Item 1. Financial Statements
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
April 28,
2018
|
|
July 29,
2017
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,758
|
|
|
$
|
15,414
|
|
Accounts receivable, less allowances of $18,185
and $13,939
|
|
635,190
|
|
|
525,636
|
|
Inventories
|
|
1,195,860
|
|
|
1,031,690
|
|
Deferred income taxes
|
|
—
|
|
|
40,635
|
|
Prepaid expenses and other current assets
|
|
41,953
|
|
|
49,295
|
|
Total current assets
|
|
1,894,761
|
|
|
1,662,670
|
|
Property & equipment, net
|
|
574,197
|
|
|
602,090
|
|
Goodwill
|
|
362,916
|
|
|
371,259
|
|
Intangible assets, less accumulated amortization of
$60,888
and $49,926
|
|
196,979
|
|
|
208,289
|
|
Other assets
|
|
49,993
|
|
|
42,255
|
|
Total assets
|
|
$
|
3,078,846
|
|
|
$
|
2,886,563
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
543,631
|
|
|
$
|
534,616
|
|
Accrued expenses and other current liabilities
|
|
176,127
|
|
|
157,243
|
|
Current portion of long-term debt
|
|
12,423
|
|
|
12,128
|
|
Total current liabilities
|
|
732,181
|
|
|
703,987
|
|
Notes payable
|
|
329,000
|
|
|
223,612
|
|
Deferred income taxes
|
|
37,348
|
|
|
98,833
|
|
Other long-term liabilities
|
|
27,274
|
|
|
28,347
|
|
Long-term debt, excluding current portion
|
|
140,740
|
|
|
149,863
|
|
Total liabilities
|
|
1,266,543
|
|
|
1,204,642
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, par value $0.01 per share, authorized 5,000 shares; issued none
|
|
—
|
|
|
—
|
|
Common stock, par value $0.01 per share, authorized 100,000 shares; 51,006 shares issued and 50,441 shares outstanding at April 28, 2018, 50,622 shares issued and outstanding at July 29, 2017
|
|
510
|
|
|
506
|
|
Additional paid-in capital
|
|
479,220
|
|
|
460,011
|
|
Treasury stock at cost
|
|
(22,237
|
)
|
|
—
|
|
Accumulated other comprehensive loss
|
|
(12,634
|
)
|
|
(13,963
|
)
|
Retained earnings
|
|
1,367,444
|
|
|
1,235,367
|
|
Total stockholders’ equity
|
|
1,812,303
|
|
|
1,681,921
|
|
Total liabilities and stockholders’ equity
|
|
$
|
3,078,846
|
|
|
$
|
2,886,563
|
|
See Notes to Condensed Consolidated Financial Statements.
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except for per share data)
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|
|
|
|
|
|
|
|
|
|
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|
13-Week Period Ended
|
|
39-Week Period Ended
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
April 28,
2018
|
|
April 29,
2017
|
Net sales
|
|
$
|
2,648,879
|
|
|
$
|
2,369,556
|
|
|
$
|
7,634,435
|
|
|
$
|
6,933,438
|
|
Cost of sales
|
|
2,240,792
|
|
|
2,003,195
|
|
|
6,487,610
|
|
|
5,873,116
|
|
Gross profit
|
|
408,087
|
|
|
366,361
|
|
|
1,146,825
|
|
|
1,060,322
|
|
Operating expenses
|
|
325,779
|
|
|
297,469
|
|
|
957,964
|
|
|
891,820
|
|
Restructuring and asset impairment expenses
|
|
151
|
|
|
3,946
|
|
|
11,393
|
|
|
3,946
|
|
Total operating expenses
|
|
325,930
|
|
|
301,415
|
|
|
969,357
|
|
|
895,766
|
|
Operating income
|
|
82,157
|
|
|
64,946
|
|
|
177,468
|
|
|
164,556
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
4,468
|
|
|
4,225
|
|
|
12,368
|
|
|
13,188
|
|
Interest income
|
|
(121
|
)
|
|
(82
|
)
|
|
(308
|
)
|
|
(278
|
)
|
Other expense (income), net
|
|
(24
|
)
|
|
478
|
|
|
(1,305
|
)
|
|
760
|
|
Total other expense, net
|
|
4,323
|
|
|
4,621
|
|
|
10,755
|
|
|
13,670
|
|
Income before income taxes
|
|
77,834
|
|
|
60,325
|
|
|
166,713
|
|
|
150,886
|
|
Provision for income taxes
|
|
25,943
|
|
|
23,738
|
|
|
33,831
|
|
|
59,600
|
|
Net income
|
|
$
|
51,891
|
|
|
$
|
36,587
|
|
|
$
|
132,882
|
|
|
$
|
91,286
|
|
Basic per share data:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.03
|
|
|
$
|
0.72
|
|
|
$
|
2.63
|
|
|
$
|
1.81
|
|
Weighted average basic shares of common stock outstanding
|
|
50,424
|
|
|
50,601
|
|
|
50,563
|
|
|
50,554
|
|
Diluted per share data:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1.02
|
|
|
$
|
0.72
|
|
|
$
|
2.61
|
|
|
$
|
1.80
|
|
Weighted average diluted shares of common stock outstanding
|
|
50,751
|
|
|
50,801
|
|
|
50,816
|
|
|
50,718
|
|
See Notes to Condensed Consolidated Financial Statements.
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
39-Week Period Ended
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
April 28,
2018
|
|
April 29,
2017
|
Net income
|
|
$
|
51,891
|
|
|
$
|
36,587
|
|
|
$
|
132,882
|
|
|
$
|
91,286
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of swap agreements, net of tax
|
|
729
|
|
|
125
|
|
|
3,649
|
|
|
5,203
|
|
Foreign currency translation adjustments
|
|
(3,159
|
)
|
|
(2,611
|
)
|
|
(2,320
|
)
|
|
(3,231
|
)
|
Total other comprehensive income (loss)
|
|
(2,430
|
)
|
|
(2,486
|
)
|
|
1,329
|
|
|
1,972
|
|
Total comprehensive income
|
|
$
|
49,461
|
|
|
$
|
34,101
|
|
|
$
|
134,211
|
|
|
$
|
93,258
|
|
See Notes to Condensed Consolidated Financial Statements.
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
Additional
Paid-in Capital
|
|
Accumulated
Other
Comprehensive (Loss) Income
|
|
Retained Earnings
|
|
Total
Stockholders’ Equity
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
Balances at July 29, 2017
|
50,622
|
|
|
$
|
506
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
460,011
|
|
|
$
|
(13,963
|
)
|
|
$
|
1,235,367
|
|
|
$
|
1,681,921
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
1,314
|
|
|
|
|
|
(805
|
)
|
|
509
|
|
Stock option exercises and restricted stock vestings, net of tax
|
384
|
|
|
4
|
|
|
|
|
|
|
(3,924
|
)
|
|
|
|
|
|
|
|
(3,920
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
21,712
|
|
|
|
|
|
|
|
|
21,712
|
|
Repurchase of common stock
|
|
|
|
|
565
|
|
|
(22,237
|
)
|
|
|
|
|
|
|
|
|
(22,237
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
107
|
|
Fair value of swap agreements, net of tax
|
|
|
|
|
|
|
|
|
|
|
3,649
|
|
|
|
|
3,649
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,320
|
)
|
|
|
|
|
(2,320
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,882
|
|
|
132,882
|
|
Balances at April 28, 2018
|
51,006
|
|
|
$
|
510
|
|
|
565
|
|
|
$
|
(22,237
|
)
|
|
$
|
479,220
|
|
|
$
|
(12,634
|
)
|
|
$
|
1,367,444
|
|
|
$
|
1,812,303
|
|
See Notes to Condensed Consolidated Financial Statements.
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
39-Week Period Ended
|
|
|
April 28,
2018
|
|
April 29,
2017
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income
|
|
$
|
132,882
|
|
|
$
|
91,286
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
65,982
|
|
|
63,930
|
|
Share-based compensation
|
|
21,712
|
|
|
18,702
|
|
Loss on disposals of property and equipment
|
|
111
|
|
|
825
|
|
Gain associated with disposal of investments
|
|
(699
|
)
|
|
—
|
|
Excess tax deficit from share-based payment arrangements
|
|
—
|
|
|
1,403
|
|
Restructuring and asset impairment
|
|
3,370
|
|
|
711
|
|
Goodwill impairment
|
|
7,872
|
|
|
—
|
|
Deferred income taxes
|
|
(21,866
|
)
|
|
(160
|
)
|
Change in accounting estimate
|
|
(20,909
|
)
|
|
—
|
|
Provision for doubtful accounts
|
|
8,805
|
|
|
4,847
|
|
Non-cash interest expense
|
|
594
|
|
|
79
|
|
Changes in assets and liabilities, net of acquired businesses:
|
|
|
|
|
|
|
Accounts receivable
|
|
(119,149
|
)
|
|
(61,820
|
)
|
Inventories
|
|
(165,049
|
)
|
|
(19,758
|
)
|
Prepaid expenses and other assets
|
|
10,317
|
|
|
(9,135
|
)
|
Accounts payable
|
|
6,396
|
|
|
79,023
|
|
Accrued expenses and other liabilities
|
|
14,465
|
|
|
(6,836
|
)
|
Net cash (used in) provided by operating activities
|
|
(55,166
|
)
|
|
163,097
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Capital expenditures
|
|
(29,646
|
)
|
|
(40,004
|
)
|
Purchase of businesses, net of cash acquired
|
|
(29
|
)
|
|
(9,198
|
)
|
Proceeds from disposals of property and equipment
|
|
47
|
|
|
34
|
|
Proceeds from disposal of investments
|
|
756
|
|
|
—
|
|
Long-term investment
|
|
(3,397
|
)
|
|
(2,000
|
)
|
Net cash used in investing activities
|
|
(32,269
|
)
|
|
(51,168
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
(9,043
|
)
|
|
(8,531
|
)
|
Repurchase of common stock
|
|
(22,237
|
)
|
|
—
|
|
Proceeds from borrowings under revolving credit line
|
|
500,061
|
|
|
154,412
|
|
Repayments of borrowings under revolving credit line
|
|
(394,671
|
)
|
|
(276,443
|
)
|
Increase in bank overdraft
|
|
23,890
|
|
|
19,075
|
|
Proceeds from exercise of stock options
|
|
602
|
|
|
165
|
|
Payment of employee restricted stock tax withholdings
|
|
(4,522
|
)
|
|
(1,295
|
)
|
Excess tax deficit from share-based payment arrangements
|
|
—
|
|
|
(1,403
|
)
|
Capitalized debt issuance costs
|
|
—
|
|
|
(180
|
)
|
Net cash provided by (used in) financing activities
|
|
94,080
|
|
|
(114,200
|
)
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
(301
|
)
|
|
(203
|
)
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
6,344
|
|
|
(2,474
|
)
|
Cash and cash equivalents at beginning of period
|
|
15,414
|
|
|
18,593
|
|
Cash and cash equivalents at end of period
|
|
$
|
21,758
|
|
|
$
|
16,119
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
Cash paid for interest
|
|
$
|
12,368
|
|
|
$
|
13,188
|
|
Cash paid for federal and state income taxes, net of refunds
|
|
$
|
45,021
|
|
|
$
|
58,199
|
|
See Notes to Condensed Consolidated Financial Statements.
UNITED NATURAL FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 28, 2018
(unaudited)
1.
SIGNIFICANT ACCOUNTING POLICIES
(a)
Nature of Business
United Natural Foods, Inc. and its subsidiaries (the “Company”) is a leading distributor and retailer of natural, organic and specialty products. The Company sells its products primarily throughout the United States and Canada.
(b)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
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 have been condensed or omitted. In the Company’s opinion, these condensed consolidated financial statements include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. However, the results of operations for interim periods may not be indicative of the results that may be expected for a full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
July 29, 2017
.
