Quarterly Report (10-q)

Date : 12/11/2019 @ 10:08PM
Source : Edgar (US Regulatory)
Stock : United Natural Foods Inc (UNFI)
Quote : 7.54  -0.3 (-3.83%) @ 12:59AM
After Hours
Last Trade
Last $ 7.54 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 
     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 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
UNFICOA03.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,
Rhode Island
 
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  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  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
 
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 
As of December 6, 2019 there were 53,508,147 shares of the registrant’s common stock, $0.01 par value per share, outstanding.
 




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
36
 
 
 
51
 
 
 
51
 
 
 
 
 
 
 
51
 
 
 
52
 
 
 
52
 
 
 
53
 
 
 
 
54


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)
 
 
November 2,
2019
 
August 3,
2019
ASSETS
 
 

 
 

Cash and cash equivalents
 
$
39,758

 
$
42,350

Accounts receivable, net
 
1,136,924

 
1,065,699

Inventories
 
2,324,979

 
2,089,416

Prepaid expenses and other current assets
 
192,463

 
226,727

Current assets of discontinued operations
 
155,883

 
143,729

Total current assets
 
3,850,007

 
3,567,921

Property and equipment, net
 
1,494,309

 
1,639,259

Operating lease assets
 
1,051,128

 

Goodwill
 
19,791

 
442,256

Intangible assets, net
 
999,586

 
1,041,058

Deferred income taxes
 
98,768

 
31,087

Other assets
 
106,038

 
107,319

Long-term assets of discontinued operations
 
343,892

 
352,065

Total assets
 
$
7,963,519

 
$
7,180,965

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Accounts payable
 
$
1,606,470

 
$
1,476,857

Accrued expenses and other current liabilities
 
246,563

 
249,426

Accrued compensation and benefits

164,605


148,296

Current portion of operating lease liabilities
 
127,327

 

Current portion of long-term debt and finance lease liabilities
 
34,458

 
112,103

Current liabilities of discontinued operations
 
100,878

 
122,265

Total current liabilities
 
2,280,301

 
2,108,947

Long-term debt
 
3,051,238

 
2,819,050

Long-term operating lease liabilities
 
949,978

 

Long-term finance lease liabilities
 
68,682

 
108,208

Pension and other postretirement benefit obligations
 
220,550

 
237,266

Deferred income taxes
 
1,047

 
1,042

Other long-term liabilities
 
267,080

 
393,595

Long-term liabilities of discontinued operations
 
1,403

 
1,923

Total liabilities
 
6,840,279

 
5,670,031

Commitments and contingencies
 


 


Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value, authorized 5,000 shares; none issued or outstanding
 

 

Common stock, $0.01 par value, authorized 100,000 shares; 54,121 shares issued and 53,506 shares
outstanding at November 2, 2019; 53,501 shares issued and 52,886 shares outstanding at August 3, 2019
 
541

 
535

Additional paid-in capital
 
532,958

 
530,801

Treasury stock at cost
 
(24,231
)
 
(24,231
)
Accumulated other comprehensive loss
 
(111,691
)
 
(108,953
)
Retained earnings
 
728,979

 
1,115,519

Total United Natural Foods, Inc. stockholders’ equity
 
1,126,556

 
1,513,671

Noncontrolling interests
 
(3,316
)
 
(2,737
)
Total stockholders' equity
 
1,123,240

 
1,510,934

Total liabilities and stockholders’ equity
 
$
7,963,519

 
$
7,180,965


See accompanying Notes to Condensed Consolidated Financial Statements.

3



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

13-Week Period Ended
 

November 2,
2019

October 27,
2018
Net sales

$
6,019,585


$
2,868,156

Cost of sales

5,248,543


2,455,825

Gross profit

771,042


412,331

Operating expenses

775,414


363,165

Goodwill and asset impairment charges
 
425,405

 

Restructuring, acquisition and integration related expenses

14,250


68,004

Operating loss

(444,027
)

(18,838
)
Other expense (income):

 


 

Net periodic benefit income, excluding service cost
 
(11,384
)
 
(844
)
Interest expense, net
 
49,518

 
7,525

Other, net

(46
)

97

Total other expense, net

38,088


6,778

Loss from continuing operations before income taxes

(482,115
)

(25,616
)
Benefit for income taxes

(73,753
)

(4,255
)
Net loss from continuing operations
 
(408,362
)
 
(21,361
)
Income from discontinued operations, net of tax
 
24,954

 
2,070

Net loss including noncontrolling interests
 
(383,408
)
 
(19,291
)
Less net income attributable to noncontrolling interests
 
(519
)
 
(3
)
Net loss attributable to United Natural Foods, Inc.

$
(383,927
)

$
(19,294
)


 


 

Basic (loss) earnings per share:
 
 
 
 
Continuing operations
 
$
(7.67
)
 
$
(0.42
)
Discontinued operations
 
$
0.46

 
$
0.04

Basic loss per share
 
$
(7.21
)
 
$
(0.38
)
Diluted (loss) earnings per share:
 
 
 
 
Continuing operations
 
$
(7.67
)
 
$
(0.42
)
Discontinued operations
 
$
0.46

 
$
0.04

Diluted loss per share
 
$
(7.21
)
 
$
(0.38
)
Weighted average shares outstanding:






Basic

53,213

 
50,583

Diluted

53,213

 
50,583


See accompanying Notes to Condensed Consolidated Financial Statements.

4



UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)
(In thousands)
 
 
13-Week Period Ended
 
 
November 2,
2019
 
October 27,
2018
Net loss including noncontrolling interests
 
$
(383,408
)
 
$
(19,291
)
Other comprehensive (loss) income:
 
 

 
 

Recognition of pension and other postretirement benefit obligations, net of tax(1)
 
572

 

Recognition of interest rate swap cash flow hedges, net of tax(2)
 
(3,681
)
 
196

Foreign currency translation adjustments
 
371

 
(672
)
Total other comprehensive loss
 
(2,738
)
 
(476
)
Less comprehensive income attributable to noncontrolling interests
 
(519
)
 
(3
)
Total comprehensive loss attributable to United Natural Foods, Inc.
 
