in cash utilized for capital expenditures, partially offset by cashproceeds received from the sale of the Riverside, California distribution center in fiscal 2022 discussed above and leaseback of two distribution centers, and the sale of two surplus facilities,a reduction in payments for aggregate proceeds of $172.5 million, as discussed above.capital expenditures.
The increasedecrease in netNet cash provided byused in financing activities of continuing operations was primarily due to borrowings on long-term debt of $1,926.6 million to finance the Supervalu acquisition, a net increase in revolving credit facility borrowings of $883.4 million, including payments to finance the Supervalu acquisition, the absence ofless cash utilized to repurchase common stock in fiscal 2019 compared to $24.2 million in fiscal 2018, an increase in proceeds from the issuance of common stock in fiscal 2019 of $23.0 million, and other borrowings of $22.4 million in fiscal 2019, partially offset by an increase in repayments of long-term debt and capital lease obligations of $767.8 million, including the repayment of the Supervalu Senior Notes, payments for debt financing costs of $62.6 million.
Net cash flows from discontinued operations primarily include operating activity cash flowavailable from operating income and investing activity cash inflows from the saleactivities, net of Hornbacher’s, a surplus distribution center, and surplus retail stores, partially offset by capital expenditures of discontinued operations.
Fiscal 2018 compared to Fiscal 2017
Net cash provided by operations was $109.0 million for the fiscal year ended July 28, 2018, a decrease of $164.3 million from the $273.3 million provided by operations for the year ended July 29, 2017. The primary reasons for the net cash provided by operating activities for fiscal 2018 were net income for the year of $165.7 million, which included depreciation and amortization of $87.6 million, and share based compensation expense of $25.8 million, offset by increases in inventory and accounts receivable of $108.8 million and $67.3 million, respectively. Net cash provided by operations of $273.3 million for the year ended July 29, 2017 was primarily due to net income for the year of $130.2 million, which included depreciation and amortization of $86.1 million, and an increase in accounts payable of $82.8 million, offset by an increase in accounts receivable of $38.8 million.
Working capital increased by $131.0 million, or 13.7%, to $1.09 billion at July 28, 2018, compared to working capital of $958.7 million at July 29, 2017. This increase was primarily as a result of an increase in inventory to support increased demand for our products.
Net cash used in investing activities, decreased approximately $13.0 million to $47.0 million for the fiscal year ended July 28, 2018, compared to $60.0 million for the fiscal year ended July 29, 2017. This decrease was primarily due to a decrease in cash paid for acquisitionsreduce our outstanding debt.
Other Obligations and Commitments
Our principal contractual obligations and commitments consist of $9.2 million and a $11.5 million decrease in capital spending.
Net cash used in financing activities was $53.6 million for the fiscal year ended July 28, 2018. The net cash used in financing activities was primarily due to repayments of borrowingsobligations under our prior asset-backed revolving credit facility of $569.7 million, share repurchases of $24.2 million and repayments of long-term debt, of $12.1 million, partially offset by proceeds from borrowings under our prior asset-backed revolving credit facility of $556.1 million. Net cash usedinterest on long-term debt, operating and finance leases, purchase obligations, self-insurance liabilities and multiemployer plan withdrawals.
Refer to Note 9—Long-Term Debt, Note 11—Leases, Note 13—Benefit Plans, Note 1—Significant Accounting Policies and Note 17—Commitments, Contingencies and Off-Balance Sheet Arrangements to the Consolidated Financial Statements in financing activities was $217.1 million for the fiscal year ended July 29, 2017 and was primarily due to repayments of borrowings under our prior asset-backed revolving credit facility and long term debt of $418.7 million and $11.5 million, respectively, partially offset by proceeds from borrowings under our prior asset-backed revolving credit facility of $215.7 million.
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 repurchased 614,660 shares of our common stock at an aggregate cost of $24.2 million in fiscal 2018. We did not purchase any shares of the Company’s common stock under the share repurchase program in the fiscal 2019. As of August 3, 2019, we have $175.8 million remaining authorized under the share repurchase program.
We no longer intend to indefinitely reinvest accumulated earnings in our Canada operations. Accordingly, we have recorded the tax impactsPart II, Item 8 of this treatment (a taxAnnual Report for more information on the nature and timing of obligations for debt, leases, benefit plans, self-insurance and purchase obligations, respectively. The future amount and timing of $0.6 million dueinterest expense payments are expected to vary with the foreign exchange loss on previously taxed income)amount and then prevailing contractual interest rates over our debt as discussed in fiscal 2019.Interest Rate Risk in Part II, Item 7A of this Annual Report
Pension and Other Postretirement Benefit Obligations
We contributed $4.1$1 million and $1.6$2 million to our defined benefit pension and other postretirement benefit plans, respectively, in fiscal 2019.2022. As described in further detail in Note 13—Benefit Plans in Part II, Item 8 of this Annual Report, in fiscal 2022, we merged the Unified Grocers, Inc. Cash Balance Plan into the SUPERVALU INC. Retirement Plan. In fiscal 2020, $8.3 million of2023, no minimum pension contributions are required to be made under the Unified Grocers, Inc. Cash BalanceSUPERVALU INC. Retirement Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”). No minimum pensionAn insignificant amount of contributions are requiredexpected to be made to the SUPERVALU Retirement Plan under ERISAdefined benefit pension plans and postretirement benefit plans in fiscal 2020. We anticipate fiscal 2020 discretionary pension contributions and required minimum other postretirement benefit plan contributions to be approximately $0 million to $6 million.2023. We fund our defined benefit pension plans based on the minimum contribution amount required under ERISA, the Pension Protection Act of 2006 and other applicable laws as determined by us, including our external actuarial consultant, and additional contributions made at our discretion. We may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable. We assess the relative attractiveness of the use of cash to accelerate contributions considering such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required Pension Benefit Guaranty Corporation variable rate premiums or in order to achieve exemption from participant notices of underfunding.
Lump Sum Pension Settlement Offering
On August 1, 2019, we amended the SUPERVALU Retirement Plan to provide for a lump sum settlement window. On August 2, 2019, we sent plan participants lump sum settlement election offerings that committed the SUPERVALU Retirement Plan to pay certain deferred vested pension plan participants and retirees, that 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 will be made to certain former (i) retired associates and beneficiaries who are receiving their monthly pension benefit payment and (ii) terminated associates who are deferred vested in the Plan, had not yet begun receiving monthly pension benefit payments and who are not eligible for any prior lump sum offerings under the plan. Benefit obligations 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 Company expects the Plan to make lump sum settlement payments to Plan participants on or around November 1, 2019, which we anticipate will result in a required remeasurement of the defined benefit pension obligations under the plan at that time.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management believes the following critical accounting policies reflect our more subjective or complex judgments and estimates used in the preparation of our Consolidated Financial Statements.
Inventories
Inventories are valued at the lower of cost or market. Substantially all of our inventory consists of finished goods. Inventories are recorded net of vendor allowances and cash discounts. We evaluate inventory shortages (shrink) throughout each fiscal year based on actual physical counts in our facilities.
Prior to fiscal 2019, we determined inventory cost using the first-in, first-out (“FIFO”) method. For a substantial portion of legacy Supervalu inventory, cost was determined using the LIFO method, with the rest primarily determined using FIFO. Inventories acquired as part of the Supervalu acquisition were recorded at their fair market values as of the acquisition date. During the second quarter of fiscal 2019, we completed our evaluation of our combined inventory accounting policies and changed our method of inventory costing for certain historical United Natural Foods, Inc. inventory from the FIFO accounting method to the LIFO accounting method. We concluded that the LIFO method of inventory costing is preferable because it allows for better matching of costs and revenues, as historical inflationary inventory acquisition prices are expected to continue in the future and the LIFO method uses the current acquisition cost to value cost of goods sold as inventory is sold. Additionally, LIFO allows for better comparability of the results of our operations with those of similar companies in its peer group. As a result of the change to the LIFO method, certain Company inventories, excluding Supervalu inventories, were reduced by $15.0 million for fiscal 2019, which resulted in increases to Cost of sales and Loss from continuing operations before income taxes of the same amount in the Consolidated Statements of Operations for fiscal 2019. As of August 3, 2019, approximately $1.6 billion inventory was valued under the LIFO method and primarily included grocery, frozen food and general merchandise products, with the remaining inventory valued under the FIFO method and primarily included meat, dairy and deli products.
Vendor funds
We receive funds from many of the vendors whose products we buy for resale. These vendor funds are generally provided to increase the sell-through of the related products. We receive vendor funds for a variety of merchandising activities: placement of the vendors’ products in our advertising; display of the vendors’ products in prominent locations in our stores; supporting the introduction of new products into our stores and distribution centers; exclusivity rights in certain categories; and to compensate for temporary price reductions offered to customers on products held for sale. We also receive vendor funds for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of the vendor fund contracts have terms of less than a year, although some of the contracts have terms of longer than one year.
We recognize vendor funds for merchandising activities as a reduction of Cost of sales when the related products are sold, unless it has been determined that a discrete identifiable benefit has been provided to the vendor, in which case the related amounts are recognized within Net sales and represent less than one half of one percent of total Net sales. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions to the value of on-hand inventory.
The amount and timing of recognition of vendor funds as well as the amount of vendor funds to be recognized as a reduction to ending inventory requires management judgment and estimates. Management determines these amounts based on estimates of current year purchase volume using forecast and historical data, and a review of average inventory turnover data. These judgments and estimates impact our reported gross profit, operating income and inventory amounts. The historical estimates have been reliable in the past, and we believe our methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant changes in the level of vendor support. However, if such changes were to occur, cost of sales and net sales could change, depending on the specific vendors involved. If vendor advertising allowances were substantially reduced or eliminated, we would consider changing the volume, type and frequency of the advertising, which could increase or decrease our advertising expense.
Benefit plans
We sponsor pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. Pension benefits associated with these plans are generally based on each participant’s years of service, compensation, and age at retirement or termination. Our defined benefit pension plans and certain supplemental executive retirement plans were closed to new participants and service crediting.
While we believe the valuation methods used to determine the fair value of plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The determination of our obligation and related expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions used in calculating these amounts. These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and healthcare costs. We measure our defined benefit pension and other postretirement plan obligations as of the nearest calendar month end. Refer to Note 14—Benefit Plans in Part II, Item 8 of this Annual Report on Form 10-K for information related to the actuarial assumptions used in determining pension and postretirement healthcare liabilities and expenses.
We review and select the discount rate to be used in connection with our pension and other postretirement obligations annually. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. We set our rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
Our expected long-term rate of return on plan assets assumption is determined based on the portfolio’s actual and target composition, current market conditions, forward-looking return and risk assumptions by asset class, and historical long-term investment performance. The assumed long-term rate of return on pension assets ranged from 6.25 percent to 6.5 percent for fiscal 2019. The 10-year rolling average annualized return for a portfolio of investments applied in a manner consistent with our target allocations have generated average returns of approximately 8.04 percent based on returns from 1990 to 2017. In accordance with GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods.
Each 25 basis point reduction in the discount rate would increase the postretirement benefit obligation by $65 million, as of August 3, 2019, and for fiscal 2019 would decrease pension expense by approximately $3.5 million and each 25 basis point reduction in expected return on plan assets would increase pension expense by approximately $5.6 million. Similarly, for postretirement benefits, a 100 basis point increase in the healthcare cost trend rate would increase the accumulated postretirement benefit obligation by approximately $3.2 million as of the end of fiscal 2019 and would increase service and interest cost by less than $0.1 million. Conversely, a 100 basis point decrease in the healthcare cost trend rate would decrease the accumulated postretirement benefit obligation as of the end of fiscal 2019 by approximately $2.6 million and would decrease service and interest cost by less than $0.1 million. Although we believe our assumptions are appropriate, the actuarial assumptions may differ from actual results due to changing market and economic conditions, higher or lower withdrawal rates and longer or shorter life spans of participants.
We recognize the amortization of net actuarial loss on the SUPERVALU Retirement Plan and the Unified Grocers Inc. Cash Balance Plan over the remaining life expectancy of inactive participants based on our determination that almost all of the defined benefit pension plan participants are inactive and the plan is frozen to new participants. For the purposes of inactive participants, we utilized an over approximately 90 percent threshold established under our policy.
We utilize the “full yield curve” approach for determining the interest and service cost components of net periodic benefit cost for defined benefit pension and other postretirement benefit plans. Under this method, the discount rate assumption used in the interest and service cost components of net periodic benefit cost is built through applying the specific spot rates along the yield curve used in the determination of the benefit obligation described above, to the relevant projected future cash flows of our pension and other postretirement benefit plans. We believe the “full yield curve” approach reflects a greater correlation between projected benefit cash flows and the corresponding yield curve spot rates and provides a more precise measurement of interest and service costs.
Business dispositions
The Company reviews the presentation of planned business dispositions in the Consolidated Financial Statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results. In addition, the Company evaluates whether the business has met the criteria as a business held for sale. In order for a planned disposition to be classified as a business held for sale, the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year.
Planned business dispositions are presented as discontinued operations when all the criteria described above are met. Operations of the business components meeting the discontinued operations requirements are presented within Income from discontinued operations, net of tax in the Consolidated Statements of Operations, and assets and liabilities of the business component planned to be disposed of are presented as separate lines within the Consolidated Balance Sheets.
The carrying value of the business held for sale is reviewed for recoverability upon meeting the classification requirements. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, indefinite lived intangible assets and other assets are assessed. After the valuation process is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell, and no additional depreciation or amortization expense is recognized. Acquired businesses are evaluated for certain criteria to be classified as held for sale, and if so, are reported at their fair value less costs to sell as of the acquisition date and subsequently adjusted each reporting period.
Judgments and estimates utilized to determine whether impairment charges exist include the review of the business units fair value, which may occur under the income and market approaches and include forecasted revenues, operating expenses, income tax expenses, depreciation and amortization expenses and discount rates. In addition, we evaluate the recognition of other charges and costs, including potential multiemployer plan withdrawal charges. The sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to closing. See Note 19—Discontinued Operations in Part II, Item 8 of this Annual Report on Form 10-K for the carrying value of discontinued operations held for sale assets and liabilities and additional information.
Self-Insurance liabilities
We are primarily self-insured for workers’ compensation, general and automobile liability insurance. It is our policy to record the self-insured portions of our workers’ compensation, general and automobile liabilities based upon actuarial methods of estimating the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported. Any projection of losses concerning these liabilities is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting litigation trends, benefit level changes and claim settlement patterns. If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our Consolidated Financial Statements. Accruals for workers’ compensation, general and automobile liabilities totaled $88.8 million and $24.7 million as of August 3, 2019 and July 28, 2018, respectively.
Valuation of assets and liabilities acquired in a business combination
We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. Goodwill represents the excess of consideration transferred over the fair value of net assets acquired in a business combination. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as the estimated useful life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. During the measurement period, purchase price allocation changes that impact the carrying value of goodwill effects any measurement of goodwill impairment that was taken during the time period. In fiscal 2019, we recorded a goodwill impairment charge related to the Supervalu distribution reporting unit in a period in which the purchase price allocation had not been completed. Estimates that are sensitive include judgments as to whether information gathered during the measurement period relate to information that was not yet available or whether subsequent developments have occurred that indicate the recognition of other asset and liabilities should be recorded within net income.
In determining the estimated fair value for intangible assets, we typically utilize the income approach, which discounts the projected future net cash flow using an appropriate discount rate that reflects the risks associated with such projected future cash flow. Estimates that are sensitive to the determination of the fair value of acquired customer intangibles, include forecasted revenues, operating expenses, income tax expenses, depreciation and amortization expenses, and attrition and discount rates, all of which can have a material impact on the estimated fair values of customer relationship intangible assets.
Other significant judgments include the estimated fair value of real and personal property that utilizes significant inputs such as rental and discount rates to determine the fair value of the acquired assets, and the market approach that utilizes significant inputs such as market rental rates and sales comparisons. Fair value estimates are based on available historical information, future expectations and assumptions determined to be reasonable but are inherently uncertain with respect to future events, including economic conditions, competition, the useful life of the acquired assets and other factors. Estimates that are sensitive to the determination of the fair value of real and personal property include external transactions and other comparable transactions, estimated replacement and reproduction costs, and estimated useful lives and salvage values.
Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Intangible assets determined to have an indefinite useful life are reassessed periodically based on the expected use of the asset by us, legal or contractual provisions that may affect the useful life or renewal or extension of the asset’s contractual life without substantial cost, and the effects of demand, competition and other economic factors.
Recoverability of goodwill and intangible assets
Goodwill
We review goodwill for impairment at least annually, and on an interim basis if events occur or circumstances indicate that it is more likely than not that a reporting units’ fair value is below its carrying amount. We have elected to perform our annual tests for indications of goodwill impairment as of the first day of the fourth quarter of each fiscal year. We test for goodwill impairment at the reporting unit level, which is at or one level below the operating segment level, unless components are determined to be economically similar, in which case components would be aggregated into goodwill reporting units that are at the same level as an operating segment. The determination of reporting units considers the quantitative and qualitative characteristics of aggregation of each of the components within the operating segments. The significant qualitative and economic characteristics used in determining our components to support their aggregation include types of businesses and the manner in which the components operate, consideration of key impacts to net sales, cost of sales, competitive risks and the extent to which components share assets and other resources. Based an interim fiscal 2019 quantitative assessment, the Supervalu distribution reporting unit’s fair value was substantially less than its carrying value and the entire amount of goodwill from the acquisition that was attributed to the reporting unit was impaired. If we were to change the composition of our reporting units, such that the unrealized fair value deficit over the carrying value was subject to measurement as part of the recoverability of other reporting units, under a new basis of reporting units, we may incur additional impairment charges. Goodwill has been assigned as of the acquisition date of the respective components. Goodwill has only been allocated upon a business’s disposal or upon achievement of criterion to classify an existing component as a new reporting unit.
Total goodwill by reporting unit is as follows:
|
| | | | |
(in thousands) | | August 3, 2019 |
Legacy Company distribution | | $ | 423,534 |
|
UNFI Canada | | 8,862 |
|
Blue Marble Brands | | 5,436 |
|
Woodstock Farms | | 4,424 |
|
Supervalu distribution | | — |
|
Total Goodwill | | $ | 442,256 |
|
A qualitative review may be conducted to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative review is bypassed or it is determined that it is more likely than not that the carrying value is greater than the fair value of the reporting unit, a quantitative impairment test must be performed. The quantitative impairment test determines the fair value of each reporting unit, which is then compared against the carrying amount of the reporting unit, including goodwill, to determine if an impairment exists. In fiscal 2019, we performed two qualitative reviews, and as a result of one of the qualitative reviews a quantitative review of goodwill was conducted in the second quarter of fiscal 2019. During fiscal 2019, we recorded a total impairment charge of $292.8 million to goodwill related to the acquired Supervalu distribution business.
