NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
United Natural Foods, Inc. and its subsidiaries (the “Company” or “UNFI”) is a leading distributor of natural, organic, specialty, and conventional grocery and non-food products, and provider of support services. The Company sells its products primarily throughout the United States and Canada.
Fiscal Year
The Company’s fiscal years end on the Saturday closest to July 31 and contain either 52 or 53 weeks. References to the first quarter of fiscal 2020 and 2019 relate to the 13-week fiscal quarters ended November 2, 2019 and October 27, 2018, respectively.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation, with the exception of sales transactions from continuing to discontinued operations for wholesale supply discussed further in Note 3—Revenue Recognition. Unless otherwise indicated, references to the Condensed Consolidated Statements of Operations, the Condensed Consolidated Balance Sheets and the Notes to the Condensed Consolidated Financial Statements exclude all amounts related to discontinued operations. Refer to Note 17—Discontinued Operations for additional information about discontinued operations.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally required in complete financial statements prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. In the Company’s opinion, these Condensed Consolidated Financial Statements include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. However, the results of operations for interim periods may not be indicative of the results that may be expected for a full year. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 3, 2019 (the “Annual Report”). Except as described for lease accounting below, there were no material changes in significant accounting policies from those described in the Company’s Annual Report.
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less. The Company’s banking arrangements allow it to fund outstanding checks when presented to the financial institution for payment. The Company funds all intraday bank balance overdrafts during the same business day. Checks outstanding in excess of bank balances create book overdrafts, which are recorded in Accounts payable in the Condensed Consolidated Balance Sheets and are reflected as an operating activity in the Condensed Consolidated Statements of Cash Flows. As of November 2, 2019 and August 3, 2019, the Company had net book overdrafts of $242.5 million and $236.9 million, respectively.
Inventories, Net
Inventories are valued at the lower of cost or market. Substantially all of the Company’s inventories consist of finished goods and a substantial portion of its inventories have a last-in, first-out (“LIFO”) reserve applied. Interim LIFO calculations are based on the Company’s estimates of expected year-end inventory levels and costs, as the actual valuation of inventory under the LIFO method is computed at the end of each year based on the inventory levels and costs at that time. If the first-in, first-out method had been used, Inventories, net would have been higher by approximately $30.7 million and $24.1 million at November 2, 2019 and August 3, 2019, respectively.
Leases
At the inception or modification of contract, the Company determines whether a lease exists and classifies its leases as an operating or finance lease at commencement. Subsequent to commencement, lease classification is only reassessed upon a change to the expected lease term or contract modification. Finance and operating lease assets represent the Company’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 arising 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 lease 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 secured debt risk. The lease asset also reflects any prepaid rent, initial direct costs incurred and lease incentives received. The Company’s lease terms include option 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 consolidated balance sheets and the related lease expense is recognized on a straight-line basis over the lease term.
The Company recognizes 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 Condensed Consolidated Balance Sheets the operating lease assets and liabilities, and finance lease assets and obligations.
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 leases with step rent provisions whereby the rental payments increase over the life of the lease, and for leases where the Company receives rent-free periods, the Company recognizes expense and income based on a straight-line basis based on the total minimum lease payments to be made or lease receipts expected to be received over the expected lease term. The Company is generally obligated for property tax, insurance and maintenance expenses related to leased properties, which often represent variable lease expenses. For contractual obligations on properties where the Company remains the primary 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 recognize rent expense and rent income within Operating expenses.
Operating and finance lease assets are reviewed for impairment 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, and other factors. The Company calculates operating and finance lease impairments using a discount rate to calculate the present value of estimated subtenant rentals that could be reasonably obtained for the property. Lease impairment charges are recorded as a component of Restructuring, acquisition and integration related expenses in the Condensed Consolidated Statements of Operations.
The calculation of lease impairment charges requires significant judgments and estimates, including estimated subtenant rentals, discount rates and future cash flows based on the Company’s experience and knowledge of the market in which the property is located, previous efforts to dispose of similar assets and the assessment of existing market conditions. Impairment reserves are reflected as a reduction to Operating lease assets. Refer to Note 11—Leases for additional information.
NOTE 2—RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standard update (“ASU”) No. 2016-02, Leases (Topic 842), which provides new comprehensive lease accounting guidance that supersedes previous 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 and operating are substantially similar to criteria for distinguishing between capital and operating leases in previous lease guidance. Lease agreements 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 adopted this standard in the first quarter of fiscal 2020 on August 4, 2019, the effective and initial application date, using 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 impact of the adoption to the Company’s Condensed Consolidated Balance Sheets includes the recognition of operating lease liabilities of $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. The difference between the amount of right-of-use assets and lease liabilities recognized is primarily related to adjustments to prepaid rent, deferred rent, lease intangible assets/liabilities, and closed property reserves. In addition, the adoption of the standard resulted in the derecognition of existing property and equipment for certain properties that did not qualify for sale accounting because the Company was determined to be the accounting owner during the construction phase. In addition, at the transition date the Company is constructing one facility that, when complete, the Company will perform a sale-leaseback assessment. For properties where the Company was deemed the accounting owner during construction for which construction has been completed, the difference between the assets and liabilities derecognized, net of the deferred tax impact, was recorded as an adjustment to retained earnings. Lessor accounting guidance remained largely unchanged from previous guidance. Adoption of this standard did not have a material impact to the Company’s Condensed Consolidated Statements of Operations or Cash Flows. The Company has revised its accounting policies, processes and controls, and systems as applicable to comply with the provisions and disclosure requirements of the standard.
The effects of the changes, including those discussed above, made to the Company’s Condensed Consolidated Balance Sheets as of August 3, 2019 for the adoption of the new lease guidance were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 3, 2019
|
|
Adjustments due to adoption of the new lease guidance
|
|
Adjusted Balance at August 4, 2019
|
Assets
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
226,727
|
|
|
$
|
(14,733
|
)
|
|
$
|
211,994
|
|
Property and equipment, net
|
|
1,639,259
|
|
|
(142,541
|
)
|
|
1,496,718
|
|
Operating lease assets
|
|
—
|
|
|
1,059,473
|
|
|
1,059,473
|
|
Intangible assets, net
|
|
1,041,058
|
|
|
(17,671
|
)
|
|
1,023,387
|
|
Deferred income taxes
|
|
$
|
31,087
|
|
|
1,052
|
|
|
$
|
32,139
|
|
Total increase to assets
|
|
|
|
$
|
885,580
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholder’s Equity
|
|
|
|
|
|
|
Accrued expense and other current liabilities
|
|
$
|
249,426
|
|
|
$
|
(7,260
|
)
|
|
$
|
242,166
|
|
Current portion of operating lease liabilities
|
|
—
|
|
|
137,741
|
|
|
137,741
|
|
Current portion of long-term debt and finance lease liabilities
|
|
112,103
|
|
|
(6,936
|
)
|
|
105,167
|
|
Long-term operating lease liabilities
|
|
—
|
|
|
936,728
|
|
|
936,728
|
|
Long-term finance lease obligations
|
|
108,208
|
|
|
(37,565
|
)
|
|
70,643
|
|
Other long-term liabilities
|
|
393,595
|
|
|
(134,515
|
)
|
|
259,080
|
|
Total stockholder’s equity
|
|
$
|
1,510,934
|
|
|
(2,613
|
)
|
|
$
|
1,508,321
|
|
Total increase to liabilities and stockholder’s equity
|
|
|
|
$
|
885,580
|
|
|
|
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 adopted this standard in the first quarter of fiscal 2020 with no impact to the Company’s consolidated financial statements as LIBOR is still being used as benchmark interest rate.
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. The Company adopted this ASU in the first quarter of fiscal 2020. The adoption of this ASU had no impact to Accumulated other comprehensive loss or Retained earnings.
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 236 and provides further clarification on previously issued updates including ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities and ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Since the Company adopted ASU 2017-12 in the fourth quarter of fiscal 2018, the amendments in ASU 2019-04 related to clarifications on Accounting for Hedging Activities have been adopted by 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 adopted this standard in the first quarter of fiscal 2020 with no impact to Accumulated other comprehensive loss or Retained earnings for fiscal 2020, as the Company did not have separately measured ineffectiveness related to its cash flow hedges.
Recently Issued Accounting Pronouncements
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 requires additional disclosures under defined benefit pension plans and other postretirement plans. The Company is required to adopt this 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 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.
NOTE 3—REVENUE RECOGNITION
Disaggregation of Revenues
The Company records revenue to four customer channels, which are described below:
|
|
•
|
Supernatural, which consists of chain accounts that are national in scope and carry primarily natural products, and currently consists solely of Whole Foods Market.
|
|
|
•
|
Supermarkets, which include accounts that also carry conventional products, and include chain accounts, supermarket independents, and gourmet and ethnic specialty stores.
|
|
|
•
|
Independents, which include single store and chain accounts (excluding supernatural, as defined above), which carry primarily natural products and buying clubs of consumer groups joined to buy products, and the conventional military business.
|
|
|
•
|
Other, which includes foodservice, e-commerce and international customers outside of Canada, as well as sales to Amazon.com, Inc.
|
The following tables detail the Company’s revenue recognition for the periods presented by customer channel for each of its segments. The Company does not record its revenues within its wholesale reportable segment for financial reporting purposes by product group, and it is therefore impracticable for it to report them accordingly.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales for the 13-Week Period Ended
|
(in millions)
|
|
November 2, 2019
|
Customer Channel
|
|
Wholesale
|
|
Other
|
|
Eliminations
|
|
Consolidated
|
Supermarkets
|
|
$
|
3,769
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,769
|
|
Supernatural
|
|
1,111
|
|
|
—
|
|
|
—
|
|
|
1,111
|
|
Independents
|
|
758
|
|
|
—
|
|
|
—
|
|
|
758
|
|
Other
|
|
368
|
|
|
64
|
|
|
(51
|
)
|
|
381
|
|
Total
|
|
$
|
6,006
|
|
|
$
|
64
|
|
|
$
|
(51
|
)
|
|
$
|
6,019
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales for the 13-Week Period Ended
|
(in millions)
|
|
October 27, 2018(1)
|
Customer Channel
|
|
Wholesale
|
|
Other
|
|
Eliminations
|
|
Consolidated
|
Supernatural
|
|
$
|
1,027
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,027
|
|
Supermarkets
|
|
930
|
|
|
—
|
|
|
—
|
|
|
930
|
|
Independents
|
|
667
|
|
|
—
|
|
|
—
|
|
|
667
|
|
Other
|
|
233
|
|
|
49
|
|
|
(38
|
)
|
|
244
|
|
Total
|
|
$
|
2,857
|
|
|
$
|
49
|
|
|
$
|
(38
|
)
|
|
$
|
2,868
|
|
|
|
(1)
|
During the first quarter of fiscal 2020, the presentation of net sales by customer channel was adjusted to reflect reclassification of customer types resulting from management’s determination that a customer serviced by both Supervalu and legacy UNFI should be classified as a Supermarket customer given that customer’s operations. In addition, during the second quarter of fiscal 2019, net sales attributable to Supervalu was incorporated into the Company’s definition of sales by customer channel. There was no impact to the Condensed Consolidated Statements of Operations as a result of the reclassification of customer types. As a result of these adjustments, net sales to the Company’s Supermarkets channel for the first quarter of fiscal 2019 increased approximately $223 million compared to the previously reported amounts, while net sales to the Other channel increased approximately $1 million, with an offsetting elimination of the Supervalu customer channel.
|
The Company serves customers in the United States and Canada, as well as customers located in other countries. However, all of the Company’s revenue is earned in the U.S. and Canada, as international distribution occurs through freight-forwarders. The Company does not have any performance obligations related to international shipments subsequent to delivery to the domestic port.