$
(386,665
)
 
$
(19,770
)

(1)
Amounts are net of tax (benefit) expense of $0.2 million and $0.0 million for the 13-week periods ended November 2, 2019 and October 27, 2018, respectively.
(2)
Amounts are net of tax (benefit) expense of $(1.3) million and $0.3 million for the 13-week periods ended November 2, 2019 and October 27, 2018, respectively.

See accompanying 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
 
Retained Earnings
 
Total United Natural Foods, Inc.
Stockholders’ Equity
 
Noncontrolling Interests
 
Total Stockholders’ Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balances at August 3, 2019
53,501

 
$
535

 
615

 
$
(24,231
)
 
$
530,801

 
$
(108,953
)
 
$
1,115,519

 
$
1,513,671

 
$
(2,737
)
 
$
1,510,934

Cumulative effect of change in accounting principle
 

 
 

 
 
 
 
 
 
 
 

 
(2,613
)
 
(2,613
)
 
 
 
(2,613
)
Restricted stock vestings and stock option exercises
424

 
4

 
 
 
 
 
(823
)
 
 

 
 

 
(819
)
 
 
 
(819
)
Share-based compensation
 
 
 

 
 
 
 
 
1,247

 
 

 
 

 
1,247

 
 
 
1,247

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
(2,738
)
 
 
 
(2,738
)
 
 
 
(2,738
)
Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
(1,098
)
 
(1,098
)
Proceeds from issuance of common stock, net
196

 
2

 
 
 
 
 
1,733

 
 
 
 
 
1,735

 
 
 
1,735

Net loss
 

 
 

 
 
 
 
 
 

 
 

 
(383,927
)
 
(383,927
)
 
519

 
(383,408
)
Balances at November 2, 2019
54,121

 
$
541

 
615

 
$
(24,231
)
 
$
532,958

 
$
(111,691
)
 
$
728,979

 
$
1,126,556

 
$
(3,316
)
 
$
1,123,240

 
Common Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive Loss
 
Retained Earnings
 
Total
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, net of tax
401

 
4

 
 
 
 
 
(3,012
)
 
 

 
 

 
(3,008
)
 
 
 
(3,008
)
Share-based compensation
 
 
 

 
 
 
 
 
8,089

 
 

 
 

 
8,089

 
 
 
8,089

Other/share-based compensation
 

 
 

 
 
 
 
 
403

 
 

 
 

 
403

 
 
 
403

Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
(476
)
 
 
 
(476
)
 
 
 
(476
)
Acquisition of noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,633
)
 
(1,633
)
Net loss
 

 
 

 
 
 
 
 
 

 
 

 
(19,294
)
 
(19,294
)
 
3

 
(19,291
)
Balances at October 27, 2018
51,426

 
$
514

 
615

 
$
(24,231
)
 
$
489,103

 
$
(14,655
)
 
$
1,381,215

 
$
1,831,946

 
$
(1,630
)
 
$
1,830,316

 
See accompanying Notes to Condensed Consolidated Financial Statements.

6



UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
13-Week Period Ended
(In thousands)
 
November 2,
2019
 
October 27,
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net loss including noncontrolling interests
 
$
(383,408
)
 
$
(19,291
)
Income from discontinued operations, net of tax
 
24,954

 
2,070

Net loss from continuing operations
 
(408,362
)
 
(21,361
)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
 
 

 
 

Depreciation and amortization
 
75,141

 
24,793

Share-based compensation
 
1,247

 
8,089

(Gain) loss on disposition of assets
 
(1,308
)
 
6

Closed property and other restructuring charges
 
4,969

 
412

Goodwill and asset impairment charges
 
425,405

 

Net pension and other postretirement benefit income
 
(11,370
)
 
(844
)
Deferred income tax (benefit) expense
 
(62,560
)
 
1,214

LIFO charge
 
6,546

 

Provision for doubtful accounts
 
13,098

 
3,037

Loss on debt extinguishment
 
73

 
1,114

Non-cash interest expense
 
3,833

 
345

Changes in operating assets and liabilities, net of acquired businesses
 
(182,257
)
 
(118,124
)
Net cash used in operating activities of continuing operations
 
(135,545
)
 
(101,319
)
Net cash provided by (used in) operating activities of discontinued operations
 
676

 
(5,701
)
Net cash used in operating activities
 
(134,869
)
 
(107,020
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Capital expenditures
 
(41,122
)
 
(16,381
)
Purchases of acquired businesses, net of cash acquired
 

 
(2,273,829
)
Proceeds from dispositions of assets
 
1,605

 
149,529

Payments for long-term investment
 
(162
)
 
(110
)
Payments of company owned life insurance premiums
 
(1,204
)
 

Net cash used in investing activities of continuing operations
 
(40,883
)
 
(2,140,791
)
Net cash provided by (used in) investing activities of discontinued operations
 
17,002

 
(89
)
Net cash used in investing activities
 
(23,881
)
 
(2,140,880
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Proceeds from borrowings of long-term debt
 
2,050

 
1,905,547

Proceeds from borrowings under revolving credit line
 
1,338,446

 
1,805,300

Repayments of borrowings under revolving credit line
 
(1,100,746
)
 
(688,000
)
Repayments of long-term debt and finance leases
 
(83,510
)
 
(110,000
)
Proceeds from the issuance of common stock and exercise of stock options
 
1,735

 
118

Payment of employee restricted stock tax withholdings
 
(819
)
 
(3,126
)
Payments for debt issuance costs
 

 
(60,309
)
Net cash provided by financing activities of continuing operations
 
157,156

 
2,849,530

Net cash used in financing activities of discontinued operations
 
(1,060
)
 

Net cash provided by financing activities
 
156,096

 
2,849,530

EFFECT OF EXCHANGE RATE CHANGES ON CASH
 
(10
)
 
(49
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
 
(2,664
)
 
601,581

Cash and cash equivalents, at beginning of period
 
45,267

 
23,315

Cash and cash equivalents, including restricted cash at end of period
 
42,603

 
624,896

Less: cash and cash equivalents of discontinued operations
 
(2,845
)
 
(4,633
)
Cash and cash equivalents including restricted cash of continuing operations
 
$
39,758

 
$
620,263

Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for interest
 
$
49,296

 
$
7,325

Cash (refunds) payments for federal and state income taxes, net
 
$
(28,874
)
 
$
462

 See accompanying Notes to Condensed Consolidated Financial Statements.