For the fiscal 2019 quantitative assessment, we estimated the fair value for our reporting units, utilizing the income and market approaches, which were weighted on a 50:50 basis to determine each reporting unit’s fair value. Estimates that were sensitive to the fair value determination under income and market approach, include forecasted revenues, operating expenses, income tax expenses, depreciation and amortization expenses and discount rates. In addition, the market approach quantifications included comparable company market multiples relative to each reporting unit. Refer to Note 7—Goodwill and Intangible Assets in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
Intangible Assets
We review indefinite lived intangible assets and other long lived assets with finite lives at least annually, and on an interim basis if events occur or circumstances indicate that the carrying value of the respective asset may not be recoverable. If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow model. Impairment is measured as the difference between the fair value of the asset and its carrying value. Cash flows expected to be generated by the related assets are estimated over the asset’s useful life based on projected cash flows.
Indefinite-lived intangible assets are reviewed for impairment at least annually as of the first day of the fourth fiscal quarter and if events occur or circumstances change that would indicate that the value of the asset may be impaired. We perform qualitative assessments of goodwill and indefinite lived intangibles assets for impairment, unless we believe it is more likely than not that an intangible asset’s fair value is less than the carrying value, in which case a quantitative assessment would be performed.
Our fiscal 2019 annual indefinite lived impairment assessment indicated that no impairment existed. Refer to Note 7—Goodwill and Intangible Assets in Part II, Item 8 of this Annual Report on Form 10-K for the carrying values reviewed and additional information.
We review long-lived assets, including definite-lived intangible assets, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. If the evaluation indicates that the carrying amount of an asset may not be recoverable, the potential impairment is measured based using the income approach. We group long-lived assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.
Income taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The calculation of the Company’s tax liabilities includes addressing uncertainties in the application of complex tax regulations and is based on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Addressing these uncertainties requires judgment and estimates; however, actual results could differ, and we may be exposed to losses or gains. Our effective tax rate in a given financial statement period could be affected based on favorable or unfavorable tax settlements. Unfavorable tax settlements will generally require the use of cash and may result in an increase to our effective tax rate in the period of resolution. Favorable tax settlements may be recognized as a reduction to our effective tax rate in the period of resolution.
The Company regularly reviews its deferred tax assets for recoverability to evaluate whether it is more likely than not that they will be realized. In making this evaluation, the Company considers the statutory recovery periods for the assets, along with available sources of future taxable income, including reversals of existing taxable temporary differences, tax planning strategies, history of taxable income, and projections of future income. The Company gives more significance to objectively verifiable evidence, such as the existence of deferred tax liabilities that are forecast to generate taxable income within the relevant carryover periods, and a history of earnings. A valuation allowance is provided when the Company concludes, based on all available evidence, that it is more likely than not that the deferred tax assets will not be realized during the applicable recovery period.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the TCJA. The TCJA makes broad and complex changes to the U.S. tax code, including reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. Shortly after the TCJA was enacted, the Securities and Exchange Commission (“SEC”) issued accounting guidance, which provides a one-year measurement period during which a company may complete its accounting for the impacts of the TCJA. To the extent a company’s accounting for certain income tax effects of the TCJA is incomplete, the company may determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. See Note 15—Income Taxes for further effects of the new tax legislation on the Company.
COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ARRANGEMENTS
Off-Balance Sheet Multiemployer Pension Arrangements
Guarantees and Contingent Liabilities
We have outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of August 3, 2019. We are contingently liable for leases that have been assigned to various parties in connection with facility closings and dispositions. We are also a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise. Refer to Note 18—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding our outstanding guarantees and contingent liabilities.
Multiemployer Benefit Plans
We contribute to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Trustees are appointed in equal number by employers and unions that are parties to the relevant collective bargaining agreement. Based on the assessment of the most recent information available from the multiemployer plans, we believe that most of the plans to which we contribute are underfunded. We are only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability to us.
Our contributions can fluctuate from year to year due to store closures, employer participation within the respective plans and reductions in headcount. Our contributions to these plans could increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of our collective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, we could trigger a partial or complete withdrawal that could require us to record a withdrawal liability obligation and make withdrawal liability payments to the fund. Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized continuing and discontinued operations expense of $41.0$45 million, $0.5$48 million and $0.0$52 million in fiscal 2019, 20182022, 2021 and 2017, 2020, respectively. In fiscal 2020,2023, we expect to contribute approximately $37 $51 million to multiemployer plans related to continuing operations, contributions to the multiemployer pension plans, subject to the outcome of collective bargaining and capital market conditions. Furthermore, ifWe expect required cash payments to fund multiemployer pension plans from which we werehave withdrawn to significantly reduce contributions, exit certain markets or otherwise cease making contributionsbe insignificant in any one fiscal year, which would exclude any payments that may be agreed to these plans, it could triggeron a partial or completelump sum basis to satisfy existing withdrawal that would require us to record a withdrawal liability.liabilities. Any future withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP. Any triggered withdrawal obligation could result in a material charge and payment obligations that would be required to be made over an extended period of time.
We also make contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating expenses could increase in the future.
Refer to Note 14—13—Benefit Plans in Part II, Item 8 of this Annual Report on Form 10-K for furtheradditional information regarding the plans in which we participate.
Share Repurchases
Contractual Obligations
In September 2022, our Board of Directors authorized a new repurchase program for up to $200 million of our Common stock over a term of four years (the “2022 Repurchase Program”). Upon approval of the 2022 Repurchase Program, our Board terminated the repurchase program authorized in October 2017, which provided for the purchase of up to $200 million of our outstanding Common stock (the "2017 Repurchase Program"). We did not repurchase any shares of our Common stock in fiscal 2022, 2021 or 2020 pursuant to the 2017 Repurchase Program. As of July 30, 2022, we had $176 million remaining authorized under the 2017 Repurchase Program.
We will manage the pacing of any repurchases in response to market conditions and other relevant factors, including any limitations on our ability to conduct repurchases under the terms of our ABL Credit Facility, Term Loan Facility and Senior Notes. We may implement all or part of the repurchase program pursuant to a plan or plans meeting the conditions of Rule 10b5-1 under the Exchange Act.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management believes the following schedule summarizescritical accounting policies reflect our more subjective or complex judgments and estimates used in the preparation of our Consolidated Financial Statements.
Inventories
Inventories are valued at the lower of cost or market. Substantially all of our inventories consist of finished goods. Inventories are recorded net of vendor allowances and cash discounts. We evaluate inventory shortages (shrink) throughout each fiscal year based on actual physical counts in our facilities. The majority of our inventory is valued under the LIFO method, which allows for matching of costs and revenues, as the current acquisition cost to is used to value cost of goods sold as inventory is sold in an inflationary environment. If the first-in, first-out (“FIFO”) method had been used, Inventories, net, would have been higher by approximately $225 million and $67 million at July 30, 2022 and July 31, 2021, respectively. As of July 30, 2022, approximately $1.9 billion or 74% of inventory was valued under the LIFO method, before the application of any LIFO reserve, and primarily included grocery, frozen food and general merchandise products, with the remaining inventory valued under the first-in, first-out method and primarily included meat, dairy and deli products. When holding inventory levels and mix constant, as of July 30, 2022, we estimate a 50 basis point increase in the inflation rate on our ending LIFO-based inventory would result in an $8 million increase in the LIFO charge on an annualized basis.
Vendor funds
We receive funds from many of the vendors whose products we buy for resale. These vendor funds are generally provided to increase the purchasing and sell-through of the related products. We receive vendor funds for a variety of merchandising activities: placement of the vendors’ products in our advertising; display of the vendors’ products in prominent locations in our stores; support for the introduction of new products into our stores and distribution centers; exclusivity rights in certain categories; and compensation for temporary price reductions offered on products held for sale. We also receive vendor funds for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of our vendor fund contracts have terms of less than a year, although some of the contracts have terms of longer than one year.
We recognize vendor funds for merchandising activities as a reduction of Cost of sales when the related products are sold, unless it has been determined that a discrete identifiable benefit has been provided to the vendor, in which case the related amounts are recognized within Net sales and represent less than 0.5% of total Net sales. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions to the value of on-hand inventory.
The amount and timing of recognition of vendor funds as well as the amount of vendor funds to be recognized as a reduction to ending inventory requires management judgment and estimates. Management determines these amounts based on estimates of current year purchase volume using forecast and historical data, and a review of average inventory turnover data. These judgments and estimates impact our reported Gross profit, Operating income and inventory amounts. The historical estimates have been reliable in the past, and we believe our methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant contractualchanges in the level of vendor support. However, if such changes were to occur, Cost of sales and Net sales could change, depending on the specific vendors involved. If vendor advertising allowances were substantially reduced or eliminated, we would consider changing the volume, type and frequency of the advertising, which could increase or decrease our advertising expense.
Benefit plans
We sponsor pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. Pension benefits associated with these plans are generally based on each participant’s years of service, compensation, and age at retirement or termination. Our defined benefit pension plans and certain supplemental executive retirement plans are closed to new participants and service crediting.
While we believe the valuation methods used to determine the fair value of plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
The determination of our obligation and related expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions used in calculating these amounts. These assumptions include, among other things, the discount rate and the expected long-term rate of return on plan assets. We measure our defined benefit pension and other postretirement plan obligations as of August 3, 2019:the nearest calendar month end. Refer to Note 13—Benefit Plans in Part II, Item 8 of this Annual Report for information related to the actuarial assumptions used in determining pension and postretirement healthcare liabilities and expenses.
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| Payments Due Per Period |
(in millions) | Total | | Fiscal 2020 | | Fiscal 2021-2022 | | Fiscal 2023-2024 | | Thereafter |
Contractual obligations(1)(2): | | | | | | | | | |
Long-term debt(3) | $ | 3,003 |
| | $ | 103 |
| | $ | 62 |
| | $ | 1,137 |
| | $ | 1,701 |
|
Interest on long-term debt(4) | 913 |
| | 167 |
| | 324 |
| | 284 |
| | 138 |
|
Operating leases(5) | 1,732 |
| | 174 |
| | 300 |
| | 251 |
| | 1,007 |
|
Capital leases(6) | 180 |
| | 35 |
| | 55 |
| | 45 |
| | 45 |
|
Purchase obligations(7) | 260 |
| | 182 |
| | 68 |
| | 6 |
| | 4 |
|
Self-insurance liabilities(8) | 96 |
| | 31 |
| | 34 |
| | 15 |
| | 16 |
|
Multiemployer plan withdrawal liabilities | 74 |
| | 2 |
| | 3 |
| | 6 |
| | 63 |
|
Deferred compensation | 6 |
| | 1 |
| | 2 |
| | 1 |
| | 2 |
|
Total contractual obligations | $ | 6,264 |
| | $ | 695 |
| | $ | 848 |
| | $ | 1,745 |
| | $ | 2,976 |
|
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(1) | Because the timing of certain future payments beyond fiscal 2019 cannot be reasonably determined, contractual obligations payments due per fiscal period presented here exclude our discretionary funding of our pension plans and required funding of our postretirement benefit obligations. Pension and postretirement benefit obligations were $239 million as of fiscal year ended August 3, 2019. The Company expects to contribute approximately $8 million to $14 million to its defined benefit pension plans and postretirement benefit plans in fiscal 2020.
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(2) | Unrecognized tax benefits, which totaled $40 million as of fiscal year ended August 3, 2019, were excluded from the contractual obligations table because an estimate of the timing of future tax settlements cannot be reasonably determined. |
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(3) | Long-term debt amounts exclude original issue discounts and deferred financing costs. Long-term debt payments due per period exclude any cash prepayments that may be required under the provisions of the Term Loan Facility because future prepayment amounts, if any, are not reasonably estimable as of August 3, 2019. |
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(4) | Amounts include contractual interest payments (net of our interest rate swap payments) using the face value and applicable interest rate as of August 3, 2019. The face value of variable debt instruments with a variable rate equal to one-month LIBOR plus an applicable margin is $2,892 million. The face value of variable interest debt instruments with a variable rate equal to the prime rate plus an applicable margin is $53 million. |
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(5) | Represents the minimum rents payable under operating leases, excluding common area maintenance, insurance or tax payments, for which we are also obligated, offset by minimum subtenant rentals of $215 million total, $50 million, $69 million, $39 million and $57 million, respectively. |
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(6) | Represents the minimum payments under capital leases, excluding common area maintenance, insurance or tax payments, for which we are also obligated, offset by minimum subtenant rentals of $21 million total, $6 million, $8 million, $4 million and $3 million, respectively. |
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(7) | Our purchase obligations include various obligations that have annual purchase commitments of $1 million or greater. As of fiscal year ended August 3, 2019, future purchase obligations existed that primarily related to fixed asset, information technology and inventory purchase commitments. In addition, in the ordinary course of business, we enter into supply contracts to purchase product for resale to wholesale customers and to consumers, which are typically of a short-term nature with limited or no purchase commitments. The majority of our supply contracts are short-term in nature and relate to fixed assets, information technology and contracts to purchase product for resale. These supply contracts typically include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. The supply contracts that are cancelable have not been included above. |
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(8) | Our insurance liabilities include the undiscounted obligations related to workers’ compensation, general and automobile liabilities at the estimated ultimate cost of reported claims and claims incurred but not yet reported and related expenses. Future payments reflected here represent our reasonably determined estimate. |
Discount rates
We review and select the discount rate to be used in connection with our pension and other postretirement obligations annually. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. We set our rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
We utilize the “full yield curve” approach for determining the interest and service cost components of net periodic benefit cost for defined benefit pension and other postretirement benefit plans. Under this method, the discount rate assumption used in the interest and service cost components of net periodic benefit cost is built through applying the specific spot rates along the yield curve used in the determination of the benefit obligation described above, to the relevant projected future cash flows of our pension and other postretirement benefit plans. We believe the “full yield curve” approach reflects a greater correlation between projected benefit cash flows and the corresponding yield curve spot rates and provides a more precise measurement of interest and service costs. Each 25-basis point reduction in the discount rate would increase our projected pension benefit obligation by $44 million, as of July 30, 2022, and for fiscal 2022 would increase Net periodic benefit income by approximately $4 million.
Expected rate of return on plan assets
Our expected long-term rate of return on plan assets assumption is determined based on the portfolio’s actual and target composition, current market conditions, forward-looking return and risk assumptions by asset class, and historical long-term investment performance. The assumed long-term rate of return on pension assets ranged from 4.25% to 4.50% for fiscal 2022. The 10-year rolling average annualized return for the SUPERVALU INC. Retirement Plan is approximately 8.0% based on returns from 2013 to 2022. In accordance with GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods. Each 25-basis point reduction in expected return on plan assets would decrease Net periodic benefit income for fiscal 2022 by approximately $5 million.
Amortizing gains and losses
We recognize the amortization of net actuarial loss on the SUPERVALU INC. Retirement Plan over the remaining life expectancy of inactive participants based on our determination that almost all of the defined benefit pension plan participants are inactive and the plan is frozen to new participants. For the purposes of inactive participants, we utilized a 90% threshold established under our policy.
Multiemployer pension plans
We contribute to various multiemployer pension plans based on obligations arising from collective bargaining agreements. These multiemployer pension plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are typically responsible for determining the level of benefits to be provided to participants as well as such matters as the investment of the assets and the administration of the plans.
We continue to evaluate and address our potential exposure to underfunded multiemployer pension plans as it relates to our associates who are or were beneficiaries of these plans. In the future, we may consider opportunities to limit the Company’s exposure to underfunded multiemployer pension obligations by moving our active associates in such plans to defined contribution plans, and withdrawing from the pension plan or continuing to participate in the plans for prior obligations. In fiscal 2021, we incurred a $63 million charge for obligations related to withdrawal liabilities for three Retail multiemployer pension plans where our active associates moved to defined contribution plans for future benefits. As we continue to work to find solutions to underfunded multiemployer pension plans, it is possible we could incur withdrawal liabilities for certain additional multiemployer pension plan obligations in the future as we actively negotiate new collective bargaining agreements with a number of our unions in due course.
We continue to evaluate our exposure to underfunded multiemployer pension plans. Although these liabilities are not a direct obligation or liability of ours, addressing these uncertainties requires judgment in the timing of expense recognition when we determine our commitment is probable and estimable.
Refer to Note 13—Benefit Plans in Part II, Item 8 of this Annual Report for more information relating to our participation in these multiemployer pension plans and to the actuarial assumptions used in determining pension and other postretirement liabilities and expenses.
Self-insurance liabilities
We are primarily self-insured for workers’ compensation, general and automobile liability insurance. It is our policy to record the self-insured portions of our workers’ compensation, general and automobile liabilities based upon actuarial methods of estimating the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported. Any projection of losses concerning these liabilities is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting litigation trends, benefit level changes and claim settlement patterns. If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our Consolidated Financial Statements. Accruals for workers’ compensation, general and automobile liabilities totaled $98 million and $103 million as of July 30, 2022 and July 31, 2021, respectively.
Recoverability of long-lived assets
We review long-lived assets, including definite-lived intangible assets at least annually, and on an interim basis if events occur or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We evaluate these assets at the asset-group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. When the undiscounted future cash flows are not sufficient to recover an asset’s carrying amount, the fair value is compared to the carrying value to determine the loss to be recorded.
Estimates of future cash flows and expected sales prices are judgments based on the Company’s experience and knowledge of operations. These estimates project cash flows several years into the future and include assumptions on variables such as changes in supply contracts, macroeconomic impacts and market competition.
We did not identify any material impairments in fiscal 2022 as part of our quarterly procedures or annual impairment assessment.
Income taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized within the provision for income tax in the period that includes the enactment date.
The calculation of the Company’s tax liabilities includes addressing uncertainties in the application of complex tax regulations and is based on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Addressing these uncertainties requires judgment and estimates; however, actual results could differ, and we may be exposed to losses or gains. Our effective tax rate in a given financial statement period could be affected based on favorable or unfavorable tax settlements. Unfavorable tax settlements will generally require the use of cash and may result in an increase to our effective tax rate in the period of resolution. Favorable tax settlements may be recognized as a reduction to our effective tax rate in the period of resolution.
The Company regularly reviews its deferred tax assets for recoverability to evaluate whether it is more likely than not that they will be realized. In making this evaluation, the Company considers the statutory recovery periods for the assets, along with available sources of future taxable income, including reversals of existing and future taxable temporary differences, tax planning strategies, history of taxable income and projections of future income. The Company gives more significance to objectively verifiable evidence, such as the existence of deferred tax liabilities that are forecast to generate taxable income within the relevant carryover periods and a history of earnings. A valuation allowance is provided when the Company concludes, based on all available evidence, that it is more likely than not that the deferred tax assets will not be realized during the applicable recovery period.