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 $244.6 million within Net sales from continuing operations attributable to discontinued operations inter-company product purchases in the first quarter of fiscal 2020, 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 purchases by retail banners that the Company expects to dispose of without a supply agreement, which were eliminated upon consolidation within continuing operations and amounted to $113.0 million in the first quarter of fiscal 2020.
Contract Balances
Accounts and notes receivable are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
November 2, 2019
|
|
August 3, 2019
|
Customer accounts receivable
|
|
$
|
1,143,836
|
|
|
$
|
1,063,167
|
|
Allowance for uncollectible receivables
|
|
(27,812
|
)
|
|
(20,725
|
)
|
Other receivables, net
|
|
20,900
|
|
|
23,257
|
|
Accounts receivable, net
|
|
$
|
1,136,924
|
|
|
$
|
1,065,699
|
|
|
|
|
|
|
Customer notes receivable, net, included within Prepaid expenses and other current assets
|
|
$
|
11,235
|
|
|
$
|
11,912
|
|
Long-term notes receivable, net, included within Other assets
|
|
$
|
25,683
|
|
|
$
|
34,408
|
|
NOTE 4—ACQUISITIONS
Supervalu Acquisition
On July 25, 2018, the Company entered into an agreement and plan of merger to acquire all of the outstanding equity securities of Supervalu, which was then the largest publicly traded conventional grocery distributor in the United States. The acquisition of Supervalu diversifies the Company’s customer base, further enables cross-selling opportunities, expands market reach and scale, enhances technology, capacity and systems, and is expected to deliver significant synergies and accelerate potential growth. The merger was completed on October 22, 2018 (the “Closing Date”). At the effective time of the acquisition, each share of Supervalu common stock, par value $0.01 per share, issued and outstanding, was canceled and converted into the right to receive a cash payment equal to $32.50 per share, without interest. Total consideration related to this acquisition was $2.3 billion, $1.3 billion of which was paid in cash to Supervalu shareholders and $1.0 billion of which was used to satisfy Supervalu’s outstanding debt obligations. Included in the liabilities assumed in the Supervalu acquisition were the Supervalu Senior Notes with a fair value of $546.6 million. These Senior Notes were redeemed in the second quarter of fiscal 2019 following the required 30-day notice period, resulting in their satisfaction and discharge.
The assets and liabilities of Supervalu were recorded in the Company’s Consolidated Financial Statements on a preliminary basis at their estimated fair values as of the acquisition date. In conjunction with the Supervalu acquisition, the Company announced its plan to sell the remaining acquired retail operations of Supervalu. Refer to Note 17—Discontinued Operations for more information on discontinued operations.
The following table summarizes the final consideration, fair value of assets acquired and liabilities assumed, and the resulting goodwill.
|
|
|
|
|
|
(in thousands)
|
|
Final Acquisition Date Fair Values
|
Consideration:
|
|
|
Outstanding shares
|
|
$
|
1,258,450
|
|
Outstanding debt, excluding acquired senior notes
|
|
1,046,170
|
|
Equity-based awards
|
|
18,411
|
|
Total consideration
|
|
$
|
2,323,031
|
|
|
|
|
Fair value of assets acquired and liabilities assumed:
|
|
|
Cash and cash equivalents
|
|
$
|
25,102
|
|
Accounts receivable
|
|
552,381
|
|
Inventories
|
|
1,156,781
|
|
Prepaid expenses and other current assets
|
|
112,449
|
|
Current assets of discontinued operations
|
|
196,848
|
|
Property, plant and equipment
|
|
1,207,115
|
|
Goodwill
|
|
376,181
|
|
Intangible assets
|
|
918,103
|
|
Other assets
|
|
77,008
|
|
Long-term assets of discontinued operations
|
|
433,839
|
|
Accounts payable
|
|
(974,252
|
)
|
Current portion of long-term debt and finance lease obligations
|
|
(579,565
|
)
|
Other current liabilities
|
|
(331,693
|
)
|
Current liabilities of discontinued operations
|
|
(148,763
|
)
|
Long-term debt
|
|
(34,355
|
)
|
Long-term finance lease obligations
|
|
(103,289
|
)
|
Pension and other postretirement benefit obligations
|
|
(234,324
|
)
|
Deferred income taxes
|
|
(18,254
|
)
|
Other long-term liabilities
|
|
(308,516
|
)
|
Long-term liabilities of discontinued operations
|
|
(1,398
|
)
|
Noncontrolling interests
|
|
1,633
|
|
Total consideration
|
|
2,323,031
|
|
Less: Cash and cash equivalents(1)
|
|
(30,596
|
)
|
Total consideration, net of cash and cash equivalents acquired
|
|
$
|
2,292,435
|
|
|
|
(1)
|
Includes cash and cash equivalents acquired attributable to continuing operations and discontinued operations.
|
Goodwill represents the future economic benefits arising largely from the synergies expected from combining the operations of the Company and Supervalu that could not be individually identified and separately recognized. A substantial portion of goodwill is deductible for income tax purposes. Goodwill from the acquisition was attributed to the Company’s Supervalu Wholesale reporting unit and the legacy Company Wholesale reporting unit, which in the first quarter of fiscal 2020 was reorganized into a single U.S. Wholesale reporting unit, as discussed further in Note 6—Goodwill and Intangible Assets. No goodwill was attributed to the Company’s Retail reporting unit within discontinued operations.
During the first quarter of fiscal 2020, the Company finalized its preliminary fair value estimates of its net assets, primarily by completing income tax returns and reviews of carrying values of other assets and liabilities. There were no material changes to preliminary amounts previously reported.
The following table summarizes the identifiable intangible assets and liabilities recorded based on final valuations. The identifiable intangible assets are expected to be amortized on a straight-line basis over the estimated useful lives indicated. The fair value of identifiable intangible assets acquired was determined using income approaches. Significant assumptions utilized in the income approach were based on Company-specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Final Acquisition Date Fair Values
|
(in thousands)
|
Estimated Useful Life
|
|
Continuing Operations
|
|
Discontinued Operations
|
Customer relationship assets
|
10–17 years
|
|
$
|
810,000
|
|
|
$
|
—
|
|
Favorable operating leases
|
1-19 years
|
|
21,629
|
|
|
—
|
|
Leases in place
|
1-8 years
|
|
10,474
|
|
|
—
|
|
Tradenames
|
2-9 years
|
|
66,000
|
|
|
17,000
|
|
Pharmacy prescription files
|
5-7 years
|
|
—
|
|
|
45,900
|
|
Non-compete agreement
|
2 years
|
|
10,000
|
|
|
—
|
|
Unfavorable operating leases
|
1-12 years
|
|
(21,754
|
)
|
|
—
|
|
Total
|
|
|
$
|
896,349
|
|
|
$
|
62,900
|
|
The Company incurred acquisition-related costs in conjunction with the Supervalu acquisition, which are quantified in Note 5—Restructuring, Acquisition and Integration Related Expenses.
The accompanying Condensed Consolidated Statements of Operations include the results of operations of Supervalu from October 22, 2018. Supervalu’s net sales from discontinued operations for this time period are reported in Note 17—Discontinued Operations.
The following table presents unaudited supplemental pro forma consolidated Net sales and Net loss from continuing operations based on the Company’s historical reporting periods as if the acquisition of Supervalu had occurred as of July 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
(in thousands, except per share data)
|
|
October 27, 2018(1)
|
|
October 28, 2017(2)
|
Net sales
|
|
$
|
5,984,970
|
|
|
$
|
5,910,484
|
|
Net loss from continuing operations
|
|
$
|
(47,893
|
)
|
|
$
|
(53,367
|
)
|
Basic net loss continuing operations per share
|
|
$
|
(0.95
|
)
|
|
$
|
(1.05
|
)
|
Diluted net loss from continuing operations per share
|
|
$
|
(0.95
|
)
|
|
$
|
(1.05
|
)
|
|
|
(1)
|
Includes 12 weeks of pro forma Supervalu results for the period ended September 8, 2018.
|
|
|
(2)
|
Includes 13 weeks of pro forma Supervalu results for the period ended September 17, 2017 and 13 weeks of pro forma Associated Grocers of Florida, Inc. results for the period ended August 5, 2017, which was acquired by Supervalu on December 8, 2017.
|
These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined companies would have been had the acquisitions occurred at the beginning of the periods being presented, nor are they indicative of future results of operations.
NOTE 5—RESTRUCTURING, ACQUISITION AND INTEGRATION RELATED EXPENSES
Restructuring, acquisition and integration related expenses incurred were as follows:
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
(in thousands)
|
November 2, 2019
|
|
October 27, 2018
|
2019 SUPERVALU INC. restructuring expenses
|
$
|
1,837
|
|
|
$
|
36,069
|
|
Acquisition and integration costs
|
9,294
|
|
|
31,935
|
|
Closed property charges and costs
|
3,119
|
|
|
—
|
|
Total
|
$
|
14,250
|
|
|
$
|
68,004
|
|
Restructuring Programs
The following is a summary of the current period activity within restructuring reserves by program included in the Condensed Consolidated Balance Sheets, primarily within Accrued compensation and benefits for severance and other employee separation costs and related tax payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019 SUPERVALU INC.
|
|
2018 Earth Origins Market
|
|
2017 Cost Saving and Efficiency Initiatives
|
|
Total
|
Balances at August 3, 2019
|
$
|
11,857
|
|
|
$
|
383
|
|
|
701
|
|
|
$
|
12,941
|
|
Restructuring program charge
|
1,837
|
|
|
—
|
|
|
—
|
|
|
1,837
|
|
Cash payments
|
(7,078
|
)
|
|
—
|
|
|
—
|
|
|
(7,078
|
)
|
Balances at November 2, 2019
|
$
|
6,616
|
|
|
$
|
383
|
|
|
$
|
701
|
|
|
$
|
7,700
|
|
|
|
|
|
|
|
|
|
Cumulative program charges incurred from inception to date
|
$
|
76,251
|
|
|
$
|
2,219
|
|
|
$
|
6,864
|
|
|
$
|
85,334
|
|
2019 SUPERVALU INC.
As part of its acquisition of Supervalu and in order to achieve synergies from this combination, the Company is taking certain actions, which began during the first quarter of fiscal 2019 and is expected to continue through fiscal 2020 to: (i) review its organizational structure and the strategic needs of the business going forward to identify and place talent with the appropriate skills, experience and qualifications to meet these needs; and (ii) dispose of and exit the Supervalu legacy retail operations, as efficiently and economically as possible in order to focus on the Company’s core wholesale distribution business. Actions associated with retail divestitures and adjustments to the Company’s core cost-structure for its wholesale food distribution business are expected to result in headcount reductions and other costs and charges.
NOTE 6—GOODWILL AND INTANGIBLE ASSETS
The 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. The Company has five goodwill reporting units, two of which represent separate operating segments and are aggregated within the Wholesale reportable segment (U.S. Wholesale and Canada Wholesale), two of which are separate operating segments (Woodstock Farms and Blue Marble Brands) that do not meet the criteria for being disclosed as separate reportable segments, and a single retail reporting unit, which is included within discontinued operations. The Canada operating segment, which is aggregated with Wholesale, would not meet the quantitative thresholds for separate reporting if it did not meet the aggregation criteria. The composition of goodwill reporting units is 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 or move from one reporting unit to another.