7



UNITED NATURAL FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Business

United Natural Foods, Inc. and its subsidiaries (the “Company” or “UNFI”) is a leading distributor of natural, organic, specialty, and conventional grocery and non-food products, and provider of support services. The Company sells its products primarily throughout the United States and Canada.

Fiscal Year

The Company’s fiscal years end on the Saturday closest to July 31 and contain either 52 or 53 weeks. References to the first quarter of fiscal 2020 and 2019 relate to the 13-week fiscal quarters ended November 2, 2019 and October 27, 2018, respectively.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation, with the exception of sales transactions from continuing to discontinued operations for wholesale supply discussed further in Note 3—Revenue Recognition. Unless otherwise indicated, references to the Condensed Consolidated Statements of Operations, the Condensed Consolidated Balance Sheets and the Notes to the Condensed Consolidated Financial Statements exclude all amounts related to discontinued operations. Refer to Note 17—Discontinued Operations for additional information about discontinued operations.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally required in complete financial statements prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. In the Company’s opinion, these Condensed Consolidated Financial Statements include all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. However, the results of operations for interim periods may not be indicative of the results that may be expected for a full year. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 3, 2019 (the “Annual Report”). Except as described for lease accounting below, there were no material changes in significant accounting policies from those described in the Company’s Annual Report.

Use of Estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of three months or less. The Company’s banking arrangements allow it to fund outstanding checks when presented to the financial institution for payment. The Company funds all intraday bank balance overdrafts during the same business day. Checks outstanding in excess of bank balances create book overdrafts, which are recorded in Accounts payable in the Condensed Consolidated Balance Sheets and are reflected as an operating activity in the Condensed Consolidated Statements of Cash Flows. As of November 2, 2019 and August 3, 2019, the Company had net book overdrafts of $242.5 million and $236.9 million, respectively.


8



Inventories, Net

Inventories are valued at the lower of cost or market. Substantially all of the Company’s inventories consist of finished goods and a substantial portion of its inventories have a last-in, first-out (“LIFO”) reserve applied. Interim LIFO calculations are based on the Company’s estimates of expected year-end inventory levels and costs, as the actual valuation of inventory under the LIFO method is computed at the end of each year based on the inventory levels and costs at that time. If the first-in, first-out method had been used, Inventories, net would have been higher by approximately $30.7 million and $24.1 million at November 2, 2019 and August 3, 2019, respectively.

Leases

At the inception or modification of contract, the Company determines whether a lease exists and classifies its leases as an operating or finance lease at commencement. Subsequent to commencement, lease classification is only reassessed upon a change to the expected lease term or contract modification. Finance and operating lease assets represent the Company’s right to use an underlying asset as lessee for the lease term, and lease obligations represent the Company’s obligation to make lease payments arising from the lease. These assets and obligations are recognized at the lease commencement date based on the present value of lease payments, net of incentives, over the lease term. Incremental borrowing rates are estimated based on the Company’s borrowing rate as of the lease commencement date to determine the present value of lease payments, when lease contracts do not provide a readily determinable implicit rate. Incremental borrowing rates are determined by using the yield curve based on the Company’s credit rating adjusted for the Company’s specific debt profile and secured debt risk. The lease asset also reflects any prepaid rent, initial direct costs incurred and lease incentives received. The Company’s lease terms include option extension periods when it is reasonably certain that those options will be exercised. Leases with an initial expected term of 12 months or less are not recorded in the consolidated balance sheets and the related lease expense is recognized on a straight-line basis over the lease term.

The Company recognizes contractual obligations and receipts on a gross basis, such that the related lease obligation to the landlord is presented separately from the sublease created by the lease assignment to the assignee. As a result, the Company continues to recognize on its Condensed Consolidated Balance Sheets the operating lease assets and liabilities, and finance lease assets and obligations.

The Company records operating lease expense and income using the straight-line method within Operating expenses, and lease income on a straight-line method for leases with its customers within Net sales. Finance lease expense is recognized as amortization expense within Operating expenses, and interest expense within Interest expense, net. For leases with step rent provisions whereby the rental payments increase over the life of the lease, and for leases where the Company receives rent-free periods, the Company recognizes expense and income based on a straight-line basis based on the total minimum lease payments to be made or lease receipts expected to be received over the expected lease term. The Company is generally obligated for property tax, insurance and maintenance expenses related to leased properties, which often represent variable lease expenses.  For contractual obligations on properties where the Company remains the primary obligor upon assignment of the lease and does not obtain a release from landlords or retain the equity interests in the legal entities with the related rent contracts, the Company continues to recognize rent expense and rent income within Operating expenses.

Operating and finance lease assets are reviewed for impairment based on an ongoing review of circumstances that indicate the assets may no longer be recoverable, such as closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations, and other factors. The Company calculates operating and finance lease impairments using a discount rate to calculate the present value of estimated subtenant rentals that could be reasonably obtained for the property. Lease impairment charges are recorded as a component of Restructuring, acquisition and integration related expenses in the Condensed Consolidated Statements of Operations.

The calculation of lease impairment charges requires significant judgments and estimates, including estimated subtenant rentals, discount rates and future cash flows based on the Company’s experience and knowledge of the market in which the property is located, previous efforts to dispose of similar assets and the assessment of existing market conditions. Impairment reserves are reflected as a reduction to Operating lease assets. Refer to Note 11—Leases for additional information.