Recently Issued Financial Accounting Standards
For a discussion of recently issued financial accounting standards, refer to Note 2—Recently Adopted and Issued Accounting Pronouncementsin Part II, Item 8 of this Annual Report on Form 10-K for further detail.Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to a number of market related risks, including changes in interest rates, fuel prices, foreign exchange rates and changes in the market price of investments held in our master trust used to fund defined benefit pension obligations. We have historically employed financial derivative instruments from time to time to reduce these risks. We do not use financial instruments or derivatives for any trading or other speculative purposes. We currently utilize derivative financial instruments to reduce the market risks related to changes in interest rates, fuel prices and foreign exchange rates.
Interest Rate Risk
We are exposed to market pricing risk consisting of interest rate risk related to certain of our debt instruments and notes receivable outstanding. Our debt obligations are more fully described in Note 10—9—Long-Term Debt to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report. Interest rate risk is managed through the strategic use of fixed and variable rate debt and derivative instruments. As more fully described in Note 9—8—Derivatives to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report, we have used interest rate swap agreements with the objective to protect us againstmitigate our exposure to adverse changes in interest rates by effectively converting certain of our variable rate obligations to fixed rate obligations. These interest rate swaps are derivative instruments designated as cash flow hedges on the forecasted interest payments related to a certain portion of our debt obligations. Our variable rate borrowings consist primarily of LIBOR basedSOFR-based loans, which is the benchmark interest rate being hedged in our interest rate swap agreements.
Changes in interest rates could also affect the interest rates we pay on future borrowings under our ABL Credit Facility and Term Loan Facility, which rates are typically related to LIBOR. WeSOFR. As of July 30, 2022, we estimate that a 100 basis100-basis point increase in the interest rates related to our variable rate borrowings would increase our annualized interestInterest expense by approximately $7.4$4 million, net of the floating interest rate receivable on our interest rate swaps. Changes in interest rates related to our fixed rate debt instruments dowould not have an impact upon future results of operations or cash flows while outstanding; however, if additional debt issuances at higher interest rates are required to fund fixed rate debt maturities, future results of operations or cash flows may be impacted.
At August 3, 2019,As of July 30, 2022, a 100 basis point increase in interest rates would decrease the unrealized fair market value of our debt currently bearing fixed rates or debt scheduled to convert to fixed rates by approximately $2.3 million, while a 100 basis point decrease in interest rates would increase the unrealized fair market value of those same debt instruments by approximately $2.4 million. At August 3, 2019, a 100 basis100-basis point increase in forward LIBORSOFR interest rates would increase the fair value of our outstandingthe interest rate swaps by approximately $69.7 million,$17 million; while a 100 basis100-basis point decrease in forward SOFR interest rates would decrease the fair value of thosethe interest rate swaps by approximately $73.0$18 million. Refer to Note 8—Derivatives in Part II, Item 8 of this Annual Report for further information on interest rate swap contracts.
Loans are extended to certain wholesale customers in the normal course of business through notes receivable. The notes generally bear fixed interest rates negotiated with each wholesale customer. The market value of the fixed rate notes is subject to change due to fluctuations in market interest rates.
The table below provides information about our financial instruments that are sensitive to changes in interest rates, including debt obligations, interest rate swaps and notes receivable. For debt obligations, the table presents principal amounts due and related weighted average interest rates by expected maturity dates using interest rates as of August 3, 2019,July 30, 2022, excluding any original issue and purchase accounting discounts and deferred financing costs. For interest rate swaps, the table presents the notional amounts and related weighted average interest rates by maturity. For notes receivable, the table presents the expected collection of principal cash flows and weighted average interest rates by expected year of maturity.
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| July 30, 2022 | | Expected Fiscal Year of Maturity |
| Fair Value | | Total | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| (in millions, except interest rates) |
Long-term Debt: | | | | | | | | | | | | | | | |
Variable rate—principal payments | $ | 1,628 | | | $ | 1,640 | | | $ | — | | | $ | — | | | $ | — | | | $ | 800 | | | $ | 840 | | | $ | — | |
Weighted average interest rate(1) | | | 4.6 | % | | — | % | | — | % | | — | % | | 5.7 | % | | 3.6 | % | | — | % |
Fixed rate—principal payments | $ | 525 | | | $ | 523 | | | $ | 14 | | | $ | 8 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | 500 | |
Weighted average interest rate | | | 6.7 | % | | 5.3 | % | | 4.8 | % | | 4.4 | % | | — | % | | — | % | | 6.8 | % |
Interest Rate Swaps(2): | | | | | | | | | | | | | | | |
Notional amounts hedged under pay fixed, receive variable swaps | $ | 3 | | | $ | 1,229 | | | $ | 429 | | | $ | 350 | | | $ | 250 | | | $ | 200 | | | $ | — | | | $ | — | |
Weighted average pay rate | | | 2.6 | % | | 2.6 | % | | 2.5 | % | | 2.5 | % | | 2.8 | % | | — | % | | — | % |
Weighted average receive rate | | | 3.1 | % | | 3.1 | % | | 3.3 | % | | 3.1 | % | | 2.9 | % | | — | % | | — | % |
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| August 3, 2019 | | Expected Fiscal Year of Maturity |
| Fair Value | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| (in millions, except interest rates) |
Long-term Debt: | | | | | | | | | | | | | | | |
Variable rate—principal payments | $ | 2,671 |
| | $ | 2,945 |
| | $ | 92 |
| | $ | 18 |
| | $ | 18 |
| | $ | 18 |
| | $ | 1,098 |
| | $ | 1,701 |
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Weighted average interest rate(1) | | | 5.4 | % | | 4.7 | % | | 6.5 | % | | 6.5 | % | | 6.5 | % | | 3.6 | % | | 6.5 | % |
Fixed rate—principal payments | $ | 59 |
| | $ | 58 |
| | $ | 11 |
| | $ | 12 |
| | $ | 13 |
| | $ | 14 |
| | $ | 8 |
| | $ | — |
|
Weighted average interest rate | | | 5.3 | % | | 5.3 | % | | 5.3 | % | | 5.3 | % | | 5.3 | % | | 4.9 | % | | — |
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Interest Rate Swaps: | | | | | | | | | | | | | | | |
Notional amounts hedged under pay fixed, receive variable swaps | $ | (77 | ) | | $ | 2,200 |
| | $ | 208 |
| | $ | 360 |
| | $ | 360 |
| | $ | 472 |
| | $ | 350 |
| | $ | 450 |
|
Weighted average pay rate | | | 2.5 | % | | 2.4 | % | | 2.3 | % | | 2.4 | % | | 2.6 | % | | 2.7 | % | | 2.7 | % |
Weighted average receive rate | | | 1.5 | % | | 1.8 | % | | 1.6 | % | | 1.5 | % | | 1.5 | % | | 1.5 | % | | 1.5 | % |
Notes receivable: | | | | | | | | | | | | | | | |
Principal receivable | $ | 45 |
| | $ | 46 |
| | $ | 12 |
| | $ | 8 |
| | $ | 6 |
| | $ | 5 |
| | $ | 2 |
| | $ | 13 |
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Weighted average receivable rate | | | 5.1 | % | | 5.3 | % | | 5.4 | % | | 5 | % | | 4.8 | % | | 6 | % | | 4.6 | % |
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(1) | (1)Excludes the effect of interest rate swaps effectively converting certain of our variable rate obligations to fixed rate obligations. |
Fuel Price Risk
We are exposed to market pricing risk consisting of changes in diesel prices. We maintain a fuel surcharge program, which allows us to pass some of our higher fuel costs throughvariable rate obligations to our customers. In addition,fixed rate obligations.
(2)Refer to reduce diesel price risk, we haveNote 8—Derivatives in the past, and may in the future, periodically enter in to derivative financial instruments and forward purchase commitmentsPart II, Item 8 of this Annual Report for a portionfurther information on interest rate swap contracts.
Foreign Exchange Risk
We are exposed to market pricing risk consisting of changes in foreign exchange rates. To reduce foreign exchange risk, we have in the past, and may in the future, periodically enter into derivative financial instruments for a portion of our projected monthly foreign currency requirements at fixed prices. As of August 3, 2019, our outstanding foreign currency forward contracts were immaterial.
Investment Risk
We assumed the defined benefit pension plan obligations and assets of theThe SUPERVALU INC. Retirement Plan from the Supervalu acquisition. This plan holds investments in public andfixed income securities, domestic equity securities, private equity fixed incomesecurities, international equity securities and real estate securities, which is described further in Note 14—13—Benefit Plans in Part II, Item 8 of this Annual Report. Changes in SUPERVALU INC. Retirement Plan assets can affect the amount of our anticipated future contributions. In addition, increases or decreases in SUPERVALU INC. Retirement Plan assets can result in a related increase or decrease to our equity through Accumulated other comprehensive loss. In fiscal 2022, as the plan administrator, we took additional steps to de-risk the investments in the plan assets as its funding level increased. This de-risking included a further shift to fixed income investments. Given the relationships between discount rates that impact the valuation of fixed income plan assets and the impact of discount rates in measuring plan obligations, the SUPERVALU INC. Retirement Plan is subject to less volatility in the net plan assets. As of August 3, 2019,July 30, 2022, a 10 percent10% unfavorable change in the total value of investments held by the SUPERVALU INC. Retirement Plan (entirely within the return-seeking portion of the plan assets) would not have had an impact on our minimum contributions required under ERISA for fiscal 2019,2022, but would have resulted in an unfavorable change in net periodic pension income for fiscal 20202023 of $3$2 million and would have reduced stockholders’Stockholders’ equity by $250$172 million on a pre-tax basis as of August 3, 2019.July 30, 2022.
Fuel Price and Foreign Exchange Risk
To reduce diesel price risk, we have entered into derivative financial instruments and/or forward purchase commitments for a portion of our projected monthly diesel fuel requirements at fixed prices primarily related to inbound transportation. To reduce foreign exchange risk, we have entered into derivative financial instruments for a portion of our projected monthly foreign currency requirements at fixed prices. The fair values of fuel derivative and foreign exchange agreements are measured using Level 2 inputs. As of July 30, 2022, the fair value and expected exposure risk based on aggregate notional values are insignificant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|
| | | | | | | |
Consolidated Financial Statements | | Page |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
All other schedules are omitted because they are not applicable or not required.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
United Natural Foods, Inc.:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of United Natural Foods, Inc. and subsidiaries (the Company) as of August 3, 2019July 30, 2022 and July 28, 2018,31, 2021, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended August 3, 2019,July 30, 2022, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of August 3, 2019,July 30, 2022, based on criteria established in Internal Control -– Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 3, 2019July 30, 2022 and July 28, 2018,31, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended August 3, 2019,July 30, 2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 3, 2019,July 30, 2022, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company acquired SUPERVALU Inc. (Supervalu) on October 22, 2018, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of August 3, 2019, Supervalu’s internal control over financial reporting associated with total assets of $4.4 billion (of which $923 million represents goodwill and intangible assets included within the scope of management’s assessment) and total revenues of $10.5 billion included in the consolidated financial statements of the Company as of and for the year ended August 3, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Supervalu.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that: (1) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit mattersmatter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.
Evaluation of the acquisition-date fair value of customer relationship assets
As discussed in Note 4 to the consolidated financial statements, on October 22, 2018, the Company acquired Supervalu. As a result of the transaction, the Company acquired customer relationship assets representing the generation of future income from Supervalu’s existing customers. The acquisition-date fair value for the customer relationship assets was $810 million.
We identified the evaluation of the acquisition-date fair value of the Supervalu customer relationship assets as a critical audit matter due to the high degree of subjectivity in evaluating certain inputs in the discounted cash flow model used to determine the fair value of such assets. The discounted cash flow model included the following internally-developed assumptions for which there was limited observable market information, and the calculated fair value of such assets was sensitive to possible changes to these key assumptions:
| |
– | forecasted revenues attributable to existing customers |
| |
– | forecasted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins for the acquired business |
| |
– | estimated annual customer attrition rates |
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition-date valuation process, including controls over the development of the key assumptions listed above. We performed sensitivity analyses to assess the impact of reasonably possible changes to forecasted revenues, EBITDA margins, annual customer attrition rates, and the discount rate. We evaluated the forecasted revenue growth rates from existing customers by comparing the growth assumptions to those of the Company’s peers and industry reports. In connection with our assessment of the forecasts used in the valuation, we compared (1) forecasted revenue, cost of sales, and operating expense margins to Supervalu’s historical actual results and (2) estimated annual customer attrition rates to historical Supervalu customer attrition data. We tested the Company’s determined weighted average cost of capital (WACC), which was used to determine the discount rate, by comparing it to the WACC of comparable companies. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
| |
– | evaluating the selected discount rate by comparing it against a discount rate range that was independently developed using publicly available market data for comparable companies, and |
| |
– | developing an estimate of the acquisition-date fair value of the customer relationship assets using the Company’s cash flow forecasts and the independently developed discount rate, and comparing the result to the Company’s fair value estimate. |
Evaluation of the acquisition-date fair value of property, plant, and equipment assets
As discussed in Note 4 to the consolidated financial statements, the Supervalu acquisition resulted in the acquisition of property, plant, and equipment assets, which were recorded at fair value as of the acquisition date. The acquisition-date fair value of the acquired property, plant, and equipment was $1.2 billion.
We identified the evaluation of the acquisition-date fair value of the Supervalu property, plant, and equipment assets as a critical audit matter. A high degree of subjectivity was involved in evaluating the methodologies and certain key inputs and assumptions used to determine the acquisition-date fair values of those assets. The Company used a combination of cost and market approaches to determine the estimated fair values of such assets, which were sensitive to changes in the following key inputs and internally-developed assumptions:
| |
– | external transactions and other information related to comparable assets |
| |
– | estimated replacement or reproduction costs |
| |
– | estimated useful lives and salvage values |
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition-date valuation process, including controls over the selection of the valuation methodologies used as well as the key inputs and assumptions listed above. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
| |
– | evaluating the valuation methodologies selected |
| |
– | evaluating the relevance and reliability of the Company’s inputs and assumptions by comparing them to industry sources |
| |
– | developing estimates of the property, plant, and equipment fair values using independently obtained external information and comparing the results to the Company’s fair value estimates |
| |
– | performing sensitivity analyses to assess the impact of reasonably possible changes to the key inputs and assumptions on the acquisition-date fair values. |
Evaluation of the Company’s second quarter goodwill impairment assessment
As discussed in Note 7 to the consolidated financial statements, due to a sustained decline in stock price through the second quarter, the Company determined that there was more than a 50% likelihood that the carrying value of the Supervalu wholesale reporting unit exceeded its fair value. Accordingly, the Company performed an interim quantitative impairment test of goodwill for all of its reporting units. Based on this analysis, the Company determined that the carrying value of its Supervalu wholesale reporting unit exceeded its fair value by an amount that was greater than its assigned goodwill. As a result, the Company recorded a goodwill impairment charge of $292.8 million. The goodwill impairment charge represented the impairment of all of the Supervalu wholesale reporting unit’s goodwill.
We identified the evaluation of the goodwill impairment assessment as a critical audit matter because of the high degree of subjectivity in evaluating the assumptions used to estimate the fair values of the Company’s reporting units. The reporting unit fair values were used as the basis to determine whether goodwill impairment existed in one or more of the Company’s reporting units. The fair value estimation methodologies used the following internally-developed assumptions for which there was limited observable market information, and the determined fair values were sensitive to changes to the following key assumptions:
| |
– | forecasted reporting unit cash flows |
| |
– | estimated long-term growth rates |
| |
– | estimated discount rates |
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s quantitative impairment test process, including controls related to the development of the key assumptions listed above. We performed sensitivity analyses to assess the impact of reasonably possible changes to forecasted cash flows, long-term growth rates, and discount rates. We evaluated the Company’s forecasted growth rates by comparing the growth assumptions to those of the Company’s peers and industry reports. We compared the Company’s forecasted revenue, cost of sales, and operating expense margins to historical actual results to assess the Company’s ability to accurately forecast cash flows. We tested the Company’s determined WACC, which was used to determine the discount rates, by comparing it to the WACC of comparable companies. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
| |
– | evaluating the discount rates used by the Company by comparing them against discount rate ranges that were independently developed using publicly available market data for comparable companies, and |
| |
– | developing an estimate of fair value for each of the Company’s reporting units, using the Company’s cash flow forecasts and the independently developed discount rates, and comparing the results to the Company’s fair value estimates. |
relates.
Assessment of the value of the defined benefit pension obligation
As discussed in Note 1413 to the consolidated financial statements, the Company sponsors a defined benefit pension plans, acquired in connection with the Supervalu acquisition,plan, covering primarily former Supervalu employees who meet certain eligibility requirements. The fair value of the defined benefit pension obligation at the date of acquisition and at year end was $2.5$1.71 billion, and $2.7 billion, respectively, partially offset by plan assets totaling $2.3 billion and $2.5 billion as of the acquisition date and year end, respectively.$1.72 billion. The determination of the Company’s defined benefit pension obligation with respect to these plansthe plan is dependent, in part, on the selection of certain actuarial assumptions, including the discount rate and mortality rate used.
We identified the assessment of the value of the defined benefit pension obligation as a critical audit matter because of the subjectivity in evaluating the discount ratesrate used, and the impact small changes in this assumption would have on the measurement of the defined benefit pension obligation. Additionally, the audit effort associated with the evaluation of the discount rate required specialized skills and knowledge.
The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls overrelated to the Company’s defined benefit pension obligation process, including controlsa control related to the development of the discount ratesrate used. We compared the methodology used in the current year to develop the discount ratesrate to the methodology used by Supervalu in periods prior to the acquisition.periods. In addition, we involved an actuarial professionalsprofessional with specialized skills and knowledge, who assisted in the evaluation of the Company’s discount rates,rate by understandingevaluating the methodology usedutilized by the Company and assessing the selected discount ratesrate against publicly available discount rate benchmark information.
/s/ KPMG LLP
We have served as the Company’s auditor since 1993.
