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.
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.
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.
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:
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the reclassification of
Accrued compensation and benefits
to present separately from
Accrued expenses and other current liabilities
;
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the reclassification of Notes payable balances into
Long-term debt
;
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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
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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
.
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Reclassifications of prior year amounts within the Condensed Consolidated Statements of Income include:
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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
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the combination of Interest expense and Interest income to present within
Interest expense, net
.
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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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
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.
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.
|
|
|
|
|
(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.
|
|
|
|
|
(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.
|
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
.
|
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.
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
|
|
(2)
|
$
|
362,495
|
|
|
Preliminary goodwill from current fiscal year business combinations
|
444,572
|
|
|
—
|
|
|
444,572
|
|
|
Impairment charge
|
(332,602
|
)
|
|
—
|
|
|
(332,602
|
)
|
|
Other adjustments
|
(1,952
|
)
|
|
—
|
|
|
(1,952
|
)
|
|
Change in foreign exchange rates
|
(670
|
)
|
|
—
|
|
|
(670
|
)
|
|
Goodwill as of April 27, 2019
|
$
|
461,690
|
|
(1)
|
$
|
10,153
|
|
(2)
|
$
|
471,843
|
|
|
|
|
|
(1)
|
Amounts are net of accumulated goodwill impairment charges of
$0.0 million
and
$332.6 million
as of July 28, 2018 and
April 27, 2019
, respectively.
|
|
|
|
|
(2)
|
Amounts are net of accumulated goodwill impairment charges of
$9.3 million
as of both July 28, 2018 and
April 27, 2019
.
|
Identifiable intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 27, 2019
|
|
July 28, 2018
|
|
(in thousands)
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
1,011,880
|
|
|
$
|
93,104
|
|
|
$
|
918,776
|
|
|
$
|
197,246
|
|
|
$
|
61,543
|
|
|
$
|
135,703
|
|
|
Non-compete agreements
|
11,900
|
|
|
3,229
|
|
|
8,671
|
|
|
2,900
|
|
|
1,914
|
|
|
986
|
|
|
Operating lease intangibles
|
33,099
|
|
|
905
|
|
|
32,194
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Trademarks and tradenames
|
67,700
|
|
|
11,255
|
|
|
56,445
|
|
|
1,700
|
|
|
981
|
|
|
719
|
|
|
Total amortizing intangible assets
|
1,124,579
|
|
|
108,493
|
|
|
1,016,086
|
|
|
201,846
|
|
|
64,438
|
|
|
137,408
|
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
55,812
|
|
|
—
|
|
|
55,812
|
|
|
55,801
|
|
|
—
|
|
|
55,801
|
|
|
Intangible assets, net
|
$
|
1,180,391
|
|
|
$
|
108,493
|
|
|
$
|
1,071,898
|
|
|
$
|
257,647
|
|
|
$
|
64,438
|
|
|
$
|
193,209
|
|
Amortization expense was
$19.5 million
and
$3.7 million
for the 13-week periods ended
April 27, 2019
and
April 28, 2018
, respectively, and
$44.1 million
and
$11.2 million
for the 39-week periods ended
April 27, 2019
and
April 28, 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
April 27, 2019
is shown below:
|
|
|
|
|
|
|
|
Fiscal Year:
|
(In thousands)
|
|
Remaining fiscal 2019
|
$
|
24,170
|
|
|
2020
|
84,313
|
|
|
2021
|
70,739
|
|
|
2022
|
66,880
|
|
|
2023
|
67,092
|
|
|
2024 and thereafter
|
702,892
|
|
|
|
$
|
1,016,086
|
|
8.
FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS
Recurring Fair Value Measurements
The following table provides the fair value for financial assets and liabilities under the fair value hierarchy that are measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at April 27, 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
|
|
$
|
—
|
|
|
$
|
1,826
|
|
|
$
|
—
|
|
|
Mutual funds
|
|
Prepaid expenses and other current assets
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate swaps designated as hedging instruments
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
1,143
|
|
|
$
|
—
|
|
|
Mutual funds
|
|
Other assets
|
|
$
|
1,809
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps designated as hedging instruments
|
|
Accrued expenses and other current liabilities
|
|
$
|
—
|
|
|
$
|
4,820
|
|
|
$
|
—
|
|
|
Interest rate swaps designated as hedging instruments
|
|
Other long-term liabilities
|
|
$
|
—
|
|
|
$
|
27,657
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at July 28, 2018
|
|
(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
|
|
$
|
—
|
|
|
$
|
1,459
|
|
|
$
|
—
|
|
|
Interest rate swaps designated as hedging instruments
|
|
Other assets
|
|
$
|
—
|
|
|
$
|
5,860
|
|
|
$
|
—
|
|
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
April 27, 2019
, a 100 basis point increase in forward LIBOR interest rates would increase the fair value of the interest rate swaps by approximately
$72.5 million
; a 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of the interest rate swaps by approximately
$76.1 million
. Refer to Note 9. “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. Deferred compensation liabilities consist of obligations to participants in deferred compensation plans, and are determined based on the fair value of the related deferred compensation plan investments or designated phantom investments of the plan at each reporting period.
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. The carrying amount of borrowings on the ABL Credit Facility approximates fair value as interest rates on the ABL Credit Facility approximate current market rates (Level 2 criteria).
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 value of borrowings under the Company’s Term Loan Facility, including current portion, is determined by using available market information and appropriate valuation methodologies taking into account the instruments’ interest rate, terms, maturity date and collateral, if any, in comparison to the Company’s incremental borrowing rate for similar financial instruments and are therefore deemed Level 2 inputs. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 27, 2019
|
|
July 28, 2018
|
|
(In thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Notes receivable, including current portion
|
|
$
|
48,506
|
|
|
$
|
47,326
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion and original issue discount, excluding debt issuance costs
|
|
$
|
3,108,881
|
|
|
$
|
2,930,352
|
|
|
$
|
320,000
|
|
|
$
|
320,000
|
|
9.
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
April 27, 2019
. Interest rate swap contracts are reflected at their fair values in the Condensed Consolidated Balance Sheets. Refer to Note 8. “Fair Value Measurements of Financial Instruments” for further information on the fair value of interest rate swap contracts.
Details of outstanding swap contracts as of
April 27, 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
|
|
June 9, 2019
(1)
|
|
50.0
|
|
|
0.8725
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
April 29, 2021
(1)
|
|
25.0
|
|
|
1.0650
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
June 30, 2019
(2)
|
|
50.0
|
|
|
0.7265
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
April 29, 2021
(2)
|
|
25.0
|
|
|
0.9260
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
August 15, 2022
(3)
|
|
63.0
|
|
|
1.7950
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
August 15, 2022
(4)
|
|
42.0
|
|
|
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
|
|
|
2.5200
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
June 30, 2022
(13)
|
|
100.0
|
|
|
2.2170
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
June 30, 2021
(14)
|
|
—
|
|
|
2.2290
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
June 30, 2022
(14)
|
|
—
|
|
|
2.1840
|
%
|
|
One-Month LIBOR
|
|
Monthly
|
|
|
|
$
|
2,205.0
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On June 7, 2016, the Company entered into
two
pay fixed and receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of June 9, 2016 and expire at varied dates between June 2019 and April 2021. These interest rate swap contracts have an aggregate notional principal amount of
$75 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
0.8725%
and
1.0650%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(2)
|
On June 24, 2016, the Company entered into
two
pay fixed and receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of June 24, 2016 and expire at varied dates between June 2019 and April 2021. These interest rate swap contracts have an aggregate notional principal amount of
$75 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
0.7265%
and
0.9260%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(3)
|
On January 23, 2015, the Company entered into a pay fixed and receive floating interest rate swap contract to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreement has an effective date of August 3, 2015 and expires in August 2022. On March 31, 2015, the Company amended the original contract to reduce the beginning notional principal amount from
$140 million
to
$84 million
. The interest rate swap contract has an amortizing notional principal amount which adjusts down on a quarterly basis and requires the Company to pay interest payments during the duration of the contract at a fixed annual rate of
1.7950%
, while receiving interest for the same respective contract period at one-month LIBOR on the same notional principal amount.
|
|
|
|
|
(4)
|
On March 31, 2015, the Company entered into a pay fixed and receive floating interest rate swap contract to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreement has an effective date of August 3, 2015 and expires in August 2022. The interest rate swap contract has an amortizing notional principal amount which adjusts down on a quarterly basis and requires the Company to pay interest payments during the duration of the contract at a fixed annual rate of
1.7950%
, while receiving interest for the same respective contract period at one-month LIBOR on the same notional principal amount.
|
|
|
|
|
(5)
|
On October 26, 2018, the Company entered into
four
pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of October 26, 2018 and expire at varied dates between October 2020 and October 2025. These interest rate swap contracts have an aggregate notional principal amount of
$350 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
2.8240%
and
2.9550%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(6)
|
On November 16, 2018, the Company entered into
three
pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of November 16, 2018 and expire at varied dates between March 2023 and October 2025. These interest rate swap contracts have an aggregate notional principal amount of
$250 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
2.8950%
and
2.9590%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(7)
|
On November 30, 2018, the Company entered into
three
pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of November 30, 2018 and expire at varied dates between October 2021 and October 2024. These interest rate swap contracts have an aggregate notional principal amount of
$250 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
2.8084%
and
2.8480%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(8)
|
On January 11, 2019, the Company entered into
three
pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of January 11, 2019 and expire at varied dates between October 2022 and October 2024. These interest rate swap contracts have an aggregate notional principal amount of
$250 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
2.4678%
and
2.5010%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(9)
|
On January 23, 2019, the Company entered into
four
pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of January 23, 2019 and expire at varied dates between April 2021 and March 2024. These interest rate swap contracts have an aggregate notional principal amount of
$250 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
2.5255%
and
2.5500%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(10)
|
On January 24, 2019, the Company entered into
two
pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of January 24, 2019 and expire at varied dates between October 2024 and October 2025. These interest rate swap contracts have an aggregate notional principal amount of
$100 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
2.5210%
and
2.5558%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(11)
|
On March 18, 2019, the Company entered into a pay fixed and receive floating interest rate swap contract to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreement has an effective date of March 21, 2019 and expires in April 2022. The interest rate swap contract has an aggregate notional principal amount of
$100 million
and requires the Company to pay interest payments during the duration of the contract at a fixed annual rate of
2.3645%
, while receiving interest for the same respective contract period at one-month LIBOR on the same aggregate notional principal amount.
|
|
|
|
|
(12)
|
On March 21, 2019, the Company entered into
two
pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of March 21, 2019 and expire at varied dates between December 2019 and May 2020. These interest rate swap contracts have an aggregate notional principal amount of
$200 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
2.4490%
and
2.4925%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(13)
|
On April 2, 2019, the Company entered into
two
pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of April 2, 2019 and expire at varied dates between June 2021 and June 2022. These interest rate swap contracts have an aggregate notional principal amount of
$200 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
2.2170%
and
2.2520%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
|
|
|
|
(14)
|
On April 2, 2019, the Company entered into
two
pay fixed receive floating interest rate swap contracts to effectively fix the underlying variability in expected interest payment cash outflows on its LIBOR based debt. The agreements have an effective date of June 10, 2019 and June 28, 2019 and expire at varied dates between June 2021 and June 2022. These interest rate swap contracts have an aggregate notional principal amount of
$100 million
and require the Company to pay interest payments during the duration of the respective contracts at fixed annual rates between
2.1840%
and
2.2290%
, while receiving interest for the same respective contract periods at one-month LIBOR on the same aggregate notional principal amounts.
|
The Company performs an initial quantitative assessment of hedge effectiveness using the “Hypothetical Derivative Method” in the period in which the hedging transaction is entered. Under this method, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. In future reporting periods, the Company performs a qualitative analysis for quarterly prospective and retrospective assessments of hedge effectiveness. The Company also monitors the risk of counterparty default on an ongoing basis and noted that the counterparties are reputable financial institutions. The entire change in the fair value of the derivative is initially reported in Other comprehensive income (outside of earnings) and subsequently reclassified to earnings in interest expense when the hedged transactions affect earnings.