The Company reviews goodwill for impairment at least annually and more frequently if events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount. The annual review for goodwill impairment is performed as of the first day of the fourth quarter of each fiscal year. The Company tests for goodwill impairment at the reporting unit level, which is at or one level below the operating segment level.
Supervalu Acquisition Goodwill
In conjunction with the acquisition of Supervalu, goodwill resulting from the acquisition was assigned to the previous Supervalu Wholesale reporting unit and the previous legacy Company Wholesale reporting unit, as both of these reporting units were expected to benefit from the synergies of the business combination. The assignment was based on the relative synergistic value estimated as of the acquisition date. This systematic approach utilized the relative cash flow contributions and value created from the acquisition to each reporting unit on a stand-alone basis. As of the acquisition date, approximately $80.9 million was attributed to the legacy Company Wholesale reporting unit.
As discussed in Note 7—Goodwill and Intangible Assets in the Consolidated Financial Statements of the Annual Report, the Company impaired all goodwill attributed to the Supervalu Wholesale reporting unit prior to the finalization of its purchase accounting within the opening balance sheet. In the first quarter of fiscal 2020, as discussed further in Note 4—Acquisitions the Company finalized purchase accounting and the opening balance sheet related to the Supervalu acquisition. Adjustments to the opening balance sheet goodwill in the first quarter of fiscal 2020, resulted in an additional goodwill impairment charge of $2.5 million.
Fiscal 2020 Goodwill Impairment Review
During the first quarter of fiscal 2020, the Company changed its management structure and internal financial reporting to combine the Supervalu Wholesale reporting unit and the legacy Company Wholesale reporting unit into one U.S. Wholesale reporting unit, and experienced a further sustained decline in market capitalization and enterprise value. As a result of the change in reporting units and the sustained decline in market capitalization and enterprise value, the Company performed an interim quantitative impairment review of goodwill for the Wholesale reporting unit, which included a determination of the fair value of all reporting units.
The Company estimated the fair values of all reporting units using both the market approach, applying a multiple of earnings based on observable multiples for guideline publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The rates used to discount projected future cash flows under the income approach reflect a weighted average cost of capital of 8.5%, which considered observable data about guideline publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums, including those reflected in the Company’s market capitalization. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. Based on this analysis, the Company determined that the carrying value of its U.S. Wholesale reporting unit exceeded its fair value by an amount that exceeded its assigned goodwill. As a result, the Company recorded a goodwill impairment charge of $421.5 million in the first quarter of fiscal 2020. The goodwill impairment charge is reflected in Goodwill and asset impairment charges in the Condensed Consolidated Statements of Operations. The goodwill impairment charge reflects the impairment of all of the U.S. Wholesale’s reporting unit goodwill.
Goodwill and Intangible Assets Changes
Changes in the carrying value of Goodwill by reportable segment that have goodwill consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Wholesale
|
|
Other
|
|
Total
|
Goodwill as of August 3, 2019
|
$
|
432,103
|
|
(1)
|
$
|
10,153
|
|
(2)
|
$
|
442,256
|
|
Goodwill adjustment for prior fiscal year business combinations
|
1,424
|
|
|
—
|
|
|
1,424
|
|
Impairment charges
|
(423,712
|
)
|
|
(293
|
)
|
|
(424,005
|
)
|
Change in foreign exchange rates
|
116
|
|
|
—
|
|
|
116
|
|
Goodwill as of November 2, 2019
|
$
|
9,931
|
|
(1)
|
$
|
9,860
|
|
(2)
|
$
|
19,791
|
|
|
|
(1)
|
Amounts are net of accumulated goodwill impairment charges of $292.8 million and $716.5 million as of August 3, 2019 and November 2, 2019, respectively.
|
|
|
(2)
|
Amounts are net of accumulated goodwill impairment charges of $9.3 million and $9.6 million as of August 3, 2019 and November 2, 2019.
|
Identifiable intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2, 2019
|
|
August 3, 2019
|
(in thousands)
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
1,008,103
|
|
|
$
|
127,906
|
|
|
$
|
880,197
|
|
|
$
|
1,007,089
|
|
|
$
|
111,940
|
|
|
$
|
895,149
|
|
Non-compete agreements
|
12,900
|
|
|
7,571
|
|
|
5,329
|
|
|
12,900
|
|
|
6,237
|
|
|
6,663
|
|
Operating lease intangibles
|
11,748
|
|
|
2,451
|
|
|
9,297
|
|
|
32,103
|
|
|
2,209
|
|
|
29,894
|
|
Trademarks and tradenames
|
67,700
|
|
|
18,750
|
|
|
48,950
|
|
|
67,700
|
|
|
14,161
|
|
|
53,539
|
|
Total amortizing intangible assets
|
1,100,451
|
|
|
156,678
|
|
|
943,773
|
|
|
1,119,792
|
|
|
134,547
|
|
|
985,245
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
55,813
|
|
|
—
|
|
|
55,813
|
|
|
55,813
|
|
|
—
|
|
|
55,813
|
|
Intangible assets, net
|
$
|
1,156,264
|
|
|
$
|
156,678
|
|
|
$
|
999,586
|
|
|
$
|
1,175,605
|
|
|
$
|
134,547
|
|
|
$
|
1,041,058
|
|
Amortization expense was $22.1 million and $3.7 million for the 13-week periods ended November 2, 2019 and October 27, 2018, respectively. The estimated future amortization expense for each of the next five fiscal years and thereafter on definite lived intangible assets existing as of November 2, 2019 is shown below:
|
|
|
|
|
Fiscal Year:
|
(In thousands)
|
Remaining fiscal 2020
|
$
|
64,180
|
|
2021
|
71,510
|
|
2022
|
65,893
|
|
2023
|
65,842
|
|
2024
|
66,054
|
|
2025 and thereafter
|
610,294
|
|
|
$
|
943,773
|
|
NOTE 7—FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
Recurring Fair Value Measurements
The following table provides the fair value hierarchy for financial assets and liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at November 2, 2019
|
(In thousands)
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate swaps designated as hedging instruments
|
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
279
|
|
|
$
|
—
|
|
Interest rate swaps designated as hedging instruments
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
89
|
|
|
$
|
—
|
|
Mutual funds
|
|
Other assets
|
|
$
|
1,759
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps designated as hedging instruments
|
|
Accrued expenses and other current liabilities
|
|
$
|
—
|
|
|
$
|
20,645
|
|
|
$
|
—
|
|
Interest rate swaps designated as hedging instruments
|
|
Other long-term liabilities
|
|
$
|
—
|
|
|
$
|
61,370
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at August 3, 2019
|
(in thousands)
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate swaps designated as hedging instruments
|
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
389
|
|
|
$
|
—
|
|
Mutual funds
|
|
Prepaid expenses and other current assets
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps designated as hedging instruments
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
145
|
|
|
$
|
—
|
|
Mutual funds
|
|
Other assets
|
|
1,799
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps designated as hedging instruments
|
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
16,360
|
|
|
$
|
—
|
|
Interest rate swaps designated as hedging instruments
|
|
Other long-term liabilities
|
|
$
|
—
|
|
|
$
|
60,737
|
|
|
$
|
—
|
|
Interest Rate Swap Contracts
The fair values of interest rate swap contracts are measured using Level 2 inputs. The interest rate swap contracts are valued using an income approach interest rate swap valuation model incorporating observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. As of November 2, 2019, a 100 basis point increase in forward LIBOR interest rates would increase the fair value of the interest rate swaps by approximately $64.9 million; a 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of the interest rate swaps by approximately $67.8 million. Refer to Note 8—Derivatives for further information on interest rate swap contracts.
Mutual Funds
Mutual fund assets consist of balances held in investments to fund certain deferred compensation plans. The fair values of mutual fund assets are based on quoted market prices of the mutual funds held by the plan at each reporting period. Mutual funds traded in active markets are classified within Level 1 of the fair value hierarchy.
Fair Value Estimates
For certain of the Company’s financial instruments including cash and cash equivalents, receivables, accounts payable, accrued vacation, compensation and benefits, and other current assets and liabilities the fair values approximate carrying amounts due to their short maturities. Notes receivable estimated fair value is determined by a discounted cash flow approach applying a market rate for similar instruments that is determined using Level 3 inputs.
The estimated fair values are based on market quotes, where available, or market values for similar instruments, using Level 2 and 3 inputs. In the table below, the carrying value of the Company’s long-term debt is net of original issue discounts and debt issuance costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2, 2019
|
|
August 3, 2019
|
(In thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Notes receivable, including current portion
|
|
$
|
36,918
|
|
|
$
|
37,218
|
|
|
$
|
46,320
|
|
|
$
|
45,232
|
|
Long-term debt, including current portion
|
|
$
|
3,070,456
|
|
|
$
|
2,812,437
|
|
|
$
|
2,906,483
|
|
|
$
|
2,730,271
|
|
Fuel Supply Agreements and Derivatives
To reduce diesel price risk, the Company has in the past, and may in the future, periodically enter in to derivative financial instruments and/or forward purchase commitments for a portion of its projected monthly diesel fuel requirements at fixed prices. As of August 3, 2019, the Company had no outstanding fuel supply agreements and derivative agreements. As of November 2, 2019, the Company’s fuel supply agreements and derivatives were immaterial.
Foreign Exchange Derivatives
To reduce foreign exchange risk, the Company has in the past, and may in the future, periodically enter in to derivative financial instruments for a portion of its projected monthly foreign currency requirements at fixed prices. As of November 2, 2019 and August 3, 2019, the Company’s outstanding foreign currency forward contracts were immaterial.
NOTE 8—DERIVATIVES
Management of Interest Rate Risk
The Company enters into interest rate swap contracts from time to time to mitigate its exposure to changes in market interest rates as part of its overall strategy to manage its debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates. Interest rate swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company’s interest rate swap contracts are designated as cash flow hedges at November 2, 2019. Interest rate swap contracts are reflected at their fair values in the Condensed Consolidated Balance Sheets. Refer to Note 7—Fair Value Measurements of Financial Instruments for further information on the fair value of interest rate swap contracts.