Net sales consist primarily of sales of natural, organic and specialty products to retailers, adjusted for customer volume discounts, returns, and allowances. Net sales also include amounts charged by the Company to customers for shipping and handling and fuel surcharges. The principal components of cost of sales include the amounts paid to suppliers for product sold, plus the cost of transportation necessary to bring the product to the Company’s distribution facilities, offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers' products. Cost of sales also includes amounts incurred by the Company’s manufacturing subsidiary, United Natural Trading LLC, which does business as Woodstock Farms Manufacturing, for inbound transportation costs offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products. Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, amortization expense, and depreciation expense related to the wholesale and retail divisions. Other expense (income) includes interest on outstanding indebtedness, including the financing obligation related to our Aurora, Colorado distribution center and the lease for office space for our corporate headquarters in Providence, Rhode Island, interest income and miscellaneous income and expenses.
As noted above, the Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound freight are generally recorded in cost of sales, whereas shipping and handling costs for selecting, quality assurance, and outbound transportation are recorded in operating expenses. Outbound shipping and handling costs, including allocated employee benefit expenses, totaled
$148.4 million
and
$129.2 million
for the
third quarter
of fiscal
2018
and
2017
, respectively. Outbound shipping and handling costs, including allocated employee benefit expenses, totaled
$432.8 million
and
$385.1 million
for the first
39 weeks
of fiscal
2018
and
2017
, respectively.
(c)
Change in Accounting Estimate
The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires the Company to make estimates and judgments that affect the amounts reported in its condensed consolidated financial statements and the accompanying notes. Actual results may differ materially from the Company's estimates.
The Company has experienced growth in customer demand since the start of fiscal 2018 and for the 13 and 39-week periods ended April 28, 2018, net sales increased approximately
11.8%
and
10.1%
, respectively, when compared to the comparable periods in fiscal 2017. Additionally, inventories have increased approximately
15.9%
since
July 29, 2017
. During the first quarter of fiscal 2018, the Company opened its shared services center which established a centralized processing function for certain of its legal entities. As a result of the aforementioned growth in net sales and inventory and the changes in processing and the resulting increase in the Company’s estimate of its accrual for inventory purchases the Company initiated a review of its vendor invoicing processes and undertook a review of its estimate of its accrual for inventory purchases.
The Company typically generates purchase orders to initiate the procurement process for the products it sells, and orders are subsequently fulfilled by suppliers and delivered to the Company. In certain situations, inventory purchased by the Company may be delivered to the Company prior to the supplier sending the Company an associated invoice. When the Company receives inventory from a supplier before the supplier invoice is received, the Company customarily accrues for liabilities associated with this received but not invoiced inventory as its accrual for inventory purchases. During the 13 and 39-week periods ended April 28, 2018 the Company experienced an increased volume in its accrual for inventory purchases. When the Company receives a vendor invoice subsequent to a period end, the invoice is reconciled to the accrual for inventory purchases account. Due to the large volumes of orders and SKUs, and pricing and quantity differences between the vendor invoice and the Company’s records, at times only a portion of the accrual for inventory purchases is able to be matched to the vendor invoice. Historically, the Company relieved any unresolved and partially matched amounts in its accrual for inventory purchases following when such amounts were substantially matched or aged past twelve months as it was determined that a liability was no longer considered probable at that point.
In the third quarter of fiscal 2018, the Company finalized its analysis and review of its accrual for inventory purchases, including a historical data analysis of unmatched and partially matched amounts that were aged greater than twelve months and the ultimate resolution of such aged accruals. Based on its analysis, the Company determined that it could reasonably estimate the outcome of its partially matched vendor invoices upon receipt of such invoice rather than when the amount was aged greater than twelve months and a liability was no longer considered probable. As a result of this change in estimate, accounts payable was reduced by
$20.9 million
, resulting in an increase to net income of
$13.9 million
, or
$0.27
per diluted share, for both the 13 and 39-weeks ended
April 28, 2018
.
2.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,
which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of the fiscal year ending August 1, 2020, with early adoption permitted. We are currently reviewing the provisions of the new standard and evaluating its impact on the Company's consolidated financial statements.
In December 2017, the United States ("U.S.") government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The SEC staff issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cut and Jobs Act
("SAB 118"), which provides guidance on accounting for the tax effects of the TCJA. Refer to Note 8, Income Taxes, for disclosure regarding the Company’s implementation of SAB 118.
In August 2017, the FASB issued ASU 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,
which changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line item as the hedged item. The ASU also provides new alternatives for applying hedge accounting to additional hedging strategies, measuring the hedged item in fair value hedges of interest rate risk, reducing the cost and complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method and reducing the risk of a material error correction if a company applies the shortcut method inappropriately. This ASU is effective for public companies in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of the fiscal year ending August 1, 2020, with early adoption permitted. We are currently reviewing the provisions of the new standard and evaluating its impact on the Company's consolidated financial statements, however, the Company plans to early adopt this standard in the fourth quarter of fiscal 2018.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which is intended to improve the accounting for share-based payment transactions as part of the FASB's simplification initiative. This ASU has changed aspects of accounting for share-based payment award transactions including accounting for income taxes, the classification of excess tax benefits and the classification of employee taxes paid when shares are withheld for tax-withholding purposes on the statement of cash flows, forfeitures, and minimum statutory tax withholding requirements. The Company adopted the new standard in the first quarter of fiscal 2018. Accordingly, the Company will account for excess tax benefits or tax deficiencies related to share-based payments in its provision for income taxes as opposed to additional paid-in capital. The Company recognized a de minimis amount of income tax benefit related to excess tax benefits for share-based payments for the
13-week period ended April 28, 2018
and
$0.9 million
of income tax expense related to tax deficiencies for share-based payments for the
39-week period ended April 28, 2018
. In addition, the Company elected to account for forfeitures as they occur and recorded a cumulative adjustment to retained earnings and additional paid-in capital as of July 30, 2017, the first day of fiscal 2018, of approximately
$0.8 million
and
$1.3 million
, respectively.
In February 2016, the FASB issued ASU No. 2016-2,
Leases
(Topic 842)
. 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. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. In addition, this ASU expands the disclosure requirements of lease arrangements. This ASU will require the Company to recognize most current operating lease obligations as right-of-use assets with a corresponding liability based on the present value of future operating leases, which the Company believes will result in a significant impact to its consolidated balance sheets. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The ASU is effective for public companies with interim and annual periods in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of the fiscal year ending August 1, 2020, with early adoption permitted. The Company expects to adopt this standard in the first quarter of fiscal 2020 and has begun an initial assessment plan to determine the impacts of this ASU on the Company's consolidated financial statements and any necessary changes to our accounting policies, processes and controls, and, if required, our systems.
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
, which requires entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The new pronouncement is effective for public companies with annual periods, and interim periods within those annual periods, beginning after December 15, 2016, which for the Company was the first quarter of fiscal 2018. The Company adopted this guidance on a prospective basis in the first quarter of fiscal 2018 and it resulted in a reclassification from current deferred income tax assets to noncurrent deferred income tax liabilities of
$40.6 million
. All future adjustments will be reported as noncurrent.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers, (Topic 606)
, which has been updated by multiple amending ASUs and supersedes existing revenue recognition requirements. The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the ASU requires new, enhanced quantitative and qualitative disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The collective guidance is effective for public companies with annual periods, and interim periods within those periods, beginning after December 15, 2017, which for the Company will be the first quarter of the fiscal year ending August 3, 2019. The new standard permits either of the following adoption methods: (i) a full retrospective application with restatement of each period presented in the financial statements with the option to elect certain practical expedients, or (ii) a retrospective application with the cumulative effect of adopting the guidance recognized as of the date of initial application (“modified retrospective method”).
The Company will adopt this new guidance in the first quarter of fiscal 2019 and preliminarily expects to use the modified retrospective method. The Company substantially completed its assessment of the new standard in the third quarter of fiscal 2018. The Company’s assessment work consisted of scoping of revenue streams, reviewing contracts with customers, and documenting the accounting analysis and conclusions of the impacts of the ASU on the Company’s wholesale distribution and other segments. We are currently quantifying the impact of adoption and developing new policies, procedures, and internal controls for the adoption and recognition of revenue under the ASU. The Company currently believes it has isolated its areas of impact resulting from the adoption of the new standard, which include the sale of certain private label products to customers where the Company has no alternative use and has an enforceable right to payment for performance completed to date. Under the new standard, revenue for these sales will be recognized over time as opposed to at a point in time under the Company’s current policies. Although the quantification of impacts is ongoing, as a result of its assessment work to date, the Company does not expect a material quantitative impact to its consolidated financial statements as a result of adoption of the new standard. The Company expects to complete its evaluation of the new standard in the fourth quarter of fiscal 2018, which will include quantification of the impacts upon adoption and the impact to the Company’s footnote disclosures.
3.
ACQUISITIONS
Wholesale Segment - Wholesale Distribution Acquisition
Gourmet Guru, Inc.
On August 10, 2016, the Company acquired all of the outstanding equity securities of Gourmet Guru, Inc. ("Gourmet Guru"). Gourmet Guru is a distributor and merchandiser of fresh and organic food focusing on new and emerging brands. Total cash consideration related to this acquisition was approximately
$10.0 million
. The fair value of identifiable intangible assets acquired was determined by using an income approach. The identifiable intangible asset recorded based on a provisional valuation consisted of customer lists of
$1.0 million
, which are being amortized on a straight-line basis over an estimated useful life of approximately two years. During the first quarter of fiscal 2018, the Company recorded an increase to goodwill of
approximately
$0.2 million
with a decrease to prepaid expenses. The goodwill of
$10.3 million
represents the future economic benefits expected to arise that could not be individually identified and separately recognized. During the first quarter of fiscal 2018, the Company finalized its purchase accounting related to the Gourmet Guru acquisition. Operations have been combined with the Company's existing wholesale distribution business and therefore results are not separable from the rest of the wholesale distribution business. The Company has not furnished pro forma financial information relating to this acquisition as such information is not material to the Company's financial results.
4.
RESTRUCTURING ACTIVITIES AND ASSET IMPAIRMENTS
2018 Earth Origins Market.
During the second quarter of fiscal 2018, the Company recorded restructuring and asset impairment expenses of
$11.4 million
related to the Company's Earth Origins Market retail business. The Company made the decision in the second quarter of fiscal 2018 to close three non-core, under-performing stores of its total twelve stores which resulted in restructuring costs of
$0.2 million
related to severance and closure costs.
Based on the decision to close these stores, coupled with the decline in results in the first half of fiscal 2018 and the future outlook as a result of competitive pressure, the Company determined that both a test for recoverability of long-lived assets and a goodwill impairment analysis should be performed. The determination of the need for a goodwill analysis was based on the assertion that it was more likely than not that the fair value of the reporting unit was below its carrying amount. As a result of both these analyses, the Company recorded a total impairment charge of
$3.3 million
on long-lived assets and
$7.9 million
to goodwill, respectively. Both of these charges were recorded in the Company's "Other" segment in the second quarter of fiscal 2018. The Company did not record any charges during the third quarter of fiscal 2018, but expects to incur additional restructuring charges primarily related to future exit costs of approximately
$1.4 million
during the fourth quarter of fiscal 2018.
The following is a summary of the restructuring costs the Company recorded related to Earth Origins Market in fiscal 2018, the payments and other adjustments related to these costs and the remaining liability as of
April 28, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Costs Recorded in Fiscal 2018
|
|
Payments and Other Adjustments
|
|
Restructuring Cost Liability as of April 28, 2018
|
Severance and closure costs
|
|
$
|
245
|
|
|
$
|
(17
|
)
|
|
$
|
228
|
|
2017 Cost Saving and Efficiency Initiatives.
During fiscal 2017, the Company announced a restructuring program in conjunction with various cost saving and efficiency initiatives, including the planned opening of a shared services center. The Company recorded total restructuring costs of
$6.9 million
during the fiscal year ended July 29, 2017, all of which was recorded in the second half of fiscal 2017. Of the total restructuring costs recorded,
$6.6 million
was primarily related to severance and other employee separation and transition costs and
$0.3 million
was due to an early lease termination and facility closing costs for the Company's Gourmet Guru facility in Bronx, New York. During fiscal 2018 the Company performed an analysis on the remaining restructuring cost liability and as a result, recorded a benefit of
$0.2 million
during the second quarter of fiscal 2018 and expense of
$0.2 million
during the third quarter of fiscal 2018. These items are included in "payments and other adjustments" in the table below.
