Quarterly Report (10-q)

Date : 06/05/2019 @ 10:21PM
Source : Edgar (US Regulatory)
Stock : United Natural Foods Inc (UNFI)
Quote : 6.56  -0.29 (-4.23%) @ 1:00AM
After Hours
Last Trade
Last $ 6.57 ▲ 0.01 (0.15%)

Quarterly Report (10-q)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
X      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 27, 2019  
or  
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 001-15723
UNFICOA01.JPG
UNITED NATURAL FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
05-0376157
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
313 Iron Horse Way, Providence, RI
 
02908
(Address of principal executive offices)
 
(Zip Code)
 Registrant’s telephone number, including area code: (401) 528-8634
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common stock, par value $0.01
UNFI
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:  Yes  X   No _
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  X   No _
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer  X
 
Accelerated filer __
Non-accelerated filer __
 
Smaller reporting company __
 
 
Emerging growth company __
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. __

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _  No  X
 
As of May 30, 2019 there were 52,704,476 shares of the registrant’s common stock, $0.01 par value per share, outstanding.
 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In thousands, except for per share data)
 
 
April 27,
2019
 
July 28,
2018
ASSETS
 
 

 
 

Cash and cash equivalents
 
$
37,861

 
$
23,315

Accounts receivable, net
 
1,049,273

 
579,702

Inventories
 
2,214,950

 
1,135,775

Prepaid expenses and other current assets
 
185,498

 
50,122

Current assets of discontinued operations
 
147,521

 

Total current assets
 
3,635,103

 
1,788,914

Property and equipment, net
 
1,648,156

 
571,146

Goodwill
 
471,843

 
362,495

Intangible assets, net
 
1,071,898

 
193,209

Other assets
 
107,078

 
48,708

Long-term assets of discontinued operations
 
393,143

 

Total assets
 
$
7,327,221

 
$
2,964,472

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Accounts payable
 
$
1,472,250

 
$
517,125

Accrued expenses and other current liabilities
 
227,356

 
103,526

Accrued compensation and benefits

152,757


66,132

Current portion of long-term debt and capital lease obligations
 
133,676

 
12,441

Current liabilities of discontinued operations
 
116,110

 

Total current liabilities
 
2,102,149

 
699,224

Long-term debt
 
2,943,992

 
308,836

Long-term capital lease obligations
 
122,936

 
31,487

Pension and other postretirement benefit obligations
 
208,816

 

Deferred income taxes
 
43,232

 
44,384

Other long-term liabilities
 
374,949

 
34,586

Long-term liabilities of discontinued operations
 
935

 

Total liabilities
 
5,797,009

 
1,118,517

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; 51,719 shares issued and 51,104 shares outstanding at April 27, 2019, 51,025 shares issued and 50,411 shares outstanding at July 28, 2018
 
517

 
510

Additional paid-in capital
 
502,733

 
483,623

Treasury stock at cost
 
(24,231
)
 
(24,231
)
Accumulated other comprehensive loss
 
(43,385
)
 
(14,179
)
Retained earnings
 
1,096,582

 
1,400,232

Total United Natural Foods, Inc. stockholders’ equity
 
1,532,216

 
1,845,955

Noncontrolling interests
 
(2,004
)
 

Total stockholders’ equity
 
1,530,212

 
1,845,955

Total liabilities and stockholders’ equity
 
$
7,327,221

 
$
2,964,472

See Notes to Condensed Consolidated Financial Statements.

3



UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except for per share data)
 
 

13-Week Period Ended

39-Week Period Ended
 

April 27,
2019

April 28,
2018

April 27,
2019

April 28,
2018
Net sales

$
5,962,620


$
2,648,879


$
14,979,982


$
7,634,435

Cost of sales

5,174,070


2,240,792


13,017,318


6,487,610

Gross profit

788,550


408,087


1,962,664

 
1,146,825

Operating expenses

737,681


325,779


1,852,768


957,964

Goodwill and asset impairment (adjustment) charges
 
(38,250
)
 

 
332,621


11,242

Restructuring, acquisition, and integration related expenses

19,438


151


134,567


151

Operating income (loss)

69,681


82,157


(357,292
)
 
177,468

Other expense (income):

 


 


 
 
 
Net periodic benefit income, excluding service cost
 
(10,941
)
 

 
(22,691
)
 

Interest expense, net
 
54,917

 
4,347

 
121,149

 
12,060

Other, net

958


(24
)

231


(1,305
)
Total other expense, net

44,934


4,323


98,689

 
10,755

Income (loss) from continuing operations before income taxes

24,747


77,834


(455,981
)
 
166,713

(Benefit) provision for income taxes

(8,027
)

25,943


(104,091
)

33,831

Net income (loss) from continuing operations
 
32,774

 
51,891

 
(351,890
)
 
132,882

Income from discontinued operations, net of tax
 
24,370

 

 
47,847

 

Net income (loss) including noncontrolling interests
 
57,144

 
51,891

 
(304,043
)
 
132,882

Less net (income) loss attributable to noncontrolling interests
 
(52
)
 

 
116

 

Net income (loss) attributable to United Natural Foods, Inc.

$
57,092


$
51,891


$
(303,927
)
 
$
132,882



 


 


 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.64

 
$
1.03

 
$
(6.93
)
 
$
2.63

Discontinued operations
 
$
0.48

 
$

 
$
0.95

 
$

Basic income (loss) per share
 
$
1.12

 
$
1.03

 
$
(5.99
)
 
$
2.63

Diluted earnings per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.64

 
$
1.02

 
$
(6.93
)
 
$
2.61

Discontinued operations
 
$
0.48

 
$

 
$
0.94

 
$

Diluted income (loss) per share
 
$
1.12

 
$
1.02

 
$
(5.99
)
 
$
2.61

Weighted average share outstanding:












Basic

50,846


50,424


50,748


50,563

Diluted

50,964


50,751


50,748


50,816


See Notes to Condensed Consolidated Financial Statements.
    

4



UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(In thousands)
 
 
 
 
13-Week Period Ended
 
39-Week Period Ended
 
 
April 27,
2019
 
April 28,
2018
 
April 27,
2019
 
April 28,
2018
Net income (loss) including noncontrolling interests
 
$
57,144

 
$
51,891

 
$
(304,043
)
 
$
132,882

Other comprehensive (loss) income:
 
 

 
 

 
 

 
 
Recognition of interest rate swap cash flow hedges (1)
 
(16,196
)
 
729

 
(26,898
)
 
3,649

Foreign currency translation adjustments
 
(1,326
)
 
(3,159
)
 
(2,308
)
 
(2,320
)
Total other comprehensive (loss) income
 
(17,522
)
 
(2,430
)
 
(29,206
)
 
1,329

Less comprehensive (income) loss attributable to noncontrolling interests
 
(52
)
 

 
116

 

Total comprehensive income (loss) attributable to United Natural Foods, Inc.
 
$
39,570

 
$
49,461

 
$
(333,133
)
 
$
134,211


(1)
Amounts are net of tax (benefit) expense of $(6.0) million and $0.3 million for the 13-week periods ended April 27, 2019 and April 28, 2018 , respectively, and $(9.9) million and $1.6 million for the 39-week periods ended April 27, 2019 and April 28, 2018 , respectively.

See Notes to Condensed Consolidated Financial Statements.