The location and amount of gains or losses recognized in the Condensed Consolidated Statements of Income for interest rate swap contracts for each of the periods, presented on a pretax basis, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
39-Week Period Ended
|
|
|
|
April 27, 2019
|
|
April 28, 2018
|
|
April 27, 2019
|
|
April 28, 2018
|
|
(In thousands)
|
|
Interest Expense, net
|
|
Interest Expense, net
|
|
Interest Expense, net
|
|
Interest Expense, net
|
|
Total amounts of expense line items presented in the consolidated statements of income in which the effects of cash flow hedges are recorded
|
|
$
|
54,917
|
|
|
$
|
4,347
|
|
|
$
|
121,149
|
|
|
$
|
12,060
|
|
|
Gain or (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
Gain or (loss) reclassified from comprehensive income into income
|
|
$
|
15
|
|
|
$
|
287
|
|
|
$
|
458
|
|
|
$
|
338
|
|
|
Gain or (loss) on interest rate swap contracts not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Gain or (loss) recognized as interest expense
|
|
$
|
51
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
10.
TREASURY STOCK
On October 6, 2017, the Company announced that its Board of Directors authorized a share repurchase program for up to
$200.0 million
of the Company’s outstanding common stock. The repurchase program is scheduled to expire upon the Company’s repurchase of shares of the Company’s common stock having an aggregate purchase price of
$200.0 million
. Repurchases will be made in accordance with applicable securities laws from time to time in the open market, through privately negotiated transactions, or otherwise. The Company may also implement all or part of the repurchase program pursuant to a plan or plans meeting the conditions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
The Company records the repurchase of shares of common stock at cost based on the settlement date of the transaction. These shares are classified as treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares. The Company repurchased
614,660
shares of its common stock at an aggregate cost of
$24.2 million
in the fiscal year ended July 28, 2018. The Company did
no
t purchase any shares of the Company’s common stock in the
39-week period ended
April 27, 2019
.
11.
COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Comprehensive income (loss) is reported in the Condensed Consolidated Statements of Comprehensive Income. Comprehensive income includes all changes in stockholders’ equity during the reporting period, other than those resulting from investments by and distributions to stockholders. Our comprehensive income is calculated as net earnings (loss) including noncontrolling interests, plus or minus adjustments for foreign currency translation, and changes in the fair value of cash flow hedges, net of tax, less comprehensive income attributable to noncontrolling interests.
Accumulated other comprehensive loss represents the cumulative balance of other comprehensive (loss) income, net of tax, as of the end of the reporting period and relates to foreign current translation adjustments, net of tax, and unrealized gains or losses on cash flow hedges, net of tax.
Changes in Accumulated other comprehensive loss by component for
39-week period ended April 27, 2019
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Foreign Currency
|
|
Swap Agreements
|
|
Total
|
|
Accumulated other comprehensive (loss) income at July 28, 2018, net of tax
|
$
|
(19,053
|
)
|
|
$
|
4,874
|
|
|
$
|
(14,179
|
)
|
|
Other comprehensive loss before reclassifications
|
(2,308
|
)
|
|
(26,545
|
)
|
|
(28,853
|
)
|
|
Amortization of cash flow hedge
|
—
|
|
|
(353
|
)
|
|
(353
|
)
|
|
Net current period Other comprehensive loss
|
(2,308
|
)
|
|
(26,898
|
)
|
|
(29,206
|
)
|
|
Accumulated other comprehensive loss at April 27, 2019, net of tax
|
$
|
(21,361
|
)
|
|
$
|
(22,024
|
)
|
|
$
|
(43,385
|
)
|
Changes in Accumulated other comprehensive loss by component for
39-week period ended April 28, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Foreign Currency
|
|
Swap Agreements
|
|
Total
|
|
Accumulated other comprehensive (loss) income at July 27, 2017, net of tax
|
$
|
(15,262
|
)
|
|
$
|
1,299
|
|
|
(13,963
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(2,320
|
)
|
|
3,918
|
|
|
1,598
|
|
|
Amortization of cash flow hedge
|
—
|
|
|
(269
|
)
|
|
(269
|
)
|
|
Net current period Other comprehensive (loss) income
|
(2,320
|
)
|
|
3,649
|
|
|
1,329
|
|
|
Accumulated other comprehensive (loss) income at April 28, 2018, net of tax
|
$
|
(17,582
|
)
|
|
$
|
4,948
|
|
|
$
|
(12,634
|
)
|
Items reclassified out of Accumulated other comprehensive loss had the following impact on the Condensed Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
39-Week Period Ended
|
|
Affected Line Item on the Condensed Consolidated Statements of Income
|
|
(in thousands)
|
April 27,
2019
|
|
April 28,
2018
|
|
April 27,
2019
|
|
April 28,
2018
|
|
|
Swap agreements:
|
|
|
|
|
|
|
|
|
|
|
Reclassification of cash flow hedge
|
$
|
15
|
|
|
$
|
287
|
|
|
$
|
458
|
|
|
$
|
338
|
|
|
Interest expense, net
|
|
Income tax (benefit) expense
|
(5
|
)
|
|
96
|
|
|
105
|
|
|
69
|
|
|
(Benefit) provision for income taxes
|
|
Total reclassifications, net of tax
|
$
|
20
|
|
|
$
|
191
|
|
|
$
|
353
|
|
|
$
|
269
|
|
|
|
12.
INCOME TAXES
Effective Tax Rate
Our effective income tax rate for continuing operations was
(32.4)%
compared to
33.3%
on pre-tax income for the
13-week
periods ended
April 27, 2019
and
April 28, 2018
, respectively, and
22.8%
and
20.3%
for the
39-week
periods ended
April 27, 2019
and
April 28, 2018
, respectively. The decrease in the rate for the quarter was primarily driven by purchase accounting adjustments that impacted the goodwill impairment charge adjustment that was recorded in the quarter. The Company also realized the full benefit of the reduced federal income tax rate due to tax reform during the
39-week period ended
April 27, 2019
.
The total (benefit) provision for income taxes included in the Condensed Consolidated Statements of Income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
39-Week Period Ended
|
|
(in thousands)
|
|
April 27, 2019
|
|
April 28, 2018
|
|
April 27, 2019
|
|
April 28, 2018
|
|
Continuing operations
|
|
$
|
(8,027
|
)
|
|
$
|
25,943
|
|
|
$
|
(104,091
|
)
|
|
$
|
33,831
|
|
|
Discontinued operations
|
|
7,772
|
|
|
—
|
|
|
13,759
|
|
|
—
|
|
|
Total
|
|
$
|
(255
|
)
|
|
$
|
25,943
|
|
|
$
|
(90,332
|
)
|
|
$
|
33,831
|
|
Effects of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (“TCJA”) was enacted on December 22, 2017. Given the significance of the legislation, the Securities and Exchange Commission (“SEC”) staff issued SAB 118, which allowed registrants to record provisional or estimated amounts concerning TCJA impacts during a one year “measurement period” similar to that used when accounting for business combinations. The measurement period was deemed to end when the registrant has obtained, prepared and analyzed the information necessary to finalize its accounting.
As of the current quarterly period, the Company has closed the measurement period relating to the effects of TCJA. The final amounts the Company has reported may change further only in the event of return to provision adjustments.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
39-Week Period Ended
|
|
(in thousands)
|
April 27, 2019
|
|
Unrecognized tax benefits at beginning of period
|
$
|
1,104
|
|
|
Unrecognized tax benefits assumed in a business combination
|
49,566
|
|
|
Decreases in unrecognized tax benefits due to statute expiration
|
(10,033
|
)
|
|
Unrecognized tax benefits at end of period
|
$
|
40,637
|
|
In addition, the Company has
$14 million
paid on deposit to various governmental agencies to cover the above liability. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. For the
13-week period ended April 27, 2019
, total gross interest and penalties were
$0.6 million
. For the
39-week period ended April 27, 2019
, total accrued interest and penalties was
$15.1 million
.
The Company is currently under examination in several taxing jurisdictions and remains subject to examination until the statute of limitations expires for the respective taxing jurisdiction or an agreement is reached between the taxing jurisdiction and the Company. As of
April 27, 2019
, the Company is no longer subject to federal income tax examinations for fiscal years before 2015 and in most states is no longer subject to state income tax examinations for fiscal years before 2008 and 2014 for Supervalu and United Natural Foods, Inc., respectively.
Based on the possibility of the closing of pending audits and appeals, or expiration of the statute of limitations, it is reasonably possible that the amount of unrecognized tax benefits will decrease by up to
$1 million
during the next 12 months.
Other
Under ASU 2016-09, the Company accounts for excess tax benefits or tax deficiencies related to share-based payments in its provision for income taxes as opposed to additional paid-in capital. The Company recognized
$1.5 million
of income tax expense related to excess tax deficiencies for share-based payments for the
39-week period ended April 27, 2019
and
$0.9 million
of income tax expense related to tax deficiencies for share-based payments for the
39-week period ended April 28, 2018
.
13.