The following is a summary of the restructuring costs the Company recorded in fiscal 2017, the payments and other adjustments related to these costs and the remaining liability as of
April 28, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Costs Recorded in Fiscal 2017
|
|
Payments and Other Adjustments
|
|
Restructuring Cost Liability as of April 28, 2018
|
Severance and other employee separation and transition costs
|
|
$
|
6,606
|
|
|
$
|
(5,730
|
)
|
|
$
|
876
|
|
Early lease termination and facility closing costs
|
|
258
|
|
|
(258
|
)
|
|
—
|
|
Total
|
|
$
|
6,864
|
|
|
$
|
(5,988
|
)
|
|
$
|
876
|
|
5.
EARNINGS PER SHARE
The following is a reconciliation of the basic and diluted number of shares used in computing earnings per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
39-Week Period Ended
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
April 28,
2018
|
|
April 29,
2017
|
Basic weighted average shares outstanding
|
|
50,424
|
|
|
50,601
|
|
|
50,563
|
|
|
50,554
|
|
Net effect of dilutive stock awards based upon the treasury stock method
|
|
327
|
|
|
200
|
|
|
253
|
|
|
164
|
|
Diluted weighted average shares outstanding
|
|
50,751
|
|
|
50,801
|
|
|
50,816
|
|
|
50,718
|
|
For the
third quarter
s of fiscal
2018
and fiscal
2017
, there were
84,551
and
40,023
anti-dilutive share-based awards outstanding, respectively. For the first
39 weeks
of fiscal
2018
and
2017
, there were
95,690
and
38,762
anti-dilutive share-based awards outstanding, respectively. These anti-dilutive share-based awards were excluded from the calculation of diluted earnings per share.
6.
FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
Hedging of Interest Rate Risk
The Company manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired position of fixed and floating rates. Details of outstanding swap agreements as of
April 28, 2018
, 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
|
June 9, 2019
|
|
$
|
50.0
|
|
|
0.8725
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
June 24, 2019
|
|
$
|
50.0
|
|
|
0.7265
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
April 29, 2021
|
|
$
|
25.0
|
|
|
1.0650
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
April 29, 2021
|
|
$
|
25.0
|
|
|
0.9260
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
August 3, 2022
|
|
$
|
115.0
|
|
|
1.7950
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
Interest rate swap agreements 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 agreements are designated as cash flow hedges at
April 28, 2018
and are reflected at their fair value of
$7.4 million
included in "Other Assets" in the Condensed Consolidated Balance Sheet.
The Company uses the “Hypothetical Derivative Method” described in Accounting Standards Codification ("ASC") 815 for quarterly prospective and retrospective assessments of hedge effectiveness, as well as for measurements of hedge ineffectiveness. 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. The effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings in interest income when the hedged transactions affect earnings. Ineffectiveness resulting from the hedge is recorded as a gain or loss in the condensed consolidated statement of income as part of other income. The Company did not have any hedge ineffectiveness recognized in earnings during the
third quarter
and first
39 weeks
of fiscal
2018
. The Company also monitors the risk of counterparty default on an ongoing basis and noted that the counterparties are reputable financial institutions.
Financial Instruments
The following table provides the fair value hierarchy for financial assets and liabilities measured on a recurring basis as of
April 28, 2018
and
July 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at April 28, 2018
|
|
Fair Value at July 29, 2017
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap
|
|
—
|
|
|
$
|
7,388
|
|
|
—
|
|
|
—
|
|
|
$
|
2,491
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swap
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(308
|
)
|
|
—
|
|
The fair value of the Company's other financial instruments including accounts receivable, notes receivable, accounts payable and certain accrued expenses are derived using Level 2 inputs and approximate carrying amounts due to the short-term nature of these instruments. The fair value of notes payable approximate carrying amounts as they are variable rate instruments. The carrying amount of notes payable approximates fair value as interest rates on the credit facility approximates current market rates (Level 2 criteria).
The following estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies taking into account the instruments' interest rate, terms, maturity date and collateral, if any, in comparison to the Company's incremental borrowing rate for similar financial instruments and are therefore deemed Level 2 inputs. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 28, 2018
|
|
July 29, 2017
|
(In thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
$
|
153,163
|
|
|
$
|
158,886
|
|
|
$
|
161,991
|
|
|
$
|
169,058
|
|
7.
TREASURY STOCK
On October 6, 2017, the Company announced that its Board of Directors authorized a share repurchase program for up to
$200.0 million
of the Company’s outstanding common stock. The repurchase program is scheduled to expire upon the Company’s repurchase of shares of the Company’s common stock having an aggregate purchase price of
$200.0 million
. Repurchases will be made in accordance with applicable securities laws from time to time in the open market, through privately negotiated transactions, or otherwise. The Company may also implement all or part of the repurchase program pursuant to a plan or plans meeting the conditions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
Under this program, there were
no
shares of the Company's common stock purchased by the Company in the
third quarter
of fiscal
2018
and
564,660
shares of the Company's common stock were purchased at an aggregate cost of
$22.2 million
in the
39-week period ended April 28, 2018
. The Company records the repurchase of shares of common stock at cost based on the settlement date of the transaction. These shares are classified as treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.
8.
INCOME TAXES
Effects of the Tax Cuts and Jobs Act
New tax legislation, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), was enacted on December 22, 2017. ASC 740,
Accounting for Income Taxes
, requires companies to recognize the effect of tax law changes in the period of enactment even though the effective date for most TCJA provisions is for tax years beginning after December 31, 2017. Though certain key aspects of the new law were effective January 1, 2018 and have an immediate accounting effect, other significant provisions are not effective or may not result in accounting effects for the Company until its fiscal year beginning July 29, 2018.
Given the significance of the legislation, the SEC staff issued SAB 118, which allows registrants to record provisional amounts concerning TCJA impacts during a one year “measurement period” similar to that used when accounting for business combinations. The measurement period is deemed to have ended earlier when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting. During the measurement period, impacts of the law are expected to be recorded at the time a reasonable estimate for all or a portion of the effects can be made, and provisional amounts can be recognized and adjusted as information becomes available, prepared or analyzed.
SAB 118 summarizes a process to be applied at each reporting period to account for and qualitatively disclose: (1) the effects of the change in tax law for which accounting is complete; (2) provisional amounts (or adjustments to provisional amounts) for the effects of the tax law where accounting is not complete, but that a reasonable estimate has been determined; and (3) a reasonable estimate cannot yet be made and therefore taxes are reflected in accordance with the law prior to the enactment of the TCJA.
Provisional estimates were recorded during the second quarter of fiscal 2018 for the estimated impact of the TCJA based on information that was available to the Company. These provisional estimates are comprised of amounts (including the tax basis of assets and liabilities) that will be finalized in connection with the Company's July 2017 tax returns, a rate reduction for fiscal 2018 to a
27%
blended federal tax rate, a re-measurement of deferred tax balances to the new statutory
21%
rate and the one-time mandatory repatriation transition tax. The Company estimates that the re-measurement of deferred taxes resulted in a provisional
$20.9 million
net benefit through the end of the third quarter of fiscal 2018 and the repatriation transition tax has an immaterial impact because of foreign tax credits available to the Company. As the Company completes its analysis of the TCJA, changes may be made to provisional estimates, and such changes will be reflected in the period in which the related adjustments are made.
9. BUSINESS SEGMENTS
The Company has several operating divisions aggregated under the wholesale segment, which is the Company’s only reportable segment. These operating divisions have similar products and services, customer channels, distribution methods and historical margins. The wholesale segment is engaged in the national distribution of natural, organic and specialty foods, produce and related products in the United States and Canada. The Company has additional operating divisions that do not meet the quantitative thresholds for reportable segments and are therefore aggregated under the caption of “Other.” “Other” includes a retail division, which engages in the sale of natural foods and related products to the general public through retail storefronts on the east coast of the United States, 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 divisions, which include, among other expenses, stock based compensation, and salaries, retainers, and other related expenses of certain officers and all directors. Non-operating expenses that are not allocated to the operating divisions are under the caption of “Unallocated (Income)/Expenses.” The Company does not record its revenues for financial reporting purposes by product group, and it is therefore impracticable for the Company to report them accordingly.
The following table reflects business segment information for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
Other
|
|
Eliminations
|
|
Unallocated (Income)/Expenses
|
|
Consolidated
|
13-Week Period Ended April 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,633,024
|
|
|
$
|
62,158
|
|
|
$
|
(46,303
|
)
|
|
$
|
—
|
|
|
$
|
2,648,879
|
|
Restructuring and asset impairment expenses
|
|
—
|
|
|
151
|
|
|
—
|
|
|
—
|
|
|
151
|
|
Operating income (loss)
|
|
86,633
|
|
|
(3,984
|
)
|
|
(492
|
)
|
|
—
|
|
|
82,157
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,468
|
|
|
4,468
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(121
|
)
|
|
(121
|
)
|
Other, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24
|
)
|
|
(24
|
)
|
Income before income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
77,834
|
|
Depreciation and amortization
|
|
21,261
|
|
|
472
|
|
|
—
|
|
|
—
|
|
|
21,733
|
|
Capital expenditures
|
|
13,694
|
|
|
417
|
|
|
—
|
|
|
—
|
|
|
14,111
|
|
Goodwill
|
|
352,763
|
|
|
10,153
|
|
|
—
|
|
|
—
|
|
|
362,916
|
|
Total assets
|
|
2,935,420
|
|
|
184,301
|
|
|
(40,875
|
)
|
|
—
|
|
|
3,078,846
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended April 29, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,353,723
|
|
|
$
|
67,538
|
|
|
$
|
(51,705
|
)
|
|
$
|
—
|
|
|
$
|
2,369,556
|
|
Restructuring and asset impairment expenses
|
|
2,874
|
|
|
1,072
|
|
|
—
|
|
|
—
|
|
|
3,946
|
|
Operating income (loss)
|
|
67,273
|
|
|
(1,117
|
)
|
|
(1,210
|
)
|
|
—
|
|
|
64,946
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,225
|
|
|
4,225
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(82
|
)
|
|
(82
|
)
|
Other, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
478
|
|
|
478
|
|
Income before income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60,325
|
|
Depreciation and amortization
|
|
20,559
|
|
|
913
|
|
|
—
|
|
|
—
|
|
|
21,472
|
|
Capital expenditures
|
|
16,412
|
|
|
918
|
|
|
—
|
|
|
—
|
|
|
17,330
|
|
Goodwill
|
|
351,141
|
|
|
18,025
|
|
|
—
|
|
|
—
|
|
|
369,166
|
|
Total assets
|
|
2,746,648
|
|
|
213,180
|
|
|
(39,241
|
)
|
|
—
|
|
|
2,920,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
Other
|
|
Eliminations
|
|
Unallocated (Income)/Expenses
|
|
Consolidated
|
39-Week Period Ended April 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
7,592,352
|
|
|
$
|
175,083
|
|
|
$
|
(133,000
|
)
|
|
$
|
—
|
|
|
$
|
7,634,435
|
|
Restructuring and asset impairment expenses
|
|
67
|
|
|
11,326
|
|
|
—
|
|
|
—
|
|
|
11,393
|
|
Operating income (loss)
|
|
200,530
|
|
|
(25,124
|
)
|
|
2,062
|
|
|
—
|
|
|
177,468
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,368
|
|
|
12,368
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(308
|
)
|
|
(308
|
)
|
Other, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,305
|
)
|
|
(1,305
|
)
|
Income before income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
166,713
|
|
Depreciation and amortization
|
|
64,237
|
|
|
1,745
|
|
|
—
|
|
|
—
|
|
|
65,982
|
|
Capital expenditures
|
|
27,297
|
|
|
2,349
|
|
|
—
|
|
|
—
|
|
|
29,646
|
|
Goodwill
|
|
352,763
|
|
|
10,153
|
|
|
—
|
|
|
—
|
|
|
362,916
|
|
Total assets
|
|
2,935,420
|
|
|
184,301
|
|
|
(40,875
|
)
|
|
—
|
|
|
3,078,846
|
|
|
|
|
|
|
|
|
|
|
|
|
39-Week Period Ended April 29, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,885,912
|
|
|
$
|
176,655
|
|
|
$
|
(129,129
|
)
|
|
$
|
—
|
|
|
$
|
6,933,438
|
|
Restructuring and asset impairment expenses
|
|
2,874
|
|
|
1,072
|
|
|
—
|
|
|
—
|
|
|
3,946
|
|
Operating income (loss)
|
|
178,498
|
|
|
(12,803
|
)
|
|
(1,139
|
)
|
|
—
|
|
|
164,556
|
|
Interest expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,188
|
|
|
13,188
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(278
|
)
|
|
(278
|
)
|
Other, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
760
|
|
|
760
|
|
Income before income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
150,886
|
|
Depreciation and amortization
|
|
61,837
|
|
|
2,093
|
|
|
—
|
|
|
—
|
|
|
63,930
|
|
Capital expenditures
|
|
38,016
|
|
|
1,988
|
|
|
—
|
|
|
—
|
|
|
40,004
|
|
Goodwill
|
|
351,141
|
|
|
18,025
|
|
|
—
|
|
|
—
|
|
|
369,166
|
|
Total assets
|
|
2,746,648
|
|
|
213,180
|
|
|
(39,241
|
)
|
|
—
|
|
|
2,920,587
|
|
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of
April 28, 2018
and
July 29, 2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
April 28,
2018
|
|
July 29,
2017
|
Accrued salaries and employee benefits
|
$
|
63,400
|
|
|
$
|
63,937
|
|
Workers' compensation and automobile liabilities
|
23,642
|
|
|
22,774
|
|
Interest rate swap liability
|
—
|
|
|
308
|
|
Other
|
89,085
|
|
|
70,224
|
|
Total accrued expenses and other current liabilities
|
$
|
176,127
|
|
|
$
|
157,243
|
|
11.