Providence, Rhode Island
October 1, 2019September 27, 2022
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands,in millions, except for per share data)par amounts)
| | | | | | | | | | | |
| July 30, 2022 | | July 31, 2021 |
ASSETS | | | |
Cash and cash equivalents | $ | 44 | | | $ | 41 | |
Accounts receivable, net | 1,214 | | | 1,103 | |
Inventories, net | 2,355 | | | 2,247 | |
Prepaid expenses and other current assets | 184 | | | 157 | |
Current assets of discontinued operations | — | | | 2 | |
Total current assets | 3,797 | | | 3,550 | |
Property and equipment, net | 1,690 | | | 1,784 | |
Operating lease assets | 1,176 | | | 1,064 | |
Goodwill | 20 | | | 20 | |
Intangible assets, net | 819 | | | 891 | |
Deferred income taxes | — | | | 57 | |
Other long-term assets | 126 | | | 157 | |
Long-term assets of discontinued operations | — | | | 2 | |
Total assets | $ | 7,628 | | | $ | 7,525 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Accounts payable | $ | 1,742 | | | $ | 1,644 | |
Accrued expenses and other current liabilities | 260 | | | 341 | |
Accrued compensation and benefits | 232 | | | 243 | |
Current portion of operating lease liabilities | 156 | | | 135 | |
Current portion of long-term debt and finance lease liabilities | 27 | | | 120 | |
Current liabilities of discontinued operations | — | | | 4 | |
Total current liabilities | 2,417 | | | 2,487 | |
Long-term debt | 2,109 | | | 2,175 | |
Long-term operating lease liabilities | 1,067 | | | 962 | |
Long-term finance lease liabilities | 23 | | | 35 | |
Pension and other postretirement benefit obligations | 18 | | | 53 | |
Deferred income taxes | 8 | | | — | |
Other long-term liabilities | 194 | | | 299 | |
Total liabilities | 5,836 | | | 6,011 | |
Commitments and contingencies | | | |
Stockholders’ equity: | | | |
Preferred stock, $0.01 par value, authorized 5.0 shares; none issued or outstanding | — | | | — | |
Common stock, $0.01 par value, authorized 100.0 shares; 58.9 shares issued and 58.3 shares outstanding at July 30, 2022; 57.0 shares issued and 56.4 shares outstanding at July 31, 2021 | 1 | | | 1 | |
Additional paid-in capital | 608 | | | 599 | |
Treasury stock at cost | (24) | | | (24) | |
Accumulated other comprehensive loss | (20) | | | (39) | |
Retained earnings | 1,226 | | | 978 | |
Total United Natural Foods, Inc. stockholders’ equity | 1,791 | | | 1,515 | |
Noncontrolling interests | 1 | | | (1) | |
Total stockholders’ equity | 1,792 | | | 1,514 | |
Total liabilities and stockholders’ equity | $ | 7,628 | | | $ | 7,525 | |
|
| | | | | | | |
| August 3, 2019 | | July 28, 2018 |
ASSETS | | | |
Cash and cash equivalents | $ | 42,350 |
| | $ | 23,315 |
|
Accounts receivable, net | 1,065,699 |
| | 579,702 |
|
Inventories | 2,089,416 |
| | 1,135,775 |
|
Prepaid expenses and other current assets | 226,727 |
| | 50,122 |
|
Current assets of discontinued operations | 143,729 |
| | — |
|
Total current assets | 3,567,921 |
| | 1,788,914 |
|
Property and equipment, net | 1,639,259 |
| | 571,146 |
|
Goodwill | 442,256 |
| | 362,495 |
|
Intangible assets, net | 1,041,058 |
| | 193,209 |
|
Deferred income taxes | 31,087 |
| | — |
|
Other assets | 107,319 |
| | 48,708 |
|
Long-term assets of discontinued operations | 352,065 |
| | — |
|
Total assets | $ | 7,180,965 |
| | $ | 2,964,472 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Accounts payable | $ | 1,476,857 |
| | $ | 517,125 |
|
Accrued expenses and other current liabilities | 249,426 |
| | 103,526 |
|
Accrued compensation and benefits | 148,296 |
| | 66,132 |
|
Current portion of long-term debt and capital lease obligations | 112,103 |
| | 12,441 |
|
Current liabilities of discontinued operations | 122,265 |
| | — |
|
Total current liabilities | 2,108,947 |
| | 699,224 |
|
Long-term debt | 2,819,050 |
| | 308,836 |
|
Long-term capital lease obligations | 108,208 |
| | 31,487 |
|
Pension and other postretirement benefit obligations | 237,266 |
| | — |
|
Deferred income taxes | 1,042 |
| | 44,384 |
|
Other long-term liabilities | 393,595 |
| | 34,586 |
|
Long-term liabilities of discontinued operations | 1,923 |
| | — |
|
Total liabilities | 5,670,031 |
| | 1,118,517 |
|
Commitments and contingencies |
| |
|
Stockholders’ equity: | | | |
Preferred stock, $0.01 par value, authorized 5,000 shares; none issued or outstanding | — |
| | — |
|
Common stock, $0.01 par value, authorized 100,000 shares; 53,501 shares issued and 52,886 shares outstanding at August 3, 2019; 51,025 issued and 50,411 shares outstanding shares at July 28, 2018 | 535 |
| | 510 |
|
Additional paid-in capital | 530,801 |
| | 483,623 |
|
Treasury stock at cost | (24,231 | ) | | (24,231 | ) |
Accumulated other comprehensive loss | (108,953 | ) | | (14,179 | ) |
Retained earnings | 1,115,519 |
| | 1,400,232 |
|
Total United Natural Foods, Inc. stockholders’ equity | 1,513,671 |
| | 1,845,955 |
|
Noncontrolling interests | (2,737 | ) | | — |
|
Total stockholders' equity | 1,510,934 |
| | 1,845,955 |
|
Total liabilities and stockholders’ equity | $ | 7,180,965 |
| | $ | 2,964,472 |
|
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands,in millions, except for per share data)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| July 30, 2022 (52 weeks) | | July 31, 2021 (52 weeks) | | August 1, 2020 (52 weeks) |
Net sales | $ | 28,928 | | | $ | 26,950 | | | $ | 26,559 | |
Cost of sales | 24,746 | | | 23,011 | | | 22,670 | |
Gross profit | 4,182 | | | 3,939 | | | 3,889 | |
Operating expenses | 3,825 | | | 3,593 | | | 3,552 | |
Goodwill impairment charges | — | | | — | | | 425 | |
Restructuring, acquisition and integration related expenses | 21 | | | 56 | | | 87 | |
(Gain) loss on sale of assets | (87) | | | (4) | | | 18 | |
Operating income (loss) | 423 | | | 294 | | | (193) | |
Net periodic benefit income, excluding service cost | (40) | | | (85) | | | (39) | |
Interest expense, net | 155 | | | 204 | | | 192 | |
Other, net | (2) | | | (8) | | | (4) | |
Income (loss) from continuing operations before income taxes | 310 | | | 183 | | | (342) | |
Provision (benefit) for income taxes | 56 | | | 34 | | | (91) | |
Net income (loss) from continuing operations | 254 | | | 149 | | | (251) | |
Income (loss) from discontinued operations, net of tax | — | | | 6 | | | (18) | |
Net income (loss) including noncontrolling interests | 254 | | | 155 | | | (269) | |
Less net income attributable to noncontrolling interests | (6) | | | (6) | | | (5) | |
Net income (loss) attributable to United Natural Foods, Inc. | $ | 248 | | | $ | 149 | | | $ | (274) | |
| | | | | |
Basic earnings (loss) per share: | | | | | |
Continuing operations | $ | 4.28 | | | $ | 2.55 | | | $ | (4.76) | |
Discontinued operations | $ | — | | | $ | 0.10 | | | $ | (0.34) | |
Basic earnings (loss) per share | $ | 4.28 | | | $ | 2.65 | | | $ | (5.10) | |
Diluted earnings (loss) per share: | | | | | |
Continuing operations | $ | 4.07 | | | $ | 2.38 | | | $ | (4.76) | |
Discontinued operations | $ | — | | | $ | 0.09 | | | $ | (0.34) | |
Diluted earnings (loss) per share | $ | 4.07 | | | $ | 2.48 | | | $ | (5.10) | |
Weighted average shares outstanding: | | | | | |
Basic | 58.0 | | | 56.1 | | | 53.8 | |
Diluted | 61.0 | | | 60.0 | | | 53.8 | |
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| August 3, 2019 | | July 28, 2018 | | July 29, 2017 |
Net sales | $ | 21,387,068 |
| | $ | 10,226,683 |
| | $ | 9,274,471 |
|
Cost of sales | 18,602,058 |
| | 8,703,916 |
| | 7,845,550 |
|
Gross profit | 2,785,010 |
| | 1,522,767 |
| | 1,428,921 |
|
Operating expenses | 2,629,713 |
| | 1,274,562 |
| | 1,196,032 |
|
Goodwill and asset impairment charges | 292,770 |
| | 11,242 |
| | — |
|
Restructuring, acquisition and integration related expenses | 153,539 |
| | 9,738 |
| | 6,864 |
|
Operating (loss) income | (291,012 | ) | | 227,225 |
| | 226,025 |
|
Other expense (income): | | | | | |
Net periodic benefit income, excluding service cost | (34,726 | ) | | — |
| | — |
|
Interest expense, net | 179,963 |
| | 16,025 |
| | 16,754 |
|
Other, net | (957 | ) | | (1,545 | ) | | (5,152 | ) |
Total other expense, net | 144,280 |
| | 14,480 |
| | 11,602 |
|
(Loss) income from continuing operations before income taxes | (435,292 | ) | | 212,745 |
| | 214,423 |
|
(Benefit) provision for income taxes | (84,609 | ) | | 47,075 |
| | 84,268 |
|
Net (loss) income from continuing operations | (350,683 | ) | | 165,670 |
| | 130,155 |
|
Income from discontinued operations, net of tax | 65,800 |
| | — |
| | — |
|
Net (loss) income including noncontrolling interests | (284,883 | ) | | 165,670 |
| | 130,155 |
|
Less net (income) loss attributable to noncontrolling interests | (107 | ) | | — |
| | — |
|
Net (loss) income attributable to United Natural Foods, Inc. | $ | (284,990 | ) | | $ | 165,670 |
| | $ | 130,155 |
|
| | | | | |
Basic (loss) earnings per share: | | | | | |
Continuing operations | $ | (6.84 | ) |
| $ | 3.28 |
|
| $ | 2.57 |
|
Discontinued operations | $ | 1.28 |
| | $ | — |
| | $ | — |
|
Basic (loss) income per share | $ | (5.56 | ) | | $ | 3.28 |
| | $ | 2.57 |
|
Diluted (loss) earnings per share: | | | | | |
Continuing operations | $ | (6.84 | ) | | $ | 3.26 |
| | $ | 2.56 |
|
Discontinued operations | $ | 1.27 |
| | $ | — |
| | $ | — |
|
Diluted (loss) income per share | $ | (5.56 | ) | | $ | 3.26 |
| | $ | 2.56 |
|
Weighted average shares outstanding: | | | | | |
Basic | 51,245 |
| | 50,530 |
| | 50,570 |
|
Diluted | 51,537 |
| | 50,837 |
| | 50,775 |
|
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)in millions)
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
| July 30, 2022 (52 weeks) | | July 31, 2021 (52 weeks) | | August 1, 2020 (52 weeks) |
Net income (loss) including noncontrolling interests | $ | 254 | | | $ | 155 | | | $ | (269) | |
Other comprehensive income (loss): | | | | | |
Recognition of pension and other postretirement benefit obligations, net of tax(1) | (40) | | | 153 | | | (83) | |
Recognition of interest rate swap cash flow hedges, net of tax(2) | 60 | | | 42 | | | (46) | |
Foreign currency translation adjustments | (3) | | | 5 | | | (1) | |
Recognition of other cash flow derivatives, net of tax(3) | 2 | | | — | | | — | |
Total other comprehensive income (loss) | 19 | | | 200 | | | (130) | |
Less comprehensive income attributable to noncontrolling interests | (6) | | | (6) | | | (5) | |
Total comprehensive income (loss) attributable to United Natural Foods, Inc. | $ | 267 | | | $ | 349 | | | $ | (404) | |
|
| | | | | | | | | | | |
| Fiscal Year Ended |
| August 3, 2019 (53 weeks) | | July 28, 2018 (52 weeks) | | July 29, 2017 (52 weeks) |
Net (loss) income including noncontrolling interests | $ | (284,883 | ) | | $ | 165,670 |
| | $ | 130,155 |
|
Other comprehensive (loss) income: | | |
| | |
Recognition of pension and other postretirement benefit obligations, net of tax(1) | (32,458 | ) | | — |
| | — |
|
Recognition of interest rate swap cash flow hedges, net of tax(2) | (61,287 | ) | | 3,575 |
| | 4,879 |
|
Foreign currency translation adjustments | (1,029 | ) | | (3,791 | ) | | 3,537 |
|
Total other comprehensive (loss) income | (94,774 | ) | | (216 | ) | | 8,416 |
|
Less comprehensive (income) loss attributable to noncontrolling interests | (107 | ) | | — |
| | — |
|
Total comprehensive (loss) income attributable to United Natural Foods, Inc. | $ | (379,764 | ) | | $ | 165,454 |
| | $ | 138,571 |
|
(1)Amounts are net of tax (benefit) expense of $(12) million, $52 million and $(29) million, respectively.
(2)Amounts are net of tax expense (benefit) of $22 million, $13 million and $(16) million, respectively.
| |
(1) | Amounts are net of tax (benefit) expense of $(11.3) million, $0 million and $0 million for the fiscal years ended August 3, 2019, July 28, 2018 and July 29, 2017, respectively. |
| |
(2) | Amounts are net of tax (benefit) expense of $(22.5) million, $1.5 million and 3.2 million for the fiscal years ended August 3, 2019, July 28, 2018 and July 29, 2017, respectively. |
(3)Amount is net of tax expense of $1 million, $0 million, and $0 million, respectively.
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY
(In thousands)in millions)
| | | | | | | | | | | | | | | | | | | | | | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total United Natural Foods, Inc. Stockholders’ Equity | | Noncontrolling Interests | | Total Stockholders’ Equity |
| | | | | | | | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total United Natural Foods, Inc. Stockholders’ Equity | | Noncontrolling Interests | | Total Stockholders’ Equity | | Common Stock | | Treasury Stock | |
| Common Stock | | Treasury Stock | | | Shares | | Amount | | Shares | | Amount | |
| Shares | | Amount | | Shares | | Amount | | |
Balances at July 30, 2016 | 50,383 |
| | $ | 504 |
| | — |
| | $ | — |
| | $ | 436,167 |
| | $ | (22,379 | ) | | $ | 1,105,212 |
| | $ | 1,519,504 |
| | — |
| | $ | 1,519,504 |
| |
Restricted stock vestings and stock option exercises, net | 239 |
| | 2 |
| |
|
| |
|
| | (1,041 | ) | |
|
| |
|
| | (1,039 | ) | | | | (1,039 | ) | |
Share-based compensation | | | | | | | | | 26,205 |
| | | | | | 26,205 |
| | | | 26,205 |
| |
Tax deficit associated with stock plans | | | | | | | | | (1,320 | ) | | | | | | (1,320 | ) | | | | (1,320 | ) | |
Other comprehensive income | | | | | | | | | | | 8,416 |
| | | | 8,416 |
| | | | 8,416 |
| |
Net income | | | | | | | | | | | | | 130,155 |
| | 130,155 |
| | | | 130,155 |
| |
Balances at July 29, 2017 | 50,622 |
| | $ | 506 |
| | — |
| | $ | — |
| | $ | 460,011 |
| | $ | (13,963 | ) | | $ | 1,235,367 |
| | $ | 1,681,921 |
| | $ | — |
| | $ | 1,681,921 |
| |
Balances at August 3, 2019 | | Balances at August 3, 2019 | 53.5 | | | $ | 1 | | | 0.6 | | | $ | (24) | | | $ | 531 | | | $ | (109) | | | $ | 1,108 | | | $ | 1,507 | | | $ | (3) | | | $ | 1,504 | |
Cumulative effect of change in accounting principle | | | | | | | | | 1,314 |
| | | | (805 | ) | | 509 |
| | | | 509 |
| Cumulative effect of change in accounting principle | — | | | — | | | — | | | — | | | — | | | — | | | 4 | | | 4 | | | — | | | 4 | |
Restricted stock vestings and stock option exercises, net | 403 |
| | 4 |
| |
|
| |
|
| | (3,592 | ) | | | | | | (3,588 | ) | | | | (3,588 | ) | |
Share-based compensation | | | | | | | | | 25,890 |
| | | | | | 25,890 |
| | | | 25,890 |
| |
Repurchase of common stock | | | | | 615 |
| | (24,231 | ) | | | | | | | | (24,231 | ) | | | | (24,231 | ) | |
Other comprehensive loss | | | | | | | | | | | (216 | ) | | | | (216 | ) | | | | (216 | ) | |
Net income | | | | | | | | | | | | | 165,670 |
| | 165,670 |
| | | | 165,670 |
| |
Balances at July 28, 2018 | 51,025 |
| | $ | 510 |
| | 615 |
| | $ | (24,231 | ) | | $ | 483,623 |
| | $ | (14,179 | ) | | $ | 1,400,232 |
| | $ | 1,845,955 |
| | $ | — |
| | $ | 1,845,955 |
| |
Cumulative effect of change in accounting principle | | | | | | | | | | | | | 277 |
| | 277 |
| | | | 277 |
| |
Restricted stock vestings and stock option exercises, net | 471 |
| | 5 |
| | | | | | (2,613 | ) | | | | | | (2,608 | ) | | | | (2,608 | ) | |
Restricted stock vestings | | Restricted stock vestings | 0.5 | | | — | | | — | | | — | | | (1) | | | — | | | — | | | (1) | | | — | | | (1) | |
Share-based compensation | | | | | | | | | 25,954 |
| | | | | | 25,954 |
| | | | 25,954 |
| Share-based compensation | — | | | — | | | — | | | — | | | 25 | | | — | | | — | | | 25 | | | — | | | 25 | |
Other comprehensive loss | | | | | | | | | | | (94,774 | ) | |
|
| | (94,774 | ) | | | | (94,774 | ) | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (130) | | | — | | | (130) | | | — | | | (130) | |
Distributions to noncontrolling interests | | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
Proceeds from issuance of common stock, net | | Proceeds from issuance of common stock, net | 1.3 | | | — | | | — | | | — | | | 14 | | | — | | | — | | | 14 | | | — | | | 14 | |
Net (loss) income | | Net (loss) income | — | | | — | | | — | | | — | | | — | | | — | | | (274) | | | (274) | | | 5 | | | (269) | |
Balances at August 1, 2020 | | Balances at August 1, 2020 | 55.3 | | | $ | 1 | | | 0.6 | | | $ | (24) | | | $ | 569 | | | $ | (239) | | | $ | 838 | | | $ | 1,145 | | | $ | (3) | | | $ | 1,142 | |
Cumulative effect of change in accounting principle | | Cumulative effect of change in accounting principle | — | | | — | | | — | | | — | | | — | | | — | | | (9) | | | (9) | | | — | | | (9) | |
Restricted stock vestings | | Restricted stock vestings | 1.6 | | | — | | | — | | | — | | | (14) | | | — | | | — | | | (14) | | | — | | | (14) | |
Share-based compensation | | Share-based compensation | — | | | — | | | — | | | — | | | 45 | | | — | | | — | | | 45 | | | — | | | 45 | |
Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 200 | | | — | | | 200 | | | — | | | 200 | |
Distributions to noncontrolling interests | | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
Proceeds from issuance of common stock, net | | Proceeds from issuance of common stock, net | 0.1 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | | | — | | | 1 | |
Acquisition of noncontrolling interests | | | | | | | | | | | | | | | — |
| | (1,633 | ) | | (1,633 | ) | Acquisition of noncontrolling interests | — | | | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) | | | — | | | (2) | |
Net income | | Net income | — | | | — | | | — | | | — | | | — | | | — | | | 149 | | | 149 | | | 6 | | | 155 | |
Balances at July 31, 2021 | | Balances at July 31, 2021 | 57.0 | | | $ | 1 | | | 0.6 | | | $ | (24) | | | $ | 599 | | | $ | (39) | | | $ | 978 | | | $ | 1,515 | | | $ | (1) | | | $ | 1,514 | |
Restricted stock vestings | | Restricted stock vestings | 1.7 | | | — | | | — | | | — | | | (41) | | | — | | | — | | | (41) | | | — | | | (41) | |
Share-based compensation | | Share-based compensation | — | | | — | | | — | | | — | | | 44 | | | — | | | — | | | 44 | | | — | | | 44 | |
Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 19 | | | — | | | 19 | | | — | | | 19 | |
Distributions to noncontrolling interests | | | | | | | | | | | | | | | — |
| | (1,211 | ) | | (1,211 | ) | Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
Proceeds from the issuance of common stock, net | 2,005 |
| | 20 |
| | | | | | 23,837 |
| | | | | | 23,857 |
| | | | 23,857 |
| |
Net (loss) income | | | | | | | | | | | | | (284,990 | ) | | (284,990 | ) | | 107 |
| | (284,883 | ) | |
Balances at August 3, 2019 | 53,501 |
| | $ | 535 |
| | 615 |
| | $ | (24,231 | ) | | $ | 530,801 |
| | $ | (108,953 | ) | | $ | 1,115,519 |
| | $ | 1,513,671 |
| | $ | (2,737 | ) | | $ | 1,510,934 |
| |
Proceeds from issuance of common stock, net | | Proceeds from issuance of common stock, net | 0.2 | | | — | | | — | | | — | | | 8 | | | — | | | — | | | 8 | | | — | | | 8 | |