9


NOTE 2—RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued accounting standard update (“ASU”) No. 2016-02, Leases (Topic 842), which provides new comprehensive lease accounting guidance that supersedes previous lease guidance. The objective of this ASU is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Criteria for distinguishing leases between finance and operating are substantially similar to criteria for distinguishing between capital and operating leases in previous lease guidance. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. In addition, this ASU expands the disclosure requirements of lease arrangements. The Company adopted this standard in the first quarter of fiscal 2020 on August 4, 2019, the effective and initial application date, using the additional transition method under ASU 2018-11, which allows for a cumulative effect adjustment within retained earnings in the period of adoption. In addition, the Company elected the “package of three” practical expedients which allows companies to not reassess whether arrangements contain leases, the classification of leases, and the capitalization of initial direct costs. The impact of the adoption to the Company’s Condensed Consolidated Balance Sheets includes the recognition of operating lease liabilities of $1.1 billion with corresponding right-of-use assets of approximately the same amount based on the present value of the remaining lease payments for existing operating leases. The difference between the amount of right-of-use assets and lease liabilities recognized is primarily related to adjustments to prepaid rent, deferred rent, lease intangible assets/liabilities, and closed property reserves. In addition, the adoption of the standard resulted in the derecognition of existing property and equipment for certain properties that did not qualify for sale accounting because the Company was determined to be the accounting owner during the construction phase. In addition, at the transition date the Company is constructing one facility that, when complete, the Company will perform a sale-leaseback assessment. For properties where the Company was deemed the accounting owner during construction for which construction has been completed, the difference between the assets and liabilities derecognized, net of the deferred tax impact, was recorded as an adjustment to retained earnings. Lessor accounting guidance remained largely unchanged from previous guidance. Adoption of this standard did not have a material impact to the Company’s Condensed Consolidated Statements of Operations or Cash Flows. The Company has revised its accounting policies, processes and controls, and systems as applicable to comply with the provisions and disclosure requirements of the standard.

The effects of the changes, including those discussed above, made to the Company’s Condensed Consolidated Balance Sheets as of August 3, 2019 for the adoption of the new lease guidance were as follows (in thousands):
 
 
Balance at August 3, 2019
 
Adjustments due to adoption of the new lease guidance
 
Adjusted Balance at August 4, 2019
Assets
 
 
 
 
 
 
Prepaid expenses and other current assets
 
$
226,727

 
$
(14,733
)
 
$
211,994

Property and equipment, net
 
1,639,259

 
(142,541
)
 
1,496,718

Operating lease assets
 

 
1,059,473

 
1,059,473

Intangible assets, net
 
1,041,058

 
(17,671
)
 
1,023,387

Deferred income taxes
 
$
31,087

 
1,052

 
$
32,139

Total increase to assets
 
 
 
$
885,580

 
 
 
 
 
 
 
 
 
Liabilities and Stockholder’s Equity
 
 
 
 
 

Accrued expense and other current liabilities
 
$
249,426

 
$
(7,260
)
 
$
242,166

Current portion of operating lease liabilities
 

 
137,741

 
137,741

Current portion of long-term debt and finance lease liabilities
 
112,103

 
(6,936
)
 
105,167

Long-term operating lease liabilities
 

 
936,728

 
936,728

Long-term finance lease obligations
 
108,208

 
(37,565
)
 
70,643

Other long-term liabilities
 
393,595

 
(134,515
)
 
259,080

Total stockholder’s equity
 
$
1,510,934

 
(2,613
)
 
$
1,508,321

Total increase to liabilities and stockholder’s equity
 
 
 
$
885,580

 
 


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

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2018.  The Company adopted this ASU in the first quarter of fiscal 2020. The adoption of this ASU had no impact to Accumulated other comprehensive loss or Retained earnings.

In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326 Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825. This ASU clarifies the accounting treatment for the measurement of credit losses under ASC 236 and provides further clarification on previously issued updates including ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities and ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Since the Company adopted ASU 2017-12 in the fourth quarter of fiscal 2018, the amendments in ASU 2019-04 related to clarifications on Accounting for Hedging Activities have been adopted by the Company in the first quarter of fiscal 2020. The remaining amendments within ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, which for the Company is the first quarter of fiscal 2021. Early adoption is permitted. The Company adopted this standard in the first quarter of fiscal 2020 with no impact to Accumulated other comprehensive loss or Retained earnings for fiscal 2020, as the Company did not have separately measured ineffectiveness related to its cash flow hedges.

Recently Issued Accounting Pronouncements

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

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

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


10



NOTE 3—REVENUE RECOGNITION

Disaggregation of Revenues

The Company records revenue to four customer channels, which are described below:

Supernatural, which consists of chain accounts that are national in scope and carry primarily natural products, and currently consists solely of Whole Foods Market.
Supermarkets, which include accounts that also carry conventional products, and include chain accounts, supermarket independents, and gourmet and ethnic specialty stores.
Independents, which include single store and chain accounts (excluding supernatural, as defined above), which carry primarily natural products and buying clubs of consumer groups joined to buy products, and the conventional military business.
Other, which includes foodservice, e-commerce and international customers outside of Canada, as well as sales to Amazon.com, Inc.

The following tables detail the Company’s revenue recognition for the periods presented by customer channel for each of its segments. The Company does not record its revenues within its wholesale reportable segment for financial reporting purposes by product group, and it is therefore impracticable for it to report them accordingly.
 
 
Net Sales for the 13-Week Period Ended
(in millions)
 
November 2, 2019
Customer Channel
 
Wholesale
 
Other
 
Eliminations
 
Consolidated
Supermarkets
 
$
3,769

 
$

 
$

 
$
3,769

Supernatural
 
1,111

 

 

 
1,111

Independents
 
758

 

 

 
758

Other
 
368

 
64

 
(51
)
 
381

Total
 
$
6,006

 
$
64

 
$
(51
)
 
$
6,019

 
 
 
 
 
 
 
 
 
 
 
Net Sales for the 13-Week Period Ended
(in millions)
 
October 27, 2018(1)
Customer Channel
 
Wholesale
 
Other
 
Eliminations
 
Consolidated
Supernatural
 
$
1,027

 
$

 
$

 
$
1,027

Supermarkets
 
930

 

 

 
930

Independents
 
667

 

 

 
667

Other
 
233

 
49

 
(38
)
 
244

Total
 
$
2,857

 
$
49

 
$
(38
)
 
$
2,868


(1)
During the first quarter of fiscal 2020, the presentation of net sales by customer channel was adjusted to reflect reclassification of customer types resulting from management’s determination that a customer serviced by both Supervalu and legacy UNFI should be classified as a Supermarket customer given that customer’s operations. In addition, during the second quarter of fiscal 2019, net sales attributable to Supervalu was incorporated into the Company’s definition of sales by customer channel. There was no impact to the Condensed Consolidated Statements of Operations as a result of the reclassification of customer types. As a result of these adjustments, net sales to the Company’s Supermarkets channel for the first quarter of fiscal 2019 increased approximately $223 million compared to the previously reported amounts, while net sales to the Other channel increased approximately $1 million, with an offsetting elimination of the Supervalu customer channel.