NOTES PAYABLE
On April 29, 2016, the Company entered into the Third Amended and Restated Loan and Security Agreement (the "Third A&R Credit Agreement") amending and restating certain terms and provisions of its revolving credit facility which increased the maximum borrowings under the amended and restated revolving credit facility and extended the maturity date to April 29, 2021. Up to
$850.0 million
is available to the Company's U.S. subsidiaries and up to
$50.0 million
is available to UNFI Canada. After giving effect to the Third A&R Credit Agreement, the amended and restated revolving credit facility provides an option to increase the U.S. or Canadian revolving commitments by up to an additional
$600.0 million
in the aggregate (but in not less than
$10.0 million
increments) subject to certain customary conditions and the lenders committing to provide the increase in funding.
The borrowings of the U.S. portion of the amended and restated revolving credit facility, after giving effect to the Third A&R Credit Agreement, accrued interest at the base rate plus an applicable margin of
0.25%
or
LIBOR
rate plus an applicable margin
of
1.25%
for the twelve-month period ended April 29, 2017. After this period, the interest on the U.S. borrowings is accrued at the Company's option, at either (i) a base rate (generally defined as the highest of (x) the Bank of America Business Capital prime rate, (y) the average overnight
federal funds effective rate
plus one-half percent (
0.50%
) per annum and (z)
one-month LIBOR
plus one percent (
1%
) per annum) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) the
LIBOR
rate plus an applicable margin that varies depending on daily average aggregate availability. The borrowings on the Canadian portion of the credit facility accrued interest at the Canadian prime rate plus an applicable margin of
0.25%
or a bankers' acceptance equivalent rate plus an applicable margin of
1.25%
for the twelve-month period ended April 29, 2017. After this period, the borrowings on the Canadian portion of the credit facility accrue interest, at the Company's option, at either (i) a Canadian prime rate (generally defined as the highest of (x)
0.50%
over 30-day
Reuters Canadian Deposit Offering Rate ("CDOR")
for bankers' acceptances, (y) the prime rate of Bank of America, N.A.'s Canada branch, and (z) a
bankers' acceptance equivalent rate for a one month interest period
plus 1.00%) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) a bankers' acceptance equivalent rate of the rate of interest per annum equal to the annual rates applicable to Canadian Dollar bankers' acceptances on the "CDOR Page" of Reuter Monitor Money Rates Service, plus five basis points, and an applicable margin that varies depending on daily average aggregate availability. Unutilized commitments are subject to an annual fee in the amount of
0.30%
if the total outstanding borrowings are less than
25%
of the aggregate commitments, or a per annum fee of
0.25%
if such total outstanding borrowings are
25%
or more of the aggregate commitments. The Company is also required to pay a letter of credit fronting fee to each letter of credit issuer equal to
0.125%
per annum of the stated amount of each such letter of credit (or such other amount as may be mutually agreed by the borrowers under the facility and the applicable letter of credit issuer), as well as a fee to all lenders equal to the applicable margin for
LIBOR
or bankers’ acceptance equivalent rate loans, as applicable, times the average daily stated amount of all outstanding letters of credit.
As of
April 28, 2018
, the Company's borrowing base, which is calculated based on eligible accounts receivable and inventory levels, net of
$4.2 million
of reserves, was
$887.2 million
. As of
April 28, 2018
, the Company had
$329.0 million
of borrowings outstanding under the Company's amended and restated revolving credit facility and
$29.7 million
in letter of credit commitments which reduced the Company's available borrowing capacity under its revolving credit facility on a dollar for dollar basis. The Company's resulting remaining availability was
$528.5 million
as of
April 28, 2018
.
The revolving credit facility, as amended and restated, subjects the Company to a springing minimum fixed charge coverage ratio (as defined in the Third A&R Credit Agreement) of
1.0
to
1.0
calculated at the end of each of our fiscal quarters on a rolling
four
quarter basis when the adjusted aggregate availability (as defined in the Third A&R Credit Agreement) is less than the greater of (i)
$60.0 million
and (ii)
10%
of the aggregate borrowing base. The Company was not subject to the fixed charge coverage ratio covenant under the Third A&R Credit Agreement during the
third quarter
of fiscal
2018
.
The revolving credit facility also allows for the lenders thereunder to syndicate the credit facility to other banks and lending institutions. The Company has pledged the majority of its and its subsidiaries' accounts receivable and inventory for its obligations under the amended and restated revolving credit facility.
12.
LONG-TERM DEBT
On August 14, 2014, the Company and certain of its subsidiaries entered into a real estate backed term loan agreement (the "Term Loan Agreement"). The total initial borrowings under the Term Loan Agreement were
$150.0 million
. The Company is required to make
$2.5 million
principal payments quarterly, which began on November 1, 2014. Under the Term Loan Agreement, the Company at its option may request the establishment of one or more new term loan commitments in increments of at least
$10.0 million
, but not to exceed
$50.0 million
in total, subject to the approval of the lenders electing to participate in such incremental loans and the satisfaction of the conditions required by the Term Loan Agreement. The Company will be required to make quarterly principal payments on these incremental borrowings in accordance with the terms of the Term Loan Agreement. Proceeds from this Term Loan Agreement were used to pay down borrowings on the Company's amended and restated revolving credit facility.
On April 29, 2016, the Company entered into a First Amendment Agreement (the “Term Loan Amendment”) to the Term Loan Agreement which amends the Term Loan Agreement. The Term Loan Amendment was entered into to reflect the changes to the amended and restated revolving credit facility reflected in the Third A&R Credit Agreement. The Term Loan Agreement will terminate on the earlier of (a) August 14, 2022 and (b) the date that is ninety days prior to the termination date of the Company’s amended and restated revolving credit agreement, as amended.
On September 1, 2016, the Company entered into a Second Amendment Agreement (the "Second Amendment") to the Term Loan Agreement which amends the Term Loan Agreement. The Second Amendment was entered into to adjust the applicable margin charged to borrowings under the Term Loan Agreement. As amended by the Second Amendment, borrowings under the Term Loan Agreement bear interest at rates that, at the Company's option, can be either: (1) a base rate generally defined as the sum of (i) the highest of (x) the administrative agent's prime rate, (y) the average
overnight federal funds effective rate
plus
0.50%
and
(z)
one-month LIBOR
plus one percent (
1%
) per annum and (ii) a margin of
0.75%
; or, (2) a LIBOR rate generally defined as the sum of (i) LIBOR (as published by Reuters or other commercially available sources) for
one, two, three or six months or, if approved by all affected lenders, nine months
(all as selected by the Company), and (ii) a margin of
1.75%
. Interest accrued on borrowings under the Term Loan Agreement is payable in arrears. Interest accrued on any LIBOR loan is payable on the last day of the interest period applicable to the loan and, with respect to any LIBOR loan of more than three (3) months, on the last day of every three (3) months of such interest period. Interest accrued on base rate loans is payable on the first day of every month. The Company is also required to pay certain customary fees to the administrative agent. The borrowers' obligations under the Term Loan Agreement are secured by certain parcels of the borrowers' real property.
The Term Loan Agreement includes financial covenants that require (i) the ratio of the Company’s consolidated EBITDA (as defined in the Term Loan Agreement) minus the unfinanced portion of Capital Expenditures (as defined in the Term Loan Agreement) to the Company’s consolidated Fixed Charges (as defined in the Term Loan Agreement) to be at least 1.20 to 1.00 as of the end of any period of four fiscal quarters, (ii) the ratio of the Company’s Consolidated Funded Debt (as defined in the Term Loan Agreement) to the Company’s EBITDA for the four fiscal quarters most recently ended to be not more than 3.00 to 1.00 as of the end of any fiscal quarter and (iii) the ratio, expressed as a percentage, of the Company’s outstanding principal balance under the Loans (as defined in the Term Loan Agreement), divided by the Mortgaged Property Value (as defined in the Term Loan Agreement) to be not more than 75% at any time. As of
April 28, 2018
, the Company was in compliance with the financial covenants of its Term Loan Agreement.
As of
April 28, 2018
, the Company had borrowings of
$111.3 million
under the Term Loan Agreement which is included in "Long-term debt" on the Condensed Consolidated Balance Sheet.
During the fiscal year ended August 1, 2015, the Company entered into an amendment to an existing lease agreement for the office space utilized as the Company's corporate headquarters in Providence, Rhode Island. The amendment provides for additional office space to be utilized by the Company and extends the lease term for an additional
10
years. The lease qualifies for capital lease treatment pursuant to ASC 840,
Leases,
and the estimated fair value of the building was originally recorded on the balance sheet with the capital lease obligation included in long-term debt. A portion of each lease payment reduces the amount of the lease obligation, and a portion is recorded as interest expense at an effective rate of approximately
12.05%
. The capital lease obligation as of
April 28, 2018
was
$12.5 million
. The Company recorded
$0.4 million
of interest expense during each of the
third quarter
s of fiscal
2018
and
2017
and
$1.2 million
during the first
39 weeks
of both fiscal
2018
and
2017
.
During the fiscal year ended July 28, 2012, the Company entered into a lease agreement for a new distribution facility in Aurora, Colorado. At the conclusion of the fiscal year ended August 3, 2013, actual construction costs exceeded the construction allowance as defined by the lease agreement, and therefore, the Company determined it met the criteria for continuing involvement pursuant to FASB ASC 840,
Leases
, and applied the financing method to account for this transaction during the fourth quarter of fiscal 2013. Under the financing method, the book value of the distribution facility and related accumulated depreciation remains on the Condensed Consolidated Balance Sheet. The construction allowance is recorded as a financing obligation in "Long-term debt." A portion of each lease payment reduces the amount of the financing obligation, and a portion is recorded as interest expense at an effective rate of approximately
7.32%
. The financing obligation as of
April 28, 2018
was
$29.4 million
. The Company recorded
$0.5 million
and
$0.6 million
of interest expense related to this lease during the
third quarter
s of fiscal
2018
and
2017
, respectively. During the first
39 weeks
of fiscal
2018
and
2017
, the Company recorded
$1.6 million
and
$1.7 million
of interest expense related to this lease, respectively.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plans,” “planned,” “seek,” “should,” “will,” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information.