Acquisition of noncontrolling interests | | Acquisition of noncontrolling interests | — | | | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) | | | — | | | (2) | |
Net income | | Net income | — | | | — | | | — | | | — | | | — | | | — | | | 248 | | | 248 | | | 6 | | | 254 | |
Balances at July 30, 2022 | | Balances at July 30, 2022 | 58.9 | | | $ | 1 | | | 0.6 | | | $ | (24) | | | $ | 608 | | | $ | (20) | | | $ | 1,226 | | | $ | 1,791 | | | $ | 1 | | | $ | 1,792 | |
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Fiscal Year Ended |
(In thousands) | August 3, 2019 (53 weeks) | | July 28, 2018 (52 weeks) | | July 29, 2017 (52 weeks) |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
Net (loss) income including noncontrolling interests | $ | (284,883 | ) |
| $ | 165,670 |
| | $ | 130,155 |
|
Income from discontinued operations, net of tax | 65,800 |
| | — |
| | — |
|
Net (loss) income from continuing operations | (350,683 | ) | | 165,670 |
| | 130,155 |
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 246,825 |
| | 87,631 |
| | 86,051 |
|
Share-based compensation | 25,551 |
| | 25,783 |
| | 25,675 |
|
Loss on disposal of assets | 2,859 |
| | 2,820 |
| | 943 |
|
Gain associated with disposal of investment | — |
| | (699 | ) | | (6,106 | ) |
Closed property and other restructuring charges | 26,875 |
| | — |
| | 640 |
|
Goodwill and asset impairments | 292,770 |
| | 11,242 |
| | — |
|
Net pension and other postretirement benefit income | (34,553 | ) | | — |
| | — |
|
Deferred income tax benefit | (60,798 | ) | | (14,819 | ) | | (1,891 | ) |
LIFO charge | 24,120 |
| | — |
| | — |
|
Change in accounting estimate | — |
| | (20,909 | ) | | — |
|
Provision for doubtful accounts | 9,749 |
| | 12,006 |
| | 5,728 |
|
Loss on debt extinguishment | 2,903 |
| | — |
| | — |
|
Excess tax deficit from share-based payment arrangements | — |
| | — |
| | 1,320 |
|
Non-cash interest expense | 12,751 |
| | 275 |
| | 175 |
|
Changes in operating assets and liabilities, net of acquired businesses | | | | | |
Accounts receivable | 52,735 |
| | (67,283 | ) | | (38,757 | ) |
Inventories | 177,094 |
| | (108,795 | ) | | (6,929 | ) |
Prepaid expenses and other assets | (43,167 | ) | | 4,473 |
| | (6,383 | ) |
Accounts payable | (40,149 | ) | | 3,961 |
| | 82,772 |
|
Accrued expenses, other liabilities and other | (169,760 | ) | | 7,682 |
| | (62 | ) |
Net cash provided by operating activities of continuing operations | 175,122 |
|
| 109,038 |
| | 273,331 |
|
Net cash provided by operating activities of discontinued operations | 109,408 |
| | — |
| | — |
|
Net cash provided by operating activities | 284,530 |
| | 109,038 |
| | 273,331 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
Capital expenditures | (207,817 | ) | | (44,608 | ) | | (56,112 | ) |
Purchases of acquired businesses, net of cash acquired | (2,292,435 | ) | | (39 | ) | | (9,207 | ) |
Proceeds from dispositions of assets | 173,747 |
| | 283 |
| | 168 |
|
Proceeds from disposal of investments | — |
| | 756 |
| | 9,192 |
|
Payments for long-term investment | (110 | ) | | (3,397 | ) | | (2,000 | ) |
Payment of company owned life insurance premiums | (170 | ) | | — |
| | (2,000 | ) |
Net cash used in investing activities of continuing operations | (2,326,785 | ) |
| (47,005 | ) | | (59,959 | ) |
Net cash provided by investing activities of discontinued operations | 67,998 |
| | — |
| | — |
|
Net cash used in investing activities | (2,258,787 | ) | | (47,005 | ) | | (59,959 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
Proceeds from borrowings of long-term debt | 1,926,642 |
| | — |
| | — |
|
Proceeds from borrowings under revolving credit line | 3,971,504 |
| | 556,061 |
| | 215,662 |
|
Proceeds from issuance of other loans | 22,358 |
| | — |
| | — |
|
Repayments of borrowings under revolving credit line | (3,101,679 | ) | | (569,671 | ) | | (418,693 | ) |
Repayments of long-term debt and capital lease obligations | (779,909 | ) | | (12,128 | ) | | (11,546 | ) |
Repurchase of common stock | — |
| | (24,231 | ) | | — |
|
Proceeds from the issuance of common stock and exercise of stock options | 23,975 |
| | 975 |
| | 274 |
|
Payment of employee restricted stock tax withholdings | (2,727 | ) | | (4,563 | ) | | (1,313 | ) |
Excess tax deficit from share-based payment arrangements | — |
| | — |
| | (1,320 | ) |
Payments for debt issuance costs | (62,600 | ) | | — |
| | (180 | ) |
Net cash provided by (used in) financing activities of continuing operations | 1,997,564 |
| | (53,557 | ) | | (217,116 | ) |
Net cash used in by financing activities of discontinued operations | (1,212 | ) | | — |
| | — |
|
Net cash provided by (used in) financing activities | 1,996,352 |
|
| (53,557 | ) | | (217,116 | ) |
EFFECT OF EXCHANGE RATE ON CASH | (143 | ) |
| (575 | ) | | 565 |
|
|
| | | | | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 21,952 |
|
| 7,901 |
| | (3,179 | ) |
Cash and cash equivalents at beginning of period | 23,315 |
|
| 15,414 |
| | 18,593 |
|
Cash and cash equivalents at end of period | 45,267 |
| | 23,315 |
| | 15,414 |
|
Less: cash and cash equivalents of discontinued operations | (2,917 | ) | | — |
| | — |
|
Cash and cash equivalents of continuing operations | $ | 42,350 |
| | $ | 23,315 |
| | $ | 15,414 |
|
Supplemental disclosures of cash flow information: | |
| | | |
Cash paid for interest | $ | 183,042 |
|
| $ | 16,471 |
| | $ | 17,115 |
|
Cash paid for federal and state income taxes, net of refunds | $ | 77,676 |
|
| $ | 64,042 |
| | $ | 78,984 |
|
| | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
(in millions) | July 30, 2022 (52 weeks) | | July 31, 2021 (52 weeks) | | August 1, 2020 (52 weeks) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income (loss) including noncontrolling interests | $ | 254 | | | $ | 155 | | | $ | (269) | |
Income (loss) from discontinued operations, net of tax | — | | | 6 | | | (18) | |
Net income (loss) from continuing operations | 254 | | | 149 | | | (251) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 285 | | | 285 | | | 282 | |
Share-based compensation | 44 | | | 45 | | | 25 | |
(Gain) loss on sale of assets | (87) | | | (4) | | | 18 | |
Closed property and other restructuring charges | 2 | | | 6 | | | 46 | |
Goodwill impairment charges | — | | | — | | | 425 | |
Net pension and other postretirement benefit income | (40) | | | (85) | | | (39) | |
Deferred income tax expense (benefit) | 55 | | | (5) | | | (71) | |
LIFO charge | 158 | | | 24 | | | 18 | |
Provision for losses on receivables | 2 | | | (5) | | | 46 | |
Non-cash interest expense and other adjustments | 24 | | | 51 | | | 15 | |
Changes in operating assets and liabilities, net of acquired businesses | | | | | |
Accounts and notes receivable | (108) | | | 24 | | | (124) | |
Inventories | (264) | | | 14 | | | (111) | |
Prepaid expenses and other assets | (155) | | | (37) | | | 113 | |
Accounts payable | 86 | | | 15 | | | 107 | |
Accrued expenses and other liabilities | 75 | | | 137 | | | (42) | |
| | | | | |
| | | | | |
Net cash provided by operating activities | 331 | | | 614 | | | 457 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Payments for capital expenditures | (251) | | | (310) | | | (173) | |
| | | | | |
Proceeds from dispositions of assets | 230 | | | 82 | | | 147 | |
Other | (28) | | | (11) | | | (2) | |
Net cash used in investing activities of continuing operations | (49) | | | (239) | | | (28) | |
Net cash provided by investing activities of discontinued operations | — | | | 2 | | | 27 | |
Net cash used in investing activities | (49) | | | (237) | | | (1) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Proceeds from borrowings of long-term debt | — | | | 500 | | | 2 | |
Proceeds from borrowings under revolving credit line | 4,425 | | | 3,676 | | | 4,278 | |
Proceeds from issuance of other loans | — | | | — | | | 6 | |
Repayments of borrowings under revolving credit line | (4,287) | | | (3,731) | | | (4,601) | |
Repayments of long-term debt and finance leases | (376) | | | (792) | | | (122) | |
Proceeds from the issuance of common stock and exercise of stock options | 8 | | | 1 | | | 14 | |
Payment of employee restricted stock tax withholdings | (41) | | | (14) | | | (1) | |
Payments for debt issuance costs | (6) | | | (13) | | | — | |
Distributions to noncontrolling interests | (4) | | | (4) | | | (5) | |
Repayments of other loans | — | | | (6) | | | (24) | |
Other | 2 | | | (1) | | | — | |
| | | | | |
| | | | | |
Net cash used in financing activities | (279) | | | (384) | | | (453) | |
EFFECT OF EXCHANGE RATE ON CASH | — | | | 1 | | | (1) | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 3 | | | (6) | | | 2 | |
Cash and cash equivalents, at beginning of period | 41 | | | 47 | | | 45 | |
Cash and cash equivalents, at end of period | $ | 44 | | | $ | 41 | | | $ | 47 | |
| | | | | |
| | | | | |
| | | | | |
Supplemental disclosures of cash flow information: | | | | | |
Cash paid for interest | $ | 134 | | | $ | 146 | | | $ | 182 | |
Cash payments (refunds) for federal, state and foreign income taxes, net | $ | 5 | | | $ | (16) | | | $ | (22) | |
Additions of property and equipment included in Accounts payable | $ | 45 | | | $ | 35 | | | $ | 27 | |
See accompanying Notes to Consolidated Financial Statements.
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United Natural Foods, Inc. and its subsidiaries (the “Company”, “we”, “us”, “UNFI”, or “our”) is a leading distributor of natural, organic, specialty, produce, and conventional grocery and non-food products, and provider of support services in the United States and Canada. On October 22, 2018, we acquired all of the outstanding equity securities of SUPERVALU INC. (“Supervalu”); refer to Note 4—Acquisitions for further information.retailers. The Company sells its products primarily throughout the United States and Canada.
Fiscal Year
OurThe Company’s fiscal years end on the Saturday closest to July 31 and contain either 52 or 53 weeks. References to fiscal 20192022, fiscal 2021 and fiscal 2020, or 2019,2022, 2021 and 2020, as presented in tabular disclosure, fiscal 2018 or 2018, and fiscal 2017 or 2017, relate to the 53-week,52-week, 52-week and 52-week fiscal periods ended July 30, 2022, July 31, 2021 and August 3, 2019, July 28, 2018 and July 29, 2017,1, 2020, respectively.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of the Company and its wholly and majority-owned subsidiaries. The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation, with the exception of sales transactions from continuing to discontinued operations for wholesale supply discussed further in Note 3—Revenue Recognition.consolidation. Unless otherwise indicated, references to the Consolidated Statements of Operations and the Consolidated Balance Sheets in the Notes to the Consolidated Financial Statements exclude all amounts related to discontinued operations. Refer to Note 19—18—Discontinued Operations for additional information including accounting policies, about the Company’s discontinued operations. The remaining two stores previously included in discontinued operations were sold in fiscal 2022.
Net Sales
Our Net sales consist primarily of product sales of conventional, natural, organic, specialty, produce and produceconventional grocery and non-food products, and provision of support services torevenue from retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue. Net sales also include amounts charged by the Company to customers for shipping and handling and fuel surcharges. Vendor incentives do not reduce sales in circumstances where the vendor tenders the incentive to the customer, when the incentive is not a direct reimbursement from a vendor, when the incentive is not influenced by or negotiated in conjunction with any other incentive arrangements and when the incentive is not subject to an agency relationship with the vendor, whether expressed or implied.
The Company recognizes revenue in an amount that reflects the consideration that is expected to be received for goods or services when its performance obligations are satisfied by transferring control of those promised goods or services to its customers. Accounting Standards Codification (“ASC”) 606 defines a five-step process to recognize revenue that requires judgment and estimates, including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when or as the performance obligation is satisfied.
Revenues from wholesale product sales are recognized when control is transferred, which typically happens upon either shipment or delivery, depending on the contract terms with the customer. Typically, shipping and customer receipt of wholesale products occur on the same business day. Discounts and allowances provided to customers are recognized as a reduction in Net sales as control of the products is transferred to customers. The Company recognizes freight revenue related to transportation of its products when control of the product is transferred, which is typically upon delivery.
Revenues from Retail product sales are recognized at the point of sale upon customer check-out. Advertising income earned from our franchisees that participate in our Retail advertising program are recognized as Net sales. The Company recognizes loyalty program expense in the form of fuel rewards as a reduction of Net sales.
Sales tax is excluded from Net sales. Limited rights of return exist with our customers due to the nature of the products we sell.
Refer to Note 3—Revenue Recognition for additional information regarding the Company’s revenue recognition policies.
Cost of Sales
Cost of sales consist primarily of amounts paid to suppliers for product sold, plus transportation costs necessary to bring the product to, or move product between, the Company’s distribution facilities and retail stores, partially offset by consideration received from suppliers in connection with the purchase, transportation or promotion of the suppliers’ products. Retail store advertising expenses are components of Cost of sales also includes production and labor costs for the Company’s Woodstock Farms manufacturing business.are expensed as incurred.
The Company receives allowances and credits from vendors for buying activities, such as volume incentives, promotional allowances directed by the Company to customers, cash discounts and new product introductions (collectively referred to as “vendor funds”), which are typically based on contractual arrangements covering a period of one year or less. The Company recognizes vendor funds for merchandising activities as a reduction of Cost of sales when the related products are sold, unless it has been determined that a discrete identifiable benefit has been provided to the vendor, in which case the related amounts are recognized within Net sales. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as a reduction to the cost of inventory. When payments or rebates can be reasonably estimated and it is probable that the specified target will be met, the payment or rebate is accrued. However, when attaining the milestonetarget is not probable, the payment or rebate is recognized only when and if the milestonetarget is achieved. Any upfront payments received for multi-period contracts are generally deferred and
amortized over the life of the contracts. The majority of the vendor fund contracts have terms of less than a year, with a small proportion of the contracts longer than one year.
Shipping and Handling Fees and Costs
The Company includes shipping and handling fees billed to customers in netNet sales. Shipping and handling costs associated with inbound freight are recorded in Cost of sales, whereas shipping and handling costs for receiving, selecting, quality assurance, and outbound transportation are recorded in Operating expenses. Outbound shipping and handling costs, including allocated employee benefit expenses that are recorded in Operating expenses, totaled $1,298.9$1,737 million, $582.9$1,513 million and $517.2$1,505 million for fiscal 2019, 2018,2022, 2021 and 2017,2020, respectively.
Operating Expenses
Operating expenses include distribution expenses of warehousing, delivery, purchasing, receiving, selecting, and Other Expenses
Operatingoutbound transportation expenses, and selling and administrative expenses. These expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation and amortization expense. Other expense, (income),and share-based compensation expense.
Restructuring, Acquisition and Integration Related Expenses
Restructuring, acquisition and integration related expenses reflect expenses resulting from restructuring activities, including severance costs, facility closure asset impairment charges and costs, share-based compensation acceleration charges and acquisition and integration related expenses. Integration related expenses include certain professional consulting expenses related to business transformation and incremental expenses related to combining facilities required to optimize our distribution network as a result of acquisitions.
(Gain) Loss on Sale of Assets
(Gain) loss on sale of assets includes (gain) loss on sale of assets and non-cash charges related to changes in plans of sales of discontinued operations. In fiscal 2022, the Company recorded a gain on sale related to our Riverside, California distribution center. Refer to Note 11—Leases for additional information on this gain on sale. In fiscal 2020, the Company recorded a non-cash charge of $50 million to reduce the carrying amount of Retail’s property and equipment, and intangible assets for any depreciation and amortization expense that would have been recognized had the assets been held and used as part of continuing operations since their acquisition date through the end of fiscal 2020, which was comprised of $39 million related to property and equipment, and $11 million related to intangible assets.
Interest Expense, Net
Interest expense, net includes primarily interest expense on outstanding indebtedness, including direct financing and capitallong-term debt, net of capitalized interest, loss on debt extinguishment, interest expense on finance lease obligations, net periodic benefit plan income, excluding serviceamortization of financing costs and discounts, and interest income and miscellaneous income and expenses.income.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported therein. Due toamounts of revenues and expenses during the inherent uncertainty involved in making estimates, actualreporting period. Actual results reported in future periods may be based on amounts thatcould differ from those estimates.