BUSINESS SEGMENTS
The Company has
three
operating segments: legacy Company Wholesale; Supervalu Wholesale and Canada Wholesale, aggregated under the Wholesale reportable segment. In addition, the Company’s Retail operating segment is a separate reportable segment, which is primarily comprised of discontinued operations activities. The legacy Company Wholesale, Supervalu Wholesale and Canada Wholesale operating segments have similar products and services, customer channels, distribution methods and economic characteristics. The Wholesale reportable segment is engaged in the national distribution of natural, organic, specialty, and conventional grocery and non-food products, and in the provision of support services in the United States and Canada. The Company has additional operating segments that do not meet the quantitative thresholds for reportable segments and are therefore aggregated under the caption of “Other.” “Other” includes a former retail division, that engaged in the sale of natural foods and related products to the general public through retail storefronts on the east coast of the United States, a manufacturing division, which engages in the importing, roasting, packaging, and distributing of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections, the Company’s branded product lines, and the Company’s brokerage business, which markets various products on behalf of food vendors directly and exclusively to the Company’s customers. “Other” also includes certain corporate operating expenses that are not allocated to operating segments, which include, among other expenses, restructuring, acquisition, and integration related expenses, share-based compensation, and salaries, retainers, and other related expenses of certain officers and all directors. The Company allocates certain corporate Supervalu capital expenditures and identifiable assets to its business segments and retains certain depreciation expense related to those assets within “Other.” Non-operating expenses that are not allocated to the operating segments are under the caption of “Unallocated (Income)/Expenses.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Wholesale
|
|
Other
|
|
Eliminations
|
|
Unallocated (Income)/Expenses
|
|
Consolidated
|
|
13-Week Period Ended April 27, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
(1)
|
|
$
|
5,943,928
|
|
|
$
|
62,503
|
|
|
$
|
(43,811
|
)
|
|
$
|
—
|
|
|
$
|
5,962,620
|
|
|
Goodwill and asset impairment (adjustment) charges
|
|
(38,250
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(38,250
|
)
|
|
Restructuring, acquisition, and integration related expenses
|
|
—
|
|
|
19,438
|
|
|
—
|
|
|
—
|
|
|
19,438
|
|
|
Operating income (loss)
|
|
131,888
|
|
|
(60,024
|
)
|
|
(2,183
|
)
|
|
—
|
|
|
69,681
|
|
|
Total other expense, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,934
|
|
|
44,934
|
|
|
Income (loss) from continuing operations before income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,747
|
|
|
Depreciation and amortization
|
|
63,348
|
|
|
8,439
|
|
|
—
|
|
|
—
|
|
|
71,787
|
|
|
Capital expenditures
|
|
56,655
|
|
|
161
|
|
|
—
|
|
|
—
|
|
|
56,816
|
|
|
Total assets of continuing operations
|
|
6,403,512
|
|
|
423,663
|
|
|
(40,618
|
)
|
|
—
|
|
|
6,786,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended April 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,633,024
|
|
|
$
|
62,158
|
|
|
$
|
(46,303
|
)
|
|
$
|
—
|
|
|
$
|
2,648,879
|
|
|
Restructuring, acquisition, and integration related expenses
|
|
—
|
|
|
151
|
|
|
—
|
|
|
—
|
|
|
151
|
|
|
Operating income (loss)
|
|
86,633
|
|
|
(3,984
|
)
|
|
(492
|
)
|
|
—
|
|
|
82,157
|
|
|
Total other expense, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,323
|
|
|
4,323
|
|
|
Income (loss) from continuing operations before income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
77,834
|
|
|
Depreciation and amortization
|
|
21,261
|
|
|
472
|
|
|
—
|
|
|
—
|
|
|
21,733
|
|
|
Capital expenditures
|
|
13,694
|
|
|
417
|
|
|
—
|
|
|
—
|
|
|
14,111
|
|
|
Total assets of continuing operations
|
|
2,935,420
|
|
|
184,301
|
|
|
(40,875
|
)
|
|
—
|
|
|
3,078,846
|
|
|
|
|
|
(1)
|
For the
third quarter of fiscal 2019
, the Company recorded
$233.4
million within Net sales in its wholesale reportable segment attributable to discontinued operations inter-company product purchases from its Retail operating segment, which it expects will continue subsequent to the sale of certain retail banners.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Wholesale
|
|
Other
|
|
Eliminations
|
|
Unallocated (Income)/Expenses
|
|
Consolidated
|
|
39-Week Period Ended April 27, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
(1)
|
|
$
|
14,931,170
|
|
|
$
|
169,116
|
|
|
$
|
(120,304
|
)
|
|
$
|
—
|
|
|
$
|
14,979,982
|
|
|
Goodwill and asset impairment (adjustment) charges
|
|
332,621
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
332,621
|
|
|
Restructuring, acquisition, and integration related expenses
|
|
4
|
|
|
134,563
|
|
|
—
|
|
|
—
|
|
|
134,567
|
|
|
Operating income (loss)
|
|
(120,083
|
)
|
|
(233,961
|
)
|
|
(3,248
|
)
|
|
—
|
|
|
(357,292
|
)
|
|
Total other expense, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98,689
|
|
|
98,689
|
|
|
Income (loss) from continuing operations before income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(455,981
|
)
|
|
Depreciation and amortization
|
|
149,201
|
|
|
20,579
|
|
|
—
|
|
|
—
|
|
|
169,780
|
|
|
Capital expenditures
|
|
136,065
|
|
|
888
|
|
|
—
|
|
|
—
|
|
|
136,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39-Week Period Ended April 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
7,592,352
|
|
|
$
|
175,083
|
|
|
$
|
(133,000
|
)
|
|
$
|
—
|
|
|
$
|
7,634,435
|
|
|
Goodwill and asset impairment (adjustment) charges
|
|
67
|
|
|
11,175
|
|
|
—
|
|
|
—
|
|
|
11,242
|
|
|
Restructuring, acquisition, and integration related expenses
|
|
—
|
|
|
151
|
|
|
—
|
|
|
—
|
|
|
151
|
|
|
Operating income (loss)
|
|
200,530
|
|
|
(25,124
|
)
|
|
2,062
|
|
|
—
|
|
|
177,468
|
|
|
Total other expense, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,755
|
|
|
10,755
|
|
|
Income (loss) from continuing operations before income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
166,713
|
|
|
Depreciation and amortization
|
|
64,237
|
|
|
1,745
|
|
|
—
|
|
|
—
|
|
|
65,982
|
|
|
Capital expenditures
|
|
27,297
|
|
|
2,349
|
|
|
—
|
|
|
—
|
|
|
29,646
|
|
|
|
|
|
(1)
|
For the
39-week period ended April 27, 2019
, the Company recorded
$520.4 million
within Net sales in its wholesale reportable segment attributable to discontinued operations inter-company product purchases from its Retail operating segment, which it expects will continue subsequent to the sale of certain retail banners.
|
14.
SHARE-BASED AWARDS
Pursuant to the Merger Agreement, dated as of July 25, 2018, as amended, each outstanding Supervalu stock option, whether vested or unvested, that was unexercised as of immediately prior to the effective time of the Merger (“SVU Option”) was converted, effective as of the effective time of the Merger, into a stock option exercisable for shares of common stock of the Company (“Replacement Option”) in accordance with the adjustment provisions of the Supervalu stock plan pursuant to which such SVU Option was granted and the Merger Agreement, with such Replacement Option generally having the same terms and conditions as the underlying SVU Option. In addition, pursuant to the Merger Agreement, each outstanding Supervalu restricted share award, restricted stock unit award, deferred share unit award and performance share unit award (“SVU Equity Award”) was converted, effective as of the effective time of the Merger, into time-vesting awards (“Replacement Award”) with a settlement value equal to the merger consideration (
$32.50
per share) multiplied by the number of shares of Supervalu common stock subject to such SVU Equity Award, and generally upon the same terms of the SVU Equity Award including the applicable change in control termination protections. The Merger Agreement originally provided that the Replacement Awards were payable in cash, however, the Merger Agreement was amended on October 10, 2018, to provide that the Replacement Awards could be settled at the Company’s election, in cash and/or an equal value in shares of common stock of the Company.
On October 22, 2018, the Company authorized for issuance and registered on a Registration Statement on Form S-8 filed with the SEC
5,000,000
shares of common stock for issuance in order to satisfy the Replacement Options and Replacement Awards. On March 28, 2019, the Company filed a Registration Statement on Form S-3 with the SEC, which was declared effective on April 5, 2019. During the third quarter of fiscal 2019, the Company issued
259,866
shares of common stock at an average price of
$12.06
per share for
$3.1 million
of cash, of which
$1.6 million
was received subsequent to the end of the third quarter. In addition, subsequent to the end of the third quarter of fiscal 2019, the Company issued approximately
1.6 million
shares of common stock at an average market price of
$12.27
per share for
$19.3 million
of cash. Proceeds from these issuances were used to fund settlement of Replacement Award obligations.
The Replacement Awards are liability classified awards as they may ultimately be settled in cash or shares at the discretion of the employee. The Replacement Awards liabilities are expensed over the service period based on the fixed value of
$32.50
per share.
The Company recognized total share-based compensation expense of
$9.3 million
and
$27.8 million
during the
third quarter
and
39-week period ended April 27, 2019
, respectively, which included share-based compensation expense of
$4.8 million
and
$9.6 million
, respectively, for Supervalu Replacement Options and Awards related to the post-combination period, beginning on the acquisition date through
April 27, 2019
. The total income tax benefit for share-based compensation, excluding change-in-control charges, was
$2.5 million
and
$2.5 million
for the
third quarters
of fiscal
2019
and fiscal
2018
, respectively and
$7.4 million
and
$6.8 million
for the
39-week
periods ended
April 27, 2019
and
April 28, 2018
, respectively. Share-based compensation expense does not include
$32.1 million
of charges for the settlement of share-based awards recorded as part of
Restructuring, acquisition, and integration related expenses
, described in Note
5.
“Restructuring, Acquisition, and Integration Related Expenses”
of which
$23.7 million
relates to change-in-control payments. The Company recorded share-based compensation expense of
$7.9 million
and
$21.7 million
in the
third quarter
and
39-week period ended April 28, 2018
, respectively.
Supervalu Replacement Awards generally vest in
three
equal installments or cliff-vest after
three
years from the date they were originally granted by Supervalu. The Company’s other time vesting awards are typically four equal annual installments for employees and two equal installments for non-employee directors with the first installment on the date of grant and the second installment on the six-month anniversary of the grant date. As of
April 27, 2019
, there was
$60.9 million
of total unrecognized compensation cost related to outstanding share-based compensation arrangements (including stock options, restricted stock units and performance-based restricted stock units) of which
$27.7 million
relates to Supervalu Replacement Awards. Unrecognized compensation cost related to Replacement Options is de minimis. The total unrecognized compensation cost is expected to be recognized over a weighted-average period of
2.2 years
.
New Retirement Provision
During the second quarter of fiscal 2019, after reviewing retirement provisions and practices for the treatment of equity awards at comparable companies, the Compensation Committee of the Company’s Board of Directors determined to change the terms of its long-term compensation awards to executives who might consider retiring and to better assure that their awards provided an incentive to work for the long term best interests of the Company up to their termination date, and regardless of their retirement plans. Accordingly, the Compensation Committee determined that time-based vesting restricted stock units, with the exception of Replacement Awards, will continue to vest during retirement after termination of employment on the same terms as they would if the executive had not retired, but without the requirement that they remain employed. Performance share-units will be treated similarly on retirement, but subject to actual performance at the time achievement of performance objectives is measured. In addition, an executive’s equity awards granted in the year of retirement will be prorated to reflect the service period prior to the date of retirement. Retirement vesting will only be available to employees age 59 or older who voluntarily terminate employment after at least 10 years of service to the Company. As a result of these retirement provisions, the Company recorded a share-based compensation charge of approximately
$6.6 million
during the second quarter of fiscal 2019.
15.
LONG-TERM DEBT
The Company’s long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Average Interest Rate at
January 26, 2019
|
|
Maturity Year
|
|
April 27,
2019
|
|
July 28,
2018
|
|
Term Loan Facility
|
6.64%
|
|
2019-2025
|
|
$
|
1,888,800
|
|
|
$
|
—
|
|
|
ABL Credit Facility
|
4.07%
|
|
2023
|
|
1,217,100
|
|
|
—
|
|
|
Other secured loans
|
5.70%
|
|
2023
|
|
45,710
|
|
|
—
|
|
|
Former ABL Credit Facility
|
|
|
|
|
—
|
|
|
210,000
|
|
|
Former Term Loan Facility
|
|
|
|
|
—
|
|
|
110,000
|
|
|
Debt issuance costs, net
|
|
|
|
|
(57,608
|
)
|
|
(1,164
|
)
|
|
Original issue discount on debt
|
|
|
|
|
(42,729
|
)
|
|
—
|
|
|
Long-term debt, including current portion
|
|
|
|
|
$
|
3,051,273
|
|
|
$
|
318,836
|
|
|
Less: current portion of long-term debt obligations
|
|
|
|
|
(107,281
|
)
|
|
(10,000
|
)
|
|
Long-term debt
|
|
|
|
|
$
|
2,943,992
|
|
|
$
|
308,836
|
|
ABL Credit Facility
On August 30, 2018, the Company entered into a loan agreement (as amended by that certain First Amendment to Loan Agreement, dated as of October 19, 2018, and as further amended by that certain Second Amendment to Loan Agreement, dated January 24, 2019, the “ABL Loan Agreement”), by and among the Company and United Natural Foods West, Inc. (together with the Company, the “U.S. Borrowers”) and UNFI Canada, Inc. (the “Canadian Borrower” and, together with the U.S. Borrowers, the “Borrowers”), the financial institutions that are parties thereto as lenders (collectively, the “ABL Lenders”), Bank of America, N.A. as administrative agent for the ABL Lenders (the “ABL Administrative Agent”), Bank of America, N.A. (acting through its Canada branch), as Canadian agent for the ABL Lenders (the “Canadian Agent”), and the other parties thereto.