The Company serves customers in the United States and Canada, as well as customers located in other countries. However, all of the Company’s revenue is earned in the U.S. and Canada, as international distribution occurs through freight-forwarders. The Company does not have any performance obligations related to international shipments subsequent to delivery to the domestic port.


11



Sales from the Company’s Wholesale segment to its retail discontinued operations are presented within Net Sales when the Company holds the business for sale with a supply agreement that it anticipates the sale of the retail banner to include upon its disposal. The Company recorded $244.6 million within Net sales from continuing operations attributable to discontinued operations inter-company product purchases in the first quarter of fiscal 2020, which the Company expects will continue subsequent to the sale of certain retail banners. These amounts were recorded at gross margin rates consistent with sales to other similar wholesale customers of the acquired Supervalu business. No sales were recorded within continuing operations for purchases by retail banners that the Company expects to dispose of without a supply agreement, which were eliminated upon consolidation within continuing operations and amounted to $113.0 million in the first quarter of fiscal 2020.

Contract Balances

Accounts and notes receivable are as follows:
(in thousands)
 
November 2, 2019
 
August 3, 2019
Customer accounts receivable
 
$
1,143,836

 
$
1,063,167

Allowance for uncollectible receivables
 
(27,812
)
 
(20,725
)
Other receivables, net
 
20,900

 
23,257

Accounts receivable, net
 
$
1,136,924

 
$
1,065,699

 
 
 
 
 
Customer notes receivable, net, included within Prepaid expenses and other current assets
 
$
11,235

 
$
11,912

Long-term notes receivable, net, included within Other assets
 
$
25,683

 
$
34,408



NOTE 4—ACQUISITIONS

Supervalu Acquisition

On July 25, 2018, the Company entered into an agreement and plan of merger to acquire all of the outstanding equity securities of Supervalu, which was then the largest publicly traded conventional grocery distributor in the United States. The acquisition of Supervalu diversifies the Company’s customer base, further enables cross-selling opportunities, expands market reach and scale, enhances technology, capacity and systems, and is expected to deliver significant synergies and accelerate potential growth. The merger was completed on October 22, 2018 (the “Closing Date”). At the effective time of the acquisition, each share of Supervalu common stock, par value $0.01 per share, issued and outstanding, was canceled and converted into the right to receive a cash payment equal to $32.50 per share, without interest. Total consideration related to this acquisition was $2.3 billion$1.3 billion of which was paid in cash to Supervalu shareholders and $1.0 billion of which was used to satisfy Supervalu’s outstanding debt obligations. Included in the liabilities assumed in the Supervalu acquisition were the Supervalu Senior Notes with a fair value of $546.6 million. These Senior Notes were redeemed in the second quarter of fiscal 2019 following the required 30-day notice period, resulting in their satisfaction and discharge.

The assets and liabilities of Supervalu were recorded in the Company’s Consolidated Financial Statements on a preliminary basis at their estimated fair values as of the acquisition date. In conjunction with the Supervalu acquisition, the Company announced its plan to sell the remaining acquired retail operations of Supervalu. Refer to Note 17—Discontinued Operations for more information on discontinued operations.


12


The following table summarizes the final consideration, fair value of assets acquired and liabilities assumed, and the resulting goodwill.
(in thousands)
 
Final Acquisition Date Fair Values
Consideration:
 
 
Outstanding shares
 
$
1,258,450

Outstanding debt, excluding acquired senior notes
 
1,046,170

Equity-based awards
 
18,411

Total consideration
 
$
2,323,031

 
 
 
Fair value of assets acquired and liabilities assumed:
 
 
Cash and cash equivalents
 
$
25,102

Accounts receivable
 
552,381

Inventories
 
1,156,781

Prepaid expenses and other current assets
 
112,449

Current assets of discontinued operations
 
196,848

Property, plant and equipment
 
1,207,115

Goodwill
 
376,181

Intangible assets
 
918,103

Other assets
 
77,008

Long-term assets of discontinued operations
 
433,839

Accounts payable
 
(974,252
)
Current portion of long-term debt and finance lease obligations
 
(579,565
)
Other current liabilities
 
(331,693
)
Current liabilities of discontinued operations
 
(148,763
)
Long-term debt
 
(34,355
)
Long-term finance lease obligations
 
(103,289
)
Pension and other postretirement benefit obligations
 
(234,324
)
Deferred income taxes
 
(18,254
)
Other long-term liabilities
 
(308,516
)
Long-term liabilities of discontinued operations
 
(1,398
)
Noncontrolling interests
 
1,633

Total consideration
 
2,323,031

Less: Cash and cash equivalents(1)
 
(30,596
)
Total consideration, net of cash and cash equivalents acquired
 
$
2,292,435


(1)
Includes cash and cash equivalents acquired attributable to continuing operations and discontinued operations.

Goodwill represents the future economic benefits arising largely from the synergies expected from combining the operations of the Company and Supervalu that could not be individually identified and separately recognized. A substantial portion of goodwill is deductible for income tax purposes. Goodwill from the acquisition was attributed to the Company’s Supervalu Wholesale reporting unit and the legacy Company Wholesale reporting unit, which in the first quarter of fiscal 2020 was reorganized into a single U.S. Wholesale reporting unit, as discussed further in Note 6—Goodwill and Intangible Assets. No goodwill was attributed to the Company’s Retail reporting unit within discontinued operations.

During the first quarter of fiscal 2020, the Company finalized its preliminary fair value estimates of its net assets, primarily by completing income tax returns and reviews of carrying values of other assets and liabilities. There were no material changes to preliminary amounts previously reported.


13


The following table summarizes the identifiable intangible assets and liabilities recorded based on final valuations. The identifiable intangible assets are expected to be amortized on a straight-line basis over the estimated useful lives indicated. The fair value of identifiable intangible assets acquired was determined using income approaches. Significant assumptions utilized in the income approach were based on Company-specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance.
 