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:
•
our dependence on principal customers;
|
|
•
|
our sensitivity to general economic conditions, including the current economic environment;
|
|
|
•
|
changes in disposable income levels and consumer spending trends;
|
|
|
•
|
our ability to reduce our expenses in amounts sufficient to offset our increased sales to our single supernatural chain customer and conventional supermarkets and supermarket chains and the resulting lower gross margins on those sales;
|
|
|
•
|
our reliance on the continued growth in sales of natural and organic foods and non-food products in comparison to conventional products;
|
|
|
•
|
increased competition in our industry as a result of increased distribution of natural, organic and specialty products by conventional grocery distributors and direct distribution of those products by large retailers and online distributors;
|
|
|
•
|
our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company and to achieve the efficiencies and cost savings from these efforts;
|
|
|
•
|
the addition or loss of significant customers or material changes to our relationships with these customers;
|
|
|
•
|
volatility in fuel costs;
|
|
|
•
|
volatility in foreign exchange rates;
|
|
|
•
|
our sensitivity to inflationary and deflationary pressures;
|
|
|
•
|
the relatively low margins and economic sensitivity of our business;
|
|
|
•
|
the potential for disruptions in our supply chain by circumstances beyond our control;
|
|
|
•
|
the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise;
|
|
|
•
|
consumer demand for natural and organic products outpacing suppliers' ability to produce those products and challenges we may experience in obtaining sufficient amounts of products to meet our customers' demands;
|
|
|
•
|
moderated supplier promotional activity, including decreased forward buying opportunities;
|
|
|
•
|
union-organizing activities that could cause labor relations difficulties and increased costs;
|
|
|
•
|
the ability to identify and successfully complete acquisitions of other natural, organic and specialty food and non-food products distributors;
|
|
|
•
|
management’s allocation of capital and the timing of capital expenditures;
|
|
|
•
|
our ability to realize the anticipated benefits from our decision to close certain of our Earth Origins Market (“Earth Origins”) stores and for the restructuring costs related to Earth Origins to be within our current estimates;
|
|
|
•
|
the possibility that we may recognize restructuring charges with respect to our Earth Origins business in excess of those estimated for the remainder of fiscal 2018;
|
|
|
•
|
changes in interpretations, assumptions and expectations regarding the Tax Cuts and Jobs Act ("TCJA"), including additional guidance that may be issued by federal and state taxing authorities.
|
This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended to be exhaustive. You should carefully review the risks described under “Part I. Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended
July 29, 2017
, and any other cautionary language in this Quarterly Report on Form 10-Q or our other
reports filed with the Securities and Exchange Commission (the "SEC") from time to time, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations and financial condition.
Overview
We believe we are a leading distributor based on sales of natural, organic and specialty foods and non-food products in the United States and Canada and that our
thirty-three
distribution centers, representing approximately
8.7 million
square feet of warehouse space, provide us with the largest capacity of any North American-based distributor focused primarily on the natural, organic and specialty products industry. We offer more than
110,000
high-quality natural, organic and specialty foods and non-food products, consisting of national brands, regional brands, private label and master distribution products, in six product categories: grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements and sports nutrition, bulk and food service products and personal care items. We serve more than
43,000
customer locations primarily located across the United States and Canada, the majority of which can be classified into one of the following categories: independently owned natural products retailers, which include buying clubs; supernatural chains, which consist solely of Whole Foods Market Inc. ("Whole Foods Market"); conventional supermarkets, which include mass market chains; and other which includes e-commerce, foodservice and international customers outside of Canada, as well as sales to Amazon.com, Inc.
Our operations are generally comprised of three principal operating divisions. These operating divisions are:
|
|
•
|
our
wholesale division
, which includes:
|
|
|
◦
|
our broadline natural, organic and specialty distribution business in the United States, which includes our most recently completed acquisitions of Haddon House Food Products, Inc. ("Haddon") and Gourmet Guru, Inc. ("Gourmet Guru");
|
|
|
◦
|
Tony's Fine Foods ("Tony's"), which is a leading distributor of a wide array of specialty protein, cheese, deli, foodservice and bakery goods, principally throughout the Western United States;
|
|
|
◦
|
Albert's Organics, Inc. ("Albert's"), which is a leading distributor of organically grown produce and non-produce perishable items within the United States, which includes the operations of Global Organic/Specialty Source, Inc. ("Global Organic") and Nor-Cal Produce, Inc. ("Nor-Cal"), a distributor of organic and conventional produce and non-produce perishable items principally in Northern California;
|
|
|
◦
|
UNFI Canada, Inc. ("UNFI Canada"), which is our natural, organic and specialty distribution business in Canada; and
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◦
|
Select Nutrition, which distributes vitamins, minerals and supplements.
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•
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our
retail division
, consisting of Earth Origins, which operates our
nine
natural products retail stores within the United States and
one
retail operation located at our corporate headquarters in Providence, RI; and
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•
|
our
manufacturing and branded products divisions
, consisting of:
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◦
|
Woodstock Farms Manufacturing, which specializes in the importing, roasting, packaging and the distribution of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections; and
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◦
|
our Blue Marble Brands branded product lines.
|
In recent years, our sales to existing and new customers have increased through the continued growth of the natural and organic products industry in general, increased market share as a result of our high quality service and a broader product selection, including specialty products, and the acquisition of, or merger with, natural and specialty products distributors; the expansion of our existing distribution centers; the construction of new distribution centers; the introduction of new products and the development of our own line of natural and organic branded products. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. Our strategic plan is focused on increasing the type of products we distribute to our customers, including perishable products and conventional produce. As part of our “one company” approach, we are in the process of rolling out a national warehouse management and procurement system to convert our existing facilities into a single warehouse management and supply chain platform ("WMS"). We have successfully implemented the WMS system at fifteen of our facilities including most recently in Chesterfield, New Hampshire, Iowa City, Iowa, Greenwood, Indiana, Dayville, Connecticut, Gilroy, California, Richburg, South Carolina, Howell, New Jersey, and Atlanta, Georgia. We expect to complete the roll-out to all of our existing U.S. broadline facilities by the end of fiscal
2019
. These steps and others are intended to promote operational efficiencies and improve operating expenses as a percentage of net sales as we attempt to offset the lower gross margins we expect to generate by increased sales to the supernatural and conventional supermarket channels and as a result of additional competition in our business.
We have been the primary distributor to Whole Foods Market for more than
nineteen
years. We continue to serve as the primary distributor to Whole Foods Market in all of its regions in the United States pursuant to a distribution agreement that expires on September 28, 2025. Whole Foods Market accounted for approximately
37%
and
34%
of our net sales for the
third quarter
of
fiscal
2018
and
2017
, respectively. For the first
39 weeks
of fiscal
2018
and
2017
, Whole Foods Market accounted for approximately
36%
and
33%
of our net sales, respectively.
In March 2016, the Company acquired certain assets of Global Organic through its wholly owned subsidiary Albert's, in a cash transaction for approximately $20.6 million. Global Organic is located in Sarasota, Florida serving customer locations (many of which are independent retailers) across the Southeastern United States. Global Organic's operations have been fully integrated into the existing Albert's business in the Southeastern United States.
In March 2016, the Company acquired all of the outstanding equity securities of Nor-Cal and an affiliated entity as well as certain real estate, in a cash transaction for approximately $67.8 million. Nor-Cal is a distributor with its primary operations located in West Sacramento, California. Our acquisition of Nor-Cal has aided us in our efforts to expand our fresh offering, particularly within conventional produce. Nor-Cal's operations have been combined with the existing Albert's business.
In May 2016, the Company acquired all outstanding equity securities of Haddon and certain affiliated entities and real estate for total cash consideration of approximately $217.5 million. Haddon is a distributor and merchandiser of natural and organic and gourmet ethnic products primarily throughout the Eastern United States. Haddon has a history of providing quality high-touch merchandising services to its customers. Haddon has a diverse, multi-channel customer base including conventional supermarkets, gourmet food stores and independently owned product retailers. Our acquisition of Haddon has expanded the product and service offering that we expect to play an important role in our ongoing strategy to build out our gourmet and ethnic product categories. Haddon's operations have been combined with the Company's existing broadline natural, organic and specialty distribution business in the United States.
In August 2016, the Company acquired all of the outstanding equity securities of Gourmet Guru in a cash transaction for approximately
$10.0 million
. Gourmet Guru is a distributor and merchandiser of fresh and organic food focusing on new and emerging brands. We believe that our acquisition of Gourmet Guru enhances our strength in finding and cultivating emerging fresh and organic brands and further expands our presence in key urban markets. Gourmet Guru's operations have been combined with the Company's existing broadline natural, organic and specialty distribution business in the United States.
The ability to distribute specialty food items (including ethnic, kosher and gourmet products) has accelerated our expansion into a number of high-growth business markets and allowed us to establish immediate market share in the fast-growing specialty foods market. We have now integrated specialty food products and natural and organic specialty non-food products into all of our broadline distribution centers across the United States and Canada. Due to our expansion into specialty foods, over the past several fiscal years we have been awarded new business with a number of conventional supermarkets that we previously had not done business with because we did not distribute specialty products. We believe our acquisition of Haddon has expanded our capabilities in the specialty category and we have expanded our offerings of specialty products to include those products distributed by Haddon that we did not previously distribute to our customers. We believe that distribution of these products enhances our conventional supermarket business channel and that our complementary product lines continue to present opportunities for cross-selling.
To maintain our market position and improve our operating efficiencies, we seek to continually:
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•
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expand our marketing and customer service programs across regions;
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•
|
expand our national purchasing opportunities;
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|
•
|
offer a broader product selection than our competitors;
|
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|
•
|
offer operational excellence with high service levels and a higher percentage of on-time deliveries than our competitors;
|
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|
•
|
centralize general and administrative functions to reduce expenses;
|
|
|
•
|
consolidate systems applications among physical locations and regions;
|
|
|
•
|
increase our investment in people, facilities, equipment and technology;
|
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|
•
|
integrate administrative and accounting functions; and
|
|
|
•
|
reduce the geographic overlap between regions.
|
Our continued growth has allowed us to expand our existing facilities and open new facilities in an effort to achieve increasing operating efficiencies. As of
April 28, 2018
, our distribution capacity totaled approximately
8.7 million
square feet. Based on our current operations, sales trends, customers and estimates of future sales growth, we believe that we are likely to commence construction and open new distribution center capacity in fiscal 2019.
During the first 39 weeks of fiscal 2018, the Company recorded restructuring and asset impairment expenses of
$11.4 million
driven by charges related to our Earth Origins retail business. During the second quarter of fiscal 2018, we made the decision to close three non-core, under-performing Earth Origins stores, two of which closed during the third quarter of fiscal 2018. Based on the decision to close these stores, coupled with the decline in results in the first half of fiscal 2018 and the future outlook as a result of competitive pressure, we determined that both a test for recoverability of long-lived assets and a goodwill impairment
analysis should be performed. The determination of the need for a goodwill analysis was based on the assertion that it was more likely than not that the fair value of the reporting unit was below its carrying amount. As a result of both these analyses, we recorded a total impairment charge of
$3.3 million
on long-lived assets and
$7.9 million
to goodwill, respectively, during the second quarter of fiscal 2018. Both of these charges are recorded in our "Other" segment. We expect to incur additional restructuring charges primarily related to future exit costs of approximately
$1.4 million
during the fourth quarter of fiscal 2018.
Our net sales consist primarily of sales of natural, organic and specialty products to retailers, adjusted for customer volume discounts, returns, and allowances. Net sales also consist of amounts charged by us to customers for shipping and handling and fuel surcharges. The principal components of our cost of sales include the amounts paid to suppliers for product sold, plus the cost of transportation necessary to bring the product to, or move product between, our various distribution centers, offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers' products. Cost of sales also includes amounts incurred by us at our manufacturing subsidiary, Woodstock Farms Manufacturing, for inbound transportation costs offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses. We include purchasing, receiving, selecting and outbound transportation expenses within our operating expenses rather than in our cost of sales. Total operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation and amortization expense. Other expenses (income) include interest on our outstanding indebtedness, including the financing obligation related to our Aurora, Colorado distribution center and the lease for office space for our corporate headquarters in Providence, Rhode Island, interest income and miscellaneous income and expenses.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results of operations and require our most difficult, complex or subjective judgments or estimates. Based on this definition and as further described in our Annual Report on Form 10-K for the fiscal year ended
July 29, 2017
, we believe our critical accounting policies include the following: (i) determining our reserves for the self-insured portions of our workers’ compensation and automobile liabilities, (ii) valuation of assets and liabilities acquired in business combinations, (iii) valuation of goodwill and intangible assets, and (iv) income taxes. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies or estimates since our most recently filed Annual Report on Form 10-K.