Details of outstanding swap contracts as of November 2, 2019, which are all pay fixed and receive floating, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap Maturity
|
|
Notional Value (in millions)
|
|
Pay Fixed Rate
|
|
Receive Floating Rate
|
|
Floating Rate Reset Terms
|
April 29, 2021(1)
|
|
$
|
25.0
|
|
|
1.0650
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
April 29, 2021(2)
|
|
25.0
|
|
|
0.9260
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
August 15, 2022(3)
|
|
58.5
|
|
|
1.7950
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
August 15, 2022(4)
|
|
39.0
|
|
|
1.7950
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 31, 2020(5)
|
|
100.0
|
|
|
2.8240
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 31, 2022(5)
|
|
100.0
|
|
|
2.8915
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 31, 2023(5)
|
|
100.0
|
|
|
2.9210
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 22, 2025(5)
|
|
50.0
|
|
|
2.9550
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
March 31, 2023(6)
|
|
150.0
|
|
|
2.8950
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 22, 2025(6)
|
|
50.0
|
|
|
2.9580
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 22, 2025(6)
|
|
50.0
|
|
|
2.9590
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 29, 2021(7)
|
|
100.0
|
|
|
2.8084
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
September 30, 2023(7)
|
|
50.0
|
|
|
2.8315
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 31, 2024(7)
|
|
100.0
|
|
|
2.8480
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 31, 2022(8)
|
|
50.0
|
|
|
2.4678
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
March 28, 2024(8)
|
|
100.0
|
|
|
2.4770
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 31, 2024(8)
|
|
100.0
|
|
|
2.5010
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
April 29, 2021(9)
|
|
50.0
|
|
|
2.5500
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 31, 2022(9)
|
|
50.0
|
|
|
2.5255
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
March 31, 2023(9)
|
|
50.0
|
|
|
2.5292
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
March 28, 2024(9)
|
|
100.0
|
|
|
2.5420
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 31, 2024(10)
|
|
50.0
|
|
|
2.5210
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
October 22, 2025(10)
|
|
50.0
|
|
|
2.5558
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
April 15, 2022(11)
|
|
100.0
|
|
|
2.3645
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
December 13, 2019(12)
|
|
100.0
|
|
|
2.4925
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
May 15, 2020(12)
|
|
100.0
|
|
|
2.4490
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
June 30, 2021(13)
|
|
100.0
|
|
|
2.2520
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
June 30, 2022(13)
|
|
100.0
|
|
|
2.2170
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
June 30, 2021(14)
|
|
50.0
|
|
|
2.2290
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
June 30, 2022(15)
|
|
50.0
|
|
|
2.1840
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
|
$
|
2,197.5
|
|
|
|
|
|
|
|
|
|
(1)
|
This swap was executed on June 7, 2016 with an effective date of June 9, 2016.
|
|
|
(2)
|
This swap was executed on June 24, 2016 with an effective date of June 24, 2016.
|
|
|
(3)
|
This swap contract was executed on January 23, 2015 with an effective date of August 3, 2015. On March 31, 2015, the Company amended the original contract to reduce the beginning notional principal amount from $140 million to $84 million. The swap contract has an amortizing notional principal amount which is reduced by $1.5 million on a quarterly basis.
|
|
|
(4)
|
This swap was executed on March 31, 2015 with an effective date of August 3, 2015. The swap contract has an amortizing notional principal amount which is reduced by $1.0 million on a quarterly basis.
|
|
|
(5)
|
This swap contract was executed on October 26, 2018 with an effective date of October 26, 2018.
|
|
|
(6)
|
This swap contract was executed on November 16, 2018 with an effective date of November 16, 2018.
|
|
|
(7)
|
This swap contract was executed on November 30, 2018 with an effective date of November 30, 2018.
|
|
|
(8)
|
This swap contract was executed on January 11, 2019 with an effective date of January 11, 2019.
|
|
|
(9)
|
This swap contract was executed on January 23, 2019 with an effective date of January 23, 2019.
|
|
|
(10)
|
This swap contract was executed on January 24, 2019 with an effective date of January 24, 2019.
|
|
|
(11)
|
This swap contract was executed on March 18, 2019 with an effective date of March 21, 2019.
|
|
|
(12)
|
This swap contract was executed on March 21, 2019 with an effective date of March 21, 2019.
|
|
|
(13)
|
This swap contract was executed on April 2, 2019 with an effective date of April 2, 2019.
|
|
|
(14)
|
This swap contract was executed on April 2, 2019 with an effective date of June 10, 2019.
|
|
|
(15)
|
This swap contract was executed on April 2, 2019 with an effective date of June 28, 2019.
|
The Company performs an initial quantitative assessment of hedge effectiveness using the “Hypothetical Derivative Method” in the period in which the hedging transaction is entered. Under this method, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. In future reporting periods, the Company performs a qualitative analysis for quarterly prospective and retrospective assessments of hedge effectiveness. The Company also monitors the risk of counterparty default on an ongoing basis and noted that the counterparties are reputable financial institutions. The entire change in the fair value of the derivative is initially reported in Other comprehensive income (outside of earnings) in the Condensed Consolidated Statements of Comprehensive Loss and subsequently reclassified to earnings in Interest expense, net in the Condensed Consolidated Statements of Operations when the hedged transactions affect earnings.
The location and amount of gains or losses recognized in the Condensed Consolidated Statements of Operations for interest rate swap contracts for each of the periods, presented on a pretax basis, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
|
November 2, 2019
|
|
October 27, 2018
|
(In thousands)
|
|
Interest Expense, net
|
Total amounts of expense line items presented in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
|
|
$
|
49,518
|
|
|
$
|
7,525
|
|
Gain or (loss) on cash flow hedging relationships:
|
|
|
|
|
Gain or (loss) reclassified from comprehensive income into income
|
|
$
|
(2,370
|
)
|
|
$
|
551
|
|
Gain or (loss) on interest rate swap contracts not designated as hedging instruments:
|
|
|
|
|
Gain or (loss) recognized as interest expense
|
|
$
|
—
|
|
|
$
|
(88
|
)
|
NOTE 9—LONG-TERM DEBT
The Company’s long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Average Interest Rate at
November 2, 2019
|
|
Calendar Maturity Year
|
|
November 2,
2019
|
|
August 3,
2019
|
Term Loan Facility
|
6.04%
|
|
2025
|
|
$
|
1,786,500
|
|
|
$
|
1,864,900
|
|
ABL Credit Facility
|
3.14%
|
|
2023
|
|
1,317,700
|
|
|
1,080,000
|
|
Other secured loans
|
5.20%
|
|
2023-2024
|
|
58,417
|
|
|
57,649
|
|
Debt issuance costs, net
|
|
|
|
|
(52,374
|
)
|
|
(54,891
|
)
|
Original issue discount on debt
|
|
|
|
|
(39,787
|
)
|
|
(41,175
|
)
|
Long-term debt, including current portion
|
|
|
|
|
3,070,456
|
|
|
2,906,483
|
|
Less: current portion of long-term debt
|
|
|
|
|
(19,218
|
)
|
|
(87,433
|
)
|
Long-term debt
|
|
|
|
|
$
|
3,051,238
|
|
|
$
|
2,819,050
|
|
ABL Credit Facility
On August 30, 2018, the Company entered into a loan agreement (as amended by that certain First Amendment to Loan Agreement, dated as of October 19, 2018, and as further amended by that certain Second Amendment to Loan Agreement, dated January 24, 2019, the “ABL Loan Agreement”), by and among the Company and United Natural Foods West, Inc. (together with the Company, the “U.S. Borrowers”) and UNFI Canada, Inc. (the “Canadian Borrower” and, together with the U.S. Borrowers, the “Borrowers”), the financial institutions that are parties thereto as lenders (collectively, the “ABL Lenders”), Bank of America, N.A. as administrative agent for the ABL Lenders (the “ABL Administrative Agent”), Bank of America, N.A. (acting through its Canada branch), as Canadian agent for the ABL Lenders, and the other parties thereto.
The ABL Loan Agreement provides for a secured asset-based revolving credit facility (the “ABL Credit Facility” and the loans thereunder, the “ABL Loans”), of which up to (i) $2,050.0 million is available to the U.S. Borrowers and (ii) $50.0 million is available to the Canadian Borrower. The ABL Loan Agreement also provides for (i) a $125.0 million sublimit of availability for letters of credit of which there is a further $5.0 million sublimit for the Canadian Borrower, and (ii) a $100.0 million sublimit for short-term borrowings on a swingline basis of which there is a further $3.5 million sublimit for the Canadian Borrower. The ABL Credit Facility replaced the Company’s $900.0 million prior asset-based revolving credit facility. In addition, $1,475.0 million of proceeds from the ABL Credit Facility were drawn to finance the Supervalu acquisition and related transaction costs on the Supervalu acquisition date (the “Closing Date”).
Under the ABL Loan Agreement, the Borrowers may, at their option, increase the aggregate amount of the ABL Credit Facility in an amount of up to $600.0 million without the consent of any ABL Lenders not participating in such increase, subject to certain customary conditions and applicable lenders committing to provide the increase in funding. There is no assurance that additional funding would be available.
The Borrowers’ obligations under the ABL Credit Facility are guaranteed by most of the Company’s wholly-owned subsidiaries who are not also Borrowers (collectively, the “ABL Guarantors”), subject to customary exceptions and limitations. The Borrowers’ obligations under the ABL Credit Facility and the ABL Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the Borrowers’ and ABL Guarantors’ accounts receivable, inventory and certain other assets arising therefrom or related thereto (including substantially all of their deposit accounts, collectively, the “ABL Assets”) and (ii) a second-priority lien on all of the Borrowers’ and ABL Guarantors’ assets that do not constitute ABL Assets, in each case, subject to customary exceptions and limitations.
Availability under the ABL Credit Facility is subject to a borrowing base (the “Borrowing Base”), which is based on 90% of eligible accounts receivable, plus 90% of eligible credit card receivables, plus 90% of the net orderly liquidation value of eligible inventory, plus 90% of eligible pharmacy receivables, plus certain pharmacy scripts availability of the Borrowers, after adjusting for customary reserves. The aggregate amount of the ABL Loans made and letters of credit issued under the ABL Credit Facility shall at no time exceed the lesser of the aggregate commitments under the ABL Credit Facility (currently $2,100.0 million or, if increased at the Borrowers’ option as described above, up to $2,700.0 million) or the Borrowing Base. To the extent that the Borrowers’ Borrowing Base declines, the availability under the ABL Credit Facility may decrease below $2,100.0 million.
As of November 2, 2019, the U.S. Borrowers’ Borrowing Base, net of $143.9 million of reserves, was $2,333.7 million, which is above the $2,050.0 million limit of availability to the U.S. Borrowers under the ABL Credit Facility. As of November 2, 2019, the Canadian Borrower’s Borrowing Base, net of $4.0 million of reserves, was $40.8 million, which is below the $50 million limit of availability to the Canadian Borrower under the ABL Credit facility, resulting in a total Borrowing Base of $2,090.8 million supporting the ABL Loans and outstanding letters of credit under the ABL Credit Facility. As of November 2, 2019, the U.S. Borrowers had $1,317.7 million of ABL Loans outstanding, which are presented net of debt issuance costs of $12.2 million and are included in Long-term debt in the Condensed Consolidated Balance Sheets, and the Canadian Borrower had no ABL Loans outstanding under the ABL Credit Facility. As of November 2, 2019, the U.S. Borrowers had $77.4 million in letters of credit and the Canadian Borrower had no letters of credit outstanding under the ABL Credit Facility. The Company’s resulting remaining availability under the ABL Credit Facility was $695.7 million as of November 2, 2019.
The ABL Loans of the U.S. Borrowers under the ABL Credit Facility bear interest at rates that, at the U.S. Borrowers’ option, can be either: (i) a base rate and an applicable margin, or (ii) a LIBOR rate and an applicable margin. As of November 2, 2019, the applicable margin for base rate loans was 0.25%, and the applicable margin for LIBOR loans was 1.25%. The ABL Loans of the Canadian Borrower under the ABL Credit Facility bear interest at rates that, at the Canadian Borrower’s option, can be either: (i) prime rate and an applicable margin, or (ii) a Canadian dollar bankers’ acceptance equivalent rate and an applicable margin. As of November 2, 2019, the applicable margin for prime rate loans was 0.25%, and the applicable margin for Canadian dollar bankers’ acceptance equivalent rate loans was 1.25%. Commencing on the first day of the calendar month following the ABL Administrative Agent’s receipt of the Company’s aggregate availability calculation for the fiscal quarter ending on November 2, 2019, and quarterly thereafter, the applicable margins for borrowings by the U.S. Borrowers and Canadian Borrower will be subject to adjustment based upon the aggregate availability under the ABL Credit Facility. Unutilized commitments under the ABL Credit Facility are subject to a per annum fee of (i) 0.375% if the average daily total outstandings were less than 25% of the aggregate commitments during the preceding fiscal quarter or (ii) 0.25% if such average daily total outstandings were 25% or more of the aggregate commitments during the preceding fiscal quarter. As of November 2, 2019, the unutilized commitment fee was 0.25% per annum. The Borrowers are also required to pay a letter of credit fronting fee to each letter of credit issuer equal to 0.125% per annum of the amount available to be drawn under each such letter of credit, as well as a fee to all lenders equal to the applicable margin for LIBOR or Canadian dollar bankers’ acceptance equivalent rate loans, as applicable, times the average daily amount available to be drawn under all outstanding letters of credit.