Change in Accounting EstimateReclassifications
As a result of growth in net sales and inventory in fiscal 2018, and the changes in processing and the resulting increase in the Company’s estimate of its accrual for inventory purchases, the Company initiated a review of its vendor invoicing processes and undertook a review of its estimate of its accrual for inventory purchases. In the third quarter of fiscal 2018, the Company finalized its analysis and review of its accrual for inventory purchases, including a historical data analysis of unmatched and partially matched amounts that were aged greater than twelve months and the ultimate resolution of such aged accruals. Based on its analysis, the Company determined that it could reasonably estimate the outcome of its partially matched vendor invoices upon receipt of such invoice rather than when the amount was aged greater than twelve months and a liability was no longer considered probable. As a result of this change in estimate, Accounts payable was reduced by $20.9 million, resulting in an increase to net income of $13.9 million, or $0.27 per diluted share, for fiscal 2018.
Change in Inventory Accounting Policy
Inventories are valued at the lower of cost or market. Prior to fiscal 2019, inventory cost was determined using the first-in, first-out (“FIFO”) method. For a substantial portion of legacy Supervalu inventory, cost was determined using the last-in, first-out (“LIFO”) method, with the rest primarily determined using FIFO. Inventories acquired as part of the Supervalu acquisition were recorded at their fair market values as of the acquisition date. During the second quarter of fiscal 2019, the Company completed its evaluation of its combined inventory accounting policies and changed its method of inventory costing for certain historical United Natural Foods, Inc. inventory from the FIFO accounting method to the LIFO accounting method. The Company concluded that the LIFO method of inventory costing is preferable because it allows for better matching of costs and revenues, as historical inflationary inventory acquisition prices are expected to continue in the future and the LIFO method uses the current acquisition cost to value cost of goods sold as inventory is sold. Additionally, LIFO allows for better comparability of the results of the Company’s operations with those of similar companies in its peer group. As a result of the change to the LIFO method, certain Company inventories, excluding Supervalu inventories, were reduced by $15.0 million for fiscal 2019, which resulted in increases to Cost of sales and Loss from continuing operations before income taxes of the same amount inWithin the Consolidated Financial Statements of Operations for fiscal 2019. This resulted in an increase to Net loss from continuing operations of $11.0 million, or $0.21 per diluted share, for fiscal 2019. The Company has not retrospectively adjustedcertain immaterial amounts prior to fiscal 2019 in its Consolidated Balance Sheets or Consolidated Statements of Operations, as applying the change in accounting policy prior to fiscal 2019 is not practicable due to data limitations of inventory costs in prior periods.
Change in Book Overdraft Accounting Policy
In the first quarter of fiscal 2019, the Company changed its accounting policy for reporting book overdrafts in the Consolidated Statements of Cash Flows. Amounts previously reported as increase in bank overdrafts on the Consolidated Statements of Cash Flows represent outstanding checks issued but not yet presented to financial institutions for disbursement in excess of positive balances held at financial institutions, and as such represent book overdrafts. Book overdrafts are included within the Accounts payable balance in the Consolidated Balance Sheets. The change in these book overdraft amounts were previously reported as financing activities cash flows on the Consolidated Statements of Cash Flows, on a line item titled Increase in bank overdrafts. The Company has elected a preferable accounting policy presentation for classifying the change in book overdrafts from financing activities to operating activities, which resulted in the reclassification of prior period amounts to conform to the current period presentation. The Company concluded that operating activity classification is preferable, as book overdrafts do not result in financial institution borrowing or repayment activity at the end of respective reporting periods and the presentation presents a more accurate disclosure of its cash generation and consumption activities. The reclassification resulted in decreases to cash provided by operating activities of $0.4 million and $7.4 million, and corresponding decreases in cash used in financing activities for fiscal 2018 and 2017, respectively. The reclassification had no effect on previously reported Consolidated Balance Sheets, Consolidated Statements of Operations or Consolidated Statements of Stockholders’ Equity.
Reclassifications
Certain prior year amounts within the Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Stockholder’s Equity and Consolidated Statements of Cash Flows have been reclassified to conform to thewith current period’syear presentation.
Reclassifications of prior year amounts within the Consolidated Balance Sheets include:
the reclassification of Accrued compensation and benefits to present separately from Accrued expenses and other current liabilities;
the reclassification of Notes payable balances into Long-term debt;
the reclassification of the long-term portion of capital lease obligations from Long-term debt to present separately within Long-term capital lease obligations; and
the reclassification of residual financing obligations of $7.4 million associated with build-to-suit properties for which the Company is not obligated to fund unless it is obligated under a future extension of a lease agreement from the Long-term capital lease obligations to Other long-term liabilities.
Reclassifications of prior year amounts within the Consolidated Statements of Operations include:
the reclassification of goodwill and asset impairment charges of $11.2 million from a line item previously titled Restructuring and asset impairment charges to a new line item titled Goodwill and asset impairment charges;
the reclassification of acquisition costs previously included within Operating expenses of $5.0 million to a new line item titled Restructuring, acquisition and integration related expenses; and
the combination of Interest expense and Interest income to present the same amounts within Interest expense, net.
Within the Consolidated Statements of Cash Flows, prior year amounts for asset impairment charges have been reclassified within operating activities in a line item titled Goodwill and asset impairment charges. These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less. OurThe Company’s banking arrangements allow usit to fund outstanding checks when presented to the financial institution for payment. We fundThe Company funds all intraday bank balance overdrafts during the same business day. Checks outstanding in excess of bank balances create book overdrafts, which are recorded in Accounts payable in the Consolidated Balance Sheets and are reflected as an operating activity in the Consolidated Statements of Cash Flows. As of August 3, 2019July 30, 2022 and July 28, 2018, we31, 2021, the Company had net book overdrafts of $236.9$266 million and $115.8$268 million, respectively.
Accounts Receivable, Net
Accounts receivable, net primarily consist of trade receivables from customers and net receivable balances from suppliers. In determining the adequacy of the allowances, management analyzes customer creditworthiness, aging of receivables, payment terms, the value of the collateral, customer financial statements, historical collection experience aging of receivables and other economic and industry factors. In instances where a reserve has been recorded for a particular customer, future sales to the customer are conducted using either cash-on-delivery terms, or the account is closely monitored so that as agreed upon payments are received and then orders are released; a failure to pay results in held or canceled orders.
Inventories
Inventories, Net
Substantially all of the Company’s inventories consist primarily of finished goods and are valuedgoods. To value discrete inventory items at the lower of cost or net realizable value withbefore application of any last-in, first-out (“LIFO”) reserve, the Company utilizes the weighted average cost primarily being determined usingmethod, perpetual cost method, the LIFOretail inventory method and under FIFO for inventories such as perishables and other inventory.the replacement cost method. Allowances for vendor funds and cash discounts received from suppliers are recorded as a reduction to Inventories, net and subsequently within Cost of sales upon the sale of the related products. Inventory quantities are evaluated throughout each fiscal year based on actual physical counts in our distribution facilities and stores. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the end of each fiscal year. As of August 3, 2019,July 30, 2022 and July 31, 2021, approximately $1.6$1.9 billion and $1.8 billion, respectively, of inventory was valued under the LIFO method, before the application of a LIFO reserve, and primarily included grocery, frozen food and general merchandise products, with the remaining inventory valued under the FIFOfirst-in, first-out (“FIFO”) method and primarily included meat, dairy and deli products. The LIFO reserve was approximately $225 million and $65 million as of July 30, 2022 and July 31, 2021, respectively, which is recorded within Inventories, net on the Consolidated Balance Sheets.
Property and Equipment, Net and Amortizing Intangible Assets
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation expense is based on the estimated useful lives of the assets using the straight-line method. Applicable interest charges incurred during the construction of new facilities are capitalized as one of the elements of cost and are amortized over the assets’ estimated useful lives if certain criteria are met. Refer to Note 6—5—Property and Equipment, Net for additional information.
Capital lease assets are stated at the lower
The Company reviews long-lived assets, including amortizing intangible assets, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. The Company groups long-lived assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the evaluation indicates that the carrying amount of an asset group may not be recoverable, the potential impairment is measured based on a fair value discounted cash flow model or a market approach method.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company records liabilities to address uncertain tax positions we have taken in previously filed tax returns or that we expect to take in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that our tax position, based on technical merits, will be sustained upon examination. For those positions for which we conclude it is more likely than not it will be sustained, we recognize the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded.
The Company allocates tax expense among specific financial statement components using a “with-or-without” approach. Under this approach, the Company first determines the total tax expense or benefit (current and deferred) for the period. The Company then calculates the tax effect of pretax income from continuing operations only. The residual tax expense is allocated on a proportional basis to other financial statement components (i.e. discontinued operations, other comprehensive income).
Goodwill and Intangible Assets, Net
We accountThe Company accounts for acquired businesses using the purchase method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the acquisition date at their respective estimated fair values. Goodwill represents the excess acquisition cost over the fair value of net assets acquired in a business combination. Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that generated the goodwill. Goodwill reporting units exist at or one level below the operating segment level unless they are determined to be economically similar, and are evaluated for events or changes in circumstances indicating a goodwill reporting unit has changed. Relative fair value allocations are performed when components of an aggregated goodwill reporting unit become separate reporting units. Referunits or move from one reporting unit to Note 7—another.
Goodwill and Intangible Assets for additional information regarding the Company’s fiscal 2019 impairment reviews, changes to its reporting units and other information. Refer to Note 4—Acquisitionsfor further detail on the valuation of goodwill and intangible assets related to specific acquisitions.
Intangible Assets, Net
Indefinite-lived intangible assets include a branded product line asset group and a Tony’s Fine Foods (“Tony’s”) tradename. Indefinite-lived intangible assets areis reviewed for impairment at least annually as of the first day of the fourth fiscal quarter and if events occur or circumstances change that would indicate that the value of the reporting unit may be impaired. The Company performs qualitative assessments of Goodwill for impairment. If the qualitative assessment indicates it is more likely than not that a reporting unit’s fair value is less than the carrying value, or the Company bypasses the qualitative assessment, a quantitative assessment would be performed. When a quantitative assessment is required, the Company estimates the fair values of its reporting units by using the market approach, applying a multiple of earnings based on guidelines for publicly traded companies, and/or the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit. Refer to Note 6—Goodwill and Intangible Assets, Net for additional information regarding the Company’s goodwill impairment reviews, changes to its reporting units and other information.
Indefinite-lived intangible assets include a branded product line and a Tony’s Fine Foods tradename. Indefinite-lived intangible assets are reviewed for impairment at least annually as of the first day of the fourth fiscal quarter and more frequently if events occur or circumstances change that would indicate that the value of the asset may be impaired. The Company performed aannual qualitative reviewreviews of its indefinite lived intangible assets, including Goodwill, in fiscal 2019,2022, 2021 and 2020, which indicated a quantitative assessment was not required. During fiscal 2018,
When a quantitative assessment is required, the Company performed its annual qualitative assessment of its indefinite lived intangible assets and determined that a quantitative analysis was required forestimates the Tony’s tradename. Based on the results of its quantitative test performed, the Company determined that the fair value was in excess of its carrying value and no impairment existed.
In determining the estimated fair value for intangible assets we typically utilizeutilizing the income approach, which discounts the projected future net cash flow using an appropriate discount rate that reflects the risks associated with such projected future cash flow. Refer to Note 7—6—Goodwill and Intangible Assets, and Note 4—AcquisitionsNet for additional information on the Company’s intangible assets.
The Company performs qualitative assessments of goodwill and indefinite lived intangibles assets for impairment. If the qualitative assessment indicates it is more likely than not that a reporting unit’s or intangible asset’s fair value is less than the carrying value, or the Company bypasses the qualitative assessment, a quantitative assessment would be performed.
The Company reviews long-lived assets, including definite-lived intangible assets, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. If the evaluation indicates that the carrying amount of an asset may not be recoverable, the potential impairment is measured based using the income approach. The Company groups long-lived assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.
Intangible assets with definite lives are amortized on a straight-line basis over the following lives:
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| | | | |
Customer relationships | 7-2010 - 20 years |
Non-competition agreementsTrademarks and tradenames | 1-102 - 10 years |
Trademarks and tradenamesFavorable operating leases | 2-102 - 8 years |
Leases in placeUnfavorable operating leases | 1-92 - 8 years |
Favorable operating leases | 2-25 years |
Unfavorable operating leases | 2-25 years |
Pharmacy prescription files | 5-77 years |
Business Dispositions
The Company reviews the presentation of planned business dispositions in the Consolidated Financial Statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results. In addition, the Company evaluates whether the business has met the criteria as a business held for sale. In order for a planned disposition to be classified as a business held for sale, the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year.
Planned business dispositions are presented as discontinued operations when all the criteria described above are met. Operations of the business components meeting the discontinued operations requirements are presented within Income from discontinued operations, net of tax in the Consolidated Statements of Operations, and assets and liabilities of the business component planned to be disposed of are presented as separate lines within the Consolidated Balance Sheets. See Note 19—18—Discontinued Operations for additional information.
The carrying value of the business held for sale is reviewed for recoverability upon meeting the classification requirements. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill,Goodwill, indefinite lived intangible assets and other assets are assessed. After the valuation process is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell, and no additional depreciation or amortization expense is recognized.
There are inherent judgments and estimates used in determining the fair value less costs to sell of a business and any impairment charges. The sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to closing.
Investments
The Company has long term investments in unconsolidated entities, which it accounts for using either the cost method or the equity method of accounting. Investments in which the Company cannot exercise significant influence over the operating and financial policies of the investee are recorded at their historical cost. Investments where the Company has the ability to exercise significant influence over the investee are accounted for using the equity method, with income or loss attributable to the Company from the investee adjusting the carrying value of the investment and recorded in the Company’s Consolidated Statements of Operations. The carrying values of both cost and equity method investments were not material for fiscal 2019 or 2018, either individually or in the aggregate, and are included within Other assets in the Consolidated Balance Sheets. Income attributable to investments accounted for using the equity method is not material for fiscal 2019, 2018, or 2017, and is recorded in Other, net, within the Consolidated Statements of Operations.
On May 24, 2017, the Company sold its stake in Kicking Horse Coffee, a Canadian roaster and marketer of organic and fair trade coffee, which was accounted for using the cost method of accounting. As a result of the sale, the Company recognized a pre-tax gain of $6.1 million in fiscal 2017, which is included in Other, net in the Consolidated Statements of Operations.
Fair Value of Financial Instruments
Financial assets and liabilities measured on a recurring basis, and non-financial assets and liabilities that are recognized on a non-recurring basis, are recognized or disclosed at fair value on at least an annual basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value:
•Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2 Inputs—Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data.
•Level 3 Inputs—One or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value
measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation.
The carrying amounts of the Company’s financial instruments including cashCash and cash equivalents, accountsAccounts receivable, accountsAccounts payable and certain accruedAccrued expenses and otherOther assets and liabilities approximate fair value due to the short-term nature of these instruments.
Share-Based Compensation
Share-based compensation consists of time-based restricted stock units, performanceperformance-based restricted units, stock options and Supervalu replacement awards.SUPERVALU INC. (“Supervalu”) Replacement Awards (as defined below). Share-based compensation expense is measured by the fair value of the award on the date of grant. The Company recognizes share-basedShare-based compensation expense on a straight-line basis over the requisite service period of the individual grants. Forfeitures are recognized as reductions to share-basedShare-based compensation when they occur. The grant date closing price per share of the Company’s stock is used to determine the fair value of restricted stock units. Supervalu Replacement Awards arewere liability classified awards as they may ultimately be settled in cash or shares at the discretion of the employee. The Company’s Chief Executive Officer and Chairman and other executive officers and members of senior management have been granted performance units which vest, when and if earned, in accordance with the terms of the related performance unit award agreements. The Company recognizes share-basedShare-based compensation expense based on the target number of shares of common stock and the Company’s stock price on the date of grant and subsequently adjusts expense based on actual and forecasted performance compared to planned targets. Stock options are granted at exercise prices equal to the fair market value of the Company’s stock at the dates of grant. The fair value of stock option grants is estimated at the date of grant using the Black-Scholes option pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and expected life. Expected volatilities utilized in the model are based on the historical volatility of the Company’s stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The model incorporates exercise and post-vesting forfeiture assumptions based on an analysis of historical data. The expected term is derived from historical information and other factors. Share-based compensation expense is recognized within Operating expenses for ongoing employees and in certain instances is recorded within Restructuring, acquisition and integration related expenses when an employee is notified of termination and their awards become accelerated. Refer to Note 13—12—Share-Based Awards for additional information.
Benefit Plans
The Company recognizes the funded status of its company-sponsoredCompany-sponsored defined benefit plans which it assumed in the first quarter of fiscal 2019 through the acquisition of Supervalu, in the Consolidated Balance Sheets and gains or losses and prior service costs or credits not yet recognized as a component of Accumulated other comprehensive loss, net of tax, in the Consolidated Balance Sheets. The Company measures its defined benefit pension and other postretirement plan obligations as of the nearest calendar month end. The Company records netNet periodic benefit income or expense related to interest cost, expected return on plan assets and the amortization of actuarial gains and losses, excluding service costs, in the Consolidated Statements of Operations within Total other expense, net.Net periodic benefit income, excluding service cost. Service costs are recorded in Operating expenses in the Consolidated Statements of Operations.
The Company sponsors pension and other postretirement plans in various forms covering participants who meet eligibility requirements. The determination of the Company’s obligation and related income or expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in healthcare costs. These assumptions are disclosed in Note 14—13—Benefit Plans. Actual results that differ from the assumptions are accumulated and amortized over future periods.
The Company contributes to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. Pension expense for these plans is recognized as contributions are funded. In addition, the Company provides postretirement health and welfare benefits for certain groups of union and non-union employees. See Note 14—13—Benefit Plans for additional information on participation in multiemployer plans.
Earnings Per Share
Basic earnings per share is calculated by dividing net income (loss) income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adding the dilutive potential common shares to the weighted average number of common shares that were outstanding during the period. For purposes of the diluted earnings per share calculation, outstanding stock options, restricted stock units and performance-based awards, if applicable, are considered common stock equivalents, using the treasury stock method.
Treasury Stock
The Company records the repurchase of shares of common stock at cost based on the settlement date of the transaction. These shares are classified as treasuryTreasury stock, which is a reduction to stockholders’Stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.
On October 6, 2017, the Company announced that itsIn September 2022, our Board of Directors authorized a sharenew repurchase program for up to $200.0$200 million of our Common stock over a term of four years (the “2022 Repurchase Program”). Upon approval of the Company’s outstanding common stock. The2022 Repurchase Program, our Board terminated the repurchase program is scheduledauthorized in October 2017, which provided for the purchase of up to expire upon the Company’s repurchase$200 million of shares of the Company’s commonour outstanding Common stock having an aggregate purchase price of $200.0 million. The Company repurchased 614,660 shares of its common stock at an aggregate cost of $24.2 million in fiscal 2018. The Company(the "2017 Repurchase Program"). We did not repurchase any shares of its commonour Common stock in fiscal 2019.2022, 2021 or 2020 pursuant to the 2017 Repurchase Program. As of July 30, 2022, we had $176 million remaining authorized under the 2017 Repurchase Program. Refer to Note 9—Long-Term Debt for information the Company’s credit facilities’ limitations on its ability to repurchase shares of Common stock above certain levels unless certain conditions and financial tests are met.