5



UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
(In thousands)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive (Loss) Income
 
Retained Earnings
 
Total United Natural Foods, Inc.
Stockholders’ Equity
 
Noncontrolling Interests
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balances at July 28, 2018
51,025

 
$
510

 
615

 
$
(24,231
)
 
$
483,623

 
$
(14,179
)
 
$
1,400,232

 
$
1,845,955

 
$

 
$
1,845,955

Cumulative effect of change in accounting principle
 

 
 

 
 
 
 
 
 
 
 

 
277

 
277

 
 
 
277

Restricted stock vestings and stock option exercises
408

 
4

 
 
 
 
 
(3,023
)
 
 

 
 

 
(3,019
)
 
 
 
(3,019
)
Share-based compensation
 
 
 

 
 
 
 
 
14,511

 
 

 
 

 
14,511

 
 
 
14,511

Other/share-based compensation
 

 
 

 
 
 
 
 
403

 
 

 
 

 
403

 
 
 
403

Recognition of interest rate swap cash flow hedges, net of tax
 
 
 
 
 
 
 
 
 
 
(10,702
)
 
 
 
(10,702
)
 
 
 
(10,702
)
Foreign currency translation
 

 
 

 
 
 
 
 
 

 
(982
)
 
 
 
(982
)
 
 
 
(982
)
Acquisition of noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 

 


 
(1,633
)
 
(1,633
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
(255
)
 
(255
)
Net loss
 

 
 

 
 
 
 
 
 

 
 

 
(361,019
)
 
(361,019
)
 
(168
)
 
(361,187
)
Balances at January 26, 2019
51,433

 
$
514

 
615

 
$
(24,231
)
 
$
495,514

 
$
(25,863
)
 
$
1,039,490

 
$
1,485,424

 
$
(2,056
)
 
$
1,483,368

Restricted stock vestings and stock option exercises
26

 

 
 
 
 
 
(115
)
 
 

 
 

 
(115
)
 
 
 
(115
)
Share-based compensation


 
 

 
 
 
 
 
4,316

 
 

 
 

 
4,316

 
 
 
4,316

Recognition of interest rate swap cash flow hedges, net of tax
 
 
 
 
 
 
 
 
 
 
(16,196
)
 
 
 
(16,196
)
 
 
 
(16,196
)
Foreign currency translation
 

 
 

 
 
 
 
 
 

 
(1,326
)
 
 

 
(1,326
)
 
 
 
(1,326
)
Proceeds from issuance of common stock, net
260

 
3

 
 
 
 
 
3,018

 
 
 
 
 
3,021

 
 
 
3,021

Net income
 

 
 

 
 
 
 
 
 

 
 

 
57,092

 
57,092

 
52

 
57,144

Balances at April 27, 2019
51,719

 
$
517

 
615

 
$
(24,231
)
 
$
502,733

 
$
(43,385
)
 
$
1,096,582

 
$
1,532,216

 
$
(2,004
)
 
$
1,530,212



6



 
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

Restricted stock vestings and stock option exercises, net of tax
350

 
4

 
 
 
 
 
(4,160
)
 
 

 
 

 
(4,156
)
Share-based compensation
 
 
 

 
 
 
 
 
13,846

 
 

 
 

 
13,846

Repurchase of common stock
 
 
 
 
565

 
(22,237
)
 
 
 
 
 
 
 
(22,237
)
Other/share-based compensation
 

 
 

 
 
 
 
 
107

 
 

 
 

 
107

Recognition of interest rate swap cash flow hedges, net of tax
 
 
 
 
 
 
 
 
 
 
2,920

 
 
 
2,920

Foreign currency translation
 

 
 

 
 
 
 
 
 

 
839

 
 

 
839

Net income
 

 
 

 
 
 
 
 
 

 
 

 
80,991

 
80,991

Balances at January 27, 2018
50,972

 
$
510

 
565

 
$
(22,237
)
 
$
471,118

 
$
(10,204
)
 
$
1,315,553

 
$
1,754,740

Restricted stock vestings and stock option exercises, net of tax
34

 

 
 
 
 
 
236

 
 
 
 
 
236

Share-based compensation
 
 
 
 
 
 
 
 
7,866

 
 
 
 
 
7,866

Recognition of interest rate swap cash flow hedges, net of tax
 
 
 
 
 
 
 
 
 
 
729

 
 
 
729

Foreign currency translation
 

 
 
 
 
 
 
 
 
 
(3,159
)
 
 
 
(3,159
)
Net income
 

 
 
 
 
 
 
 
 
 
 
 
51,891

 
51,891

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.

7



UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
39-Week Period Ended
(In thousands)
 
April 27, 2019
 
April 28, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net (loss) income including noncontrolling interests
 
$
(304,043
)
 
$
132,882

Income from discontinued operations, net of tax
 
47,847

 

Net (loss) income from continuing operations
 
(351,890
)
 
132,882

Adjustments to reconcile net (loss) income from continuing operations to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
169,780

 
65,982

Share-based compensation
 
18,827

 
21,712

(Gain) loss on disposition of assets
 
(1,147
)
 
111

Gain associated with disposal of investments
 

 
(699
)
Closed property and other restructuring charges
 
21,368

 

Goodwill and asset impairment charges
 
332,621

 
11,242

Net pension and other postretirement benefit income
 
(22,691
)
 

Deferred income taxes
 
(65,552
)
 
(21,866
)
LIFO charge
 
13,686

 

Change in accounting estimate
 

 
(20,909
)
Provision for doubtful accounts
 
12,486

 
8,805

Loss on debt extinguishment
 
2,562

 

Non-cash interest expense
 
6,375

 
594

Changes in operating assets and liabilities, net of acquired businesses
 
(130,051
)
 
(229,130
)
Net cash provided by (used in) operating activities of continuing operations
 
6,374

 
(31,276
)
Net cash provided by operating activities of discontinued operations
 
70,816

 

Net cash provided by (used in) operating activities
 
77,190

 
(31,276
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Capital expenditures
 
(136,953
)
 
(29,646
)
Purchase of acquired businesses, net of cash acquired
 
(2,282,327
)
 
(29
)
Proceeds from dispositions of assets
 
169,274

 
47

Proceeds from disposal of investments
 

 
756

Long-term investment
 
(110
)
 
(3,397
)
Other
 
299

 

Net cash used in investing activities of continuing operations
 
(2,249,817
)
 
(32,269
)
Net cash provided by investing activities of discontinued operations
 
50,065

 

Net cash used in investing activities
 
(2,199,752
)
 
(32,269
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from borrowings of long-term debt
 
1,912,178

 

Proceeds from borrowings under revolving credit line
 
3,313,014

 
500,061

Proceeds from issuance of other loans
 
22,719

 

Repayments of borrowings under revolving credit line
 
(2,306,104
)
 
(394,671
)
Repayments of long-term debt and capital lease obligations
 
(736,949
)
 
(9,043
)
Repurchase of common stock
 

 
(22,237
)
Proceeds from the issuance of common stock and exercise of stock options
 
1,589

 
602

Payment of employee restricted stock tax withholdings
 
(3,253
)
 
(4,522
)
Payments for capitalized debt issuance costs
 
(62,587
)
 

Net cash provided by financing activities of continuing operations
 
2,140,607

 
70,190

Net cash used in financing activities of discontinued operations
 
(254
)
 

Net cash provided by financing activities
 
2,140,353

 
70,190

EFFECT OF EXCHANGE RATE CHANGES ON CASH
 
(226
)
 
(301
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
17,565

 
6,344

Cash and cash equivalents, at beginning of period
 
23,315

 
15,414

Cash and cash equivalents, at end of period
 
40,880

 
21,758

Less: cash and cash equivalents of discontinued operations
 
(3,019
)
 

Cash and cash equivalents of continuing operations
 
$
37,861

 
$
21,758

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for interest
 
$
115,378

 
$
12,368

Cash paid for federal and state income taxes, net of refunds
 
$
71,643

 
$
45,021

  See Notes to Condensed Consolidated Financial Statements.

8



UNITED NATURAL FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 27, 2019 (unaudited)
 
1.                                        SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Business
 
United Natural Foods, Inc. and its subsidiaries (the “Company”, “we”, “us”, or “our”) is a leading distributor of natural, organic, specialty, and conventional grocery and non-food products, and provider of support services. On October 22, 2018, we acquired all of the outstanding equity securities of SUPERVALU INC. (“Supervalu”); refer to Note 4. “Acquisitions” for further information. The Company sells its products primarily throughout the United States and Canada.

Fiscal Year

Our fiscal years end on the Saturday closest to July 31 and contain either 52 or 53 weeks. References to the  third quarter of fiscal  2019  and  2018  relate to the 13-week fiscal quarters ended  April 27, 2019  and  April 28, 2018 , respectively. References to fiscal  2019  and  2018  year-to-date relate to the  39-week fiscal periods ended  April 27, 2019  and  April 28, 2018 , respectively.