The ABL Loan Agreement subjects the Company to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) of at least 1.0 to 1.0 calculated at the end of each fiscal quarter on a rolling four quarter basis when the adjusted aggregate availability (as defined in the ABL Loan Agreement) is less than the greater of (i) $235.0 million and (ii) 10% of the aggregate borrowing base. The Company was not subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement during the first quarter of fiscal 2020.
The assets included in the Condensed Consolidated Balance Sheets securing the outstanding obligations under the ABL Credit Facility on a first-priority basis, and the unused available credit and fees under the ABL Credit Facility, were as follows:
|
|
|
|
|
Assets securing the ABL Credit Facility (in thousands)(1):
|
November 2, 2019
|
Certain inventory assets included in Inventories and Current assets of discontinued operations
|
$
|
2,447,555
|
|
Certain receivables included in Accounts receivables, net and Current assets of discontinued operations
|
$
|
1,077,978
|
|
|
|
(1)
|
The ABL Credit Facility is also secured by all of the Company’s pharmacy scripts, which are included in Long-term assets of discontinued operations in the Condensed Consolidated Balance Sheets as of November 2, 2019.
|
|
|
|
|
|
Unused available credit and fees under the ABL Credit Facility (in thousands, except percentages):
|
November 2, 2019
|
Outstanding letters of credit
|
$
|
77,413
|
|
Letter of credit fees
|
1.375
|
%
|
Unused available credit
|
$
|
695,704
|
|
Unused facility fees
|
0.25
|
%
|
The ABL Loan Agreement contains other customary affirmative and negative covenants and customary representations and warranties that must be accurate in order for the Borrowers to borrow under the ABL Credit Facility. The ABL Loan Agreement also contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the ABL Credit Facility to be in full force and effect, and a change of control. If an event of default occurs and is continuing, the Borrowers may be required immediately to repay all amounts outstanding under the ABL Loan Agreement.
Term Loan Facility
On the Closing Date, the Company entered into a new term loan agreement (the “Term Loan Agreement”), by and among the Company and Supervalu (collectively, the “Term Borrowers”), the financial institutions that are parties thereto as lenders (collectively, the “Term Lenders”), Goldman Sachs Bank USA, as administrative agent for the Lenders, and the other parties thereto. The Term Loan Agreement provides for senior secured first lien term loans in an aggregate principal amount of $1,950.0 million, consisting of a $1,800.0 million seven year tranche (the “Term B Tranche”) and a $150.0 million 364-day tranche (the “364-day Tranche” and, together with the Term B Tranche, collectively, the “Term Loan Facility”). The entire amount of the net proceeds from the Term Loan Facility was used to finance the Supervalu acquisition and related transaction costs.
The loans under the Term B Tranche will be payable in full on October 22, 2025; provided that if on or prior to December 31, 2024 that certain Agreement for Distribution of Products, dated as of October 30, 2015, by and between Whole Foods Market Distribution, Inc., a Delaware corporation, and the Company has not been extended until at least October 23, 2025 on terms not materially less favorable, taken as a whole, to the Company and its subsidiaries than those in effect on the date of the Acquisition, then the loans under the Term B Tranche will be payable in full on December 31, 2024.
The loans under the 364-day Tranche were paid in full on October 21, 2019. The Company funded the scheduled maturity of the $52.8 million outstanding borrowings under the 364-day Tranche with incremental borrowings under the ABL Credit Facility on October 21, 2019. In addition, in the first quarter of fiscal 2020, the Company made mandatory prepayments and voluntary prepayments of $15.3 million and $5.8 million, respectively, on the 364-day Tranche with asset sale proceeds. In connection with the prepayments, the Company incurred a loss on debt extinguishment related to unamortized debt issuance costs of $0.1 million, which was recorded within Interest expense, net in the Condensed Consolidated Statements of Operations for the first quarter of fiscal 2020.
Under the Term Loan Agreement, the Term Borrowers may, at their option, increase the amount of the Term B Tranche, add one or more additional tranches of term loans or add one or more additional tranches of revolving credit commitments, without the consent of any Term Lenders not participating in such additional borrowings, up to an aggregate amount of $656.3 million plus additional amounts based on satisfaction of certain leverage ratio tests, subject to certain customary conditions and applicable lenders committing to provide the additional funding. There can be no assurance that additional funding would be available.
The Term Borrowers’ obligations under the Term Loan Facility are guaranteed by most of the Company’s wholly-owned domestic subsidiaries who are not also Term Borrowers (collectively, the “Term Guarantors”), subject to customary exceptions and limitations, including an exception for immaterial subsidiaries designated by the Company from time to time. The Term Borrowers’ obligations under the Term Loan Facility and the Term Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on substantially all of the Term Borrowers’ and the Term Guarantors’ assets other than the ABL Assets and (ii) a second-priority lien on substantially all of the Term Borrowers’ and the Term Guarantors’ ABL Assets, in each case, subject to customary exceptions and limitations, including an exception for owned real property with net book values of less than $10.0 million. As of November 2, 2019, there was $590.7 million of owned real property pledged as collateral that was included in Property and equipment, net in the Condensed Consolidated Balance Sheets.
The loans under the Term Loan Facility may be voluntarily prepaid, subject to certain minimum payment thresholds and the payment of breakage or other similar costs. Under the Term Loan Facility, the Company is required, subject to certain exceptions and customary reinvestment rights, to apply 100 percent of Net Cash Proceeds (as defined in the Term Loan Agreement) from certain types of asset sales to prepay the loans outstanding under the Term Loan Facility. Commencing with the fiscal year ending August 1, 2020, the Company must also prepay loans outstanding under the Term Loan Facility no later than 130 days after the fiscal year end in an aggregate principal amount equal to a specified percentage (which percentage ranges from 0 to 75 percent depending on the Consolidated First Lien Net Leverage Ratio (as defined in the Term Loan Agreement) as of the last day of such fiscal year) of Excess Cash Flow (as defined in the Term Loan Agreement) in excess of $10 million for the fiscal year then ended, minus any voluntary prepayments of the loans under the Term Loan Facility, the ABL Credit Facility (to the extent they permanently reduce commitments under the ABL Facility) and certain other indebtedness made during such fiscal year. The potential amount of prepayment from Excess Cash Flow in fiscal 2020 that may be required in fiscal 2021 is not reasonably estimable as of November 2, 2019.
The borrowings under the Term B Tranche of the Term Loan Facility bear interest at rates that, at the Term Borrowers’ option, can be either: (i) a base rate and a margin of 3.25% or (ii) a LIBOR rate and a margin of 4.25%; provided that the LIBOR rate shall never be less than 0.0%.
The Term Loan Agreement does not include any financial maintenance covenants but contains other customary affirmative and negative covenants and customary representations and warranties. The Term Loan Agreement also contains customary events of default, including, but not limited to, payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, failure of any guaranty or security document supporting the Term Loan Facility to be in full force and effect, and a change of control. If an event of default occurs and is continuing, the Term Borrowers may be required immediately to repay all amounts outstanding under the Term Loan Agreement.
As of November 2, 2019, the Company had borrowings of $1,786.5 million and no amounts outstanding under the Term B Tranche and 364-day Tranche, respectively, which are presented net of debt issuance costs of $40.2 million and an original issue discount on debt of $39.4 million. As of November 2, 2019, $18.0 million of the Term B Tranche was classified as current, excluding debt issuance costs and original issue discount on debt.
NOTE 10—COMPREHENSIVE (LOSS) INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in Accumulated other comprehensive loss by component for 13-week period ended November 2, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Benefit Plans
|
|
Foreign Currency
|
|
Swap Agreements
|
|
Total
|
Accumulated other comprehensive loss at August 3, 2019, net of tax
|
$
|
(32,458
|
)
|
|
$
|
(20,082
|
)
|
|
$
|
(56,413
|
)
|
|
$
|
(108,953
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
371
|
|
|
(1,739
|
)
|
|
(1,368
|
)
|
Amortization of amounts included in net periodic benefit income
|
572
|
|
|
—
|
|
|
—
|
|
|
572
|
|
Amortization of cash flow hedge
|
—
|
|
|
—
|
|
|
(1,942
|
)
|
|
(1,942
|
)
|
Net current period Other comprehensive loss
|
572
|
|
|
371
|
|
|
(3,681
|
)
|
|
(2,738
|
)
|
Accumulated other comprehensive loss at November 2, 2019, net of tax
|
$
|
(31,886
|
)
|
|
$
|
(19,711
|
)
|
|
$
|
(60,094
|
)
|
|
$
|
(111,691
|
)
|
Changes in Accumulated other comprehensive loss by component for 13-week period ended October 27, 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Foreign Currency
|
|
Swap Agreements
|
|
Total
|
Accumulated other comprehensive (loss) income at July 28, 2018, net of tax
|
$
|
(19,053
|
)
|
|
$
|
4,874
|
|
|
$
|
(14,179
|
)
|
Other comprehensive loss before reclassifications
|
(672
|
)
|
|
(245
|
)
|
|
(917
|
)
|
Amortization of cash flow hedge
|
—
|
|
|
441
|
|
|
441
|
|
Net current period Other comprehensive loss
|
(672
|
)
|
|
196
|
|
|
(476
|
)
|
Accumulated other comprehensive (loss) income at October 27, 2018, net of tax
|
$
|
(19,725
|
)
|
|
$
|
5,070
|
|
|
$
|
(14,655
|
)
|
Items reclassified out of Accumulated other comprehensive loss had the following impact on the Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
Affected Line Item on the Condensed Consolidated Statements of Operations
|
(in thousands)
|
|
November 2,
2019
|
|
October 27,
2018
|
|
Pension and postretirement benefit plan obligations:
|
|
|
|
|
|
|
Amortization of amounts included in net periodic benefit income(1)
|
|
$
|
774
|
|
|
$
|
—
|
|
|
Net periodic benefit income, excluding service cost
|
Income tax (benefit) expense
|
|
(202
|
)
|
|
—
|
|
|
Benefit for income taxes
|
Total reclassifications, net of tax
|
|
$
|
572
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Swap agreements:
|
|
|
|
|
|
|
Reclassification of cash flow hedge
|
|
$
|
(2,370
|
)
|
|
$
|
551
|
|
|
Interest expense, net
|
Income tax (benefit) expense
|
|
(428
|
)
|
|
110
|
|
|
Benefit for income taxes
|
Total reclassifications, net of tax
|
|
$
|
(1,942
|
)
|
|
$
|
441
|
|
|
|
|
|
(1)
|
Amortization of amounts included in net periodic benefit income include amortization of prior service benefit and amortization of net actuarial loss as reflected in Note 12—Benefit Plans.
|
NOTE 11—LEASES
The Company leases certain of its distribution centers, retail stores, office facilities, transportation equipment, and other operating equipment from third parties. Many of these leases include renewal options. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. For all classes of underlying assets, the Company has elected to not separate fixed lease components, from the fixed nonlease components.