The ABL Loan Agreement provides for an asset-based revolving credit facility (the “ABL Credit Facility” and the loans thereunder, the “ABL Loans”), of which up to (i)
$2,050.0 million
is available to the U.S. Borrowers and (ii)
$50.0 million
is available to the Canadian Borrower. The ABL Loan Agreement also provides for (i) a
$125.0 million
sublimit of availability for letters of credit of which there is a further
$5.0 million
sublimit for the Canadian Borrower, and (ii) a
$100.0 million
sublimit for short-term borrowings on a swingline basis of which there is a further
$3.5 million
sublimit for the Canadian Borrower. The ABL Credit Facility replaced the Company’s
$900.0 million
prior asset-based revolving credit facility (the “Former ABL Credit Facility”), and
$1,475.0 million
of proceeds from the ABL Credit Facility were drawn on the Closing Date to finance the Supervalu acquisition and related transaction costs on the Closing Date.
Under the ABL Loan Agreement, the Borrowers may, at their option, increase the aggregate amount of the ABL Credit Facility in an amount of up to
$600.0 million
without the consent of any ABL Lenders not participating in such increase, subject to certain customary conditions and applicable lenders committing to provide the increase in funding. There is no assurance that additional funding would be available.
The Borrowers’ obligations under the ABL Credit Facility are guaranteed by most of the Company’s wholly-owned subsidiaries who are not also Borrowers (collectively, the “ABL Guarantors”), subject to customary exceptions and limitations. The Borrowers’ obligations under the ABL Credit Facility and the ABL Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the Borrowers’ and ABL Guarantors’ accounts receivable, inventory and certain other assets arising therefrom or related thereto (including substantially all of their deposit accounts, collectively, the “ABL Assets”) and (ii) a second-priority lien on all of the Borrowers’ and ABL Guarantors’ assets that do not constitute ABL Assets, in each case, subject to customary exceptions and limitations.
Availability under the ABL Credit Facility is subject to a borrowing base (the “Borrowing Base”), which is based on
90%
of eligible accounts receivable, plus
90%
of eligible credit card receivables, plus
90%
of the net orderly liquidation value of eligible inventory, plus
90%
of eligible pharmacy receivables, plus certain pharmacy scripts availability of the Borrowers, after adjusting for customary reserves. The aggregate amount of the ABL Loans made and letters of credit issued under the ABL Credit Facility shall at no time exceed the lesser of the aggregate commitments under the ABL Credit Facility (currently
$2,100.0 million
or, if increased at the Borrowers’ option as described above, up to
$2,700.0 million
) or the Borrowing Base. To the extent that the Borrowers’ Borrowing Base declines, the availability under the ABL Credit Facility may decrease below
$2,100.0 million
.
As of
April 27, 2019
, the U.S. Borrowers’ Borrowing Base, net of
$93.4 million
of reserves, was
$2,149.0 million
, which exceeds the
$2,050.0 million
limit of availability to the U.S. Borrowers under the ABL Credit Facility. As of
April 27, 2019
, the Canadian Borrower’s Borrowing Base, net of
$3.6 million
of reserves, was
$39.0 million
, resulting in total Borrowing Base of
$2,089.0 million
supporting the ABL Loans. U.S. Borrowers’ had
$1,217.1 million
of ABL Loans and Canadian Borrower’s had no ABL Loans as of
April 27, 2019
, which are presented net of debt issuance costs of
$13.5 million
and are included in Long-term debt in the Condensed Consolidated Balance Sheets. As of
April 27, 2019
, the Company had
$80.6 million
in letters of credit outstanding under the ABL Credit Facility. The Company’s resulting remaining availability under the ABL Credit Facility was
$791.4 million
as of
April 27, 2019
.
The borrowings of the U.S. Borrowers under the ABL Credit Facility bear interest at rates that, at the U.S. Borrowers’ option, can be either: (i) a base rate and an applicable margin, or (ii) a LIBOR rate and an applicable margin. As of
April 27, 2019
, the applicable margin for base rate loans was
0.50%
, and the initial applicable margin for LIBOR loans was
1.50%
. The borrowings of the Canadian Borrower under the ABL Credit Facility bear interest at rates that, at the Canadian Borrower’s option, can be either: (i) prime rate and an applicable margin, or (ii) a Canadian dollar bankers’ acceptance equivalent rate and an applicable margin. As of
April 27, 2019
, the applicable margin for prime rate loans was
0.50%
, and the applicable margin for Canadian dollar bankers’ acceptance equivalent rate loans was
1.50%
. Commencing on the first day of the calendar month following the ABL Administrative Agent’s receipt of the Company’s aggregate availability calculation for the fiscal quarter ending on
April 27, 2019
, and quarterly thereafter, the applicable margins for borrowings by the U.S. Borrowers and Canadian Borrower will be subject to adjustment based upon the aggregate availability under the ABL Credit Facility. Unutilized commitments under the ABL Credit Facility are subject to a per annum fee of (i)
0.375%
if the average daily total outstandings were 25% or more of the aggregate commitments during the preceding Fiscal Quarter. As of
April 27, 2019
, the unutilized commitment fee was
0.25%
per annum. The Borrowers are also required to pay a letter of credit fronting fee to each letter of credit issuer equal to
0.125%
per annum of the amount available to be drawn under each such letter of credit, as well as a fee to all lenders equal to the applicable margin for LIBOR or Canadian dollar bankers’ acceptance equivalent rate loans, as applicable, times the average daily amount available to be drawn under all outstanding letters of credit.
The ABL Loan Agreement subjects the Company to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) of at least
1.0
to
1.0
calculated at the end of each of our fiscal quarters on a rolling
four
quarter basis when the adjusted aggregate availability (as defined in the ABL Loan Agreement) is less than the greater of (i)
$235.0 million
and (ii)
10%
of the aggregate borrowing base. We were not subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement during the
third quarter
of fiscal
2019
.
The assets included in the Condensed Consolidated Balance Sheets securing the outstanding borrowings under the ABL Credit Facility on a first-priority basis, and the unused available credit and fees under the ABL Credit Facility, were as follows:
|
|
|
|
|
|
|
|
Assets securing the ABL Credit Facility (in thousands)
(1)
:
|
April 27, 2019
|
|
Certain inventory assets included in Inventories and Current assets of discontinued operations
|
$
|
2,276,895
|
|
|
Certain receivables included in Receivables and Current assets of discontinued operations
|
$
|
917,296
|
|
|
|
|
|
(1)
|
The ABL Credit Facility is also secured by all of the Company’s pharmacy scripts, which are included in Long-term assets of discontinued operations in the Condensed Consolidated Balance Sheets as of
April 27, 2019
.
|
|
|
|
|
|
|
|
|
Unused available credit and fees under the ABL Credit Facility (in thousands, except percentages):
|
April 27, 2019
|
|
Outstanding letters of credit
|
$
|
80,606
|
|
|
Letter of credit fees
|
1.625
|
%
|
|
Unused available credit
|
$
|
791,352
|
|
|
Unused facility fees
|
0.25
|
%
|
Term Loan Facility
On August 14, 2014, the Company and certain of its subsidiaries entered into a real estate-backed term loan agreement (as amended by the First Amendment Agreement, dated April 29, 2016, and the Second Amendment Agreement, dated September 1, 2016, the “Former Term Loan Agreement”). The Former Term Loan Agreement provided for secured first lien term loans in an aggregate amount of
$150.0 million
(the “Former Term Loan Facility”). Proceeds from this Former Term Loan Facility were used to pay down borrowings under the Former ABL Credit Facility.
Borrowings under the Former Term Loan Facility bore interest at rates that, at the Company’s option, could have been either: (1) a base rate and a margin of
0.75%
; or, (2) a LIBOR rate and a margin of
1.75%
. The borrowers’ obligations under the Former Term Loan Facility were secured by certain parcels of the Company’s real property.
The Former Term Loan Agreement included financial covenants that required (i) the ratio of the Company’s consolidated EBITDA (as defined in the Former Term Loan Agreement) minus the unfinanced portion of Capital Expenditures (as defined in the Former Term Loan Agreement) to the Company’s consolidated Fixed Charges (as defined in the Former Term Loan Agreement) to be at least
1.20
to 1.00 as of the end of any period of
four
fiscal quarters, (ii) the ratio of the Company’s Consolidated Funded Debt (as defined in the Former Term Loan Agreement) to the Company’s EBITDA for the
four
fiscal quarters most recently ended to be not more than
3.00
to 1.00 as of the end of any fiscal quarter and (iii) the ratio, expressed as a percentage, of the Company’s outstanding borrowings under the Former Term Loan Facility), divided by the Mortgaged Property Value (as defined in the Former Term Loan Agreement) to be not more than
75%
at any time.
On August 22, 2018, the Company notified its lenders of its intention to prepay its borrowings outstanding under its Former Term Loan Facility on October 1, 2018. The Former Term Loan Facility was previously scheduled to terminate on the earlier of (a) August 14, 2022 and (b) the date that is ninety days prior to the termination date of the Former ABL Loan Agreement. On October 1, 2018, the Company prepaid the
$110.0 million
of borrowings outstanding under the Former Term Loan Agreement utilizing borrowings under its Former ABL Credit Facility and terminated the Former Term Loan Agreement. In connection with the prepayment, the Company incurred a loss on debt extinguishment related to unamortized debt issuance costs of
$0.4 million
, which was recorded as Other expense in the Condensed Consolidated Statements of Income for the first quarter of fiscal 2019.
On the Closing Date, the Company entered into a new term loan agreement (the “Term Loan Agreement”), by and among the Company and Supervalu (collectively, the “Term Borrowers”), the financial institutions that are parties thereto as lenders (collectively, the “ Term Lenders”), Goldman Sachs Bank USA, as administrative agent for the Lenders (the “TLB Administrative Agent”), and the other parties thereto. The Term Loan Agreement provides for senior secured first lien term loans in an aggregate principal amount of
$1,950.0 million
, consisting of a
$1,800.0 million
seven
-year tranche (the “Term B Tranche”) and a
$150.0 million
364
-day tranche (the “
364
-day Tranche” and, together with the Term B Tranche, collectively, the “Term Loan Facility”). The entire amount of the net proceeds from the Term Loan Facility were used to finance the Supervalu acquisition and related transaction costs.