Results of Operations
The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:
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|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
39-Week Period Ended
|
|
|
|
April 28,
2018
|
|
April 29,
2017
|
|
April 28,
2018
|
|
April 29,
2017
|
|
Net sales
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost of sales
|
|
84.6
|
%
|
|
84.5
|
%
|
|
85.0
|
%
|
|
84.7
|
%
|
|
Gross profit
|
|
15.4
|
%
|
|
15.5
|
%
|
|
15.0
|
%
|
|
15.3
|
%
|
|
Operating expenses
|
|
12.3
|
%
|
|
12.6
|
%
|
|
12.5
|
%
|
|
12.9
|
%
|
|
Restructuring and asset impairment expenses
|
|
—
|
%
|
|
0.2
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
Total operating expenses
|
|
12.3
|
%
|
|
12.7
|
%
|
*
|
12.7
|
%
|
*
|
12.9
|
%
|
*
|
Operating income
|
|
3.1
|
%
|
|
2.7
|
%
|
*
|
2.3
|
%
|
|
2.4
|
%
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.2
|
%
|
|
Interest income
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Other, net
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Total other expense, net
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.1
|
%
|
*
|
0.2
|
%
|
|
Income before income taxes
|
|
2.9
|
%
|
|
2.5
|
%
|
|
2.2
|
%
|
|
2.2
|
%
|
|
Provision for income taxes
|
|
1.0
|
%
|
|
1.0
|
%
|
|
0.4
|
%
|
|
0.9
|
%
|
|
Net income
|
|
2.0
|
%
|
*
|
1.5
|
%
|
|
1.7
|
%
|
*
|
1.3
|
%
|
|
* Total reflects rounding
Third Quarter of Fiscal 2018
Compared To
Third Quarter of Fiscal 2017
Net Sales
Our net sales for the
third quarter
of fiscal
2018
increased
approximately
11.8%
, or
$279.3 million
, to
$2.65 billion
from
$2.37 billion
for the
third quarter
of fiscal
2017
. Our net sales by customer channels for the
third quarter
of fiscal
2018
and
2017
were as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales for the 13-Week Period Ended
|
Customer Channel
|
|
April 28,
2018
|
|
% of
Net Sales
|
|
April 29,
2017
|
|
% of
Net Sales
|
Supernatural chains
|
|
$
|
992
|
|
|
37
|
%
|
|
$
|
799
|
|
|
34
|
%
|
Independently owned natural products retailers
|
|
664
|
|
|
25
|
%
|
|
625
|
|
|
26
|
%
|
Conventional supermarkets
|
|
718
|
|
|
27
|
%
|
|
692
|
|
|
29
|
%
|
Other
|
|
275
|
|
|
10
|
%
|
|
254
|
|
|
11
|
%
|
Total
|
|
$
|
2,649
|
|
|
100
|
%
|
*
|
$
|
2,370
|
|
|
100
|
%
|
* Reflects rounding
During fiscal 2017, our net sales by channel were adjusted to reflect changes in the classification of customer types from acquisitions we consummated in the third and fourth quarters of fiscal 2016 and the first quarter of fiscal 2017. There was no financial statement impact as a result of revising the classification of customer types. As a result of this adjustment, net sales to our conventional supermarket channel for the
third quarter
of fiscal
2017
increased approximately $12 million, compared to the previously reported amounts, while net sales to the independent retailer channel for the
third quarter
of fiscal
2017
decreased approximately $12 million compared to the previously reported amounts.
Whole Foods Market is our only supernatural chain customer, and net sales to Whole Foods Market for the
third quarter
of fiscal
2018
increased
by approximately
$193 million
, or
24%
, as compared to the
third quarter
of fiscal
2017
, and accounted for approximately
37%
and
34%
of our total net sales for the
third quarter
of fiscal
2018
and
2017
, respectively. The
increase
in net sales to Whole Foods Market is primarily due to an increase in same store sales following its acquisition by Amazon.com, Inc. in August 2017 coupled with growth in new product categories, most notably the health, beauty and supplement categories. Net sales within our supernatural chain channel do not include net sales to Amazon.com, Inc. in either the current period or the prior period, as these net sales are reported in our other channel.
Net sales to our independent retailer channel
increased
by approximately
$39 million
, or
6%
, during the
third quarter
of fiscal
2018
compared to the
third quarter
of fiscal
2017
, and accounted for approximately
25%
and
26%
of our total net sales for the
third quarter
of fiscal
2018
and
2017
, respectively. The increase in net sales in this channel is primarily due to growth in our wholesale division, which includes our broadline distribution business.
Net sales to conventional supermarkets for the
third quarter
of fiscal
2018
increased
by approximately
$26 million
, or
4%
, compared to the
third quarter
of fiscal
2017
, and represented approximately
27%
and
29%
of our total net sales for the
third quarter
of fiscal
2018
and
2017
, respectively. The
increase
in net sales to conventional supermarkets was primarily driven by growth in our wholesale division, which includes our broadline distribution business.
Other net sales, which include sales to foodservice customers and sales from the United States to other countries, as well as sales through our e-commerce division, branded product lines, retail division, manufacturing division, and our brokerage business,
increased
by approximately
$21 million
, or
8%
, for the
third quarter
of fiscal
2018
compared to the
third quarter
of fiscal
2017
, and accounted for approximately
10%
and
11%
of our total net sales for the
third quarter
of fiscal
2018
and
2017
, respectively. The increase in other net sales was primarily driven by growth in our e-commerce business.
As we continue to aggressively pursue new customers, expand relationships with existing customers and pursue opportunistic acquisitions, we expect net sales for fiscal 2018 to grow over fiscal 2017 levels. We believe that the integration of our specialty business into our national platform has allowed us to attract customers that we would not have been able to attract without that business and will continue to allow us to pursue a broader array of customers as many customers seek a single source for their natural, organic and specialty products. We believe that our acquisitions of Haddon, Nor-Cal, Global Organic and Gourmet Guru have also enhanced our ability to offer our customers a more comprehensive set of products than many of our competitors. We believe that our projected net sales growth will come from both sales to new customers and sales to existing customers. We expect that most of this net sales growth will occur in our lower gross margin supernatural and conventional supermarket channels.
Although sales to these customers typically generate lower gross margins than sales to customers within our independent retailer channel, they also typically carry a lower average cost to serve than sales to our independent customers.
Gross Profit
Our gross profit
increased
approximately
11.4%
, or
$41.7 million
, to
$408.1 million
for the
third quarter
of fiscal
2018
, from
$366.4 million
for the
third quarter
of fiscal
2017
. Our gross profit as a percentage of net sales was
15.41%
for the
third quarter
of fiscal
2018
compared to
15.46%
for the
third quarter
of fiscal
2017
. The
decline
in gross profit as a percentage of net sales in the
third quarter
of fiscal
2018
was primarily due to a shift in customer mix where sales growth with lower margin customers outpaced growth with other customers coupled with an increase in inbound freight costs. As discussed in more detail in Note 1 of the condensed consolidated financial statements and below under the heading "Net Income," during the third quarter of fiscal 2018 gross profit included the positive impact of a change in estimate of
$20.9 million
recorded during the period.
Operating Expenses
Our total operating expenses
increased
approximately
8.1%
, or
$24.5 million
, to
$325.9 million
for the
third quarter
of fiscal
2018
, from
$301.4 million
for the
third quarter
of fiscal
2017
. As a percentage of net sales, total operating expenses were
12.30%
for the
third quarter
of fiscal
2018
compared to
12.72%
for the
third quarter
of fiscal
2017
. The increase in operating expenses in the
third quarter
of fiscal 2018 was driven by increased costs incurred to fulfill the increased demand for our products. The third quarter of fiscal 2017 also included restructuring and impairment charges of
$3.9 million
related to our fiscal 2017 restructuring program. Total operating expenses also included share-based compensation expense of
$7.9 million
and
$4.7 million
for the
third quarter
of fiscal
2018
and
2017
, respectively. This increase from the prior year period is primarily due to an increase in performance-based compensation expense related to our long-term incentive plan for members of our executive leadership team.
Operating Income
Reflecting the factors described above, operating income
increased
approximately
26.5%
, or
$17.2 million
, to
$82.2 million
for the
third quarter
of fiscal
2018
, from
$64.9 million
for the
third quarter
of fiscal
2017
. As a percentage of net sales, operating income was
3.10%
for the
third quarter
of fiscal
2018
compared to
2.74%
for the
third quarter
of fiscal
2017
.
Other Expense (Income)
Other expense, net
decreased
approximately
$0.3 million
to
$4.3 million
for the
third quarter
of fiscal
2018
compared to
$4.6 million
for the
third quarter
of fiscal
2017
. Interest expense was
$4.5 million
for the
third quarter
of fiscal
2018
compared to
$4.2 million
for the
third quarter
of fiscal
2017
. Interest income was
$0.1 million
in each of the
third quarter
s of fiscal
2018
and
2017
. Other
income
was de minimis for the
third quarter
of fiscal
2018
, compared to
$0.5 million
of other expense for the
third quarter
of fiscal
2017
.
Provision for Income Taxes
Our effective income tax rate was
33.3%
and
39.4%
for the
third quarter
s of fiscal
2018
and fiscal
2017
, respectively. The decrease in the effective income tax rate was driven by a $5.7 million tax benefit which was recorded as result of the new lower federal tax rate on income, as well as a net tax expense of approximately $1.0 million as a result of the impact of the re-measurement of U.S. net deferred tax liabilities at the new lower corporate income tax rate.
Net Income
Reflecting the factors described in more detail above, net income
increased
$15.3 million
to
$51.9 million
, or
$1.02
per diluted common share, for the
third quarter
of fiscal
2018
, compared to
$36.6 million
, or
$0.72
per diluted common share, for the
third quarter
of fiscal
2017
.
We typically generate purchase orders to initiate the procurement process for the products we sell and orders are subsequently fulfilled by suppliers and delivered to us. In certain situations, inventory purchased by us may be delivered to us prior to the supplier generating an associated invoice. When we receive inventory from a supplier before the supplier generates the invoice, we customarily accrue for liabilities associated with such inventory purchases. As described in more detail in Note 1 of the condensed consolidated financial statements, during the first three quarters of fiscal
2018
we experienced an increased volume in our accrual for inventory purchases as a result of increasing volumes of inventory purchases and work flow changes to our practices resulting from the establishment of a centralized processing function for supplier payables. In the third quarter of fiscal 2018, we changed our estimate for the accrual for inventory purchases as a result of our review of the criteria for determining amounts where a liability is no longer considered probable as well as a review of historical data and data relating to fiscal 2018 purchases of inventory. As a result of this change in estimate, accounts payable was reduced by
$20.9 million
, resulting in an increase to net
income of
$13.9 million
, or
$0.27
per diluted share, for both the third quarter and
39 weeks
ended
April 28, 2018
. Absent the change in accounting estimate, the Company would have expected to recognize the benefit to operating income of the change in estimate within the following four quarters, as the accrual would be expected to be reduced in accordance with our prior estimate methodology.
As disclosed on our quarterly earnings release included with our Form 8-K furnished to the SEC on June 6, 2018, we have updated our fiscal 2018 diluted earnings per share guidance based on our year to date performance and our current outlook for the remainder of the fiscal year, which includes the incremental positive impact of our recent change in accounting estimate, expected continued net sales growth, and operational and corporate level impacts related to the on-going conduct of our business. While our prior fiscal 2018 guidance did not contemplate a change in accounting estimate, it did contemplate, among other factors, an expected improvement in our costs of goods sold compared to the first half of fiscal 2018.