Lease assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
Lease Type
|
|
Balance Sheet Location
|
|
November 2, 2019
|
Operating lease assets
|
|
Operating lease assets
|
|
$
|
1,051,128
|
|
Finance lease assets
|
|
Property and equipment, net
|
|
68,429
|
|
Total lease assets
|
|
|
|
$
|
1,119,557
|
|
|
|
|
|
|
Operating liabilities
|
|
Current portion of operating lease liabilities
|
|
$
|
127,327
|
|
Finance liabilities
|
|
Current portion of long-term debt and finance lease liabilities
|
|
15,239
|
|
Operating liabilities
|
|
Long-term operating lease liabilities
|
|
949,978
|
|
Finance liabilities
|
|
Long-term finance lease liabilities
|
|
68,682
|
|
Total lease liabilities
|
|
|
|
$
|
1,161,226
|
|
The Company's lease cost under ASC 842 for the 13-week period ended November 2, 2019 is as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
Statement of Operations Location
|
|
13-Week Period Ended
|
|
November 2, 2019
|
Operating lease cost
|
|
Operating expenses
|
|
$
|
67,141
|
|
Short-term lease cost
|
|
Operating expenses
|
|
10,514
|
|
Variable lease cost
|
|
Operating expenses
|
|
34,956
|
|
Sublease income
|
|
Operating expenses
|
|
(10,940
|
)
|
Sublease income
|
|
Net sales
|
|
(4,835
|
)
|
Net operating lease cost(1)
|
|
|
|
96,836
|
|
Amortization of leased assets
|
|
Operating expenses
|
|
4,703
|
|
Interest on lease liabilities
|
|
Interest expense, net
|
|
2,118
|
|
Finance lease cost
|
|
|
|
6,821
|
|
Total net lease cost
|
|
|
|
$
|
103,657
|
|
|
|
(1)
|
Rent expense as presented here includes $12.5 million of operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations, as the Company expects to remain primarily obligated under these leases
|
The Company leases certain property to third parties and receives lease and subtenant rental payments under operating leases, including assigned leases for which the Company has future minimum lease payment obligations. Future minimum lease payments (“Lease Liabilities”) to be made by the Company or certain third parties in the case of assigned leases for noncancellable operating leases and finance leases have not been reduced for future minimum lease and subtenant rentals (“Lease Receipts”) under certain operating subleases, including lease assignments for stores sold to third parties, which they operate. As of November 2, 2019, these lease obligations and lease receipts consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities and Lease Receipts
|
Lease Liabilities
|
|
Lease Receipts
|
|
Net Lease Obligations
|
Fiscal Year
|
Operating Leases(1)
|
|
Finance Leases(2)
|
|
Operating Leases
|
|
Finance Leases
|
|
Operating Leases
|
|
Finance Leases
|
Remaining fiscal 2020
|
$
|
187,380
|
|
|
$
|
18,874
|
|
|
$
|
(43,449
|
)
|
|
$
|
(161
|
)
|
|
$
|
143,931
|
|
|
$
|
18,713
|
|
2021
|
209,552
|
|
|
19,252
|
|
|
(46,516
|
)
|
|
—
|
|
|
163,036
|
|
|
19,252
|
|
2022
|
198,343
|
|
|
17,760
|
|
|
(41,562
|
)
|
|
—
|
|
|
156,781
|
|
|
17,760
|
|
2023
|
171,756
|
|
|
16,653
|
|
|
(31,360
|
)
|
|
—
|
|
|
140,396
|
|
|
16,653
|
|
2024
|
145,338
|
|
|
15,702
|
|
|
(24,236
|
)
|
|
—
|
|
|
121,102
|
|
|
15,702
|
|
Thereafter
|
1,050,386
|
|
|
21,526
|
|
|
(55,542
|
)
|
|
—
|
|
|
994,844
|
|
|
21,526
|
|
Total undiscounted lease liabilities and receipts
|
$
|
1,962,755
|
|
|
$
|
109,767
|
|
|
$
|
(242,665
|
)
|
|
$
|
(161
|
)
|
|
$
|
1,720,090
|
|
|
$
|
109,606
|
|
Less interest (3)
|
(885,450
|
)
|
|
(25,846
|
)
|
|
|
|
|
|
|
|
|
Present value of lease liabilities
|
1,077,305
|
|
|
83,921
|
|
|
|
|
|
|
|
|
|
Less current lease liabilities
|
(127,327
|
)
|
|
(15,239
|
)
|
|
|
|
|
|
|
|
|
Long-term lease liabilities
|
$
|
949,978
|
|
|
$
|
68,682
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Operating lease payments include $14.7 million related to extension options that are reasonably certain of being exercised and exclude $48.5 million of legally binding minimum lease payments for leases signed but not yet commenced.
|
|
|
(2)
|
Finance lease payments include $0.0 million related to extension options that are reasonably certain of being exercised and exclude $0.0 million of legally binding minimum lease payments for leases signed but not yet commenced.
|
|
|
(3)
|
Calculated using the interest rate for each lease.
|
As of August 3, 2019, future minimum lease payments to be made by the Company or certain third parties in the case of assigned leases for noncancellable operating leases and finance leases, which have not been reduced for future minimum subtenant rentals under certain operating subleases, including assignments, consisted of the following amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Obligations
|
|
Lease Receipts
|
|
Net Lease Obligations
|
Fiscal Year
|
|
Operating Leases
|
|
Capital Leases
|
|
Operating Leases
|
|
Capital Leases
|
|
Operating Leases
|
|
Capital Leases
|
2020
|
|
$
|
223,612
|
|
|
$
|
41,550
|
|
|
$
|
(55,922
|
)
|
|
$
|
(319
|
)
|
|
$
|
167,690
|
|
|
$
|
41,231
|
|
2021
|
|
190,845
|
|
|
32,804
|
|
|
(41,425
|
)
|
|
—
|
|
|
149,420
|
|
|
32,804
|
|
2022
|
|
179,326
|
|
|
29,869
|
|
|
(35,998
|
)
|
|
—
|
|
|
143,328
|
|
|
29,869
|
|
2023
|
|
154,812
|
|
|
26,699
|
|
|
(25,591
|
)
|
|
—
|
|
|
129,221
|
|
|
26,699
|
|
2024
|
|
135,795
|
|
|
23,095
|
|
|
(18,183
|
)
|
|
—
|
|
|
117,612
|
|
|
23,095
|
|
Thereafter
|
|
1,063,674
|
|
|
46,999
|
|
|
(59,186
|
)
|
|
—
|
|
|
1,004,488
|
|
|
46,999
|
|
Total future minimum obligations (receipts)
|
|
$
|
1,948,064
|
|
|
$
|
201,016
|
|
|
$
|
(236,305
|
)
|
|
$
|
(319
|
)
|
|
$
|
1,711,759
|
|
|
$
|
200,697
|
|
Less interest
|
|
|
|
(68,138
|
)
|
|
|
|
|
|
|
|
|
Present value of capital lease obligations
|
|
|
|
132,878
|
|
|
|
|
|
|
|
|
|
Less current capital lease obligations
|
|
|
|
(24,670
|
)
|
|
|
|
|
|
|
|
|
Long-term capital lease obligations
|
|
|
|
$
|
108,208
|
|
|
|
|
|
|
|
|
|
The following tables provide other information required by ASC 842:
|
|
|
|
Lease Term and Discount Rate
|
November 2, 2019
|
Weighted-average remaining lease term (years)
|
|
Operating leases
|
11.1 years
|
|
Finance leases
|
5.7 years
|
|
Weighted-average discount rate
|
|
Operating leases
|
10.7
|
%
|
Finance leases
|
9.9
|
%
|
|
|
|
|
Other Information
|
13-Week Period Ended
|
(in thousands)
|
November 2, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
Operating cash flows from operating leases
|
55,750
|
|
Operating cash flows from finance leases
|
1,880
|
|
Financing cash flows from finance leases
|
3,074
|
|
Leased assets obtained in exchange for new finance lease liabilities
|
—
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
37,020
|
|
NOTE 12—BENEFIT PLANS
Net periodic benefit (income) cost and contributions to defined benefit pension and other post-retirement benefit plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
(in thousands)
|
November 2, 2019
|
|
October 27, 2018
|
|
November 2, 2019
|
|
October 27, 2018
|
Net Periodic Benefit (Income) Cost
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
4
|
|
Interest cost
|
16,690
|
|
|
1,847
|
|
|
236
|
|
|
38
|
|
Expected return on plan assets
|
(27,482
|
)
|
|
(2,724
|
)
|
|
(54
|
)
|
|
(5
|
)
|
Amortization of net actuarial loss (gain)
|
3
|
|
|
—
|
|
|
(777
|
)
|
|
—
|
|
Net periodic benefit (income) cost
|
$
|
(10,789
|
)
|
|
$
|
(877
|
)
|
|
$
|
(581
|
)
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
Contributions to benefit plans
|
$
|
(4,100
|
)
|
|
$
|
(37
|
)
|
|
$
|
(100
|
)
|
|
$
|
(9
|
)
|
Pension Contributions
No minimum pension contributions are required to be made to the SUPERVALU Retirement Plan in fiscal 2020. Minimum pension contributions of $8.25 million are required to be made under the Unified Grocers, Inc. Cash Balance Plan under the Employee Retirement Income Security Act of 1974, as amended, (“ERISA”) in fiscal 2020. The Company expects to contribute approximately $0.0 million to $6.0 million to its other defined benefit pension plans and postretirement benefit plans in fiscal 2020.
Multiemployer Pension Plans
The Company contributed $13.5 million and $0.1 million in the first quarters of fiscal 2020 and 2019, respectively, to continuing and discontinued operations multiemployer pension plans.
Lump Sum Pension Settlement Offering
On August 1, 2019, the Company amended the SUPERVALU Retirement Plan to provide for a lump sum settlement window. On August 2, 2019, the Company sent plan participants lump sum settlement election offerings that committed the plan to pay certain deferred vested pension plan participants and retirees, who make such an election, a lump sum payment in exchange for their rights to receive ongoing payments from the plan. The lump sum payment amounts are equal to the present value of the participant’s pension benefits, and were made to certain former (i) retired associates and beneficiaries who are receiving their monthly pension benefit payment and (ii) terminated associates who are deferred vested in the plan, had not yet begun receiving monthly pension benefit payments and who are not eligible for any prior lump sum offerings under the plan. Benefit obligations associated with the lump sum offering have been incorporated into the funded status utilizing the actuarially determined lump sum payments based on estimated offer acceptances. The plan made aggregate lump sum settlement payments of $664.0 million to plan participants on November 4, 2019 and November 12, 2019. The Company expects that the lump sum settlement payments will result in an estimated non-cash pension settlement charge of approximately $10.0 million in the second quarter of fiscal 2020 from the acceleration of a portion of the accumulated unrecognized actuarial loss, which will be based on the fair value of SUPERVALU Retirement Plan assets and remeasured liabilities. The settlement and subsequent re-measurement is expected to result in a decrease to accumulated other comprehensive loss and an improvement to the SUPERVALU Retirement Plan’s unfunded status.
NOTE 13—INCOME TAXES
The effective income tax rate for continuing operations was a benefit of 15.3% compared to a benefit of 16.6% on pre-tax losses for the first quarter of fiscal 2020 and 2019, respectively. The change in the effective income tax rate for the first quarter of fiscal 2020 was primarily driven by the impact of the goodwill impairment charge.