 
 
Final Acquisition Date Fair Values
(in thousands)
Estimated Useful Life
 
Continuing Operations
 
Discontinued Operations
Customer relationship assets
10–17 years
 
$
810,000

 
$

Favorable operating leases
1-19 years
 
21,629

 

Leases in place
1-8 years
 
10,474

 

Tradenames
2-9 years
 
66,000

 
17,000

Pharmacy prescription files
5-7 years
 

 
45,900

Non-compete agreement
2 years
 
10,000

 

Unfavorable operating leases
1-12 years
 
(21,754
)
 

Total
 
 
$
896,349

 
$
62,900

The Company incurred acquisition-related costs in conjunction with the Supervalu acquisition, which are quantified in Note 5—Restructuring, Acquisition and Integration Related Expenses.

The accompanying Condensed Consolidated Statements of Operations include the results of operations of Supervalu from October 22, 2018. Supervalu’s net sales from discontinued operations for this time period are reported in Note 17—Discontinued Operations.

The following table presents unaudited supplemental pro forma consolidated Net sales and Net loss from continuing operations based on the Company’s historical reporting periods as if the acquisition of Supervalu had occurred as of July 30, 2017:
 
 
13-Week Period Ended
(in thousands, except per share data)
 
October 27, 2018(1)
 
October 28, 2017(2)
Net sales
 
$
5,984,970

 
$
5,910,484

Net loss from continuing operations
 
$
(47,893
)
 
$
(53,367
)
Basic net loss continuing operations per share
 
$
(0.95
)
 
$
(1.05
)
Diluted net loss from continuing operations per share
 
$
(0.95
)
 
$
(1.05
)
(1)
Includes 12 weeks of pro forma Supervalu results for the period ended September 8, 2018.
(2)
Includes 13 weeks of pro forma Supervalu results for the period ended September 17, 2017 and 13 weeks of pro forma Associated Grocers of Florida, Inc. results for the period ended August 5, 2017, which was acquired by Supervalu on December 8, 2017.

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

NOTE 5—RESTRUCTURING, ACQUISITION AND INTEGRATION RELATED EXPENSES

Restructuring, acquisition and integration related expenses incurred were as follows:
 
13-Week Period Ended
(in thousands)
November 2, 2019
 
October 27, 2018
2019 SUPERVALU INC. restructuring expenses
$
1,837

 
$
36,069

Acquisition and integration costs
9,294

 
31,935

Closed property charges and costs
3,119

 

Total
$
14,250

 
$
68,004




14



Restructuring Programs

The following is a summary of the current period activity within restructuring reserves by program included in the Condensed Consolidated Balance Sheets, primarily within Accrued compensation and benefits for severance and other employee separation costs and related tax payments.
(in thousands)
2019 SUPERVALU INC.
 
2018 Earth Origins Market
 
2017 Cost Saving and Efficiency Initiatives
 
Total
Balances at August 3, 2019
$
11,857

 
$
383

 
701

 
$
12,941

Restructuring program charge
1,837

 

 

 
1,837

Cash payments
(7,078
)
 

 

 
(7,078
)
Balances at November 2, 2019
$
6,616

 
$
383

 
$
701

 
$
7,700

 
 
 
 
 
 
 
 
Cumulative program charges incurred from inception to date
$
76,251

 
$
2,219

 
$
6,864

 
$
85,334



2019 SUPERVALU INC.

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

NOTE 6—GOODWILL AND INTANGIBLE ASSETS

The Company accounts for acquired businesses using the purchase method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the acquisition date at their respective estimated fair values. Goodwill represents the excess acquisition cost over the fair value of net assets acquired in a business combination. Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that generated the goodwill. The Company has five goodwill reporting units, two of which represent separate operating segments and are aggregated within the Wholesale reportable segment (U.S. Wholesale and Canada Wholesale), two of which are separate operating segments (Woodstock Farms and Blue Marble Brands) that do not meet the criteria for being disclosed as separate reportable segments, and a single retail reporting unit, which is included within discontinued operations. The Canada operating segment, which is aggregated with Wholesale, would not meet the quantitative thresholds for separate reporting if it did not meet the aggregation criteria. The composition of goodwill reporting units is evaluated for events or changes in circumstances indicating a goodwill reporting unit has changed. Relative fair value allocations are performed when components of an aggregated goodwill reporting unit become separate reporting units or move from one reporting unit to another.

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

Supervalu Acquisition Goodwill

In conjunction with the acquisition of Supervalu, goodwill resulting from the acquisition was assigned to the previous Supervalu Wholesale reporting unit and the previous legacy Company Wholesale reporting unit, as both of these reporting units were expected to benefit from the synergies of the business combination. The assignment was based on the relative synergistic value estimated as of the acquisition date. This systematic approach utilized the relative cash flow contributions and value created from the acquisition to each reporting unit on a stand-alone basis. As of the acquisition date, approximately $80.9 million was attributed to the legacy Company Wholesale reporting unit.


15



As discussed in Note 7—Goodwill and Intangible Assets in the Consolidated Financial Statements of the Annual Report, the Company impaired all goodwill attributed to the Supervalu Wholesale reporting unit prior to the finalization of its purchase accounting within the opening balance sheet. In the first quarter of fiscal 2020, as discussed further in Note 4—Acquisitions the Company finalized purchase accounting and the opening balance sheet related to the Supervalu acquisition. Adjustments to the opening balance sheet goodwill in the first quarter of fiscal 2020, resulted in an additional goodwill impairment charge of $2.5 million.

Fiscal 2020 Goodwill Impairment Review

During the first quarter of fiscal 2020, the Company changed its management structure and internal financial reporting to combine the Supervalu Wholesale reporting unit and the legacy Company Wholesale reporting unit into one U.S. Wholesale reporting unit, and experienced a further sustained decline in market capitalization and enterprise value. As a result of the change in reporting units and the sustained decline in market capitalization and enterprise value, the Company performed an interim quantitative impairment review of goodwill for the Wholesale reporting unit, which included a determination of the fair value of all reporting units.