Basis of Presentation
 
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Unless otherwise indicated, references to the Condensed Consolidated Statements of Income and the Condensed Consolidated Balance Sheets in the Notes to the Condensed Consolidated Financial Statements exclude all amounts related to discontinued operations. Refer to Note 19. “Discontinued Operations”  for additional information, including accounting policies, about our discontinued operations.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally required in complete financial statements prepared in conformity with accounting principles generally accepted in the United States 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 28, 2018 (the “Annual Report”). Except as described below, there were no material changes in significant accounting policies from those described in the Company’s Annual Report.

Net sales consist primarily of sales of natural, organic, specialty, and conventional grocery and non-food products to retailers, adjusted for customer volume discounts, returns, and allowances, and professional services revenue. Net sales also include amounts charged by the Company to customers for shipping and handling and fuel surcharges. The Company recognizes freight revenue related to transportation of its products when control of the product is transferred, which is typically upon delivery. 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, or move product between, the Company’s distribution facilities, offset by consideration received from suppliers in connection with the purchase, transportation, 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. Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation, and amortization expense. Other expense (income), net includes interest on outstanding indebtedness, including direct financing and capital lease obligations, net periodic benefit plan income, excluding service costs, interest income and miscellaneous income and expenses.
 

9



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 receiving, selecting, quality assurance, and outbound transportation are recorded in operating expenses. Outbound shipping and handling costs, including allocated employee benefit expenses that are recorded in Operating expenses, totaled $370.8 million and $148.4 million for the third quarter of fiscal 2019 and 2018 , respectively. Outbound shipping and handling costs, including allocated employee benefit expenses, totaled $908.2 million and $432.8 million for the first 39 weeks of fiscal 2019 and 2018 , respectively.

Vendor Funds
The Company receives funds from many of the vendors whose products it buys for resale. These vendor funds are provided to increase the sell-through of the related products. The Company receives vendor funds for a variety of merchandising activities; placement of the vendors’ products in its advertising; display of the vendors’ products in prominent locations in stores; supporting the introduction of new products into stores and distribution centers; exclusivity rights in certain categories; and to compensate for temporary price reductions offered to customers on products held for sale. The Company also receives vendor funds for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of the vendor fund contracts have terms of less than a year, with a small proportion of the contracts longer than one year.

The Company recognizes vendor funds for merchandising activities as a reduction of Cost of sales when the related products are sold. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as a reduction to the cost of inventory.

Business Dispositions

The Company reviews the presentation of planned business dispositions in the Condensed Consolidated Financial Statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results. In addition, the Company evaluates whether the business has met the criteria as a business held for sale. In order for a planned disposition to be classified as a business held for sale, the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year.

Planned business dispositions are presented as discontinued operations when all the criteria described above are met. Operations of the business components meeting the discontinued operations requirements are presented within  Income from discontinued operations, net of tax  in the Condensed Consolidated Statements of Income, and assets and liabilities of the business component planned to be disposed of are presented as separate lines within the Condensed Consolidated Balance Sheets. See Note 19. “Discontinued Operations”  for additional information.

The carrying value of the business held for sale is reviewed for recoverability upon meeting the classification requirements. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, indefinite lived intangible assets and other assets are assessed. After the valuation process is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell, and no additional depreciation or amortization expense is recognized.

There are inherent judgments and estimates used in determining the fair value less costs to sell of a business and any impairment charges. The sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to closing.

Benefit Plans

The Company recognizes the funded status of its company-sponsored defined benefit plans, which it acquired in the first quarter of fiscal 2019 through the acquisition of Supervalu, in the Condensed Consolidated Balance Sheets and gains or losses and prior service costs or credits not yet recognized as a component of Accumulated other comprehensive loss, net of tax, in the Condensed Consolidated Balance Sheets. The Company sponsors pension and other postretirement plans in various forms covering employees who meet eligibility requirements. The determination of the Company’s obligation and related income or expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in healthcare and compensation costs. These assumptions are disclosed in Note 17. “Benefit Plans” . Actual results that differ from the assumptions are accumulated and amortized over future periods.

10




The Company contributes to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. Pension expense for these plans is recognized as contributions are funded. See Note 17. “Benefit Plans”  for additional information on participation in multiemployer plans.

The Company also contributes to 401(k) retirement savings plans for its employees.

Change in Accounting Estimate

As a result of growth in net sales and inventory for the 13 and 39-week periods ended April 28, 2018, and the changes in processing and the resulting increase in the Company’s estimate of its accrual for inventory purchases the Company initiated a review of its vendor invoicing processes and undertook a review of its estimate of its accrual for inventory purchases. In the third quarter of fiscal 2018, the Company finalized its analysis and review of its accrual for inventory purchases, including a historical data analysis of unmatched and partially matched amounts that were aged greater than twelve months and the ultimate resolution of such aged accruals. Based on its analysis, the Company determined that it could reasonably estimate the outcome of its partially matched vendor invoices upon receipt of such invoice rather than when the amount was aged greater than twelve months and a liability was no longer considered probable. As a result of this change in estimate, accounts payable was reduced by $20.9 million , resulting in an increase to net income of $13.9 million , or $0.27 per diluted share, for both the 13 and 39-weeks ended April 28, 2018 .

Change in Inventory Accounting Policy

Inventories are valued at the lower of cost or net realizable value. For historical United Natural Foods, Inc. inventory prior to the acquisition of Supervalu, cost was determined using the first-in, first-out (“FIFO”) method. For a substantial portion of legacy Supervalu inventory, cost was determined using the last-in, first-out (“LIFO”) method, with the rest primarily determined using FIFO. Inventories acquired as part of the Supervalu acquisition were recorded at their fair market values as of the acquisition date. During the second quarter of fiscal 2019, the Company completed its evaluation of its combined inventory accounting policies and changed its method of inventory costing for certain historical United Natural Foods, Inc. inventory from the FIFO accounting method to the LIFO accounting method. The Company concluded that the LIFO method of inventory costing is preferable because it allows for better matching of costs and revenues, as historical inflationary inventory acquisition prices are expected to continue in the future and the LIFO method uses the current acquisition cost to value cost of goods sold as inventory is sold. Additionally, LIFO allows for better comparability of the results of the Company’s operations with those of similar companies in its peer group. As a result of the change to the LIFO method, certain Company inventories, excluding Supervalu inventories, were reduced by $4.1 million and $7.3 million for the 13- and 39-week periods ended April 27, 2019, respectively, which resulted in increases to Cost of sales and Loss from continuing operations before income taxes of the same amount in the Condensed Consolidated Statement of Income for the 13- and 39-week periods ended April 27, 2019. This resulted in a decrease to net income from continuing operations of $3.2 million , or $0.06 per diluted share, for the 13-week period ended April 27, 2019 and an increase to net loss from continuing operations of $4.8 million , or $0.09 per diluted share, for the 39-week period ended April 27, 2019 . The Company has not retrospectively adjusted amounts prior to fiscal 2019 in its Condensed Consolidated Balance Sheets or Statement of Income, as applying the change in accounting policy prior to fiscal 2019 is not practicable due to data limitations of inventory costs in prior periods.
Change in Book Overdraft Accounting Policy

In the first quarter of fiscal 2019, the Company changed its accounting policy for reporting book overdrafts in the Condensed Consolidated Statements of Cash Flows. Amounts previously reported as increase in bank overdrafts on the Condensed Consolidated Statements of Cash Flows represent outstanding checks issued but not yet presented to financial institutions for disbursement in excess of positive balances held at financial institutions, and as such represent book overdrafts. Book overdrafts are included within the Accounts payable balance in the Condensed Consolidated Balance Sheets. The change in these book overdraft amounts were previously reported as financing activities cash flows on the Condensed Consolidated Statements of Cash Flows, on a line item titled Increase in bank overdrafts. The Company has elected a preferable accounting policy presentation for classifying the change in book overdrafts from financing activities to operating activities, which resulted in the reclassification of prior period amounts to conform to the current period presentation. The Company concluded that operating activity classification is preferable, as book overdrafts do not result in financial institution borrowing or repayment activity at the end of respective reporting periods and the presentation presents a more accurate disclosure of its cash generation and consumption activities. The reclassification resulted in a decrease to cash used in operating activities of $23.9 million and a corresponding decrease in cash provided by financing activities for the 39-week period ended April 28, 2018 . The reclassification had no effect on previously reported Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income, or Condensed Consolidated Statements of Stockholders’ Equity.