The tax provision included $64.0 million of discrete tax benefit and $0.5 million of discrete tax expense, for the first quarter of fiscal 2020 and fiscal 2019, respectively. The benefit for the first quarter of fiscal 2020 is primarily due to a tax benefit of approximately $68.0 million related to the pre-tax goodwill impairment charge, which was partially offset by a discrete tax expense related to stock-based compensation and unrecognized tax positions of approximately $3.0 million and $0.8 million, respectively. Excluding the impact of the discrete items noted above, the effective tax rate benefit on continuing operations would be 16.4%, compared to 18.7% for the first quarter of fiscal 2020 and 2019, respectively. The effective tax rate benefit on the pre-tax losses is being reduced by the impact of other permanently non-deductible items for the first quarters of fiscal 2020 and 2019.
NOTE 14—EARNINGS PER SHARE
The following is a reconciliation of the basic and diluted number of shares used in computing earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
(in thousands, except per share data)
|
|
November 2,
2019
|
|
October 27,
2018
|
Basic weighted average shares outstanding
|
|
53,213
|
|
|
50,583
|
|
Net effect of dilutive stock awards based upon the treasury stock method
|
|
—
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
|
53,213
|
|
|
50,583
|
|
|
|
|
|
|
Basic per share data:
|
|
|
|
|
Continuing operations
|
|
$
|
(7.67
|
)
|
|
$
|
(0.42
|
)
|
Discontinued operations
|
|
$
|
0.46
|
|
|
$
|
0.04
|
|
Basic loss per share
|
|
$
|
(7.21
|
)
|
|
$
|
(0.38
|
)
|
Diluted per share data:
|
|
|
|
|
Continuing operations
|
|
$
|
(7.67
|
)
|
|
$
|
(0.42
|
)
|
Discontinued operations(1)
|
|
$
|
0.46
|
|
|
$
|
0.04
|
|
Diluted loss per share
|
|
$
|
(7.21
|
)
|
|
$
|
(0.38
|
)
|
|
|
|
|
|
Anti-dilutive stock-based awards excluded from the calculation of diluted earnings per share
|
|
8,272
|
|
|
839
|
|
|
|
(1)
|
The computation of diluted earnings per share from discontinued operations is calculated using diluted weighted average shares outstanding, which includes the net effect of dilutive stock awards, of approximately 63 thousand shares and 598 thousand for the 13-week periods ended November 2, 2019 and October 27, 2018, respectively.
|
NOTE 15—BUSINESS SEGMENTS
The Company has two operating segments aggregated under the Wholesale reportable segment: Wholesale and Canada Wholesale. In addition, the Company’s Retail operating segment is a separate reportable segment, which consists of discontinued operations disposal groups. The Wholesale and Canada Wholesale operating segments have similar products and services, customer channels, distribution methods and economic characteristics. The Wholesale reportable segment is engaged in the national distribution of natural, organic, specialty, produce, and conventional grocery and non-food products, and is also a provider of support services in the United States and Canada. The Company has additional operating segments that do not meet the quantitative thresholds for reportable segments and are therefore aggregated under the caption of Other. Other includes a manufacturing division, which engages in the importing, roasting, packaging, and distributing of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections, the Company’s branded product lines, and the Company’s brokerage business, which markets various products on behalf of food vendors directly and exclusively to the Company’s customers. Other also includes certain corporate operating expenses that are not allocated to operating segments, which include, among other expenses, restructuring, acquisition, and integration related expenses, share-based compensation, and salaries, retainers, and other related expenses of certain officers and all directors. The Company allocates certain corporate capital expenditures and identifiable assets to its business segments and retains certain depreciation expense related to those assets within Other. In the first quarter of fiscal 2020, the Company changed its measurement of segment profit, which resulted in additional Supervalu-related corporate expenses that were previously included in Other now being attributed to the Wholesale business. The change is immaterial with respect to the results presented in the first quarter of fiscal 2019, given the five day time period between the acquisition date and the end of the first quarter of fiscal 2019. Non-operating expenses that are not allocated to the operating segments are under the caption of Unallocated (Income)/Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Wholesale
|
|
Other
|
|
Eliminations
|
|
Unallocated (Income)/Expenses
|
|
Consolidated
|
13-Week Period Ended November 2, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(1)
|
|
$
|
6,007,095
|
|
|
$
|
63,749
|
|
|
$
|
(51,259
|
)
|
|
$
|
—
|
|
|
$
|
6,019,585
|
|
Goodwill and asset impairment charges
|
|
423,703
|
|
|
1,702
|
|
|
—
|
|
|
—
|
|
|
425,405
|
|
Restructuring, acquisition and integration related expenses
|
|
7,952
|
|
|
6,298
|
|
|
—
|
|
|
—
|
|
|
14,250
|
|
Operating loss
|
|
(416,229
|
)
|
|
(29,310
|
)
|
|
1,512
|
|
|
—
|
|
|
(444,027
|
)
|
Total other expense, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
38,088
|
|
|
38,088
|
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(482,115
|
)
|
Depreciation and amortization
|
|
68,199
|
|
|
6,942
|
|
|
—
|
|
|
—
|
|
|
75,141
|
|
Capital expenditures
|
|
40,129
|
|
|
993
|
|
|
—
|
|
|
—
|
|
|
41,122
|
|
Total assets of continuing operations
|
|
6,996,425
|
|
|
513,174
|
|
|
(45,855
|
)
|
|
—
|
|
|
7,463,744
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended October 27, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales(2)
|
|
$
|
2,856,966
|
|
|
$
|
48,754
|
|
|
$
|
(37,564
|
)
|
|
$
|
—
|
|
|
$
|
2,868,156
|
|
Restructuring, acquisition and integration related expenses
|
|
—
|
|
|
68,004
|
|
|
—
|
|
|
—
|
|
|
68,004
|
|
Operating loss
|
|
60,237
|
|
|
(78,329
|
)
|
|
(746
|
)
|
|
—
|
|
|
(18,838
|
)
|
Total other expense, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,778
|
|
|
6,778
|
|
Loss from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,616
|
)
|
Depreciation and amortization
|
|
23,517
|
|
|
1,276
|
|
|
—
|
|
|
—
|
|
|
24,793
|
|
Capital expenditures
|
|
15,737
|
|
|
644
|
|
|
—
|
|
|
—
|
|
|
16,381
|
|
Total assets of continuing operations
|
|
7,164,623
|
|
|
847,897
|
|
|
(39,013
|
)
|
|
—
|
|
|
7,973,507
|
|
|
|
(1)
|
For the first quarter of fiscal 2020, the Company recorded $244.6 million within Net sales in its wholesale reportable segment attributable to discontinued operations inter-company product purchases from its Retail operating segment, which it expects will continue subsequent to the sale of certain retail banners.
|
|
|
(2)
|
For the first quarter of fiscal 2019, the Company recorded $21.8 million within Net sales in its wholesale reportable segment attributable to discontinued operations inter-company product purchases from its Retail operating segment, which it expects will continue subsequent to the sale of certain retail banners.
|
NOTE 16—COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Guarantees and Contingent Liabilities
The Company has outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of November 2, 2019. These guarantees were generally made to support the business growth of wholesale customers. The guarantees are generally for the entire terms of the leases, fixture financing loans or other debt obligations with remaining terms that range from less than one year to eleven years, with a weighted average remaining term of approximately seven years. For each guarantee issued, if the wholesale customer or other third-party defaults on a payment, the Company would be required to make payments under its guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the primary obligor/retailer.
The Company reviews performance risk related to its guarantee obligations based on internal measures of credit performance. As of November 2, 2019, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was $35.1 million ($24.0 million on a discounted basis). Based on the indemnification agreements, personal guarantees and results of the reviews of performance risk, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations under the Company’s guarantee arrangements as the fair value has been determined to be de minimis.
The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company’s lease assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote. For leases that have been assigned, the Company has recorded the associated right of use operating lease assets and obligations within the Condensed Consolidated Balance Sheets. No associated lessor receivables are reflected on the Condensed Consolidated Balance Sheets; however, within Note 11—Leases expected cash flows from lease receipts reflecting the assignees payments to the landlord are reflected as lease receipts within the future maturity table, along with the Wholesale customers future lease receipts. For the Company’s lease guarantee arrangements no amounts have been recorded within the Condensed Consolidated Balance Sheets as the fair value has been determined to be de minimis.
The Company is a party to a variety of contractual agreements under which it may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise. These agreements primarily relate to the Company’s commercial contracts, service agreements, contracts entered into for the purchase and sale of stock or assets, operating leases and other real estate contracts, financial agreements, agreements to provide services to the Company and agreements to indemnify officers, directors and employees in the performance of their work. While the Company’s aggregate indemnification obligations could result in a material liability, the Company is not aware of any matters that are expected to result in a material liability. No amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations as the fair value has been determined to be de minimis.
In connection with Supervalu’s sale of New Albertson’s, Inc. (“NAI”) on March 21, 2013, the Company remains contingently liable with respect to certain self-insurance commitments and other guarantees as a result of parental guarantees issued by Supervalu with respect to the obligations of NAI that were incurred while NAI was Supervalu’s subsidiary. Based on the expected settlement of the self-insurance claims that underlie the Company’s commitments, the Company believes that such contingent liabilities will continue to decline. Subsequent to the sale of NAI, NAI collateralized most of these obligations with letters of credit and surety bonds to numerous state governmental authorities. Because NAI remains a primary obligor on these self-insurance and other obligations and has collateralized most of the self-insurance obligations for which the Company remains contingently liable, the Company believes that the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these guarantees, as the fair value has been determined to be de minimis.
Agreements with Save-A-Lot and Onex
The Agreement and Plan of Merger pursuant to which Supervalu sold the Save-A-Lot business in 2016 (the “SAL Merger Agreement”) contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters, on the terms and subject to the limitations set forth in the SAL Merger Agreement. Similarly, Supervalu entered into a Separation Agreement (the “Separation Agreement”) with Moran Foods, LLC d/b/a Save-A-Lot (“Moran Foods”), which contains indemnification obligations and covenants related to the separation of the assets and liabilities of the Save-A-Lot business from the Company. The Company also entered into a Services Agreement with Moran Foods (the “Services Agreement”), pursuant to which the Company is providing Save-A-Lot various technical, human resources, finance and other operational services for a term of five years, subject to termination provisions that can be exercised by each party. The initial annual base charge under the Services Agreement is $30 million, subject to adjustments. The Services Agreement generally requires each party to indemnify the other party against third-party claims arising out of the performance of or the provision or receipt of services under the Services Agreement. While the Company’s aggregate indemnification obligations to Save-A-Lot and Onex could result in a material liability, the Company is not aware of any matters that are expected to result in a material liability. The Company has recorded the fair value of the guarantee in the Condensed Consolidated Balance Sheets within Other long-term liabilities.
Other Contractual Commitments
In the ordinary course of business, the Company enters into supply contracts to purchase products for resale, and service contracts for fixed asset and information technology systems. These contracts typically include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. As of November 2, 2019, the Company had approximately $247.0 million of non-cancelable future purchase obligations.