The Company estimated the fair values of all reporting units using both the market approach, applying a multiple of earnings based on observable multiples for guideline publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit. The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities. The rates used to discount projected future cash flows under the income approach reflect a weighted average cost of capital of 8.5%, which considered observable data about guideline publicly traded companies, an estimated market participant’s expectations about capital structure and risk premiums, including those reflected in the Company’s market capitalization. The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling to its enterprise value and market capitalization. Based on this analysis, the Company determined that the carrying value of its U.S. Wholesale reporting unit exceeded its fair value by an amount that exceeded its assigned goodwill. As a result, the Company recorded a goodwill impairment charge of $421.5 million in the first quarter of fiscal 2020. The goodwill impairment charge is reflected in Goodwill and asset impairment charges in the Condensed Consolidated Statements of Operations. The goodwill impairment charge reflects the impairment of all of the U.S. Wholesale’s reporting unit goodwill.

Goodwill and Intangible Assets Changes

Changes in the carrying value of Goodwill by reportable segment that have goodwill consisted of the following:
(in thousands)
Wholesale
 
Other
 
Total
Goodwill as of August 3, 2019
$
432,103

(1) 
$
10,153

(2) 
$
442,256

Goodwill adjustment for prior fiscal year business combinations
1,424

 

 
1,424

Impairment charges
(423,712
)
 
(293
)
 
(424,005
)
Change in foreign exchange rates
116

 

 
116

Goodwill as of November 2, 2019
$
9,931

(1) 
$
9,860

(2) 
$
19,791


(1)
Amounts are net of accumulated goodwill impairment charges of $292.8 million and $716.5 million as of August 3, 2019 and November 2, 2019, respectively.
(2)
Amounts are net of accumulated goodwill impairment charges of $9.3 million and $9.6 million as of August 3, 2019 and November 2, 2019.


16



Identifiable intangible assets consisted of the following:
 
November 2, 2019
 
August 3, 2019
(in thousands)
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortizing intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
1,008,103

 
$
127,906

 
$
880,197

 
$
1,007,089

 
$
111,940

 
$
895,149

Non-compete agreements
12,900

 
7,571

 
5,329

 
12,900

 
6,237

 
6,663

Operating lease intangibles
11,748

 
2,451

 
9,297

 
32,103

 
2,209

 
29,894

Trademarks and tradenames
67,700

 
18,750

 
48,950

 
67,700

 
14,161

 
53,539

Total amortizing intangible assets
1,100,451

 
156,678

 
943,773

 
1,119,792

 
134,547

 
985,245

Indefinite lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trademarks and tradenames
55,813

 

 
55,813

 
55,813

 

 
55,813

Intangible assets, net
$
1,156,264

 
$
156,678

 
$
999,586

 
$
1,175,605

 
$
134,547

 
$
1,041,058


Amortization expense was $22.1 million and $3.7 million for the 13-week periods ended November 2, 2019 and October 27, 2018, respectively. The estimated future amortization expense for each of the next five fiscal years and thereafter on definite lived intangible assets existing as of November 2, 2019 is shown below:
Fiscal Year:
(In thousands)
Remaining fiscal 2020
$
64,180

2021
71,510

2022
65,893

2023
65,842

2024
66,054

2025 and thereafter
610,294

 
$
943,773



NOTE 7—FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS

Recurring Fair Value Measurements

The following table provides the fair value hierarchy for financial assets and liabilities measured on a recurring basis:
 
 
 
 
Fair Value at November 2, 2019
(In thousands)
 
Balance Sheet Location
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Interest rate swaps designated as hedging instruments
 
Prepaid expenses and other current assets
 
$

 
$
279

 
$

Interest rate swaps designated as hedging instruments
 
Other assets
 
$

 
$
89

 
$

Mutual funds
 
Other assets
 
$
1,759

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps designated as hedging instruments
 
Accrued expenses and other current liabilities
 
$

 
$
20,645

 
$

Interest rate swaps designated as hedging instruments
 
Other long-term liabilities
 
$

 
$
61,370

 
$



17



 
 
 
 
Fair Value at August 3, 2019
(in thousands)
 
Balance Sheet Location
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Interest rate swaps designated as hedging instruments
 
Prepaid expenses and other current assets
 
$

 
$
389

 
$

Mutual funds
 
Prepaid expenses and other current assets
 
$
7

 
$

 
$

Interest rate swaps designated as hedging instruments
 
Other assets
 
$

 
$
145

 
$

Mutual funds
 
Other assets
 
1,799

 

 

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps designated as hedging instruments
 
Prepaid expenses and other current assets
 
$

 
$
16,360

 
$

Interest rate swaps designated as hedging instruments
 
Other long-term liabilities
 
$

 
$
60,737

 
$



Interest Rate Swap Contracts

The fair values of interest rate swap contracts are measured using Level 2 inputs. The interest rate swap contracts are valued using an income approach interest rate swap valuation model incorporating observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. As of November 2, 2019, a 100 basis point increase in forward LIBOR interest rates would increase the fair value of the interest rate swaps by approximately $64.9 million; a 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of the interest rate swaps by approximately $67.8 million. Refer to Note 8—Derivatives for further information on interest rate swap contracts.

Mutual Funds

Mutual fund assets consist of balances held in investments to fund certain deferred compensation plans. The fair values of mutual fund assets are based on quoted market prices of the mutual funds held by the plan at each reporting period. Mutual funds traded in active markets are classified within Level 1 of the fair value hierarchy.

Fair Value Estimates

For certain of the Company’s financial instruments including cash and cash equivalents, receivables, accounts payable, accrued vacation, compensation and benefits, and other current assets and liabilities the fair values approximate carrying amounts due to their short maturities. Notes receivable estimated fair value is determined by a discounted cash flow approach applying a market rate for similar instruments that is determined using Level 3 inputs.

The estimated fair values are based on market quotes, where available, or market values for similar instruments, using Level 2 and 3 inputs. In the table below, the carrying value of the Company’s long-term debt is net of original issue discounts and debt issuance costs.
 
 
November 2, 2019
 
August 3, 2019
(In thousands)
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Notes receivable, including current portion
 
$
36,918

 
$
37,218

 
$
46,320

 
$
45,232

Long-term debt, including current portion
 
$
3,070,456

 
$
2,812,437

 
$
2,906,483

 
$
2,730,271



Fuel Supply Agreements and Derivatives

To reduce diesel price risk, the Company has in the past, and may in the future, periodically enter in to derivative financial instruments and/or forward purchase commitments for a portion of its projected monthly diesel fuel requirements at fixed prices. As of August 3, 2019, the Company had no outstanding fuel supply agreements and derivative agreements. As of November 2, 2019, the Company’s fuel supply agreements and derivatives were immaterial.