Comprehensive Income (Loss)
Comprehensive income (loss) is reported in the Consolidated Statements of Comprehensive Income. Comprehensive income (loss) includes all changes in stockholders’Stockholders’ equity during the reporting period, other than those resulting from investments by and distributions to stockholders. OurThe Company’s comprehensive income (loss) is calculated as Net income (loss) income including noncontrolling interests, plus or minus adjustments for foreign currency translation related to the translation of UNFI Canada, Inc. (“UNFI Canada”) from the functional currency of Canadian dollars to U.S. dollar reporting currency, changes in the fair value of cash flow hedges, net of tax, and changes in defined pension and other postretirement benefit plan obligations, net of tax, less comprehensive income attributable to noncontrolling interests.
Accumulated other comprehensive loss represents the cumulative balance of otherOther comprehensive income (loss) income,, net of tax, as of the end of the reporting period and relates to foreign currentcurrency translation adjustments, and unrealized gains or losses on cash flow hedges, net of tax and changes in defined pension and other postretirement benefit plan obligations, net of tax.
Derivative Financial Instruments
The Company is exposedutilizes derivative financial instruments to market risks arising frommanage its exposure to changes in interest rates, fuel costs, and with the operation of UNFI Canada, foreign currency exchange rates. The Company usesAll derivatives principallyare recognized on the Company’s Consolidated Balance Sheets at fair value based on quoted market prices or estimates, and are recorded in either current or noncurrent assets or liabilities based on their maturity. Changes in the managementfair value of interest ratederivatives are recorded in comprehensive income or net earnings, based on whether the instrument is designated and fuel price exposure. From time to timeeffective as a hedge transaction and, if so, the Company may use contracts to hedge transactions in foreign currency. The Company does not utilize derivatives that contain leverage features. For derivative transactions accounted for as hedges, on the date the Company enters into the derivative transaction, the exposure is identified. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking thetype of hedge transaction. In this documentation,Gains or losses on derivative instruments are recorded in Accumulated other comprehensive loss and are reclassified to earnings in the Company specifically identifies the asset, liability, firm commitment, forecasted transaction, or net investment that has been designated asperiod the hedged item and states how the hedging instrument is expected to reduce the risks related toaffects earnings. If the hedged item.relationship ceases to exist, any associated amounts reported in Accumulated other comprehensive loss are reclassified to earnings at that time. The Company measures effectiveness of its hedging relationships both at hedge inception and on an ongoing basis as needed.basis.
Self-Insurance Liabilities
The Company is primarily self-insured for workers’ compensation, general and automobile liability insurance. It is the Company’s policy to record the self-insured portion of workers’ compensation, general and automobile liabilities based upon actuarial methods to estimate the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported, discounted at a risk-free interest rate. The present value of such claims was calculated using a discount rates ranging from 1.9 percent to 3.0 percent.rate of 3% and 2% as of July 30, 2022 and July 31, 2021, respectively.
Changes in our insurancethe Company’s self-insurance liabilities consisted of the following:
| | | | | | | | | | | | | | | | | |
(in millions) | 2022 | | 2021 | | 2020 |
Beginning balance | $ | 103 | | | $ | 101 | | | $ | 89 | |
| | | | | |
Expense | 44 | | | 48 | | | 44 | |
Claim payments | (50) | | | (48) | | | (36) | |
Reclassifications | 1 | | | 2 | | | 4 | |
Ending balance | $ | 98 | | | $ | 103 | | | $ | 101 | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
(in thousands) | 2019 | | 2018 | | 2017 |
Beginning balance | $ | 24,703 |
| | $ | 22,776 |
| | $ | 20,109 |
|
Assumed liabilities from the Supervalu acquisition | 55,213 |
| | — |
| | — |
|
Expense | 42,764 |
| | 14,274 |
| | 13,740 |
|
Claim payments | (33,087 | ) | | (12,347 | ) | | (11,073 | ) |
Reclassifications | (755 | ) | | — |
| | — |
|
Ending balance | $ | 88,838 |
| | $ | 24,703 |
| | $ | 22,776 |
|
The current portion of the self-insurance liabilitiesliability was $34 million and $32 million as of July 30, 2022 and July 31, 2021, respectively, and is included in Accrued expenses and other current liabilities and the long-term portion is included in Other long-term liabilities in the Consolidated Balance Sheets. The insurancelong-term portions were $64 million and $71 million as of July 30, 2022 and July 31, 2021, respectively, and are included in Other long-term liabilities in the Consolidated Balance Sheets. The self-insurance liabilities as of the end of the fiscal year are net of discounts of $6.6$11 million and $1.3$10 million as of August 3, 2019July 30, 2022 and July 28, 2018,31, 2021, respectively. Amounts due from insurance companies were $11.1$12 million and $17 million as of August 3, 2019.July 30, 2022 and July 31, 2021, respectively, and are recorded in Prepaid expenses and other current assets and Other long-term assets.
Operating Lease ExpenseLeases
TheAt the inception or modification of a contract, the Company recordsdetermines whether a lease expenseexists and income usingclassifies its leases as an operating or finance lease at commencement. Subsequent to commencement, lease classification is only reassessed upon a change to the straight-line method within Operating expenses. For leases with step rent provisions wherebyexpected lease term or contract modification. Finance and operating lease assets represent the rentalCompany’s right to use an underlying asset as lessee for the lease term, and lease obligations represent the Company’s obligation to make lease payments increasearising from the lease. These assets and obligations are recognized at the lease commencement date based on the present value of lease payments, net of incentives, over the lifelease term. Incremental borrowing rates are estimated based on the Company’s borrowing rate as of the lease commencement date to determine the present value of lease payments, when lease contracts do not provide a readily determinable implicit rate. Incremental borrowing rates are determined by using the yield curve based on the Company’s credit rating adjusted for the Company’s specific debt profile and for leases wheresecured debt risk. The lease asset also reflects any prepaid rent, initial direct costs incurred and lease incentives received. The Company’s lease terms include optional extension periods when it is reasonably certain that those options will be exercised. Leases with an initial expected term of 12 months or less are not recorded in the Company receives rent-free periods,Consolidated Balance Sheets and the Company recognizesrelated lease expense and income basedis recognized on a straight-line basis based on the total minimum lease payments to be made over the expected lease term. Deferred rent obligations are included in Other current liabilities and Other long-term liabilities in the Consolidated Balance Sheets.
For contractual obligations on properties where we remain the primary obligor upon assignmentcertain classes of the lease and do not obtain a release from landlords or retain the equity interests in the legal entities with the related rent contracts,underlying assets, the Company continueshas elected to recognize rent expense and rent income. In addition,not separate fixed lease components from the fixed nonlease components.
The Company continues to recognizerecognizes contractual obligations and receipts on a gross basis, such that the related lease obligation to the landlord is presented separately from the sublease created by the lease assignment to the assignee. As a result, the Company continues to recognize on its Consolidated Balance Sheets the carrying value of capitaloperating lease assets and liabilities, and finance lease assets and obligations, for assigned leases.
The Company records operating lease expense and income using the straight-line method within Operating expenses, and lease income on a straight-line method for leases with its customers within Net sales. Finance lease expense is recognized as amortization expense within Operating expenses, and interest expense within Interest expense, net. For operating leases with step rent provisions whereby the rental payments increase over the life of the lease, and for leases with rent-free periods, the Company recognizes expense and income on a straight-line basis over the expected lease term, based on the total minimum lease payments to be made or lease receipts expected to be received. The Company is generally obligated for property tax, insurance and equipmentmaintenance expenses related to leased properties, which often represent variable lease expenses. For contractual obligations on properties where the Company determined it wasremains the accounting owner pursuantprimary obligor upon assignment of the lease and does not obtain a release from landlords or retain the equity interests in the legal entities with the related rent contracts, the Company continues to arecognize rent expense and rent income within Operating expenses.
Operating and finance lease agreement.
Reservesassets are reviewed for Closed Properties
The Company maintains reserves for costs associated withimpairment based on an ongoing review of circumstances that indicate the assets may no longer be recoverable, such as closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations. We calculate closed propertyoperations, and other factors. The Company calculates operating and finance lease liabilitiesimpairments using a discount rate to calculate the present value of the remaining noncancellable lease payments after the closing date, reduced by estimated subtenant rentals that could be reasonably obtained for the property. Lease reserve impairment charges for properties no longer used in operations are recorded as a component of Restructuring, acquisition and integration related expenses in the Consolidated Statements of Operations.
The closed property lease liabilities are usually paid over the remaining lease terms, which generally range from one to 12 years. Adjustments to closed property reserves primarily relate to changes in subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.
The calculation of the closed propertylease impairment charges requires significant judgments and estimates, including estimated subtenant rentals, discount rates and future cash flows based on ourthe Company’s experience and knowledge of the market in which the closed property is located, previous efforts to dispose of similar assets and the assessment of existing market conditions. ReservesImpairments are recognized as a reduction of the carrying value of the right of use asset and finance lease assets. Refer to Note 11—Leases for closed properties are includedadditional information.
For transactions in Other current liabilitieswhich an owned property is sold and Other long-term liabilities inleased back from the buyer, the Company recognizes a sale, and lease accounting is applied if the Company has transferred control of the property to the buyer. For such transactions, the Company removes the transferred assets from the Consolidated Balance Sheets.Sheets and a gain or loss on the sale is recognized for the difference between the carrying amount of the asset and the fair value of the transaction as of the transaction date. If control of the underlying asset is not transferred, the Company does not recognize an asset sale and recognizes a financing lease liability for consideration received.
NOTE 2—RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In March 2017,February 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standardstandards update (“ASU”) 2017-07, Compensation-Retirement BenefitsNo. 2016-02, Leases (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 changes how benefit plan costs for defined benefit pension and other postretirement benefit plans are presented in the statement of operations.842) (“ASC 842”), which provided new comprehensive lease accounting guidance that supersedes previous lease guidance. The Company adopted this guidancestandard in fiscal 2020, on August 4, 2019. Adoption of this standard did not have a material impact to the Company’s Consolidated Statements of Operations, Consolidated Statements of Stockholders' Equity or Consolidated Statements of Cash Flows.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued accounting ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): 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 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 firstCompany’s Consolidated Statements of Stockholders' Equity. The difference between reserves and allowances recorded under the former incurred loss model and the amount determined under the current expected loss model, net of the deferred tax impact, was recorded as an adjustment to Retained earnings. Adoption of this standard did not have a material impact to the Company’s Consolidated Financial Statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326 Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825. This ASU clarifies the accounting treatment for the measurement of credit losses under ASC 326 and provides further clarification on previously issued updates including ASU 2017-12, Derivatives and Hedging (Topic 815): TargetedImprovements to Accounting for Hedging Activities andASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Since the Company adopted ASU 2017-12 in the fourth quarter of fiscal 2018, the amendments in ASU 2019-04 related to clarifications on Accounting for Hedging Activities which were adopted by the Company in fiscal 2020, with no impact to Accumulated other comprehensive loss or Retained earnings for fiscal 2020, as the Company did not have separately measured ineffectiveness related to its cash flow hedges. The remaining amendments within ASU 2019-04 were adopted in fiscal 2021 with the adoption of Topic 326. Adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions to Topic 740’s general principles. The amendments also improve consistency in and it presents non-service cost components of net periodic benefit income, as disclosedsimplify its application. The Company adopted this standard in Note 14—Benefit Plans, in an other income and expense line titled “Net periodic benefit income, excluding service cost” in the Consolidated Statements of Operations. The service cost components are recorded within Operating expenses.fiscal 2022. The adoption of this standard did not have ana material impact on the Company’s prior period Consolidated Statements of Operations, as all benefit plan costs for defined benefit pension and other postretirement benefit plans incurred are attributable to the Supervalu business, which was acquired in the first quarter of fiscal 2019.Financial Statements.
In November 2016,March 2020, the FASB issued ASU No. 2016-18, Statement of Cash Flows2020-04, Reference Rate Reform (Topic 230)848): Restricted Cash (a consensusFacilitation of the FASB Emerging Issues Task Force)Effects of Reference Rate Reform on Financial Reporting. This The temporary guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. ASU clarifies the presentation of restricted cash on the statement of cash flows by requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amount generally described as restricted cash or restricted cash equivalents. This ASU2020-04 is effective for annual reporting periods,from March 12, 2020 and interim reporting periods contained therein, beginning aftermay be applied prospectively through December 15, 2017, with retrospective application required. The Company adopted this ASU in the first quarter of31, 2022. In fiscal 2019. The adoption of this ASU had no impact to the Consolidated Statement of Cash Flows for fiscal 2019, as2020, the Company did not have restricted cashelected the initial expedient to assert probability of its hedged interest rate payments regardless of any expected modification in its beginning or ending amounts for those periods.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs.terms related to reference rate reform. The Company adopted the newremaining applicable practical expedients of the standard in the first quarter of fiscal 2019, with no impact2022 when it converted its LIBOR-based contracts to its financial position, results of operations, or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The eight specific issues are (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective InterestSecured Overnight Financing Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Businesses Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; (6) Distributions Received from Equity Method Investees; (7) Beneficial Interests in Securitization Transactions; and (8) Separately Identifiable Cash and Application of the Predominance Principle. This ASU is effective for public companies with interim periods and fiscal years beginning after December 15, 2017. The Company adopted this standard in the first quarter of fiscal 2019, with no impact to its Consolidated Statements of Cash Flows.
In April 2015, the FASB issued ASU 2015-04, Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets, which allows employers with a fiscal year end that does not coincide with a calendar month end to make an accounting policy election to measure defined benefit plan assets and obligations as of the end of the month closest to their fiscal year end. ASU 2015-04 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with prospective application required. The Company adopted this ASU in fiscal 2019 and measures its defined benefit plan assets and obligations as of the month end closest to the applicable measurement date.(“SOFR”). The adoption of this standard did not have ana material impact on the Company’s prior period financial statements, as all defined benefit pension and other postretirement benefit plans are attributable to the Supervalu business, which was acquired in the first quarterConsolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (Topic 606), which has been updated by multiple amending ASUs (collectively “ASC 606”) and supersedes previous revenue recognition requirements (“ASC 605”). The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the ASU requires new, enhanced quantitative and qualitative disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The collective guidance is effective for public companies with annual periods, and interim periods within those periods, beginning after December 15, 2017. The new standard permits either of the following adoption methods: (i) a full retrospective application with restatement of each period presented in the financial statements with the option to elect certain practical expedients, or (ii) a retrospective application with the cumulative effect of adopting the guidance recognized as of the date of initial application (“modified retrospective method”). The Company has adopted this new guidance in the first quarter of fiscal 2019 using the modified retrospective method, with no significant impact to our Consolidated Balance sheets, Consolidated Statements of Operations or Consolidated Statements of Cash flows.
The primary impact of adopting the new standard, contained within the wholesale distribution reportable segment, is related to the sale of certain private label products for which revenue is recognized over time under the new standard as opposed to at a point in time under ASC 605. Private label products are specific to the customer to which they are sold, and are typically packaged with the customer’s logo or other products for which the customer has an exclusive right to sell. The Company is contractually restricted from selling private label products with the customer’s logo or other exclusive products to other third-party customers. As a result, the underlying good has no alternative use to the Company. In some instances, the Company’s contracts also require the customer to purchase private label inventory held by the Company if the agreement is terminated, the customer discontinues selling the specific product, or the product is nearing its expiration date. This gives the Company an enforceable right to payment for performance completed to date from certain customers, once it has procured private label product. As a result, the Company now recognizes revenue from these product sales over time, as control is transferred to the customer, using a cost-incurred input measure of progress, as opposed to at a point in time, typically upon delivery, under ASC 605. Control of these products is transferred to the customer upon incurrence of substantially all of the Company’s costs related to the product, and therefore the cost-incurred input method is determined to be a faithful depiction of the transfer of goods.
The effect of adopting this change resulted in an increase to Retained earnings of $0.3 million, which was recorded in the first quarter of fiscal 2019. This change did not materially impact our Consolidated Statements of Operations for fiscal 2019. Refer to Note 3—Revenue Recognition for further discussion of our adoption of the new standard.
Recently Issued Accounting Pronouncements
In April 2019,June 2022, 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 236 and provides further clarification on previously issued updates including ASU 2017-12, Derivatives and Hedging2022-03, Fair Value Measurement (Topic 815)820): Targeted Improvements to Accounting for Hedging Activities and ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition andFair Value Measurement of Financial AssetsEquity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not part of the unit of account of the equity security and, Financial Liabilities. Since the Company adopted ASU 2017-12therefore, is not considered in the fourth quarter of fiscal 2018, themeasuring fair value. The amendments in ASU 2019-04 related to clarifications on Accounting for Hedging Activities are effective for the Company in the first quarter of fiscal 2020. The remaining amendments within ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, which for the Company is the first quarter of fiscal 2021. Early adoption is permitted. The Company is currently reviewing the provisions of the new standard and evaluating its timing of adoption and impact on the Company’s consolidated financial statements.