The loans under the Term B Tranche will be payable in full on October 22, 2025; provided that if on or prior to December 31, 2024 that certain Agreement for Distribution of Products, dated as of October 30, 2015, by and between Whole Foods Market Distribution, Inc., a Delaware corporation, and the Company has not been extended until at least October 23, 2025 on terms not materially less favorable, taken as a whole, to the Company and its subsidiaries than those in effect on the date of the Acquisition, then the loans under the Term B Tranche will be payable in full on December 31, 2024. The loans under the
364
-day Tranche will be payable in full on October 21, 2019.
Under the Term Loan Agreement, the Term Borrowers may, at their option, increase the amount of the Term B Tranche, add one or more additional tranches of term loans or add one or more additional tranches of revolving credit commitments, without the consent of any Term Lenders not participating in such additional borrowings, up to an aggregate amount of
$656.25 million
plus additional amounts based on satisfaction of certain leverage ratio tests, subject to certain customary conditions and applicable lenders committing to provide the additional funding. There can be no assurance that additional funding would be available.
The Term Borrowers’ obligations under the Term Loan Facility are guaranteed by most of the Company’s wholly-owned domestic subsidiaries who are not also Term Borrowers (collectively, the “Term Guarantors”), subject to customary exceptions and limitations, including an exception for immaterial subsidiaries designated by the Company from time to time. The Term Borrowers’ obligations under the Term Loan Facility and the Term Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on substantially all of the Term Borrowers’ and the Term Guarantors’ assets other than the ABL Assets and (ii) a second-priority lien on substantially all of the Term Borrowers’ and the Term Guarantors’ ABL Assets, in each case, subject to customary exceptions and limitations, including an exception for owned real property with net book values of less than
$10.0 million
. As of
April 27, 2019
, there was
$556.8 million
of owned real property pledged as collateral that was included in Property and equipment, net in the Condensed Consolidated Balance Sheets.
The loans under the Term Loan Facility may be voluntarily prepaid in certain minimum principal amounts, subject to the payment of breakage or other similar costs. Pursuant to the Term Loan Facility, we must, subject to certain exceptions and customary reinvestment rights, apply
100 percent
of Net Cash Proceeds (as defined in the Term Loan Agreement) from certain types of asset sales to prepay the loans outstanding under the Term Loan Facility. Commencing with the fiscal year ending August 1, 2020, we must also prepay loans outstanding under the Term Loan Facility no later than 130 days after the fiscal year end in an aggregate principal amount equal to a specified percentage (which percentage ranges from
0
to
75
percent depending on our Consolidated First Lien Net Leverage Ratio (as defined in the Term Loan Agreement) as of the last day of such fiscal year) of Excess Cash Flow (as defined in the Term Loan Agreement) in excess of
$10 million
for the fiscal year then ended, minus any voluntary prepayments of the loans under the Term Loan Facility, the ABL Credit Facility (to the extent they permanently reduce commitments under the ABL Facility) and certain other indebtedness made during such fiscal year.
The borrowings under the Term Loan Facility bear interest at rates that, at the Term Borrowers’ option, can be either: (i) a base rate and a margin of (A) with respect to the Term B Tranche,
3.25%
and (B), with respect to the 364-day Tranche,
1.00%
, or (ii) a LIBOR rate and a margin of (A) with respect to the Term B Tranche,
4.25%
and (B), with respect to the 364-day Tranche,
2.00%
; provided that the LIBOR rate shall never be less than
0.0%
.
The Term Loan Agreement does not include any financial maintenance covenants.
In the second quarter of fiscal 2019, the Company made mandatory prepayments of
$47.0 million
on the 364-day Tranche with asset sale proceeds. In connection with the prepayment, the Company incurred a loss on debt extinguishment related to unamortized debt issuance costs of
$1.0 million
, which was recorded as Other expense in the Condensed Consolidated Statements of Income for the second quarter of fiscal 2019.
In the third quarter of fiscal 2019, the Company made mandatory prepayments of
$8.7 million
and
$5.5 million
on the 364-day Tranche and Term B Tranche, respectively, with asset sale proceeds. In connection with the prepayments, the Company incurred a loss on debt extinguishment related to unamortized debt issuance costs and a loss on unamortized original issue discount of
$0.2 million
and
$0.1 million
, respectively, which were recorded as Interest expense, net in the Condensed Consolidated Statements of Income for the third quarter of fiscal 2019.
As of
April 27, 2019
, the Company had borrowings of
$1,794.5
million and
$94.3 million
under the Term B Tranche and 364-day Tranche, respectively, which are presented net of debt issuance costs of
$44.1 million
and an original issue discount on debt of
$42.2 million
. As of
April 27, 2019
,
$17 million
and
$94.3 million
of the Term B Tranche and 364-day Tranche, respectively, was classified as current, excluding debt issuance costs and original issue discount on debt.
Supervalu Senior Notes
On October 22, 2018, the Company delivered an irrevocable redemption notice for the remaining
$350.0 million
of
7.75%
Supervalu Senior Notes and the remaining
$180.0 million
of
6.75%
Supervalu Senior Notes assumed in conjunction with the Supervalu acquisition. In connection with the redemption notice, the Company placed
$566.4 million
on account with the trustee of the Supervalu Senior Notes to satisfy and discharge its obligations under the indenture governing the Supervalu Senior Notes. On November 21, 2018, following the required 30-day notice period, the trustee used this
$566.4 million
to extinguish the remaining principal balances, to pay the required redemption premiums and to pay accrued and unpaid interest on the redeemed Supervalu Senior Notes. As a result of the satisfaction and discharge of the indenture governing the redemption of the Supervalu Senior Notes, the Company has fully satisfied and discharged its obligations under the Supervalu Senior Notes.
16.
LEASES
On October 23, 2018, the Company received
$101.0 million
in aggregate proceeds, excluding taxes and closing costs, for the sale and leaseback of its final distribution center of
eight
distribution center sale-leaseback transactions entered into by Supervalu in April 2018. On October 26, 2018, the Company received
$48.5 million
in aggregate proceeds, excluding taxes and closing costs, for the sale and leaseback of a separate distribution center under an agreement entered into by Supervalu in March 2018, as amended. Both distribution center sale-leasebacks qualified for sale accounting, with the lease-backs being classified as operating leases.
No
gain or loss was recognized or deferred on the sale of these facilities, as these facilities were valued at their contractual sales price as of the Supervalu acquisition date.
During the second quarter of fiscal 2019, the Company closed the remaining Shop ‘n Save St. Louis-based retail stores and the dedicated distribution center, and we continue to hold the owned real estate assets related to these locations for sale. The Company recorded a closed store reserve charge of approximately
$17.1 million
in the second quarter of fiscal 2019.
In the first quarter of fiscal 2019, the Company entered into a lease for a new distribution facility in California for approximately 1.2 million square feet.
The Company leases certain of its distribution centers and leases most of its retail stores, and leases certain office facilities and equipment from third parties. Many of these leases include renewal options and, in certain instances, also include options to purchase. Rent expense, other operating lease expense and subtenant rentals all under operating leases included within Operating expenses, and subtenant rentals under operating leases with customers included within Net sales, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
39-Week Period Ended
|
|
(in thousands)
|
April 27,
2019
|
|
April 28,
2018
|
|
April 27,
2019
|
|
April 28,
2018
|
|
Minimum rent
|
56,278
|
|
|
22,186
|
|
|
$
|
146,411
|
|
|
$
|
64,180
|
|
|
Contingent rent
|
6
|
|
|
—
|
|
|
41
|
|
|
—
|
|
|
Rent expense
(1)
|
56,284
|
|
|
22,186
|
|
|
146,452
|
|
|
64,180
|
|
|
Less subtenant rentals
|
(9,165
|
)
|
|
(412
|
)
|
|
(19,184
|
)
|
|
(1,237
|
)
|
|
Total net rent expense
|
$
|
47,119
|
|
|
$
|
21,774
|
|
|
$
|
127,268
|
|
|
$
|
62,943
|
|
|
|
|
|
(1)
|
Rent expense as presented here includes
$11.6 million
in the
third quarter
of fiscal
2019
, and
$24.3 million
year-to-date in fiscal
2019
, of operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations, as we expect to remain primarily obligated under these leases.
|
Future minimum lease payments to be made by the Company or certain third parties in the case of assigned leases for noncancellable operating leases and capital leases have not been reduced for future minimum subtenant rentals under certain operating subleases, including assignments. As of
April 27, 2019
, these lease obligations consisted of following amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Obligations
|
|
Fiscal Year
|
Operating Leases
|
|
Capital Leases
|
|
Remaining fiscal 2019
|
$
|
52,497
|
|
|
$
|
15,049
|
|
|
2020
|
183,901
|
|
|
43,556
|
|
|
2021
|
160,734
|
|
|
35,259
|
|
|
2022
|
145,768
|
|
|
32,082
|
|
|
2023
|
124,538
|
|
|
28,895
|
|
|
Thereafter
|
1,021,406
|
|
|
74,433
|
|
|
Total future minimum obligations
|
$
|
1,688,844
|
|
|
229,274
|
|
|
Less interest
|
|
|
(79,944
|
)
|
|
Present value of net future minimum obligations
|
|
|
149,330
|
|
|
Less current capital lease obligations
|
|
|
(26,394
|
)
|
|
Long-term capital lease obligations
|
|
|
$
|
122,936
|
|
The Company leases certain property to third parties under operating, capital and direct financing leases, including assigned leases for which we have future minimum lease payment obligations that are included in the table above. Future minimum lease and subtenant rentals to be received under lease assignments and noncancellable operating and deferred financing income leases, under which the Company is the lessor, as of
April 27, 2019
, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Receipts
|
|
Fiscal Year
|
Operating Leases
|
|
Direct Financing Leases
|
|
Remaining fiscal 2019
|
$
|
11,068
|
|
|
$
|
161
|
|
|
2020
|
33,824
|
|
|
281
|
|
|
2021
|
27,097
|
|
|
—
|
|
|
2022
|
23,416
|
|
|
—
|
|
|
2023
|
15,887
|
|
|
—
|
|
|
Thereafter
|
32,173
|
|
|
—
|
|
|
Total minimum lease receipts
|
$
|
143,465
|
|
|
$
|
442
|
|
17.
BENEFIT PLANS
The Company acquired various pension and other post retirement benefit plans with the acquisition of Supervalu, which resulted in the revaluation of pension and other postretirement benefit plan obligations as of the acquisition date.
The Company’s employees who participate are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans. The Company’s primary defined benefit pension plan, the SUPERVALU INC. Retirement Plan, and certain supplemental executive retirement plans were closed to new participants and service crediting ended for all participants as of December 31, 2007. Pay increases were reflected in the amount of benefits accrued in these plans until December 31, 2012. Approximately one-half of the union employees participate in multiemployer retirement plans under collective bargaining agreements. The remaining either participate in plans sponsored by the Company or are not currently eligible to participate in a retirement plan. In addition to sponsoring both defined benefit and defined contribution pension plans, the Company provides healthcare and life insurance benefits for eligible retired employees under postretirement benefit plans. The Company also provide certain health and welfare benefits, including short-term and long-term disability benefits, to inactive disabled employees prior to retirement. The terms of the postretirement benefit plans vary based on employment history, age and date of retirement. For many retirees, the Company provides a fixed dollar contribution and retirees pay contributions to fund the remaining cost.