Legal Proceedings
In December 2008, a class action complaint was filed in the United States District Court for the Western District of Wisconsin against Supervalu alleging that a 2003 transaction between Supervalu and C&S Wholesale Grocers, Inc. (“C&S”) was a conspiracy to restrain trade and allocate markets. In the 2003 transaction, Supervalu purchased certain assets of the Fleming Corporation as part of Fleming Corporation’s bankruptcy proceedings and sold certain of Supervalu’s assets to C&S that were located in New England. Three other retailers filed similar complaints in other jurisdictions and the cases were consolidated in the United States District Court in Minnesota. The complaints alleged that the conspiracy was concealed and continued through the use of non-compete and non-solicitation agreements and the closing down of the distribution facilities that Supervalu and C&S purchased from each other. Plaintiffs were divided into Midwest plaintiffs and a New England plaintiff and are seeking monetary damages, injunctive relief and attorney’s fees. As previously disclosed, the Company settled with the Midwest plaintiffs in November 2017. The New England plaintiff was not a party to the settlement and is pursuing its individual claims and potential class action claims against Supervalu, which at this time are determined as remote. On February 15, 2018, Supervalu filed a summary judgment and Daubert motion and the New England plaintiff filed a motion for class certification and on July 27, 2018, the District Court granted Supervalu’s motions. The New England plaintiff appealed to the 8th Circuit on August 15, 2018. Briefing on the appeal is complete and the hearing occurred on October 15, 2019. The Company is awaiting the 8th Circuit’s decision.
The Company is one of dozens of companies that have been named in various lawsuits alleging that drug manufacturers, retailers and distributors contributed to the national opioid epidemic. Currently, UNFI, primarily through its subsidiary, Advantage Logistics, is named in approximately 38 suits pending in the United States District Court for the Northern District of Ohio where over 1,800 cases have been consolidated as Multi-District Litigation (“MDL”). In accordance with the Stock Purchase Agreement dated January 10, 2013, between New Albertson’s Inc. and the Company (the “Stock Purchase Agreement”), New Albertson’s Inc. is defending and indemnifying UNFI in a majority of the cases under a reservation of rights as those cases relate to New Albertson’s pharmacies. In one of the MDL cases, MDL No. 2804 filed by The Blackfeet Tribe of the Blackfeet Indian Reservation, all defendants were ordered to Answer the Complaint, which UNFI did on July 26, 2019. To date, no discovery has been conducted against UNFI in any of the actions. UNFI is vigorously defending these matters, which it believes are without merit.
UNFI is currently subject to a qui tam action alleging violations of the False Claims Act (“FCA”). In United States ex rel. Schutte and Yarberry v. Supervalu, New Albertson’s, Inc., et al, which is pending in the U.S. District Court for the Central District of Illinois, the relators allege that defendants overcharged government healthcare programs by not providing the government, as a part of usual and customary prices, the benefit of discounts given to customers purchasing prescription medication who requested that defendants match competitor prices. The complaint was originally filed under seal and amended on November 30, 2015. The government previously investigated the relators' allegations and declined to intervene. Violations of the FCA are subject to treble damages and penalties of up to a specified dollar amount per false claim. Relators elected to pursue the case on their own and have alleged FCA damages against Supervalu and New Albertsons in excess of $100 million, not including trebling and statutory penalties. For the majority of the relevant period Supervalu and New Albertson’s operated as a combined company. In March 2013, Supervalu divested New Albertson’s (and related assets) pursuant the Stock Purchase Agreement. Based on the claims that are currently pending and the Stock Purchase Agreement, Supervalu’s share of a potential award (at the currently claimed value by relators) would be approximately $24 million, not including trebling and statutory penalties. Both sides moved for summary judgment. Discovery is complete, and trial will be set after the Court rules on the pending motions. On August 5, 2019, the Court granted one of relators’ summary judgment motions finding that defendants’ lower matched prices are the usual and customary prices and that Medicare Part D and Medicaid were entitled to those prices. There are additional pending motions for summary judgment filed by defendants and relators that await rulings by the Court, including on key FCA elements of materiality and knowledge. On August 30, 2019, defendants filed a motion with the District Court seeking certification of the summary judgment decision for interlocutory appeal and on November 7, 2019, the District Court denied the motion. UNFI is vigorously defending this matter and believes that it should be successful on the merits, however, in light of the most recent summary judgment decision, the Company now believes the risk of loss is reasonably possible. However, management is unable to estimate a range of reasonably possible loss because there are several disputed factual and legal matters that have not yet been resolved, including fundamentally whether the FCA violations actually occurred (which defendants still strongly believe and continue to argue did not), and the appropriate methodology of determining potential damages, if any.
In November 2018, a putative nationwide class action was filed in Rhode Island state court, which the Company removed to U.S. District Court for the District of Rhode Island. In North Country Store v. United Natural Foods, Inc., plaintiff asserts that the Company made false representations about the nature of fuel surcharges charged to customers and asserts claims for alleged violations of Connecticut’s Unfair Trade Practices Act, breach of contract, unjust enrichment and breach of the covenant of good faith and fair dealing arising out of the Company’s fuel surcharge practices. On March 5, 2019, the Company answered the complaint denying the allegations. At a court-ordered mediation on October 15, 2019, the Company reached an agreed resolution, which was immaterial in amount, to avoid costs and uncertainty of litigation. The potential settlement must go through the Court approval and notice process, which will take several months.
From time to time, the Company receives notice of claims or potential claims, becomes involved in litigation, alternative dispute resolution such as arbitration, or other legal and regulatory proceedings that arise in the ordinary course of its business, including investigations and claims regarding employment law; pension plans; labor union disputes, including unfair labor practices, such as claims for back-pay it the context of labor contract negotiations; supplier, customer and service provider contract terms and claims including matters related to supplier or customer insolvency or general inability to pay obligations as they become due; real estate and environmental matters, including claims in connection with the Company’s ownership and lease of a substantial amount of real property, both neutral and warehouse properties; and antitrust. Other than as described above, there are no pending material legal proceedings to which the Company is a party or to which its property is subject.
Predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. The Company regularly monitors its exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and estimates with respect to related costs and exposures. As of November 2, 2019, no material accrued obligations, individually or in the aggregate, have been recorded for these legal proceedings.
Although management believes it has made appropriate assessments of potential and contingent loss in each of these cases based on current facts and circumstances, and application of prevailing legal principles, there can be no assurance that material differences in actual outcomes from management’s current assessments, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates will not occur. The occurrence of any of the foregoing, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
NOTE 17—DISCONTINUED OPERATIONS
In conjunction with the Supervalu acquisition, the Company announced its plan to sell the remaining acquired retail operations of Supervalu (“Retail”). The results of operations, financial position and cash flows of Cub Foods, Hornbacher’s, Shoppers and Shop ‘n Save St. Louis and Shop ‘n Save East retail operations have been presented as discontinued operations and the related assets and liabilities have been classified as held-for-sale.
Subsequent to the end of the first quarter of fiscal 2020, the Company announced that it had entered into agreements to sell 13 Shopper’s stores, and decided to close 4 locations. The Company expects to incur approximately $32.0 million to $42.0 million in pre-tax aggregate costs and charges related to these transactions, consisting of $13.0 million to $16.0 million of estimated severance and employee-related costs, $11.0 million to $14.0 million of estimated operating losses during the period of wind-down, primarily related to inventory, $2.0 million to $3.0 million of estimated transaction costs, and $6.0 million to $9.0 million of estimated non-cash asset impairment charges, primarily associated with real estate assets and leasehold improvements. The Company continues to hold the remaining Shoppers stores for sale. In the second quarter, the Company will assess the remaining composition of the Shoppers disposal group and review the recoverability of the remaining assets, as the Company continues to hold these locations for sale.
In fiscal 2019, the Company completed the sale of seven of its eight Hornbacher's locations, as well as Hornbacher’s newest store in West Fargo, North Dakota, to Coborn's Inc. (“Coborn’s”). The Company did not incur a gain or loss on the sale of this disposal group. The Hornbacher’s store in Grand Forks, North Dakota was not included in the sale to Coborn’s and has closed pursuant to the terms of the definitive agreement. As part of the sale, Coborn's entered into a long-term agreement for the Company to serve as the primary supplier of the Hornbacher’s locations and expand its existing supply arrangements for other Coborn’s locations.
In the fourth quarter of fiscal 2019, the Company completed the sale of the pharmacy prescription files and inventory of the Shoppers disposal group. As of November 2, 2019, only the Cub Foods and Shoppers disposal groups continue to be classified as operations held for sale as discontinued operations.
Operating results of discontinued operations are summarized below:
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
(In thousands)
|
November 2, 2019
|
|
October 27, 2018(1)
|
Net sales
|
$
|
610,821
|
|
|
$
|
46,598
|
|
Cost of sales
|
441,071
|
|
|
34,534
|
|
Gross profit
|
169,750
|
|
|
12,064
|
|
Operating expenses
|
136,435
|
|
|
9,494
|
|
Restructuring, acquisition and integration related expenses
|
1,362
|
|
|
—
|
|
Operating income
|
31,953
|
|
|
2,570
|
|
Other income, net
|
(1,091
|
)
|
|
(249
|
)
|
Income from discontinued operations before income taxes
|
33,044
|
|
|
2,819
|
|
Income tax provision
|
8,090
|
|
|
749
|
|
Income from discontinued operations, net of tax
|
$
|
24,954
|
|
|
$
|
2,070
|
|
|
|
(1)
|
These results reflect retail operations from the Supervalu acquisition date of October 22, 2018 to October 27, 2018.
|
The Company recorded $244.6 million and $21.8 million within Net sales from continuing operations attributable to discontinued operations inter-company product purchases in the 13-week periods ended November 2, 2019 and October 27, 2018, respectively, 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 $113.0 million and $9.8 million in the 13-week periods ended November 2, 2019 and October 27, 2018, respectively.
The carrying amounts (in thousands) of major classes of assets and liabilities that were classified as held-for-sale on the Condensed Consolidated Balance Sheets follows in the table below.
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
November 2, 2019
|
|
August 3, 2019
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,845
|
|
|
$
|
2,917
|
|
Receivables, net
|
|
4,532
|
|
|
1,471
|
|
Inventories
|
|
139,409
|
|
|
129,142
|
|
Other current assets
|
|
9,097
|
|
|
10,199
|
|
Total current assets of discontinued operations
|
|
155,883
|
|
|
143,729
|
|
Long-term assets
|
|
|
|
|
Property and equipment
|
|
292,154
|
|
|
301,395
|
|
Intangible assets
|
|
49,687
|
|
|
48,788
|
|
Other assets
|
|
2,051
|
|
|
1,882
|
|
Total long-term assets of discontinued operations
|
|
343,892
|
|
|
352,065
|
|
Total assets of discontinued operations
|
|
$
|
499,775
|
|
|
$
|
495,794
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
54,781
|
|
|
$
|
61,634
|
|
Accrued compensation and benefits
|
|
34,574
|
|
|
45,887
|
|
Other current liabilities
|
|
11,523
|
|
|
14,744
|
|
Total current liabilities of discontinued operations
|
|
100,878
|
|
|
122,265
|
|
Long-term liabilities
|
|
|
|
|
Other long-term liabilities
|
|
1,403
|
|
|
1,923
|
|
Total liabilities of discontinued operations
|
|
102,281
|
|
|
124,188
|
|
Net assets of discontinued operations
|
|
$
|
397,494
|
|
|
$
|
371,606
|
|
As of November 2, 2019, the fair value of disposal groups were estimated based on each group’s expected consideration less costs to sell. Stand-alone fair values are estimated based on fair value reviews and indications of value for long-lived assets exclusive of transferring multiemployer pension plan obligations. Based on the impairment reviews in the first quarter of fiscal 2020, no indications of impairment existed.
If transactions were to occur at a level lower than the disposal groups, the Company would disaggregate the disposal group and perform a recoverability review of the long-lived assets based on the asset group at that time. In addition, the sale of the Company’s retail disposal groups may result in charges that may be materially different than the Company’s prior estimates. Estimates most sensitive to changes that could result in material charges include expected consideration, including the extent to which the Company is able transfer multiemployer pension plan obligations, and the potential sale of the disposal groups at a lower level.