In October 2018, the FASB issued authoritative guidance under ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU adds the Overnight Index Swap (OIS) rate based on Secured Overnight Financing Rate (SOFR) as a benchmark interest rate for hedge accounting purposes. This ASU is effective for public companies with interim and fiscal years beginning after December 15, 2018, which for the Company is the first quarter of fiscal year 2020. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. ASU 2018-05 requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The Company is required to adopt this new guidance in the first quarter of fiscal 2021. The Company has outstanding cloud computing arrangements and continues to incur costs that it believes would be required to be capitalized under ASU 2018-05. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 eliminates requirements for certain disclosures and requiresupdate also require additional disclosures under defined benefit pension plans and other postretirement plans.for equity securities subject to contractual sale restrictions. The Company is required to adopt this guidance in the first quarter of fiscal 2021.2025. The Company is currentlyin the process of reviewing the provisions of the new standard and evaluating itsbut does not expect the adoption to have a material impact on the Company’s consolidated financial statements and related disclosures.statements.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of fiscal 2020, with early adoption permitted. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The Company is required to adopt this new guidance in the first quarter of fiscal 2021. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which provides new comprehensive lease accounting guidance that supersedes existing lease guidance. The objective of this ASU is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Criteria for distinguishing leases between finance leases and operating leases are substantially similar to criteria for distinguishing between capital leases and operating leases in existing lease guidance. ASC 842 will require the Company to recognize most current operating lease obligations as right-of-use assets with a corresponding liability based on the present value of future operating lease payments. Lease agreements with terms that are 12 months or less are permitted to be excluded
from the balance sheet. In addition, this ASU expands the disclosure requirements of lease arrangements. The Company is required to adopt this standard in the first quarter of fiscal 2020 on August 4, 2019, the effective and initial application date. The Company will utilize the additional transition method under ASU 2018-11, which allows for a cumulative effect adjustment within retained earnings in the period of adoption. In addition, the Company elected the “package of three” practical expedients which allows companies to not reassess whether arrangements contain leases, the classification of leases, and the capitalization of initial direct costs. The estimated impact of the adoption to the Company’s Consolidated Balance Sheets includes the recognition of operating lease liabilities of approximately $1.1 billion with corresponding right-of-use assets of approximately the same amount based on the present value of the remaining lease payments for existing operating leases. In addition, the adoption of the standard is expected to result in the derecognition of existing assets of approximately $140.0 million and liabilities of $130.0 million for certain sale-leaseback transactions that do not qualify for sale accounting, including build-to-suit arrangements for which construction is complete and the Company is leasing the constructed asset. The difference between the assets and liabilities derecognized for these sale-leaseback transactions, net of the deferred tax impact, is expected to be recorded as an adjustment to retained earnings. The difference between the amount of right-of-use assets and lease liabilities recognized upon the adoption of ASC 842 is primarily related to adjustments to existing prepaid rent, deferred rent, lease intangible assets/liabilities, and closed property reserves. The Company does not expect a material impact on its lessor accounting from the adoption of this standard. Adoption of this standard is not expected to have a material impact to the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows. The Company is in the process of revising its accounting policies, processes and controls, and systems as applicable to comply with the provisions and disclosure requirements of the standard.
NOTE 3—REVENUE RECOGNITION
Revenue Recognition Accounting Policy
The Company recognizes revenue in an amount that reflects the consideration that is expected to be received for goods or services when its performance obligations are satisfied by transferring control of those promised goods or services to its customers. ASC 606 defines a five-step process to recognize revenue that requires judgment and estimates, including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when or as the performance obligation is satisfied. This footnote addresses the Company’s revenue recognition policies for its continuing operations only; refer to Note 19—Discontinued Operations for additional information about our revenue recognition policies of discontinued operations.
Revenues from wholesale product sales are recognized when control is transferred, which typically happens upon either shipment or delivery, depending on the contract terms with the customer. Typically, shipping and customer receipt of wholesale products occur on the same business day. Discounts and allowances provided to customers are recognized as a reduction in Net sales as control of the products is transferred to customers. The Company recognizes freight revenue related to transportation of its products when control of the product is transferred, which is typically upon delivery.
Sales tax is excluded from Net sales. Limited rights of return or product warranties exist with the Company’s customers due to the nature of the products it sells.
Product sales
The Company enters into wholesale customer distribution agreements that provide terms and conditions of our order fulfillment. The Company’s distribution agreements often specify levels of required minimum purchases in order to earn certain rebates or incentives. Certain contracts include rebates and other forms of variable consideration, including consideration payable to the customer up-front, over time or at the end of a contract term. Many of the Company’s contracts with customers outline various other promises to be performed in conjunction with the sale of product. The Company determined that these promises provided are immaterial within the overall context of the respective contract, and as such has not allocated the transaction price to these obligations.
In transactions for goods or services where the Company engages third-partiesthird parties to participate in its order fulfillment process, it evaluates whether it is the principal or an agent in the transaction. The Company’s analysis considers whether it controls the goods or services before they are transferred to its customer, including an evaluation of whether the Company has the ability to direct the use of, and obtain substantially all the remaining benefits from, the specified good or service before it is transferred to the customer. Agent transactions primarily reflect circumstances where the Company is not involved in order fulfillment or where it is involved in the order fulfillment but is not contractually obligated to purchase the related goods or services from vendors, and instead extends wholesale customers credit by paying vendor trade accounts payable and does not control products prior to their sale. Under ASC 606, if the Company determines that it is acting in an agent capacity, transactions are recorded on a net basis. If the Company determines that it is acting in a principal capacity, transactions are recorded on a gross basis.
The Company also evaluates vendor sales incentives to determine whether they reduce the transaction price with its customers. The Company’s analysis considers which party tenders the incentive, whether the incentive reflects a direct reimbursement from a vendor, whether the incentive is influenced by or negotiated in conjunction with any other incentive arrangements and whether the incentive is subject to an agency relationship with the vendor, whether expressed or implied. Typically, when vendor incentives are offered directly by vendors to the Company’s customers, require the achievement of vendor-specified requirements to be earned by customers, and are not negotiated by the Company or in conjunction with any other incentive agreement whereby the Company does not control the direction or earning of these incentives, then Net sales are not reduced as part of the Company’s determination of the transaction price. In circumstances where the vendors provide the Company consideration to promote the sale of their goods and the Company determines the specific performance requirements for its customers to earn these incentives, Net sales and Cost of sales are reduced for these customer incentives as part of the determination of the transaction price.
Sales from the Company’s Wholesale segment to its retail discontinued operations are presented within Net Sales when the Company holds the business for sale with a supply agreement that it anticipates the sale of the retail banner to include upon its disposal. The Company recorded $769.8 million within Net sales from continuing operations attributable to discontinued operations inter-company product purchases in fiscal 2019, which the Company expects will continue subsequent to the sale of certain retail banners. These amounts were recorded at gross margin rates consistent with sales to other similar wholesale customers of the acquired Supervalu business. No sales were recorded within continuing operations for retail banners that the Company expects to dispose of without a supply agreement, which were eliminated upon consolidation within continuing operations and amounted to $411.9 million in fiscal 2019.
Certain customer agreements provide for the right to license one or more of the Company’s tradenames, such as FESTIVAL FOODS®, SENTRY®, COUNTY MARKET®, NEWMARKET®, FOODLAND®, JUBILEE® and SUPERVALU®. In addition, the Company enters into franchise agreements to separately charge its customers, who the Company also sells wholesale products to, for the right to use its CUB FOODS®CUB® tradename. The Company typically does not separately charge for the right to license its tradenames. The Company believes that these tradenames are capable of being distinct, but are not distinct within the context of the contracts with its customers. Accordingly, the Company does not separately recognize revenue related to tradenames utilized by its customers.
The Company enters into distribution agreements with manufacturers to provide wholesale supplies to the Defense Commissary Agency (“DeCA”) and other government agency locations. DeCA contracts with manufacturers to obtain grocery products for the commissary system. The Company contracts with manufacturers to distribute products to the commissaries after being authorized by the manufacturers to be a military distributor to DeCA. The Company must adhere to DeCA’s delivery system procedures governing matters such as product identification, ordering and processing, information exchange and resolution of discrepancies. DeCA identifies the manufacturer with which an order is to be placed, determines which distributor is contracted by the manufacturer for a particular commissary or exchange location, and then places a product order with that distributor that is covered under DeCA’s master contract with the applicable manufacturer. The Company supplies product from its existing inventory, delivers it to the DeCA designated location, and bills the manufacturer for the product price plus a drayage fee. The manufacturer then bills DeCA under the terms of its master contract. The Company has determined that it controls the goods before they are transferred to the customer, and as such it is the principal in the transaction. Revenue is recognized on a gross basis when control of the product passes to the DeCA designated location.
Customer incentives
The Company provides incentives to its wholesale customers in various forms established under the applicable agreement, including advances, payments over time that are earned by achieving specified purchasing thresholds, and upon the passage of time. The Company typically records customer advances within Other long-term assets and OtherPrepaid expenses and other current assets and typically recognizes customer incentive payments that are based on expected purchases over the term of the agreement as a reduction to Net sales. To the extent that the transaction price for product sales includes variable consideration, such as certain of these customer incentives, the Company estimates the amount of variable consideration that should be included in the transaction price primarily by utilizing the expected value method. Variable consideration is included in the transaction price if it is probable that a significant future reversal of cumulative revenue under the agreement will not occur. The Company believes that there will not be significant changes to its estimates of variable consideration, as the uncertainty will be resolved within a relatively short time and there is a significant amount of historical data that is used in the estimation of the amount of variable consideration to be received. Therefore, the Company has not constrained its estimates of variable consideration.
Customer incentive assets are reviewed for impairment when circumstances exist for which the Company no longer expects to recover the applicable customer incentives.
Professional services and equipment sales
Separate from the services provided in conjunction with the sale of product describeproducts described above, many of the Company’s agreements with customers also include distinct professional services and other promises to customers, in addition to the sale of the product itself, such as retail store support, advertising, store layout and design services, merchandising support, couponing, e-commerce,eCommerce, network and data hosting solutions, training and certifications classes, and administrative back-office solutions. These professional services may contain a single performance obligation for each respective service, in which case such services revenues are recognized when delivered. Relative to total Net sales, revenueRevenues from professional services is insignificant.are less than 1% of total Net sales.
Wholesale equipment sales are recorded as direct sales to customers when shipped or delivered, consistent with the recognition of product sales.
Disaggregation of Revenues
The Company records revenue to fourfive customer channels within Net sales, which are described below:
•Chains, which consists of customer accounts that typically have more than 10 operating stores and excludes stores included within the Supernatural and Other channels defined below;
•Independent retailers, which includes smaller size accounts including single store and multiple store locations, and group purchasing entities that are not classified within Chains above or Other discussed below;
•Supernatural, which consists of chain accounts that are national in scope and carry primarily natural products, and at this time currently consists solely of Whole Foods Market;
Independents•Retail, which include single storereflects our Retail segment, including Cub Foods and chain accounts (excluding supernatural, as defined above), which carry primarily natural productsShoppers stores, excluding Shoppers locations that were held for sale within discontinued operations; and buying clubs of consumer groups joined to buy products;
Supermarkets, which include accounts that also carry conventional products, and at this time currently include chain accounts, supermarket independents, and gourmet and ethnic specialty stores; and
•Other, which includes foodservice, e-commerce and international customers outside of Canada, as well as sales to Amazon.com, Inc.foodservice, eCommerce, conventional military business and other sales.
The following tables detail the Company’s net sales for the periods presented by customer channel for each of its segments. The Company does not record its revenues within its wholesaleWholesale reportable segment for financial reporting purposes by product group, and it is therefore impracticable for it to report them accordingly.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Net Sales for Fiscal 2022 |
Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(1) | | Consolidated |
Chains | | $ | 12,562 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,562 | |
Independent retailers | | 7,360 | | | — | | | — | | | — | | | 7,360 | |
Supernatural | | 5,719 | | | — | | | — | | | — | | | 5,719 | |
Retail | | — | | | 2,468 | | | — | | | — | | | 2,468 | |
Other | | 2,183 | | | — | | | 219 | | | — | | | 2,402 | |
Eliminations | | — | | | — | | | — | | | (1,583) | | | (1,583) | |
Total | | $ | 27,824 | | | $ | 2,468 | | | $ | 219 | | | $ | (1,583) | | | $ | 28,928 | |
| | (in millions) | | Net Sales for Fiscal 2019 (53 weeks) | (in millions) | | Net Sales for Fiscal 2021 |
Customer Channel | | Wholesale | | Other | | Eliminations | | Consolidated | Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(1) | | Consolidated |
Chains | | Chains | | $ | 12,104 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,104 | |
Independent retailers | | Independent retailers | | 6,638 | | | — | | | — | | | — | | | 6,638 | |
Supernatural | | $ | 4,393 |
| | $ | — |
| | $ | — |
| | $ | 4,393 |
| Supernatural | | 5,050 | | | — | | | — | | | — | | | 5,050 | |
Independents | | 3,179 |
| | — |
| | — |
| | 3,179 |
| |
Supermarkets | | 12,505 |
| | — |
| | — |
| | 12,505 |
| |
Retail | | Retail | | — | | | 2,442 | | | — | | | — | | | 2,442 | |
Other | | 1,248 |
| | 228 |
| | (166 | ) | | 1,310 |
| Other | | 2,081 | | | — | | | 219 | | | — | | | 2,300 | |
Eliminations | | Eliminations | | — | | | — | | | — | | | (1,584) | | | (1,584) | |
Total | | $ | 21,325 |
| | $ | 228 |
| | $ | (166 | ) | | $ | 21,387 |
| Total | | $ | 25,873 | | | $ | 2,442 | | | $ | 219 | | | $ | (1,584) | | | $ | 26,950 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Net Sales for Fiscal 2020 |
Customer Channel | | Wholesale | | Retail | | Other | | Eliminations(1) | | Consolidated |
Chains | | $ | 12,010 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,010 | |
Independent retailers | | 6,699 | | | — | | | — | | | — | | | 6,699 | |
Supernatural | | 4,720 | | | — | | | — | | | — | | | 4,720 | |
Retail | | — | | | 2,375 | | | — | | | — | | | 2,375 | |
Other | | 2,096 | | | — | | | 228 | | | — | | | 2,324 | |
Eliminations | | — | | | — | | | — | | | (1,569) | | | (1,569) | |
Total | | $ | 25,525 | | | $ | 2,375 | | | $ | 228 | | | $ | (1,569) | | | $ | 26,559 | |
|
| | | | | | | | | | | | | | | | |
(in millions) | | Net Sales for Fiscal 2018(1) (52 weeks) |
Customer Channel | | Wholesale | | Other | | Eliminations | | Consolidated |
Supernatural | | $ | 3,758 |
| | $ | — |
| | $ | — |
| | $ | 3,758 |
|
Independents | | 2,668 |
| | — |
| | — |
| | 2,668 |
|
Supermarkets | | 2,820 |
| | — |
| | — |
| | 2,820 |
|
Other | | 925 |
| | 228 |
| | (172 | ) | | 981 |
|
Total | | $ | 10,171 |
| | $ | 228 |
| | $ | (172 | ) | | $ | 10,227 |
|
|
| | | | | | | | | | | | | | | | |
(in millions) | | Net Sales for Fiscal 2017(1) (52 weeks) |
Customer Channel | | Wholesale | | Other | | Eliminations | | Consolidated |
Supernatural | | $ | 3,096 |
| | $ | — |
| | $ | — |
| | $ | 3,096 |
|
Independents | | 2,490 |
| | — |
| | — |
| | 2,490 |
|
Supermarkets | | 2,731 |
| | — |
| | — |
| | 2,731 |
|
Other | | 894 |
| | 232 |
| | (169 | ) | | 957 |
|
Total | | $ | 9,211 |
| | $ | 232 |
| | $ | (169 | ) | | $ | 9,274 |
|
| |
(1) | During fiscal 2019, the presentation of net sales by customer channel was adjusted to reflect changes in the classification of customer types as a result of a detailed review of customer channel definitions. There was no impact to the Consolidated Statements of Operations as a result of revising the classification of customer types. As a result of this adjustment, net sales to our supermarkets channel and to our other channel for fiscal 2018 decreased approximately $36 million and $58 million, respectively, compared to the previously reported amounts, while net sales to the independents channel for fiscal 2018 increased approximately $95 million compared to the previously reported amounts. In addition, based on the consistent application of these impacts to fiscal 2017, net sales to our supermarkets channel and to our other channel for fiscal 2017 decreased approximately $16 million and |
$47 million, respectively, compared to(1)Eliminations primarily includes the previously reported amounts, while net sales elimination of Wholesale’s sales to the independents channel for fiscal 2017 increased approximately $63 million comparedRetail segment and the elimination of sales from segments included within Other to the previously reported amounts.Wholesale.
Whole Foods Market, Inc. was the Company’s largest customer in each fiscal year presented. Whole Foods Market, Inc. accounted for approximately 21%20%, 37%19% and 33%18% of the Company’s net sales for fiscal 2019, 20182022, 2021 and 2017,2020, respectively. There were no other customers that individually generated 10% or more of the Company’s net sales during those periods.
The Company serves customers in the United States and Canada, as well as customers located in other countries. However, all of the Company’s revenue is earned in the U.S.United States and Canada, and international distribution occurs through freight-forwarders. The Company does not have any performance obligations on international shipments subsequent to delivery to the domestic port.
Contract Balances
The Company typically does not typically incur costs that are required to be capitalized in connection with obtaining a contract with a customer. Expenses related to contract origination primarily relate to employee costs that the Company would incur regardless of whether the contract was obtained with the customer.
The Company typically does not have any performance obligations to deliver products under its contracts until its customers submit a purchase order, as it stands ready to deliver product upon receipt of a purchase order under contracts with its customers. These performance obligations are generally satisfied within a very short period of time. Therefore, the Company has utilized the practical expedient that provides an exemption from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not typically receive pre-payments from its customers.
Customer payments are due when control of goods or services are transferred to the customer and are typically not conditional on anything other than payment terms, which typically rangeare less than 30 days. Since no significant financing components exist between the period of time the Company transfers goods or services to the customer and when it receives payment for those goods or services, the Company has electedgenerally does not to adjust its revenue recognition policythe transaction price to recognize a financing components.component. Customer incentives are not considered contract assets as they are not generated through the transfer of goods or services to the customers. No material contract asset or liability existexists for any period reported within these Consolidated Financial Statements.
Accounts and Notes Receivable Balances
Accounts and notes receivable are as follows:
| | | | | | | | | | | |
(in millions) | July 30, 2022 | | July 31, 2021 |
Customer accounts receivable | $ | 1,213 | | | $ | 1,115 | |
Allowance for uncollectible receivables | (18) | | | (28) | |
Other receivables, net | 19 | | | 16 | |
Accounts receivable, net | $ | 1,214 | | | $ | 1,103 | |
| | | |
Notes receivable, net, included within Prepaid expenses and other current assets | $ | 6 | | | $ | 7 | |
Long-term notes receivable, net, included within Other long-term assets | $ | 12 | | | $ | 15 | |
|
| | | | | | | |
(in thousands) | August 3, 2019 | | July 28, 2018 |
Customer accounts receivable | $ | 1,063,167 |
| | $ | 595,698 |
|
Allowance for uncollectible receivables | (20,725 | ) | | (15,996 | ) |
Other receivables, net | 23,257 |
| | — |
|
Accounts receivable, net | $ | 1,065,699 |
| | $ | 579,702 |
|
| | | |
Customer notes receivable, net, included within Prepaid expenses and other current assets | $ | 11,912 |
| | $ | 1,277 |
|
Long-term notes receivable, net, included within Other assets | $ | 34,408 |
| | $ | 653 |
|
The allowance for uncollectible receivables, and estimated variable consideration allowed for as sales concessions consists of the following:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | 2022 | | 2021 | | 2020 |
Balance at beginning of year | | $ | 28 | | | $ | 56 | | | $ | 21 | |
Impact of adoption of new credit loss standard | | — | | | 4 | | | — | |
Provision for losses in Operating expenses | | 2 | | | (9) | | | 38 | |
Reductions of Net sales | | 1 | | | 3 | | | 12 | |
Write-offs charged against the allowance | | (13) | | | (26) | | | (15) | |
| | | | | | |
Balance at end of year | | $ | 18 | | | $ | 28 | | | $ | 56 | |