18



Foreign Exchange Derivatives

To reduce foreign exchange risk, the Company has in the past, and may in the future, periodically enter in to derivative financial instruments for a portion of its projected monthly foreign currency requirements at fixed prices. As of November 2, 2019 and August 3, 2019, the Company’s outstanding foreign currency forward contracts were immaterial.

NOTE 8—DERIVATIVES

Management of Interest Rate Risk

The Company enters into interest rate swap contracts from time to time to mitigate its exposure to changes in market interest rates as part of its overall strategy to manage its debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates. Interest rate swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company’s interest rate swap contracts are designated as cash flow hedges at November 2, 2019. Interest rate swap contracts are reflected at their fair values in the Condensed Consolidated Balance Sheets. Refer to Note 7—Fair Value Measurements of Financial Instruments for further information on the fair value of interest rate swap contracts.


19



Details of outstanding swap contracts as of November 2, 2019, which are all pay fixed and receive floating, are as follows:
Swap Maturity
 
Notional Value (in millions)
 
Pay Fixed Rate
 
Receive Floating Rate
 
Floating Rate Reset Terms
April 29, 2021(1)
 
$
25.0

 
1.0650
%
 
One-Month LIBOR
 
Monthly
April 29, 2021(2)
 
25.0

 
0.9260
%
 
One-Month LIBOR
 
Monthly
August 15, 2022(3)
 
58.5

 
1.7950
%
 
One-Month LIBOR
 
Monthly
August 15, 2022(4)
 
39.0

 
1.7950
%
 
One-Month LIBOR
 
Monthly
October 31, 2020(5)
 
100.0

 
2.8240
%
 
One-Month LIBOR
 
Monthly
October 31, 2022(5)
 
100.0

 
2.8915
%
 
One-Month LIBOR
 
Monthly
October 31, 2023(5)
 
100.0

 
2.9210
%
 
One-Month LIBOR
 
Monthly
October 22, 2025(5)
 
50.0

 
2.9550
%
 
One-Month LIBOR
 
Monthly
March 31, 2023(6)
 
150.0

 
2.8950
%
 
One-Month LIBOR
 
Monthly
October 22, 2025(6)
 
50.0

 
2.9580
%
 
One-Month LIBOR
 
Monthly
October 22, 2025(6)
 
50.0

 
2.9590
%
 
One-Month LIBOR
 
Monthly
October 29, 2021(7)
 
100.0

 
2.8084
%
 
One-Month LIBOR
 
Monthly
September 30, 2023(7)
 
50.0

 
2.8315
%
 
One-Month LIBOR
 
Monthly
October 31, 2024(7)
 
100.0

 
2.8480
%
 
One-Month LIBOR
 
Monthly
October 31, 2022(8)
 
50.0

 
2.4678
%
 
One-Month LIBOR
 
Monthly
March 28, 2024(8)
 
100.0

 
2.4770
%
 
One-Month LIBOR
 
Monthly
October 31, 2024(8)
 
100.0

 
2.5010
%
 
One-Month LIBOR
 
Monthly
April 29, 2021(9)
 
50.0

 
2.5500
%
 
One-Month LIBOR
 
Monthly
October 31, 2022(9)
 
50.0

 
2.5255
%
 
One-Month LIBOR
 
Monthly
March 31, 2023(9)
 
50.0

 
2.5292
%
 
One-Month LIBOR
 
Monthly
March 28, 2024(9)
 
100.0

 
2.5420
%
 
One-Month LIBOR
 
Monthly
October 31, 2024(10)
 
50.0

 
2.5210
%
 
One-Month LIBOR
 
Monthly
October 22, 2025(10)
 
50.0

 
2.5558
%
 
One-Month LIBOR
 
Monthly
April 15, 2022(11)
 
100.0

 
2.3645
%
 
One-Month LIBOR
 
Monthly
December 13, 2019(12)
 
100.0

 
2.4925
%
 
One-Month LIBOR
 
Monthly
May 15, 2020(12)
 
100.0

 
2.4490
%
 
One-Month LIBOR
 
Monthly
June 30, 2021(13)
 
100.0

 
2.2520
%
 
One-Month LIBOR
 
Monthly
June 30, 2022(13)
 
100.0

 
2.2170
%
 
One-Month LIBOR
 
Monthly
June 30, 2021(14)
 
50.0

 
2.2290
%
 
One-Month LIBOR
 
Monthly
June 30, 2022(15)
 
50.0

 
2.1840
%
 
One-Month LIBOR
 
Monthly
 
 
$
2,197.5

 
 
 
 
 
 

(1)
This swap was executed on June 7, 2016 with an effective date of June 9, 2016.
(2)
This swap was executed on June 24, 2016 with an effective date of June 24, 2016.
(3)
This swap contract was executed on January 23, 2015 with an effective date of August 3, 2015. On March 31, 2015, the Company amended the original contract to reduce the beginning notional principal amount from $140 million to $84 million. The swap contract has an amortizing notional principal amount which is reduced by $1.5 million on a quarterly basis.
(4)
This swap was executed on March 31, 2015 with an effective date of August 3, 2015. The swap contract has an amortizing notional principal amount which is reduced by $1.0 million on a quarterly basis.
(5)
This swap contract was executed on October 26, 2018 with an effective date of October 26, 2018.
(6)
This swap contract was executed on November 16, 2018 with an effective date of November 16, 2018.
(7)
This swap contract was executed on November 30, 2018 with an effective date of November 30, 2018.
(8)
This swap contract was executed on January 11, 2019 with an effective date of January 11, 2019.
(9)
This swap contract was executed on January 23, 2019 with an effective date of January 23, 2019.
(10)
This swap contract was executed on January 24, 2019 with an effective date of January 24, 2019.
(11)
This swap contract was executed on March 18, 2019 with an effective date of March 21, 2019.
(12)
This swap contract was executed on March 21, 2019 with an effective date of March 21, 2019.

20



(13)
This swap contract was executed on April 2, 2019 with an effective date of April 2, 2019.
(14)