11



Reclassifications

Certain prior year amounts within the Condensed Consolidated Balance Sheets, Statements of Income and Statements of Cash Flows have been reclassified to conform to the current period’s presentation.

Reclassifications of prior year amounts within the Condensed Consolidated Balance Sheets include:
the reclassification of Accrued compensation and benefits to present separately from Accrued expenses and other current liabilities ;
the reclassification of Notes payable balances into Long-term debt ;
the reclassification of the long-term portion of capital lease obligations from Long-term debt to present separately within Long-term capital lease obligations ; and
the reclassification of residual financing obligations associated with build-to-suit properties for which the Company is not obligated to fund unless it is obligated under a future extension of a lease agreement from the Long-term capital lease obligations to Other long-term liabilities .

Reclassifications of prior year amounts within the Condensed Consolidated Statements of Income include:
the reclassification of goodwill and asset impairment charges from a line item previously titled Restructuring and asset impairment charges to a new line item titled Goodwill and asset impairment (adjustment) charges ; and
the combination of Interest expense and Interest income to present within Interest expense, net .

Within the Condensed Consolidated Statements of Cash Flows, prior year amounts for asset impairment charges have been reclassified within operating activities in a line item titled Goodwill and asset impairment charges . These reclassifications had no impact on reported net income, cash flows, or total assets and liabilities.

2.                                       RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (“FASB”) issued accounting standard update (“ASU”) 2017-07,  Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  ASU 2017-07 changes how benefit plan costs for defined benefit pension and other postretirement benefit plans are presented in the statement of operations. The Company adopted this guidance in the first quarter of fiscal 2019, and it presents non-service cost components of net periodic benefit income, as disclosed in Note 17. “Benefit Plans” , in an other income and expense line titled “Net periodic benefit income, excluding service cost” in the Condensed Consolidated Statements of Income. The service cost components are recorded within Operating expenses. The adoption of this standard did not have an impact on the Company’s prior period Condensed Consolidated Statements of Income, as all benefit plan costs for defined benefit pension and other postretirement benefit plans incurred are attributable to the Supervalu business, which was acquired in the first quarter of fiscal 2019.

In November 2016, the FASB issued ASU No. 2016-18,  Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) . This ASU clarifies the presentation of restricted cash on the statement of cash flows by requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amount generally described as restricted cash or restricted cash equivalents. This ASU is effective for annual reporting periods, and interim reporting periods contained therein, beginning after December 15, 2017, with retrospective application required. The Company adopted this ASU in the first quarter of fiscal 2019. The adoption of this ASU had no impact to the Condensed Consolidated Statement of Cash Flows for the 39-week period ended April 28, 2018 or April 27, 2019 , as the Company did not have restricted cash in its beginning or ended amounts for those periods.

In October 2016, the FASB issued ASU No. 2016-16,  Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory , which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company adopted the new standard in the first quarter of fiscal 2019, with no impact to its financial position, results of operations, or cash flows.

In August 2016, the FASB issued ASU 2016-15,  Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments , to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The eight specific issues are (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Businesses Combination; (4) Proceeds from the Settlement of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance Policies; (6) Distributions Received from Equity Method Investees; (7) Beneficial Interests in Securitization Transactions; and (8) Separately Identifiable Cash and Application of the Predominance Principle. This ASU is effective for public companies with interim periods and fiscal years beginning after December 15, 2017. The Company adopted this standard in the first quarter of fiscal 2019, with no impact to its Condensed Consolidated Statements of Cash Flows.

In May 2014, the FASB issued ASU No. 2014-09,  Revenue from Contracts with Customers, (Topic 606) , which has been updated by multiple amending ASUs (collectively “ASC 606”) and supersedes previous revenue recognition requirements (“ASC 605”). The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, the ASU requires new, enhanced quantitative and qualitative disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The collective guidance is effective for public companies with annual periods, and interim periods within those periods, beginning after December 15, 2017. The new standard permits either of the following adoption methods: (i) a full retrospective application with restatement of each period presented in the financial statements with the option to elect certain practical expedients, or (ii) a retrospective application with the cumulative effect of adopting the guidance recognized as of the date of initial application (“modified retrospective method”). The Company has adopted this new guidance in the first quarter of fiscal 2019 using the modified retrospective method, with no significant impact to our Condensed Consolidated Balance sheets, Condensed Consolidated Statements of Income or Condensed Consolidated Statements of Cash flows.

The primary impact of adopting the new standard, contained within the wholesale distribution reportable segment, is related to the sale of certain private label products for which revenue is recognized over time under the new standard as opposed to at a point in time under ASC 605. Private label products are specific to the customer to which they are sold, and are typically packaged with the customer’s logo or other products for which the customer has an exclusive right to sell. The Company is contractually restricted from selling private label products with the customer’s logo or other exclusive products to other third-party customers. As a result, the underlying good has no alternative use to the Company. In some instances, the Company’s contracts also require the customer to purchase private label inventory held by the Company if the agreement is terminated, the customer discontinues selling the specific product, or the product is nearing its expiration date. This gives the Company an enforceable right to payment for performance completed to date from certain customers, once it has procured private label product. As a result, the Company now recognizes revenue from these product sales over time, as control is transferred to the customer, using a cost-incurred input measure of progress, as opposed to at a point in time, typically upon delivery, under ASC 605. Control of these products is transferred to the customer upon incurrence of substantially all of the Company’s costs related to the product, and therefore the cost-incurred input method is determined to be a faithful depiction of the transfer of goods.

The effect of adopting this change resulted in an increase to Retained earnings of $0.3 million , which was recorded in the first quarter of fiscal 2019. This change did not materially impact our Condensed Consolidated Statements of Income for the third quarter of fiscal 2019 or the 39-week period ended April 27, 2019 . Refer to Note 3. “Revenue Recognition” for further discussion of our adoption of the new standard.

Recently Issued Accounting Pronouncements

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326 Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825 . This ASU clarifies the accounting treatment for the measurement of credit losses under ASC 236 and provides further clarification on previously issued updates including ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities and ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Since the Company adopted ASU 2017-12 in the fourth quarter of fiscal 2018, the amendments in ASU 2019-04 related to clarifications on Accounting for Hedging Activities are effective for the Company in the first quarter of fiscal 2020. The remaining amendments within ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, which for the Company is the first quarter of fiscal 2021. Early adoption is permitted. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.

In October 2018, the FASB issued authoritative guidance under ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU adds the Overnight Index Swap (OIS) rate based on Secured Overnight Financing Rate (SOFR) as a benchmark interest rate for hedge accounting purposes. This ASU is effective for public companies with interim and fiscal years beginning after December 15, 2018, which for the Company is the first quarter of fiscal year 2020. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15,  Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.  ASU 2018-05 requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The Company is required to adopt this new guidance in the first quarter of fiscal 2021. The Company has outstanding cloud computing arrangements and continues to incur costs that it believes would be required to be capitalized under ASU 2018-05. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14,  Compensation—Retirement Benefits—Defined Benefit Plans—General: Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.  ASU 2018-14 eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other postretirement plans. The Company is required to adopt this guidance in the first quarter of fiscal 2021. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02,  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of fiscal 2020, with early adoption permitted. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13,  Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. The Company is required to adopt this new guidance in the first quarter of fiscal 2021. The Company is currently reviewing the provisions of the new standard and evaluating its impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which has been updated by subsequent amending ASUs (collectively “ASC 842”), and provides new comprehensive lease accounting guidance that supersedes existing lease guidance. The objective of ASC 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Criteria for distinguishing leases between finance and operating are substantially similar to criteria for distinguishing between capital leases and operating leases in existing lease guidance. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. In addition, ASC 842 expands the disclosure requirements of lease arrangements. ASC 842 will require the Company to recognize most current operating lease obligations as right-of-use assets with a corresponding liability based on the present value of future operating leases, which the Company believes will result in a significant impact to its consolidated balance sheets. The Company expects to use the additional transition method under ASU 2018-11, which allows for a cumulative effect adjustment within retained earnings in the period of adoption. In addition, the Company currently expects to elect the “package of three” practical expedients which allows companies to not reassess whether arrangements contain leases, the classification of leases, and the capitalization of initial direct costs. ASC 842 is effective for public companies in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of fiscal 2020, with early adoption permitted. The Company expects to adopt this standard in the first quarter of fiscal 2020 and continues its assessment of the impacts of ASC 842 on the Company’s consolidated financial statements and any necessary changes to our accounting policies, processes and controls, and systems. The Company expects that ASC 842 will have a material effect on its financial statements. The Company currently believes the most significant effects will relate to (1) the recognition of new right-of-use assets and lease liabilities on the balance sheet for existing operating leases, and (2) the derecognition of existing assets and liabilities for certain sale-leaseback transactions that do not qualify for sale accounting, including build-to-suit arrangements for which construction is complete and the Company is leasing the constructed asset. Information about the amounts and timing of our undiscounted future operating lease payments can be found in Note 16. “Leases”.