39-Week Period Ended
April 28, 2018
Compared To
39-Week Period Ended
April 29, 2017
Net Sales
Our net sales
increased
approximately
10.1%
, or
$701.0 million
, to
$7.63 billion
for the
39-week period ended April 28, 2018
, from
$6.93 billion
for the
39-week period ended April 29, 2017
. Our net sales by customer channel for the
39-week period ended April 28, 2018
and
April 29, 2017
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales for the 39-Week Period Ended
|
|
Customer Channel
|
|
April 28,
2018
|
|
% of
Net Sales
|
|
April 29,
2017
|
|
% of
Net Sales
|
|
Supernatural chains
|
|
$
|
2,776
|
|
|
36
|
%
|
|
$
|
2,326
|
|
|
33
|
%
|
*
|
Independently owned natural products retailers
|
|
1,922
|
|
|
25
|
%
|
|
1,810
|
|
|
26
|
%
|
|
Conventional supermarket
|
|
2,150
|
|
|
28
|
%
|
|
2,048
|
|
|
30
|
%
|
|
Other
|
|
787
|
|
|
10
|
%
|
|
749
|
|
|
11
|
%
|
|
Total
|
|
$
|
7,634
|
|
*
|
100
|
%
|
*
|
$
|
6,933
|
|
|
100
|
%
|
|
* Reflects rounding
During fiscal 2017, our net sales by channel were adjusted to reflect changes in the classification of customer types from acquisitions we consummated in the third and fourth quarters of fiscal 2016 and the first quarter of fiscal 2017. There was no financial statement impact as a result of revising the classification of customer types. As a result of this adjustment, net sales to our conventional supermarket channel and other channel for the
39-week period ended April 29, 2017
increased approximately $50 million and $3 million, respectively, compared to the previously reported amounts, while net sales to the independent retailer channel for the
39-week period ended April 29, 2017
decreased approximately $53 million compared to the previously reported amounts.
Net sales to the supernatural chain channel for the
39-week period ended April 28, 2018
increased
by approximately
$450 million
, or
19%
, as compared to the prior fiscal year's comparable period, and accounted for approximately
36%
of our total net sales for the
39-week period ended April 28, 2018
compared to
33%
for the
39-week period ended April 29, 2017
. The
increase
in net sales to Whole Foods Market is primarily due to an increase in same store sales following its acquisition by Amazon.com, Inc. in August 2017 coupled with growth in new product categories, most notably the health, beauty and supplement categories. Net sales within our supernatural chain channel do not include net sales to Amazon.com, Inc. in either the current period or the prior period, as these net sales are reported in our other channel.
Net sales to our independent retailer channel
increased
by approximately
$112 million
, or
6%
, during the
39-week period ended April 28, 2018
compared to the
39-week period ended April 29, 2017
, and accounted for
25%
and
26%
of our total net sales for the first
39 weeks
of fiscal 2018 and 2017, respectively. The
increase
in net sales in this channel is primarily due to growth in our wholesale division, which includes our broadline distribution business.
Net sales to conventional supermarkets for the
39-week period ended April 28, 2018
increased
by approximately
$102 million
, or
5%
, from the
39-week period ended April 29, 2017
, and represented approximately
28%
and
30%
of total net sales for the
39-week period ended April 28, 2018
and
April 29, 2017
, respectively. The
increase
in net sales in this channel is primarily due to growth in our wholesale division, which includes our broadline distribution business.
Other net sales, which include sales to foodservice customers and sales from the United States to other countries, as well as sales through our e-commerce division, branded product lines, retail division, manufacturing division, and our brokerage business,
increased
by approximately
$38 million
, or
5%
, during the
39-week period ended April 28, 2018
compared to the
39-week period ended April 29, 2017
and accounted for approximately
10%
and
11%
of total net sales for the first
39 weeks
of fiscal 2018 and 2017, respectively. The increase in other net sales was primarily driven by growth in our e-commerce business.
Gross Profit
Our gross profit
increased
approximately
8.2%
, or
$86.5 million
, to
$1.15 billion
for the
39-week period ended April 28, 2018
, from
$1.06 billion
for the
39-week period ended April 29, 2017
. Our gross profit as a percentage of net sales
decreased
to
15.02%
for the
39-week period ended April 28, 2018
compared to
15.29%
for the
39-week period ended April 29, 2017
. The
decline
in gross profit as a percentage of net sales in fiscal
2018
was primarily due to a shift in customer mix where sales growth with lower margin customers outpaced growth with other customers coupled with an increase in inbound freight costs. As described in more detail in Note 1 of the condensed consolidated financial statements and above under the heading "Net Income," gross profit for the
39-week period ended April 28, 2018
included the positive impact of a change in estimate of
$20.9 million
recorded during the third quarter of fiscal 2018.
Operating Expenses
Our total operating expenses
increased
approximately
8.2%
, or
$73.6 million
, to
$969.4 million
for the
39-week period ended April 28, 2018
, from
$895.8 million
for the
39-week period ended April 29, 2017
. As a percentage of net sales, total operating expenses
decreased
to approximately
12.70%
for the
39-week period ended April 28, 2018
, from approximately
12.92%
for the
39-week period ended April 29, 2017
. During the
39-week period ended April 28, 2018
, we recorded restructuring and impairment charges of
$11.4 million
primarily related to charges recorded for our Earth Origins retail business which was offset slightly by an adjustment to our fiscal 2017 restructuring plan. The year-over-year decrease in operating expenses as a percentage of net sales was primarily driven by leveraging of fixed costs on increased net sales. This was partially offset by restructuring and impairment charges and increased costs incurred to fulfill the increased demand for our products.
Total operating expenses for the
39-week period ended April 28, 2018
also included share-based compensation expense of
$21.7 million
compared to
$18.7 million
in the
39-week period ended April 29, 2017
.
Operating Income
Reflecting the factors described above, operating income
increased
approximately
7.8%
, or
$12.9 million
, to
$177.5 million
for the
39-week period ended April 28, 2018
, from
$164.6 million
for the
39-week period ended April 29, 2017
. As a percentage of net sales, operating income was
2.32%
for the
39-week period ended April 28, 2018
as compared to
2.37%
for the
39-week period ended April 29, 2017
.
Other Expense (Income)
Other expense, net was
$10.8 million
and
$13.7 million
for the 39-week periods ended
April 28, 2018
and
April 29, 2017
, respectively. Interest expense was
$12.4 million
for the
39-week period ended April 28, 2018
compared to
$13.2 million
for the
39-week period ended April 29, 2017
. The
decrease
in interest expense was primarily due to a reduction in outstanding debt year-over-year. Interest income was
$0.3 million
for each of the first
39 weeks
of fiscal
2018
and
2017
. Other income was
$1.3 million
for the
39-week period ended April 28, 2018
compared to other expense of
$0.8 million
for the
39-week period ended April 29, 2017
. This increase to other income was driven by positive returns on the Company's company owned life insurance and equity method investment.
Provision for Income Taxes
Our effective income tax rate was
20.3%
and
39.5%
for the
39-week
periods ended
April 28, 2018
and
April 29, 2017
, respectively. The decrease in the effective income tax rate was driven by a $12.1 million tax benefit which was recorded as result of the new lower federal tax rate, as well as a net tax benefit of approximately
$20.9 million
as a result of the impact of the re-measurement of U.S. net deferred tax liabilities at the new lower corporate income tax rate.
Net Income
Reflecting the factors described in more detail above, net income
increased
approximately
$41.6 million
to
$132.9 million
, or
$2.61
per diluted common share, for the
39-week period ended April 28, 2018
, compared to
$91.3 million
, or
$1.80
per diluted common share, for the
39-week period ended April 29, 2017
.
Liquidity and Capital Resources
We finance our day to day operations and growth primarily with cash flows from operations, borrowings under our amended and restated revolving credit facility, operating leases, a capital lease, a finance lease, trade payables and bank indebtedness. In addition, from time to time, we may issue equity and debt securities to finance our operations and acquisitions. We believe that our cash on hand and available credit through our amended and restated revolving credit facility as discussed below is sufficient for our operations and planned capital expenditures over the next twelve months. We intend to continue to utilize cash generated from operations to fund acquisitions, fund investment in working capital and capital expenditure needs and reduce our debt levels. During the fiscal quarter ended October 28, 2017, we announced our intent to repurchase up to $200.0 million of shares of our common stock. Purchases under this program will be financed with cash generated from our operations and borrowings under our amended and restated revolving credit facility. To the extent that we borrow funds to purchase these shares, our debt levels and interest expense will rise. We intend to manage capital expenditures to approximately 0.6% to 0.7% of net sales for fiscal
2018
. We expect to finance requirements with cash generated from operations and borrowings under our amended and restated revolving credit facility. Our planned capital projects for fiscal
2018
will be focused on continuing the implementation of our information technology projects across the Company that we believe will provide us with increased efficiency and the capacity to continue to support the growth of our customer base. Future investments and acquisitions may be financed through equity issuances, long-term debt or borrowings under our amended and restated revolving credit facility.
The Company has estimated an immaterial impact of the repatriation provision on earnings due to the foreign tax credits available to the Company. The Company has not recorded a tax provision for U.S. tax purposes on UNFI Canada's profits as it has no
assessable profits arising in or derived from the United States and still intends to indefinitely reinvest accumulated earnings in the UNFI Canada operations.
On April 29, 2016, we entered into the Third Amended and Restated Loan and Security Agreement (the “Third A&R Credit Agreement”) amending and restating certain terms and provisions of our revolving credit facility, which increased the maximum borrowings under the amended and restated revolving credit facility and extended the maturity date to April 29, 2021. Up to
$850.0 million
is available to our U.S. subsidiaries and up to
$50.0 million
is available to UNFI Canada. After giving effect to the Third A&R Credit Agreement, the amended and restated revolving credit facility provides an option to increase the U.S. or Canadian revolving commitments by up to an additional
$600.0 million
in the aggregate (but in not less than
$10.0 million
increments) subject to certain customary conditions and the lenders committing to provide the increase in funding.
The borrowings of the U.S. portion of the amended and restated revolving credit facility, after giving effect to the Third A&R Credit Agreement, accrued interest, at the base rate plus an applicable margin of
0.25%
or LIBOR rate plus an applicable margin of
1.25%
for the twelve month period ended April 29, 2017. After this period, the interest on the U.S. borrowings is accrued at the Company's option, at either (i) a base rate (generally defined as the highest of (x) the Bank of America Business Capital prime rate, (y) the average overnight federal funds effective rate plus one-half percent (
0.50%
) per annum and (z) one-month LIBOR plus one percent (
1%
) per annum) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) the LIBOR rate plus an applicable margin that varies depending on daily average aggregate availability. The borrowings on the Canadian portion of the credit facility accrued interest at the Canadian prime rate plus an applicable margin of
0.25%
or a bankers' acceptance equivalent rate plus an applicable margin of
1.25%
for the twelve month period ended April 29, 2017. After this period, the borrowings on the Canadian portion of the credit facility accrue interest, at the Company's option, at either (i) a Canadian prime rate (generally defined as the highest of (x)
0.50%
over 30-day Reuters Canadian Deposit Offering Rate ("CDOR") for bankers' acceptances, (y) the prime rate of Bank of America, N.A.'s Canada branch, and (z) a bankers' acceptance equivalent rate for a one month interest period plus 1.00%) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) a bankers' acceptance equivalent rate of the rate of interest per annum equal to the annual rates applicable to Canadian Dollar bankers' acceptances on the "CDOR Page" of Reuter Monitor Money Rates Service, plus five basis points, and an applicable margin that varies depending on daily average aggregate availability. Unutilized commitments are subject to an annual fee in the amount of
0.30%
if the total outstanding borrowings are less than
25%
of the aggregate commitments, or a per annum fee of
0.25%
if such total outstanding borrowings are
25%
or more of the aggregate commitments. The Company is also required to pay a letter of credit fronting fee to each letter of credit issuer equal to
0.125%
per annum of the stated amount of each such letter of credit (or such other amount as may be mutually agreed by the borrowers under the facility and the applicable letter of credit issuer), as well as a fee to all lenders equal to the applicable margin for LIBOR or bankers’ acceptance equivalent rate loans, as applicable, times the average daily stated amount of all outstanding letters of credit.