Net periodic benefit (income) cost and other changes in plan assets and benefit obligations recognized in Net periodic benefit income, excluding service cost for defined benefit pension and other postretirement benefit plans consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended April 27, 2019
|
|
39-Week Period Ended April 27, 2019
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Service cost
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
114
|
|
|
Interest cost
|
24,004
|
|
|
478
|
|
|
49,855
|
|
|
993
|
|
|
Expected return on plan assets
|
(35,416
|
)
|
|
(58
|
)
|
|
(73,555
|
)
|
|
(121
|
)
|
|
Net periodic benefit (income) cost
|
$
|
(11,412
|
)
|
|
$
|
475
|
|
|
$
|
(23,700
|
)
|
|
$
|
986
|
|
|
Contributions to benefit plans
|
$
|
(2,386
|
)
|
|
$
|
(92
|
)
|
|
$
|
(2,574
|
)
|
|
$
|
(218
|
)
|
The benefit obligation, fair value of plan assets and funded status of our defined benefit pension plans and other postretirement benefit plans assumed with the Supervalu acquisition consisted of the following as of the acquisition date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
October 22,
2018
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Benefit obligation as of October 22, 2018
|
$
|
2,499,954
|
|
|
$
|
52,276
|
|
|
Fair value of plan assets at October 22, 2018
|
2,305,020
|
|
|
11,586
|
|
|
Unfunded status at October 22, 2018
|
$
|
(194,934
|
)
|
|
$
|
(40,690
|
)
|
For the defined benefit pension plans, the accumulated benefit obligation is equal to the projected benefit obligation.
Amounts recognized in the Condensed Consolidated Balance Sheets as of the acquisition date consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
October 22,
2018
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Accrued compensation and benefits
|
$
|
1,300
|
|
|
$
|
—
|
|
|
Pension and other postretirement benefit obligations
|
193,634
|
|
|
40,690
|
|
|
Total
|
$
|
194,934
|
|
|
$
|
40,690
|
|
Assumptions
Weighted average assumptions used to determine benefit obligations and net periodic benefit cost consisted of the following:
|
|
|
|
|
|
|
October 22,
2018
|
|
Benefit obligation assumptions:
|
|
|
Discount rate
|
4.30% - 4.42%
|
The Company reviews and select the discount rate to be used in connection with measuring our pension and other postretirement benefit obligations annually. In determining the discount rate, the Company uses the yield on corporate bonds (rated AA or better) that coincides with the cash flows of the plans’ estimated benefit payouts. The model uses a yield curve approach to discount each cash flow of the liability stream at an interest rate specifically applicable to the timing of each respective cash flow. The model totals the present values of all cash flows and calculates the equivalent weighted average discount rate by imputing the singular interest rate that equates the total present value with the stream of future cash flows. This resulting weighted average discount rate is then used in evaluating the final discount rate to be used.
For those retirees whose health plans provide for variable employer contributions, the assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation before age 65 was
7.80 percent
as of October 22, 2018. The assumed healthcare cost trend rate for retirees before age 65 will decrease each year through fiscal 2026, until it reaches the ultimate trend rate of
4.50 percent
. For those retirees whose health plans provide for variable employer contributions, the assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation after age 65 was
8.70 percent
as of October 22, 2018. The assumed healthcare cost trend rate for retirees after age 65 will decrease through fiscal 2026, until it reaches the ultimate trend rate of
4.50 percent
. For those retirees whose health plans provide for a fixed employer contribution rate, a healthcare cost trend is not applicable. The healthcare cost trend rate assumption would have had the following impact on the amounts reported: a 100 basis point increase in the trend rate would have impacted the Company’s service and interest cost by approximately
$0.1 million
for the portion of the Company’s fiscal year following the transaction date; a 100 basis point decrease in the trend rate would have decreased the Company’s accumulated postretirement benefit obligation as of the Company’s acquisition date by approximately
$2.7 million
; and a 100 basis point increase would have increased our accumulated postretirement benefit obligation by approximately
$3.2 million
.
Pension Plan Assets
Pension plan assets are held in a master trust and invested in separately managed accounts and other commingled investment vehicles holding domestic and international equity securities, domestic fixed income securities and other investment classes. The Company employs a total return approach whereby a diversified mix of asset class investments is used to maximize the long-term return of plan assets for an acceptable level of risk. Alternative investments are also used to enhance risk-adjusted long-term returns while improving portfolio diversification. Risk is managed through diversification across asset classes, multiple investment manager portfolios and both general and portfolio-specific investment guidelines. Risk tolerance is established through careful consideration of the plan liabilities, plan funded status and our financial condition. This asset allocation policy mix is reviewed annually and actual versus target allocations are monitored regularly and rebalanced on an as-needed basis. Plan assets are invested using a combination of active and passive investment strategies. Passive, or “indexed” strategies, attempt to mimic rather than exceed the investment performance of a market benchmark. The plan’s active investment strategies employ multiple investment management firms. Managers within each asset class cover a range of investment styles and approaches and are combined in a way that controls for capitalization, and style biases (equities) and interest rate exposures (fixed income) versus benchmark indices. Monitoring activities to evaluate performance against targets and measure investment risk take place on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews.
The asset allocation targets and the actual allocation of pension plan assets are as follows:
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Target
|
|
October 22,
2018
|
|
Domestic equity
|
20.8
|
%
|
|
19.8
|
%
|
|
International equity
|
6.0
|
%
|
|
5.4
|
%
|
|
Private equity
|
5.0
|
%
|
|
5.0
|
%
|
|
Fixed income
|
64.8
|
%
|
|
64.2
|
%
|
|
Real estate
|
3.4
|
%
|
|
5.6
|
%
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
The following is a description of the valuation methodologies used for investments measured at fair value:
Common stock
—Valued at the closing price reported in the active market in which the individual securities are traded.
Common collective trusts
—Investments in common/collective trust funds are stated at net asset value (“NAV”) as determined by the issuer of the common/collective trust funds and is based on the fair value of the underlying investments held by the fund less its liabilities. The majority of the common/collective trust funds have a readily determinable fair value and are classified as Level 2. Other investments in common/collective trust funds determine NAV on a less frequent basis and/or have redemption restrictions. For these investments, NAV is used as a practical expedient to estimate fair value.
Corporate bonds
—Valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs.
Government securities
—Certain government securities are valued at the closing price reported in the active market in which the security is traded. Other government securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
Mortgage backed securities
—Valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar securities, the fair value is based upon an industry valuation model, which maximizes observable inputs.
Mutual funds
—Mutual funds are valued at the closing price reported in the active market in which the individual securities are traded.
Private equity and real estate partnerships
—Valued based on NAV provided by the investment manager, updated for any subsequent partnership interests’ cash flows or expected changes in fair value. The NAV is used as a practical expedient to estimate fair value.
Other
—Valued under an approach that maximizes observable inputs, such as gathering consensus data from the market participant’s best estimate of mid-market pricing for actual trades or positions held.
The valuation methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
The fair value of assets of our defined benefit pension plans and other postretirement benefits plans held in master trusts as of October 22, 2018 assumed with the Supervalu acquisition, by asset category, consisted of the following as of the acquisition date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV
|
|
Total
|
|
Common stock
|
$
|
299,234
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
299,234
|
|
|
Common collective trusts
|
—
|
|
|
739,822
|
|
|
—
|
|
|
78,230
|
|
|
818,052
|
|
|
Corporate bonds
|
—
|
|
|
368,145
|
|
|
—
|
|
|
—
|
|
|
368,145
|
|
|
Government securities
|
51,030
|
|
|
155,279
|
|
|
—
|
|
|
—
|
|
|
206,309
|
|
|
Mutual funds
|
887
|
|
|
309,582
|
|
|
—
|
|
|
—
|
|
|
310,469
|
|
|
Mortgage-backed securities
|
—
|
|
|
14,920
|
|
|
—
|
|
|
—
|
|
|
14,920
|
|
|
Other
|
52,952
|
|
|
2,193
|
|
|
—
|
|
|
—
|
|
|
55,145
|
|
|
Private equity and real estate partnerships
|
—
|
|
|
—
|
|
|
—
|
|
|
244,332
|
|
|
244,332
|
|
|
Total plan assets at fair value
|
$
|
404,103
|
|
|
$
|
1,589,941
|
|
|
$
|
—
|
|
|
$
|
322,562
|
|
|
$
|
2,316,606
|
|
Contributions
No minimum pension contributions are required to be made to the SUPERVALU Retirement Plan under the Employee Retirement Income Security Act of 1974, as amended, (“ERISA”) in fiscal 2019. The Company expects to contribute approximately
$5.0 million
to
$10.0 million
to its defined benefit pension plans and postretirement benefit plans in fiscal 2019.
The Company funds its defined benefit pension plans based on the minimum contribution required under the Code, ERISA the Pension Protection Act of 2006 and other applicable laws, as determined by our external actuarial consultant, and additional contributions made at its discretion. The Company may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable. The Company assesses the relative attractiveness of the use of cash including such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required Pension Benefit Guaranty Corporation variable rate premiums or the ability to achieve exemption from participant notices of underfunding.
Estimated Future Benefit Payments
The estimated future benefit payments to be made from our defined benefit pension and other postretirement benefit plans, which reflect expected future service, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
|
Remaining fiscal 2019
|
$
|
41,128
|
|
|
$
|
1,321
|
|
|
2020
|
158,500
|
|
|
4,800
|
|
|
2021
|
163,100
|
|
|
4,700
|
|
|
2022
|
169,900
|
|
|
4,600
|
|
|
2023
|
174,600
|
|
|
4,500
|
|
|
Years 2024-2027
|
849,500
|
|
|
19,400
|
|
Defined Contribution Plans
The Company sponsors defined contribution and profit sharing plans pursuant to Section 401(k) of the Internal Revenue Code. Employees may contribute a portion of their eligible compensation to the plans on a pre-tax basis. We match a portion of certain employee contributions by contributing cash into the investment options selected by the employees. The total amount contributed by us to the plans is determined by plan provisions or at our discretion. Total employer contribution expenses for these plans were
$20.8 million
and
$8.6 million
for the
39 weeks
of fiscal
2019
and
2018
, respectively.
Post-Employment Benefits
The Company recognizes an obligation for benefits provided to former or inactive employees. The company is self-insured for certain disability plan programs, which comprise the primary benefits paid to inactive employees prior to retirement.
Amounts recognized in the Condensed Consolidated Balance Sheets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Post-Employment Benefits
|
|
|
|
April 27,
2019
|
|
Accrued compensation and benefits
|
|
$
|
2,730
|
|
|
Other long-term liabilities
|
|
5,084
|
|
|
Total
|
|
$
|
7,814
|
|
Multiemployer Pension Plans
The Company contributes to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Trustees are appointed in equal number by employers and the unions that are parties to the relevant collective bargaining agreements.
Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP. The Company acquired multiemployer plan obligations related to continuing and discontinued operations as part of the Supervalu acquisition. The risks of participating in these multiemployer plans are different from the risks associated with single-employer plans in the following respects:
|
|
|
|
a.
|
Assets contributed to the multiemployer plan by one employer are held in trust and may be used to provide benefits to employees of other participating employers.
|
|
|
|
|
b.
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
|
|
c.
|
If we choose to stop participating in some multiemployer plans, or make market exits or closures or otherwise have participation in the plan drop below certain levels, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
The Company’s participation in these plans is outlined in the table below. The EIN-Pension Plan Number column provides the Employer Identification Number (“EIN”) and the three-digit plan number, if applicable. Unless otherwise noted, the most recent Pension Protection Act (“PPA”) zone status available in 2018 and 2017 relates to the plans’ two most recent fiscal year-ends. The zone status is based on information that we received from the plan and is annually certified by each plan’s actuary. Among other factors, red zone status plans are generally less than 65 percent funded and are considered in critical status, plans in yellow zone status are less than 80 percent funded and are considered in endangered or seriously endangered status, and green zone plans are at least 80 percent funded. The Multiemployer Pension Reform Act of 2014 (“MPRA”) created a new zone status called “critical and declining” or “Deep Red”. Plans are generally considered Deep Red if they are projected to become insolvent within 15 years. The FIP/RP Status Pending/Implemented column indicates plans for which a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented by the trustees of each plan.
The following table contains information about the Company’s significant multiemployer plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIN—Pension
Plan Number
|
|
Plan
Month/Day
End Date
|
|
Pension Protection Act Zone Status
|
|
FIP/RP Status
Pending/ Implemented
|
|
Contributions
|
|
Surcharges
Imposed
(1)
|
|
Amortization
Provisions
|
|
Pension Fund
|
2019
|
|
39-Week Period Ended April 27, 2019
|
|
|
Minneapolis Food Distributing Industry Pension Plan
(2)
|
416047047-001
|
|
12/31
|
|
Green
|
|
No
|
|
$
|
5
|
|
|
No
|
|
No
|
|
Minneapolis Retail Meat Cutters and Food Handlers Pension Fund
(3)
|
410905139-001
|
|
2/28
|
|
Red
|
|
Implemented
|
|
4
|
|
|
No
|
|
No
|
|
Minneapolis Retail Meat Cutters and Food Handlers Variable Annuity Pension Fund
(3)
|
83-2598425
|
|
12/31
|
|
N/A
|
|
N/A
|
|
1
|
|
|
N/A
|
|
N/A
|
|
Central States, Southeast and Southwest Areas Pension Fund
(2)
|
366044243-001
|
|
12/31
|
|
Deep Red
|
|
Implemented
|
|
3
|
|
|
No
|
|
Yes
|
|
UFCW Unions and Participating Employer Pension Fund
(3)
|
526117495-001
|
|
12/31
|
|
Red
|
|
Implemented
|
|
3
|
|
|
No
|
|
No
|
|
Western Conference of Teamsters Pension Plan Trust
(2)
|
916145047-001
|
|
12/31
|
|
Green
|
|
No
|
|
8
|
|
|
No
|
|
No
|
|
UFCW Unions and Employers Pension Plan
(3)
|
396069053-001
|
|
10/31
|
|
Deep Red
|
|
Implemented
|
|
1
|
|
|
Yes
|
|
Yes
|
|
All Other Multiemployer Pension Plans
(4)
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
(1)
|
PPA surcharges are 5 percent or 10 percent of eligible contributions and may not apply to all collective bargaining agreements or total contributions to each plan.
|
|
|
|
|
(2)
|
These multiemployer pension plans are associated with continuing operations.
|
|
|
|
|
(3)
|
These multiemployer pension plans are associated with discontinued operations.
|
|
|
|
|
(4)
|
All Other Multiemployer Pension Plans include 6 plans, none of which is individually significant when considering contributions to the plan, severity of the underfunded status or other factors.
|
The following table describes the expiration of the Company’s collective bargaining agreements associated with the significant multiemployer plans in which we participate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Most Significant Collective Bargaining Agreement
|
|
|
|
Pension Fund
|
Range of Collective Bargaining Agreement Expiration Dates
|
|
Total Collective Bargaining Agreements
|
|
Expiration Date
|
|
% of Associates under Collective Bargaining Agreement
(1)
|
|
Over 5% Contribution 2018
|
|
Minneapolis Food Distributing Industry Pension Plan
(2)
|
5/31/2022
|
|
1
|
|
|
5/31/2022
|
|
100.0
|
%
|
|
Yes
|
|
Minneapolis Retail Meat Cutters and Food Handlers Pension Fund
(3)
|
3/4/2023
|
|
1
|
|
|
3/4/2023
|
|
100.0
|
%
|
|
Yes
|
|
Minneapolis Retail Meat Cutters and Food Handlers Variable Annuity Pension Fund (‘VAP”)
(3)
|
3/4/2023
|
|
1
|
|
|
3/4/2023
|
|
100.0
|
%
|
|
N/A (contrib. began 1/1/2019)
|
|
Central States, Southeast and Southwest Areas Pension Fund
(2)
|
5/31/2019 - 9/14/2019
|
|
4
|
|
|
9/14/2019
|
|
42.0
|
%
|
|
No
|
|
UFCW Unions and Participating Employer Pension Fund
(3)
|
7/11/2020
|
|
2
|
|
|
7/11/2020
|
|
71.7
|
%
|
|
Yes
|
|
Western Conference of Teamsters Pension Trust
(2)
|
4/20/2019 - 4/22/2023
|
|
21
|
|
|
7/17/2021
|
|
15.8
|
%
|
|
No
|
|
UFCW Unions and Employers Pension Plan
(3)
|
4/9/2022
|
|
1
|
|
|
4/9/2022
|
|
100.0
|
%
|
|
Yes
|
|
|
|
|
(1)
|
Company participating employees in the most significant collective bargaining agreement as a percent of all Company employees participating in the respective fund.
|
|
|
|
|
(2)
|
These multiemployer pension plans are associated with continuing operations.
|
|
|
|
|
(3)
|
These multiemployer pension plans are associated with discontinued operations.
|
In connection with the closure of the Shop ‘n Save locations and the acquisition of Supervalu, we acquired a
$35.7 million
multiemployer pension plan withdrawal liability, under which payments will be made over the next 20 years and is included in Other long-term liabilities.
The Company contributed
$13.8
million and
$0.1
million in the
third quarter
s of fiscal
2019
and
2018
, respectively, and
$27.4
million and
$0.4
million in fiscal
2019
and
2018
year-to-date, respectively, to multiemployer pension plans.
Multiemployer Postretirement Benefit Plans Other than Pensions
The Company also makes contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. These plans provide medical, dental, pharmacy, vision and other ancillary benefits to active employees and retirees as determined by the trustees of each plan. The vast majority of the Company’s contributions benefit active employees and as such, may not constitute contributions to a postretirement benefit plan. However, the Company is unable to separate contribution amounts to postretirement benefit plans from contribution amounts paid to benefit active employees.
The company contributed
$42.3 million
in fiscal
2019
year-to-date to multiemployer health and welfare plans. If healthcare provisions within these plans cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating
expenses could increase in the future.
Collective Bargaining Agreements
As of
April 27, 2019
, we had approximately
19,000
employees. Approximately
5,000
employees are covered by
47
collective bargaining agreements, and negotiations are in progress for
two
initial collective bargaining agreements covering approximately
24
employees. During the first
39 weeks
of fiscal 2019,
nine
collective bargaining agreements covering approximately
800
employees were renegotiated and
five
collective bargaining agreements covering approximately
400
employees expired without their terms being renegotiated. Negotiations are expected to continue with the bargaining units representing the employees subject to those agreements. During the remainder of fiscal
2019
,
six
collective bargaining agreements covering approximately
670
employees are scheduled to expire. During fiscal 2020,
six
collective bargaining agreements covering approximately
475
employees are scheduled to expire.
18.
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Guarantees and Contingent Liabilities
We have outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of
April 27, 2019
. These guarantees were generally made to support the business growth of wholesale customers. The guarantees are generally for the entire terms of the leases, fixture financing loans or other debt obligations with remaining terms that range from less than
one
year to
eleven
years, with a weighted average remaining term of approximately
seven
years. For each guarantee issued, if the wholesale customer or other third-party defaults on a payment, we would be required to make payments under our guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the primary obligor/retailer.
We review performance risk related to our guarantee obligations based on internal measures of credit performance. As of
April 27, 2019
, the maximum amount of undiscounted payments we would be required to make in the event of default of all guarantees was
$41.9 million
(
$29.1 million
on a discounted basis). Based on the indemnification agreements, personal guarantees and results of the reviews of performance risk, we believe the likelihood that we will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations under our guarantee arrangements as the fair value has been determined to be de minimis.
We are contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. We could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of our lease assignments among third parties, and various other remedies available, we believe the likelihood that we will be required to assume a material amount of these obligations is remote. No amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations under our guarantee arrangements as the fair value has been determined to be de minimis.
We are a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise. These agreements primarily relate to our commercial contracts, service agreements, contracts entered into for the purchase and sale of stock or assets, operating leases and other real estate contracts, financial agreements, agreements to provide services to us and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligations could result in a material liability, we are not aware of any matters that are expected to result in a material liability. No amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations as the fair value has been determined to be de minimis.
In connection with Supervalu’s sale of New Albertson’s, Inc. (“NAI”) on March 21, 2013, we remain contingently liable with respect to certain self-insurance commitments and other guarantees as a result of parental guarantees issued by Supervalu with respect to the obligations of NAI that were incurred while NAI was Supervalu’s subsidiary. Based on the expected settlement of the self-insurance claims that underlie our commitments, we believe that such contingent liabilities will continue to decline. Subsequent to the sale of NAI, NAI collateralized most of these obligations with letters of credit and surety bonds to numerous state governmental authorities. Because NAI remains a primary obligor on these self-insurance and other obligations and has collateralized most of the self-insurance obligations for which we remain contingently liable, we believe that the likelihood that we will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these guarantees, as the fair value has been determined to be de minimis.
Agreements with Save-A-Lot and Onex
The Agreement and Plan of Merger pursuant to which Supervalu sold the Save-A-Lot business in 2016 (the “SAL Merger Agreement”) contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters, on the terms and subject to the limitations set forth in the SAL Merger Agreement. Similarly, Supervalu entered into a Separation Agreement (the “Separation Agreement”) with Moran Foods, LLC d/b/a Save-A-Lot (“Moran Foods”), which contains indemnification obligations and covenants related to the separation of the assets and liabilities of the Save-A-Lot business from us. We also entered into a Services Agreement with Moran Foods (the “Services Agreement”), pursuant to which we are providing Save-A-Lot various technical, human resources, finance and other operational services for a term of
five
years, subject to termination provisions that can be exercised by each party. The initial annual base charge under the Services Agreement is
$30 million
, subject to adjustments. The Services Agreement generally requires each party to indemnify the other party against third-party claims arising out of the performance of or the provision or receipt of services under the Services Agreement. While our aggregate indemnification obligations to Save-A-Lot and Onex could result in a material liability, we are not aware of any matters that are expected to result in a material liability. We have recorded the fair value of the guarantee in the Condensed Consolidated Balance Sheets within Other long-term liabilities.
Agreements with AB Acquisition LLC and Affiliates
In connection with the sale of NAI, Supervalu entered into various agreements with AB Acquisition LLC and its affiliates related to on-going operations, including a Transition Services Agreement with each of NAI and Albertson’s LLC (collectively, the “TSA”). Supervalu is now providing services to NAI and Albertson’s LLC to transition and wind down the TSA. On October 17, 2017, Supervalu entered into a letter agreement with each of Albertson’s LLC and NAI pursuant to which the parties agreed that the TSA would expire on September 21, 2018 as to those services that we are providing to Albertson’s LLC and NAI, other than with respect to certain limited transition and wind down services. The parties do not expect any of these services, or any of the transition and wind down services, to extend beyond October 2019. We also agreed that Albertson’s would no longer provide services to us after September 21, 2019.
Other Contractual Commitments
In the ordinary course of business, we enter into supply contracts to purchase products for resale and purchase, and service contracts for fixed asset and information technology commitments. These contracts typically include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. As of
April 27, 2019
, we had approximately
$0.3 million
of non-cancelable future purchase obligations.
Legal Proceedings
We are subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business. In the opinion of management, based upon currently available facts, the likelihood that the ultimate outcome of any lawsuits, claims and other proceedings will have a material adverse effect on our overall results of our operations, cash flows or financial position is remote.
In December 2008, a class action complaint was filed in the United States District Court for the Western District of Wisconsin against Supervalu alleging that a 2003 transaction between Supervalu and C&S Wholesale Grocers, Inc. (“C&S”) was a conspiracy to restrain trade and allocate markets. In the 2003 transaction, Supervalu purchased certain assets of the Fleming Corporation as part of Fleming Corporation’s bankruptcy proceedings and sold certain of Supervalu’s assets to C&S that were located in New England. Three other retailers filed similar complaints in other jurisdictions and the cases were consolidated and are proceeding in the United States District Court in Minnesota. The complaints alleged that the conspiracy was concealed and continued through the use of non-compete and non-solicitation agreements and the closing down of the distribution facilities that Supervalu and C&S purchased from each other. Plaintiffs are divided into Midwest plaintiffs and a New England plaintiff and are seeking monetary damages, injunctive relief and attorney’s fees. At a mediation on May 25, 2017, Supervalu reached a settlement with the non-arbitration Champaign distribution center class, which was the one Midwest class suing Supervalu. The court granted final approval of the settlement on November 17, 2017. The material terms of the settlement include: (1) denial of wrongdoing and liability by Supervalu; (2) release of all Midwest plaintiffs’ claims against Supervalu related to the allegations and transactions at issue in the litigation that were raised or could have been raised by the non-arbitration Champaign distribution center class; and (3) payment by Supervalu of
$9 million
. The New England plaintiff is not a party to the settlement and is pursuing its individual claims and potential class action claims against Supervalu, which at this time are determined as remote. On February 15, 2018, Supervalu filed a summary judgment and Daubert motion and the New England plaintiff filed a motion for class certification and on July 27, 2018, the District Court granted Supervalu’s motions. The New England plaintiff appealed to the 8th Circuit on August 15, 2018.
In August and November 2014,
four
class action complaints were filed against Supervalu relating to the criminal intrusion into Supervalu’s computer network that were previously announced by Supervalu in its fiscal 2015. The cases were centralized in the Federal District Court for the District of Minnesota under the caption
In Re: SUPERVALU Inc. Customer Data Security Breach Litigation
. On June 26, 2015, the plaintiffs filed a Consolidated Class Action Complaint. Supervalu filed a Motion to Dismiss the Consolidated Class Action Complaint and the hearing took place on November 3, 2015. On January 7, 2016, the District Court granted the Motion to Dismiss and dismissed the case without prejudice, holding that the plaintiffs did not have standing to sue as they had not met their burden of showing any compensable damages. On February 4, 2016, the plaintiffs filed a motion to vacate the District Court’s dismissal of the complaint or in the alternative to conduct discovery and file an amended complaint, and Supervalu filed its response in opposition on March 4, 2016. On April 20, 2016, the District Court denied plaintiffs’ motion to vacate the District Court’s dismissal or in the alternative to amend the complaint. On May 18, 2016, plaintiffs appealed to the 8th Circuit and on May 31, 2016, Supervalu filed a cross-appeal to preserve its additional arguments for dismissal of the plaintiffs’ complaint. On August 30, 2017, the 8th Circuit affirmed the dismissal for
14
out of the
15
plaintiffs finding they had no standing. The 8th Circuit did not consider Supervalu’s cross-appeal and remanded the case back for consideration of Supervalu’s additional arguments for dismissal against the one remaining plaintiff. On October 30, 2017, Supervalu filed a motion to dismiss the remaining plaintiff and on November 7, 2017, the plaintiff filed a motion to amend its complaint. The court held a hearing on the motions on December 14, 2017, and on March 7, 2018, the District Court denied plaintiff’s motion to amend and granted Supervalu’s
motion to dismiss. On March 14, 2018, plaintiff appealed to the 8th Circuit and on May 31, 2019, the 8th Circuit denied plaintiff’s appeal affirming the District Court’s dismissal of the case. Supervalu had
$50 million
of cyber threat insurance above a per incident deductible of
$1 million
at the time of the criminal intrusion, which the Company believes should cover any potential loss related to this litigation.
Predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. We regularly monitor our exposure to the loss contingencies associated with these matters and may from time to time change our predictions with respect to outcomes and estimates with respect to related costs and exposures.
With respect to the matters discussed above, we believe the chance of a material loss is remote. It is possible, although management believes that the likelihood is remote, that material differences in actual outcomes, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates, could have a material adverse effect on our financial condition, results of operations or cash flows.
19.
DISCONTINUED OPERATIONS
In conjunction with the Supervalu acquisition, the Company announced its plan to sell the remaining acquired retail operations of Supervalu (“Retail”). The results of operations, financial position and cash flows of Cub Foods, Hornbacher’s, Shoppers and Shop ‘n Save St. Louis and Shop ‘n Save East retail operations have been presented as discontinued operations and the related assets and liabilities have been classified as held-for-sale.
In the second quarter of fiscal 2019, the Company closed three of its eight Shop ‘n Save East stores and in the third quarter of fiscal 2019, the Company sold the remaining
five
Shop ‘n Save East stores to GIANT Food Store, LLC, and did not incur a gain or loss on the sale of this disposal group.
In the second quarter of fiscal 2019, the Company closed the remaining Shop ‘n Save St. Louis retail stores and the distribution center that were not sold prior to the Supervalu acquisition date.
In the second quarter of fiscal 2019, the Company completed the sale of
seven
of its
eight
Hornbacher's locations, as well as Hornbacher’s newest store currently under development in West Fargo, North Dakota, to Coborn's Inc. (“Coborn’s”). The Hornbacher’s store in Grand Forks, North Dakota was not included in the sale to Coborn’s and has closed pursuant to the terms of the definitive agreement. As part of the sale, Coborn's entered into a long-term agreement for the Company to serve as the primary supplier of the Hornbacher's locations and expand its existing supply arrangements for other Coborn’s locations.
Operating results of discontinued operations (in thousands) are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended April 27, 2019
|
|
39-Week Period
Ended April 27, 2019
(1)
|
|
|
|
|
Net sales
|
$
|
640,121
|
|
|
$
|
1,413,756
|
|
|
Cost of sales
|
463,157
|
|
|
1,031,330
|
|
|
Gross profit
|
176,964
|
|
|
382,426
|
|
|
Operating expenses
|
145,191
|
|
|
321,777
|
|
|
Operating income
|
31,773
|
|
|
60,649
|
|
|
Interest expense
|
284
|
|
|
738
|
|
|
Net periodic benefit income, excluding service cost
|
(146
|
)
|
|
(304
|
)
|
|
Equity in earnings of unconsolidated subsidiaries
|
(507
|
)
|
|
(1,391
|
)
|
|
Income from discontinued operations before income taxes
|
32,142
|
|
|
61,606
|
|
|
Income tax provision
|
7,772
|
|
|
13,759
|
|
|
Income from discontinued operations, net of tax
|
$
|
24,370
|
|
|
$
|
47,847
|
|
|
|
|
|
(1)
|
These results reflect retail operations from the Supervalu acquisition date of October 22, 2018 to
April 27, 2019
.
|
The Company recorded
$233.4
million and
$520.4 million
within Net sales from continuing operations attributable to discontinued operations inter-company product purchases in the
13-week
and
39-week
periods ended
April 27, 2019
, respectively, which we expect will continue subsequent to the sale of certain retail banners. These amounts were recorded at gross margin rates consistent with sales to other similar wholesale customers of the acquired Supervalu business. No sales were recorded within continuing operations for retail banners that the Company expects to dispose of without a supply agreement, which were eliminated upon consolidation within continuing operations and amounted to
$128.3
million and
$291.7 million
in the
13-week
and
39-week
period ended
April 27, 2019
.
The carrying amounts (in thousands) of major classes of assets and liabilities that were classified as held-for-sale on the Condensed Consolidated Balance Sheets follows in the table below. The assets and liabilities of discontinued operations were acquired as part of the Supervalu acquisition, and as of
April 27, 2019
, the purchase price allocation related to these assets and liabilities was preliminary and will be finalized when valuations are complete 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. Due to the recent closing of the transaction, some amounts reported are provisional pending the review of valuations obtained from third parties. 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 asset acquired and liabilities assumed. The fair value of discontinued operations, determined as of the acquisition date, includes estimated consideration expected to be received, less costs to sell. Within the Company’s determination of fair value of the respective disposal groups, the Company incorporates the impact of the fair value of off-balance sheet multiemployer pension plan obligations that it expects to sell so that long-lived assets are not reduced below their fair value.
|
|
|
|
|
|
|
|
(in thousands)
|
April 27, 2019
|
|
Current assets
|
|
|
Cash and cash equivalents
|
$
|
3,019
|
|
|
Receivables, net
|
2,182
|
|
|
Inventories
|
136,713
|
|
|
Other current assets
|
5,607
|
|
|
Total current assets of discontinued operations
|
147,521
|
|
|
Long-term assets
|
|
|
Property, plant and equipment
|
337,591
|
|
|
Intangible assets
|
53,486
|
|
|
Other assets
|
2,067
|
|
|
Total long-term assets of discontinued operations
|
393,143
|
|
|
Total assets of discontinued operations
|
$
|
540,664
|
|
|
|
|
|
Current liabilities
|
|
|
Accounts payable
|
$
|
55,261
|
|
|
Accrued compensation and benefits
|
39,497
|
|
|
Other current liabilities
|
21,352
|
|
|
Total current liabilities of discontinued operations
|
116,110
|
|
|
Long-term liabilities
|
|
|
Other long-term liabilities
|
935
|
|
|
Total long-term liabilities of discontinued operations
|
935
|
|
|
Total liabilities of discontinued operations
|
117,045
|
|
|
Net assets of discontinued operations
|
$
|
423,619
|
|
Additional Retail Accounting Policies
Revenues from retail product sales are recognized at the point of sale upon customer check-out. Sales tax is excluded from Net sales. Limited rights of return exist with our customers due to the nature of the products we sell. Advertising income earned from franchisees that participate in the Company’s retail advertising program are recognized as Net sales. Loyalty program expense in the form of fuel rewards is recognized as a reduction of Net sales. Franchise agreement revenue is recognized within Net sales.
Retail advertising expenses are included in cost of sales of discontinued operations, net of cooperative advertising reimbursements. Operating expenses of discontinued operations include employee-related costs, such as salaries and wages, incentive compensation, health and welfare and workers’ compensation, and occupancy costs, including utilities and operating costs of retail stores, and depreciation and amortization expense, impairment charges on property, plant and equipment and other administrative costs. Rent expense on operating leases and capital lease amortization expense of retail stores have not been included in discontinued operations, as we expect to remain primarily obligated under these leases. Refer to Note
16.
“Leases”
for additional information.
Retail inventories are valued at the lower of cost or market under LIFO. Substantially all of our inventory consists of finished goods and are valued under the retail inventory method (“RIM”) or replacement cost method to value discrete inventory items at lower of cost or market under the FIFO method before application of any LIFO reserve.