3.                                       REVENUE RECOGNITION
Revenue Recognition Accounting Policy
The Company recognizes revenue in an amount that reflects the consideration that is expected to be received for goods or services when its performance obligations are satisfied by transferring control of those promised goods or services to its customers. ASC 606 defines a five-step process to recognize revenue that requires judgment and estimates, including identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when or as the performance obligation is satisfied. This footnote addresses the Company’s revenue recognition policies for its continuing operations only; refer to Note 19. “Discontinued Operations”  for additional information about our revenue recognition policies of discontinued operations.
Revenues from wholesale product sales are recognized when control is transferred, which typically happens upon either shipment or delivery, depending on the contract terms with the customer. Typically, shipping and customer receipt of wholesale products occur on the same business day. Discounts and allowances provided to customers are recognized as a reduction in Net sales as control of the products is transferred to customers. The Company recognizes freight revenue related to transportation of its products when control of the product is transferred, which is typically upon delivery.
Sales tax is excluded from Net sales. Limited rights of return or product warranties exist with the Company’s customers due to the nature of the products it sells.
Product sales
The Company enters into wholesale customer distribution agreements that provide terms and conditions of our order fulfillment. The Company’s distribution agreements often specify levels of required minimum purchases in order to earn certain rebates or incentives. Certain contracts include rebates and other forms of variable consideration, including consideration payable to the customer up-front, over time or at the end of a contract term.
In transactions for goods or services where the Company engages third-parties to participate in its order fulfillment process, it evaluates whether it is the principal or an agent in the transaction. The Company’s analysis considers whether it controls the goods or services before they are transferred to its customer, including an evaluation of whether the Company has the ability to direct the use of, and obtain substantially all the remaining benefits from, the specified good or service before it is transferred to the customer. Agent transactions primarily reflect circumstances where the Company is not involved in order fulfillment or where it is involved in the order fulfillment but is not contractually obligated to purchase the related goods or services from vendors, and instead extends wholesale customers credit by paying vendor trade accounts payable and do not control products prior to their sale. Under ASC 606, if the Company determines that it is acting in an agent capacity, transactions are recorded on a net basis. If the Company determines that it is acting in a principal capacity, transactions are recorded on a gross basis.
The Company also evaluates vendor sales incentives to determine whether they reduce the transaction price with its customers. The Company’s analysis considers which party tenders the incentive, whether the incentive reflects a direct reimbursement from a vendor, whether the incentive is influenced by or negotiated in conjunction with any other incentive arrangements and whether the incentive is subject to an agency relationship with the vendor, whether expressed or implied. Typically, when vendor incentives are offered directly by vendors to the Company’s customers, require the achievement of vendor-specified requirements to be earned by customers, and are not negotiated by the Company or in conjunction with any other incentive agreement whereby it does not control the direction or earning of these incentives, then Net sales are not reduced as part of the Company’s determination of the transaction price. In circumstances where the vendors provide the Company consideration to promote the sale of their goods and the Company determines the specific performance requirements for its customers to earn these incentives, Net sales are reduced for these customer incentives as part of the determination of the transaction price.
Certain customer agreements provide for the right to license one or more of the Company’s tradenames, such as FESTIVAL FOODS®, SENTRY®, COUNTY MARKET®, NEWMARKET®, FOODLAND®, JUBILEE® and SUPERVALU®. The Company typically does not separately charge for the right to license its tradenames. The Company believes that these tradenames are capable of being distinct, but are not distinct within the context of the contracts with its customers. Accordingly, the Company does not separately recognize revenue related to tradenames utilized by its customers. In addition, the Company enters into franchise agreements to separately charge its customers, who the Company also sells wholesale products to, for the right to use its CUB FOODS® tradename.

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The Company enters into distribution agreements with manufacturers to provide wholesale supplies to the Defense Commissary Agency (“DeCA”) and other government agency locations. DeCA contracts with manufacturers to obtain grocery products for the commissary system. The Company contracts with manufacturers to distribute products to the commissaries after being authorized by the manufacturers to be a military distributor to DeCA. The Company must adhere to DeCA’s delivery system procedures governing matters such as product identification, ordering and processing, information exchange and resolution of discrepancies. DeCA identifies the manufacturer with which an order is to be placed, determines which distributor is contracted by the manufacturer for a particular commissary or exchange location, and then places a product order with that distributor that is covered under DeCA’s master contract with the applicable manufacturer. The Company supplies product from its existing inventory, delivers it to the DeCA designated location, and bills the manufacturer for the product price plus a drayage fee. The manufacturer then bills DeCA under the terms of its master contract. The Company has determined that it controls the goods before they are transferred to the customer, and as such it is the principal in the transaction. Revenue is recognized on a gross basis when control of the product passes to the DeCA designated location.
Professional services and equipment sales
Many of the Company’s agreements with customers include various professional services and other promises to customers, in addition to the sale of the product itself, such as retail store support, advertising, store layout and design services, merchandising support, couponing, e-commerce, network and data hosting solutions, training and certifications classes, and administrative back-office solutions. These professional services may contain a single performance obligation for each respective service, in which case such services revenues are recognized when delivered. The Company determined that certain services provided are immaterial within the overall context of the respective contract, and as such has not allocated the transaction price to these obligations.
Wholesale equipment sales are recorded as direct sales to customers when shipped or delivered, consistent with the recognition of product sales.
Customer incentives
The Company provides incentives to its wholesale customers in various forms established under the applicable agreement, including advances, payments over time that are earned by achieving specified purchasing thresholds, and upon the passage of time. The Company typically records customer advances within Other assets and Other current assets and typically recognizes customer incentive payments that are based on expected purchases over the term of the agreement as a reduction to Net sales. To the extent that the transaction price for product sales includes variable consideration, such as certain of these customer incentives, the Company estimates the amount of variable consideration that should be included in the transaction price primarily by utilizing the expected value method. Variable consideration is included in the transaction price if it is probable that a significant future reversal of cumulative revenue under the agreement will not occur. The Company believes that there will not be significant changes to its estimates of variable consideration, as the uncertainty will be resolved within a relatively short time and there is a significant amount of historical data that is used in the estimation of the amount of variable consideration to be received. Therefore, the Company has not constrained its estimates of variable consideration.
Customer incentive assets are reviewed for impairment when circumstances exist for which the Company no longer expects to recover the applicable customer incentives.
Disaggregation of Revenues
The Company records revenue to four customer channels, which are described below:
Supernatural , which consists of chain accounts that are national in scope and carry primarily natural products, and at this time currently consists solely of Whole Foods Market;
Independents , which include single store and chain accounts (excluding supernatural, as defined above), which carry primarily natural products and buying clubs of consumer groups joined to buy products;
Supermarkets , which include accounts that also carry conventional products, and at this time currently include chain accounts, supermarket independents, and gourmet and ethnic specialty stores; and
Other , which includes foodservice, e-commerce and international customers outside of Canada, as well as sales to Amazon.com, Inc.

The following tables detail the Company’s revenue recognition for the periods presented by customer channel for each of its segments. The Company does not record its revenues within its wholesale reportable segment for financial reporting purposes by product group, and it is therefore impracticable for it to report them accordingly.

13



 
 
Net Sales for the 13-Week Period Ended
(in millions)
 
April 27, 2019
Customer Channel
 
Wholesale
 
Other
 
Eliminations
 
Consolidated
Supernatural
 
$
1,102

 
$

 
$

 
$
1,102

Independents
 
829

 

 

 
829

Supermarkets
 
3,675

 

 

 
3,675

Other
 
338

 
63

 
(44
)
 
357

Total
 
$
5,944

 
$
63

 
$
(44
)
 
$
5,963

 
 
Net Sales for the 13-Week Period Ended
(in millions)
 
April 28, 2018 (1)
Customer Channel
 
Wholesale
 
Other
 
Eliminations
 
Consolidated
Supernatural
 
$
992

 
$

 
$

 
$
992

Independents
 
689

 

 

 
689

Supermarkets
 
706

 

 

 
706

Other
 
246

 
62

 
(46
)
 
262

Total
 
$
2,633


$
62

 
$
(46
)
 
$
2,649

 
 
Net Sales for the 39-Week Period Ended
(in millions)
 
April 27, 2019 (2)
Customer Channel
 
Wholesale
 
Other
 
Eliminations
 
Consolidated
Supernatural
 
$
3,229

 
$

 
$

 
$
3,229

Independents
 
2,331

 

 

 
2,331

Supermarkets
 
8,482

 

 

 
8,482

Other
 
889

 
169

 
(120
)
 
938

Total
 
$
14,931

 
$
169

 
$
(120
)
 
$
14,980

 
 
Net Sales for the 39-Week Period Ended
(in millions)
 
April 28, 2018 (1)
Customer Channel
 
Wholesale
 
Other
 
Eliminations
 
Consolidated
Supernatural
 
$
2,776

 
$

 
$

 
$
2,776

Independents
 
1,998

 

 

 
1,998

Supermarkets
 
2,118

 

 

 
2,118

Other
 
700

 
175

 
(133
)
 
742

Total
 
$
7,592


$
175

 
$
(133
)
 
$
7,634

(1)
During the second quarter of fiscal 2019, the presentation of net sales by customer channel was adjusted to reflect changes in the classification of customer types as a result of a detailed review of customer channel definitions. There was no impact to the Condensed Consolidated Statements of Income as a result of revising the classification of customer types. As a result of this adjustment, net sales to our supermarkets channel and to our other channel for the third quarter of fiscal 2018 decreased approximately $12 million and $13 million , respectively, compared to the previously reported amounts, while net sales to the independents channel for the third quarter of fiscal 2018 increased approximately $25 million compared to the previously reported amounts. In addition, net sales to our supermarkets channel and to our other channel for the 39-week period ended April 28, 2018 decreased approximately $32 million and $45 million , respectively, compared to the previously reported amounts, while net sales to the independents channel for the 39-week period ended April 28, 2018 increased approximately $77 million compared to the previously reported amounts.
(2)
During the second quarter of fiscal 2019, the presentation of net sales attributable to Supervalu was incorporated into our definitions of sales by customer channel. There was no impact to the Condensed Consolidated Statements of Income as a result of revising the classification of customer types. Net sales as reported in the first quarter of fiscal 2019 by customer channel were recast, resulting in an increase in supermarket sales of $198 million , independents of $25 million , and other of $1 million with an offsetting decrease to the Supervalu customer channel.

14



The Company serves customers in the United States and Canada, as well as customers located in other countries. However, all of the Company’s revenue is earned in the U.S. and Canada and international distribution occurs through freight-forwarders. The Company does not have any performance obligations on international shipments subsequent to delivery to the domestic port.
Contract Balances
The Company does not typically incur costs that are required to be capitalized in connection with obtaining a contract with a customer. Expenses related to contract origination primarily relate to employee costs that the Company would incur regardless of whether the contract was obtained with the customer.
The Company typically does not have any performance obligations to deliver products under its contracts until its customers submit a purchase order, as it stands ready to deliver product upon receipt of a purchase order under contracts with its customers. These performance obligations are generally satisfied within a very short period of time. Therefore, the Company has utilized the practical expedient that provides an exemption from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not typically receive pre-payments from its customers.
Customer payments are due when control of goods or services are transferred to the customer and are typically not conditional on anything other than payment terms, which typically range less than 30 days. Since no significant financing components exist between the period of time the Company transfers goods or services to the customer and when it receives payment for those goods or services, the Company has elected not to adjust its revenue recognition policy to recognize financing components. Customer incentives are not considered contract assets as they are not generated through the transfer of goods or services to the customers. No material contract assets exist for any period reported within these Condensed Consolidated Financial Statements.
Accounts and notes receivable are as follows:
(in thousands)
 
April 27, 2019
 
July 28, 2018
Customer accounts receivable
 
$
1,045,690

 
$
595,698

Allowance for uncollectible receivables
 
(13,972
)
 
(15,996
)
Other receivables, net
 
17,555

 

Accounts receivable, net
 
$
1,049,273

 
$
579,702

 
 
 
 
 
Customer notes receivable, included within Prepaid expenses and other current assets
 
$
13,118

 
$

Long-term notes receivable, included within Other assets
 
$
35,388

 
$


4.                                       ACQUISITIONS

Supervalu Acquisition

On July 25, 2018, the Company entered into an agreement and plan of merger (the “Merger Agreement”) to acquire all of the outstanding equity securities of Supervalu, which was then the largest publicly traded food wholesaler in the United States. The acquisition of Supervalu diversifies the Company’s customer base, enables cross-selling opportunities, expands market reach and scale, enhances technology, capacity and systems, and is expected to deliver significant synergies and accelerate potential growth. The merger was completed on October 22, 2018 (the “Closing Date”). At the effective time of the acquisition, each share of Supervalu common stock, par value $0.01 per share, issued and outstanding, was canceled and converted into the right to receive a cash payment equal to $32.50 per share, without interest. Total consideration related to this acquisition was approximately  $2.3 billion $1.3 billion  of which was paid in cash to Supervalu shareholders and  $1.0 billion  of which was used to satisfy Supervalu’s outstanding debt obligations.

The assets and liabilities of Supervalu were recorded in the Company’s consolidated financial statements on a provisional basis at their estimated fair values as of the acquisition date. In conjunction with the Supervalu acquisition, the Company announced its plan to sell the remaining acquired retail operations of Supervalu. Refer to Note 19. “Discontinued Operations” for more information.


15


The following table summarizes the consideration paid, preliminary fair values of the Supervalu assets acquired and liabilities assumed, and the resulting preliminary goodwill. Due to the recent closing of the transaction, management’s ongoing assessment of the fair values of acquired assets and assumed liabilities, and its further review of certain disposal components being classified as held for sale, as of April 27, 2019 , the purchase price allocation was preliminary and will be finalized when valuations and final assessments of the fair value of other acquired assets and assumed liabilities are completed. There can be no assurance that such final assessments will not result in material changes from the preliminary purchase price allocations, and such changes may result in increases or decreases to the goodwill impairment charge recorded in fiscal 2019 year-to-date due to changes in the opening balance sheet value of goodwill. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date), as the Company finalizes the valuations of certain tangible and intangible assets acquired, and liabilities assumed.
 
As of October 22, 2018
(in thousands)
Preliminary as of October 27, 2018
 
Preliminary as of April 27, 2019
Cash and cash equivalents
$
25,102

 
$
25,102

Accounts receivable
557,680

 
543,570

Inventories
1,162,360

 
1,162,175

Prepaid expenses and other current assets
66,440

 
69,850

Current assets of discontinued operations (1)
196,615

 
204,917

Property, plant and equipment
1,148,001

 
1,209,486

Goodwill
347,485

 
444,572

Intangible assets (2)
1,077,541

 
923,099

Other assets (2)
109,445

 
77,266

Long-term assets of discontinued operations (1)
404,301

 
439,235

Accounts payable
(967,429
)
 
(973,394
)
Other current liabilities
(282,692
)
 
(327,619
)
Current portion of long term debt and capital lease obligations
(579,677
)
 
(579,566
)
Current liabilities of discontinued operations (1)
(150,611
)
 
(150,690
)
Long-term debt and capital lease obligations (3)
(179,262
)
 
(137,644
)
Pension and other postretirement benefit obligations
(234,324
)
 
(234,324
)
Deferred income taxes
(177,231
)
 
(74,254
)
Other long-term liabilities (3)
(200,913
)
 
(299,598
)
Long-term liabilities of discontinued operations (1)
(1,401
)
 
(753
)
Total fair value of net assets acquired
2,321,430

 
2,321,430

Plus: noncontrolling interests
1,633

 
1,633

Less: cash and cash equivalents (4)
(30,596
)
 
(30,596
)
Less: assumed equity award liabilities
(18,638
)
 
(18,638
)
Plus: cash paid for equity awards

 
8,498

Total consideration paid in cash
2,273,829

 
2,282,327

Plus: unpaid assumed equity award liabilities (5)
18,638

 
9,914

Total consideration
$
2,292,467

 
$
2,292,241

(1)
Refer to Note 19. “Discontinued Operations” for additional information regarding the carrying value of discontinued operations within the Condensed Consolidated Balance Sheets.
(2)
During the second quarter of fiscal 2019, the Company reclassified favorable operating lease intangible assets of $23.7 million from Other assets to Intangible assets within this table.
(3)
During the second quarter of fiscal 2019, the Company reclassified residual financing obligations associated with build-to-suit properties for which the Company is not obligated to fund unless it is obligated under a future extension of a lease agreement. This reclassification resulted in a reduction of Long-term debt and capital lease obligations of $23.8 million , with an offsetting increase in Other long-term liabilities assumed within this table. If the terms of the respective leases are extended and a cash obligation for a portion of this residual value balance exists, the Company will present these contractual obligations within Long-term capital lease obligations within the Condensed Consolidated Balance Sheets.
(4)
Includes cash and cash equivalents acquired attributable to continuing operations and discontinued operations.

16


(5)
Includes equity consideration for share-based awards that have not yet been paid, which reflects non-cash consideration for the third quarter of fiscal 2019 that will become cash consideration in subsequent periods.

Preliminary goodwill represents the future economic benefits arising largely from the synergies expected from combining the operations of the Company and Supervalu that could not be individually identified and separately recognized. The Company is currently evaluating the tax deductibility of the provisional goodwill amount, however it currently expects a substantial portion of its goodwill to be deductible for income tax purposes. Based on the preliminary valuation, goodwill resulting from the acquisition was primarily attributed to the Company’s wholesale segment, which is presented in Goodwill in the table above. No goodwill was attributed to the retail reporting unit within discontinued operations. Refer to Note 7. “Goodwill and Intangible Assets” for additional information regarding the assignment of goodwill to the Company’s reporting units.

During the second and third quarters of fiscal 2019, the Company updated its preliminary fair value estimates of its net assets primarily due to a review of the cash flows used to measure fair value of intangible assets, updated estimates of expected fair value, less costs to sell, of its retail disposal groups based on indications of value, and updates to estimated carrying values of other assets and liabilities based on an ongoing review of their fair values.

The following table summarizes the identifiable intangible assets and liabilities recorded based on provisional valuations. The identifiable intangible assets are expected to be amortized on a straight-line basis over the estimated useful lives indicated. The preliminary fair value of identifiable intangible assets acquired was determined using income approaches. Significant assumptions utilized in the income approach were based on Company-specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance.
 
 
 
As of October 22, 2018
(in thousands)
Estimated Useful Life
 
Continuing Operations
 
Discontinued Operations
Customer relationship assets
11–19 years
 
$
815,000

 
$

Favorable operating leases
3–25 years
 
33,099

 

Tradenames
2-9 years
 
66,000

 
17,000

Pharmacy prescription files
5–7 years
 

 
41,100

Non-compete agreement
2 years
 
9,000

 

Unfavorable operating leases
2 years
 
(11,199
)
 

Total
 
 
$
911,900

 
$
58,100

In addition to the acquisition of assets and assumption of liabilities above, the Company also began a restructuring plan which resulted in additional expenses recorded in its Condensed Consolidated Statements of Income for the 13-week period and 39-week period ended April 27, 2019 . Refer to Note 5. “Restructuring, Acquisition, and Integration Related Expenses” and Note 14. “Share-Based Awards” for further information.

The accompanying Condensed Consolidated Statements of Income include the results of operations of Supervalu since the October 22, 2018 acquisition date through April 27, 2019 , which consisted of net sales from continuing operations of $6.94 billion , of which $3.24 billion was recorded in the 13-week period ended April 27, 2019 . Supervalu’s net sales from discontinued operations for this time period are reported in Note 19. “Discontinued Operations” .

The following table presents unaudited supplemental pro forma consolidated Net sales and Net income (loss) from continuing operations based on UNFI’s historical reporting periods as if the acquisition of Supervalu had occurred as of July 30, 2017:
 
13-Week Period Ended
 
39-Week Period Ended
(in thousands, except per share data)
April 28, 2018 (1)
 
April 27, 2019 (2)
 
April 28, 2018 (2)
Net sales
$
6,067,869

 
$
18,096,796

 
$
18,125,148

Net income (loss) from continuing operations
$
73,853

 
$
(303,364
)
 
$
42,855

Basic net income (loss) from continuing operations per share
$
1.46

 
$
(5.98
)
 
$
0.85

Diluted net income (loss) from continuing operations per share
$
1.46

 
$
(5.98
)
 
$
0.84

(1)
Includes 13 weeks of pro forma Supervalu results for the period ended April 28, 2018.
(2)
Includes 12 weeks of pro forma Supervalu results for the period ended September 8, 2018.

17


(3)
Includes 39 weeks of pro forma Supervalu results for the period ended April 28, 2018 and an additional 19 weeks of pro forma Associated Grocers of Florida, Inc. results, which was acquired by Supervalu on December 8, 2017.

These unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined companies would have been had the acquisitions occurred at the beginning of the periods being presented, nor are they indicative of future results of operations.

5.                                       RESTRUCTURING, ACQUISITION, AND INTEGRATION RELATED EXPENSES

Restructuring, acquisition, and integration related expenses incurred were as follows:
 
13-Week Period Ended
 
39-Week Period Ended
(in thousands)
April 27, 2019
 
April 27, 2019
2019 SUPERVALU INC. restructuring expenses
$
12,257

 
$
66,423

Acquisition and integration costs
6,084

 
47,500

Closed property charges
1,097

 
20,644

Total
$
19,438

 
$
134,567


Closed Property Reserves

Changes in reserves for closed properties, included additions noted above, consisted of the following:
(in thousands)
 
April 27, 2019
(39 weeks)
Reserves for closed properties at beginning of the fiscal year
 
$

Acquired liabilities
 
34,426

Additions, accretion and changes in estimates
 
17,861

Payments
 
(8,021
)
Reserves for closed properties at the end of the fiscal period
 
$
44,266


Reserves for closed property are included in the Condensed Consolidated Balance Sheets within Accrued expenses and other current liabilities and Other long-term liabilities . Closed property charges recorded in fiscal 2019 year-to-date primarily relate to 17 retail stores, including certain Shop ‘n Save and Shop ‘n Save East branded stores, and are net of estimated sublease assumptions.

Restructuring Programs

The following is a summary of the restructuring reserves by reserve type included in the Condensed Consolidated Balance Sheets, primarily within Accrued compensation and benefits for severance and other employee separation costs and tax payments, within Accrued expenses and other current liabilities for the current portion of closed property reserves and within Other long-term liabilities for the long-term portion of closed property reserves.
(in thousands)
2019 SUPERVALU INC.
 
2018 Earth Origins Market
 
Total
Balances at July 28, 2018
$

 
$
2,219

 
$
2,219

Restructuring program charge (1)
66,423

 

 
66,423

Acquired restructuring liability
6,193

 

 
6,193

Cash payments
(58,005
)
 
(2,219
)
 
(60,224
)
Balances at April 27, 2019
$
14,611

 
$

 
$
14,611

 
 
 
 
 
 
Cumulative program charges incurred from inception to date
$
66,423

 
$
2,219

 
$
68,642

(1)
Includes $40.0 million of charges related to change-in-control expense to satisfy outstanding equity awards and severance related costs.


18



2019 SUPERVALU INC.

As part of its acquisition of Supervalu and in order to achieve synergies from this combination, the Company is taking certain actions, which began during the first quarter of fiscal 2019 and will continue through at least fiscal 2020 to: (i) review its organizational structure and the strategic needs of the business going forward to identify and place talent with the appropriate skills, experience and qualifications to meet these needs; and (ii) dispose of and exit the Supervalu legacy retail operations, as efficiently and economically as possible in order to focus on the Company’s core wholesale distribution business. Actions associated with retail divestitures and adjustments to the Company’s core cost-structure for its wholesale food distribution business are expected to result in headcount reductions and other costs and charges.

The Company expects to incur approximately $2 million of additional restructuring expense for the remainder of fiscal 2019. The estimate of additional restructuring expense does not include costs and charges that may be incurred related to the divestiture of retail operations, which may be material, including multiemployer plan charges, severance costs, store closure charges, and related costs. The extent of these costs and charges will be determined based on outcomes achieved under the divestiture process. At this time, however, the Company is unable to make an estimate with reasonable certainty of the amount or type of costs and charges expected to be incurred in connection with the foregoing actions.

2018 Earth Origins Market

During the second quarter of fiscal 2018 the Company made the decision to close three non-core, under-performing stores of its total twelve stores related to its Earth Origins Market Retail business. Based on this decision, the Company recorded restructuring costs of  $2.2 million  during fiscal 2018. In the fourth quarter of fiscal 2018, the Earth Origins Retail business was sold and the Company recorded a loss on disposition of assets of $2.7 million .

6.                                       EARNINGS PER SHARE
 
The following is a reconciliation of the basic and diluted number of shares used in computing earnings per share:
 
 
13-Week Period Ended
 
39-Week Period Ended
(in thousands, except per share data)
 
April 27,
2019
 
April 28,
2018
 
April 27,
2019
 
April 28,
2018
Basic weighted average shares outstanding
 
50,846

 
50,424

 
50,748

 
50,563

Net effect of dilutive stock awards based upon the treasury stock method
 
118

 
327

 

 
253

Diluted weighted average shares outstanding
 
50,964

 
50,751

 
50,748

 
50,816

 
 
 
 
 
 
 
 
 
Basic per share data:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.64

 
$
1.03

 
$
(6.93
)
 
$
2.63

Discontinued operations
 
$
0.48

 
$

 
$
0.95

 
$

Basic income (loss) per share
 
$
1.12

 
$
1.03

 
$
(5.99
)
 
$
2.63

Diluted per share data:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.64

 
$
1.02

 
$
(6.93
)
 
$
2.61

Discontinued operations (1)
 
$
0.48

 
$

 
$
0.94

 
$

Diluted income (loss) per share
 
$
1.12

 
$
1.02

 
$
(5.99
)
 
$
2.61

 
 
 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded from the calculation of diluted earnings per share
 
5,176

 
85

 
2,723

 
96

(1)
The computation of diluted earnings per share from discontinued operations is calculated using diluted weighted average shares outstanding, which includes the net effect of dilutive stock awards, of approximately 275 thousand shares for the 39-week period ended April 27, 2019 .


19



7.                                       GOODWILL AND INTANGIBLE ASSETS

We account for acquired businesses using the purchase method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the acquisition date at their respective estimated fair values. Goodwill represents the excess acquisition cost over the fair value of net assets acquired in a business combination. Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that generated the goodwill. The Company has seven goodwill reporting units, three of which represent separate operating segments and are aggregated within the Wholesale reportable segment, three of which are separate operating segments that do not qualify as separate reportable segments, and a single retail reporting unit, which is included within discontinued operations. Goodwill reporting units are evaluated for events or changes in circumstances indicating a goodwill reporting unit has changed. Relative fair value allocations are performed when components of an aggregated goodwill reporting unit become separate reporting units.

During fiscal 2019, a relative fair value allocation was performed when the Canada Wholesale reporting unit became a separate operating segment and reporting unit.

In conjunction with the acquisition of Supervalu, goodwill resulting from the acquisition was assigned to the Supervalu Wholesale reporting unit and the legacy Company Wholesale reporting unit, as both of these reporting units are expected to benefit from the synergies of the business combination. The assignment was based on the relative synergistic value estimated as of the acquisition date. This systematic approach utilized the relative cash flow contributions and value created from the acquisition to each reporting unit on a stand-alone basis. As of the acquisition date, approximately $112 million was attributed to the legacy Company Wholesale reporting unit, which is preliminary and subject to the final determinations of the fair value of net assets acquired and a proportionate assignment adjustment between the Supervalu Wholesale reporting unit and the legacy Company reporting unit.

The Company reviews goodwill for impairment at least annually and more frequently if events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit is below its carrying amount. The annual review for goodwill impairment is performed as of the first day of the fourth quarter of each fiscal year. The Company tests for goodwill impairment at the reporting unit level, which is at or one level below the operating segment level.

Goodwill Impairment Review

During the first quarter of fiscal 2019, the Company experienced a decline in its stock price and market capitalization. During the second quarter of fiscal 2019, the stock price continued to decline, and the decline in the stock price and market capitalization became significant and sustained. Due to this sustained decline in stock price, the Company determined that it was more likely than not that the carrying value of the Supervalu Wholesale reporting unit exceeded its fair value and performed an interim quantitative impairment test of goodwill.

The Company estimated the fair values of all reporting units using both the market approach, applying a multiple of earnings based on guidelines for publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The rates used to discount projected future cash flows under the income approach reflect a weighted average cost of capital of 10%, which considered guidelines for publicly traded companies, capital structure and risk premiums, including those reflected in the current market capitalization. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. Based on this analysis, the Company determined that the carrying value of its Supervalu Wholesale reporting unit exceeded its fair value by an amount that exceeded the assigned goodwill as of the acquisition date. As a result, the Company recorded a goodwill impairment charge of $332.6 million for fiscal 2019 year-to-date, which reflects the preliminary goodwill impairment charge of $370.9 million and an adjustment to the charge of $38.3 million recorded in the second and third quarters of fiscal 2019, respectively. The goodwill impairment charge adjustment recorded in the third quarter of fiscal 2019 was attributable to changes in the preliminary fair value of net assets, which affected the initial goodwill resulting from the Supervalu acquisition. The goodwill impairment charge is reflected in Goodwill and asset impairment charges in the Condensed Consolidated Statements of Income. The goodwill impairment charge reflects all of Supervalu Wholesale’s reporting unit goodwill, based on the preliminary acquisition date assigned fair values.


20



The goodwill impairment charge recorded in fiscal 2019 year-to-date is subject to change based upon the final purchase price allocation during the measurement period for estimated fair values of assets acquired and liabilities assumed from the Supervalu acquisition. There can be no assurance that such final assessments will not result in material increases or decreases to the recorded goodwill impairment charge based upon the preliminary purchase price allocations, due to changes in the provisional opening balance sheet estimates of goodwill. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date). Refer to Note 4. “Acquisitions” for further information about the preliminary purchase price allocation and provisional goodwill estimated as of the acquisition date.

2018 Earth Origins Market Impairment

During the second quarter of fiscal 2018, the Company made the decision to close three non-core, under-performing stores of its total twelve stores. Based on this decision, 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 $3.4 million  on long-lived assets and $7.9 million  to goodwill, respectively, during the second quarter of fiscal 2018. During the fourth quarter of fiscal 2018 the Company disposed of its Earth Origins retail business.

Goodwill and Intangible Assets Changes

Changes in the carrying value of Goodwill by reportable segment that have goodwill consisted of the following:
(in thousands)
Wholesale
 
Other
 
Total
Goodwill as of July 28, 2018
$
352,342

(1)  
$
10,153