As of
April 28, 2018
, the Company's borrowing base, which is calculated based on eligible accounts receivable and inventory levels, net of
$4.2 million
of reserves, was
$887.2 million
. As of
April 28, 2018
, the Company had
$329.0 million
of borrowings outstanding under the Company's amended and restated revolving credit facility and
$29.7 million
in letter of credit commitments which reduced the Company's available borrowing capacity under the facility on a dollar for dollar basis. The Company's resulting remaining availability was
$528.5 million
as of
April 28, 2018
.
The revolving credit facility, as amended and restated, subjects us to a springing minimum fixed charge coverage ratio (as defined in the Third A&R Credit Agreement) of
1.0
to
1.0
calculated at the end of each of our fiscal quarters on a rolling four quarter basis when the adjusted aggregate availability (as defined in the Third A&R Credit Agreement) is less than the greater of (i)
$60.0 million
and (ii)
10%
of the aggregate borrowing base. We were not subject to the fixed charge coverage ratio covenant under the Third A&R Credit Agreement during the
third quarter
of fiscal
2018
.
The revolving credit facility also allows for the lenders thereunder to syndicate the credit facility to other banks and lending institutions. The Company has pledged the majority of its and its subsidiaries’ accounts receivable and inventory for its obligations under the amended and restated revolving credit facility.
On August 14, 2014, we and certain of our subsidiaries entered into a real estate backed term loan agreement (the "Term Loan Agreement"). The total initial borrowings under our term loan facility were
$150.0 million
. We are required to make
$2.5 million
principal payments quarterly. Under the Term Loan Agreement, we at our option may request the establishment of one or more new term loan commitments in increments of at least
$10.0 million
, but not to exceed
$50.0 million
in total, subject to the approval of the Lenders electing to participate in such incremental loans and the satisfaction of the conditions required by the Term Loan Agreement. We will be required to make quarterly principal payments on these incremental borrowings in accordance with the terms of the Term Loan Agreement. Proceeds from this Term Loan Agreement were used to pay down borrowings on our amended and restated revolving credit facility.
On April 29, 2016, the Company entered into a First Amendment Agreement (the “Term Loan Amendment”) to the Term Loan Agreement. The Term Loan Amendment was entered into to reflect the changes to the amended and restated revolving credit facility reflected in the Third A&R Credit Agreement. The Term Loan Agreement will terminate on the earlier of (a) August 14, 2022 and (b) the date that is ninety days prior to the termination date of our amended and restated revolving credit facility.
On September 1, 2016, the Company entered into a Second Amendment Agreement (the "Second Amendment") to the Term Loan Agreement which amended the Term Loan Agreement to adjust the applicable margin charged to borrowings thereunder. As amended by the Second Amendment, borrowings under the Term Loan Agreement bear interest at rates that, at the Company's option, can be either: (1) a base rate generally defined as the sum of (i) the highest of (x) the Administrative Agent's prime rate, (y) the average overnight federal funds effective rate plus
0.50%
and (z) one-month LIBOR plus one percent (
1%
) per annum and (ii) a margin of
0.75%
; or, (2) a LIBOR rate generally defined as the sum of (i) LIBOR (as published by Reuters or other commercially available source) for one, two, three or six months or, if approved by all affected lenders, nine months (all as selected by the Company), and (ii) a margin of
1.75%
. Interest accrued on borrowings under the Term Loan Agreement is payable in arrears. Interest accrued on any LIBOR loan is payable on the last day of the interest period applicable to the loan and, with respect to any LIBOR loan of more than three (3) months, on the last day of every three (3) months of such interest period. Interest accrued on base rate loans is payable on the first day of every month. The Company is also required to pay certain customary fees to the Administrative Agent. The borrowers’ obligations under the Term Loan Agreement are secured by certain parcels of the borrowers’ real property.
The Term Loan Agreement includes financial covenants that require (i) the ratio of our consolidated EBITDA (as defined in the Term Loan Agreement) minus the unfinanced portion of Capital Expenditures (as defined in the Term Loan Agreement) to our consolidated Fixed Charges (as defined in the Term Loan Agreement) to be at least 1.20 to 1.00 as of the end of any period of four fiscal quarters, (ii) the ratio of our Consolidated Funded Debt (as defined in the Term Loan Agreement) to our EBITDA for the four fiscal quarters most recently ended to be not more than 3.00 to 1.00 as of the end of any fiscal quarter and (iii) the ratio, expressed as a percentage, of our outstanding principal balance under the Loans (as defined in the Term Loan Agreement), divided by the Mortgaged Property Value (as defined in the Term Loan Agreement) to be not more than 75% at any time. As of
April 28, 2018
, the Company was in compliance with the financial covenants of the Term Loan Agreement.
As of
April 28, 2018
, the Company had borrowings of
$111.3 million
under the Term Loan Agreement which is included in “Long-term debt” in the Condensed Consolidated Balance Sheet.
On January 23, 2015, the Company entered into a forward starting interest rate swap agreement with an effective date of August 3, 2015, which expires in August 2022 concurrent with the scheduled maturity of our Term Loan Agreement. This interest rate swap agreement has a notional amount of
$115.0 million
and provides for the Company to pay interest for a seven-year period at a fixed rate of
1.795%
while receiving interest for the same period at the one-month LIBOR on the same notional principal amount. The interest rate swap agreement has an amortizing notional amount which adjusts down on the dates payments are due on the underlying term loan. The interest rate swap has been entered into as a hedge against LIBOR movements on
$115.0 million
of the variable rate indebtedness under the Term Loan Agreement at one-month LIBOR plus 1.00% and a margin of 1.50%, thereby fixing our effective rate on the notional amount at 4.295%. The swap agreement qualifies as an “effective” hedge under Accounting Standard Codification ("ASC") 815,
Derivatives and Hedging
.
On June 7, 2016, the Company entered into two pay fixed and receive floating interest rate swap agreements to effectively fix the underlying variable rate debt on the Company’s amended and restated revolving credit facility. The first agreement has an effective date of June 9, 2016 and expires in June of 2019. This interest rate swap agreement has a notional principal amount of
$50.0 million
and provides for the Company to pay interest for a three-year period at a fixed annual rate of
0.8725%
while receiving interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the amended and restated revolving credit facility, effectively fixes the interest rate on the
$50.0 million
notional amount. The second agreement has an effective date of June 9, 2016 and expires concurrent with the scheduled maturity of our amended and restated revolving credit facility in April of 2021. This interest rate swap agreement has a notional principal amount of
$25.0 million
and provides for the Company to pay interest for a five-year period at a fixed rate of
1.065%
while receiving interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the amended and restated revolving credit facility, effectively fixes the interest rate on the
$25.0 million
notional amount.
On June 24, 2016, the Company entered into two additional pay fixed and receive floating interest rate swap agreements to effectively fix the underlying variable rate debt on the Company’s amended and restated revolving credit facility. The first agreement has an effective date of July 24, 2016 and expires in June of 2019. This interest rate swap agreement has a notional principal amount of
$50.0 million
and provides for the Company to pay interest for a three year period at a fixed annual rate of
0.7265%
while receiving interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the amended and restated revolving credit facility, effectively fixes the interest rate on the
$50.0 million
notional amount. The
second agreement has an effective date of July 24, 2016 and expires concurrent with the scheduled maturity of our amended and restated revolving credit facility in April of 2021. This interest rate swap agreement has a notional principal amount of
$25.0 million
and provides for the Company to pay interest for a five year period at a fixed rate of
0.926%
while receiving interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the amended and restated revolving credit facility, effectively fixes the interest rate on the
$25.0 million
notional amount.
Our capital expenditures for the
39-week period ended April 28, 2018
were
$29.6 million
, compared to
$40.0 million
for the
39-week period ended April 29, 2017
, a decrease of
$10.4 million
. We believe that our capital requirements for fiscal
2018
will be between 0.6% and 0.7% of net sales. We expect to finance these requirements with cash generated from operations and borrowings under our amended and restated revolving credit facility. Our planned capital projects will provide technology that we believe will provide us with increased efficiency and the capacity to continue to support the growth of our customer base and also relate to the buildout of our shared services center. Based on our current operations and customers and estimates of future demand for our products, we believe that we are likely to commence construction and open new distribution center capacity after fiscal 2018, which would increase our capital requirements when compared to fiscal 2018 estimates. We anticipate that future investments and acquisitions will be financed through our amended and restated revolving credit facility, or with the issuance of equity or long-term debt, negotiated at the time of the potential acquisition.
Net cash
used in
operations was
$55.2 million
for the
39-week period ended April 28, 2018
, a change of
$218.3 million
from the
$163.1 million
provided by
operations for the
39-week period ended April 29, 2017
. The primary reasons for the net cash
used in
operations for the
39-week period ended April 28, 2018
were an
increase
in inventories of
$165.0 million
required to meet increased product demand and our service level agreements, an
increase
in accounts receivable of
$119.1 million
due to an increase in net sales and the timing of collections, offset by net income of
$132.9 million
, depreciation and amortization of
$66.0 million
and share-based compensation expense of
$21.7 million
.
The primary reasons for the net cash
provided by
operations for the
39-week period ended April 29, 2017
were net income of
$91.3 million
, an increase in accounts payable of
$79.0 million
, depreciation and amortization of
$63.9 million
, and share-based compensation expense of
$18.7 million
, offset by an increase in accounts receivable of
$61.8 million
due to timing of collections and an increase in inventories of
$19.8 million
, an increase in prepaid expenses and other assets of
$9.1 million
, and a decrease in accrued expenses and other liabilities of
$6.8 million
.
Days in inventory was
47
days as of
April 28, 2018
compared to
48
days as of
July 29, 2017
. Days sales outstanding
increased
to
22
days as of
April 28, 2018
from
21
days at
July 29, 2017
. Working capital
increased
by
$203.9 million
, or
21.3%
, from
$958.7 million
at
July 29, 2017
to
$1.16 billion
at
April 28, 2018
.
Net cash
used in
investing activities
decreased
$18.9 million
to
$32.3 million
for the
39-week period ended April 28, 2018
, compared to
$51.2 million
for the
39-week period ended April 29, 2017
. This change was primarily due to a decrease in cash paid for acquisitions in the
39-week period ended April 28, 2018
compared to the
39-week period ended April 29, 2017
and a
$10.4 million
decrease in capital spending between periods.
Net cash
provided by
financing activities was
$94.1 million
for the
39-week period ended April 28, 2018
. The net cash
provided by
financing activities was primarily due to borrowings on our amended and restated revolving credit facility of
$500.1 million
and increases in checks outstanding in excess of deposits of
$23.9 million
, offset by gross repayments on our amended and restated revolving credit facility of
$394.7 million
, share repurchases of
$22.2 million
and repayments of long term debt of
$9.0 million
. Net cash
used in
financing activities was
$114.2 million
for the
39-week period ended April 29, 2017
, primarily due to repayments on our amended and restated revolving credit facility and long-term debt of
$276.4 million
and
$8.5 million
, respectively, and offset by increases in bank overdrafts of
$19.1 million
and gross borrowings under our amended and restated revolving credit facility of
$154.4 million
.
On October 6, 2017, the Company announced that its Board of Directors authorized a share repurchase program for up to
$200.0 million
of the Company’s outstanding common stock. The repurchase program is scheduled to expire upon the Company’s repurchase of shares of the Company’s common stock having an aggregate purchase price of
$200.0 million
. During the
39-week period ended April 28, 2018
, the Company repurchased
564,660
shares of the Company's common stock at an aggregate cost of
$22.2 million
.
From time-to-time, we enter into fixed price fuel supply agreements. As of
April 28, 2018
and
April 29, 2017
, we were not a party to any such agreements. We were party to a contract during fiscal 2017, which required us to purchase a total of approximately
6.1 million
gallons of diesel fuel at prices ranging from
$1.76
to
$3.18
per gallon through
December 31, 2016
. All of these fixed price fuel agreements qualified and were accounted for using the “normal purchase” exception under ASC 815,
Derivatives and
Hedging
, as physical deliveries occurred rather than net settlements, and therefore the fuel purchases under these contracts have been expensed as incurred and included within operating expenses.
Contractual Obligations
There have been no material changes to our contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the year ended
July 29, 2017
.
Seasonality
Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions.