UNITED NATURAL FOODS: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, "Risk Factors" included in Part I, Item IA, "Forward-looking Statements" and other risks described elsewhere in this Annual Report.
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "seek," "should," "will," and "would," or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other "forward-looking" information. Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management's beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:
â¢ the impact and duration of the COVID-19 pandemic;
27 -------------------------------------------------------------------------------- Table of Contents â¢labor and other workforce shortages and challenges; â¢our dependence on principal customers; â¢the addition or loss of significant customers or material changes to our relationships with these customers; â¢our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends; â¢the relatively low margins of our business, which are sensitive to inflationary and deflationary pressures; â¢our ability to realize anticipated benefits of our acquisitions and strategic initiatives, including, our acquisition of Supervalu; â¢our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company and to achieve efficiencies and cost savings from these efforts; â¢our ability to continue to grow sales, including of our higher margin natural and organic foods and non-food products, and to manage that growth; â¢increased competition in our industry as a result of increased distribution of natural, organic and specialty products, and direct distribution of those products by large retailers and online distributors; â¢increased competition in our industry, including as a results of continuing consolidation of retailers and the growth of chains; â¢union-organizing activities that could cause labor relations difficulties and increased costs; â¢our ability to operate, and rely on third-parties to operate, reliable and secure technology systems; â¢moderated supplier promotional activity, including decreased forward buying opportunities; â¢the potential for disruptions in our supply chain or our distribution capabilities by circumstances beyond our control, including a health epidemic; â¢the potential for additional asset impairment charges; â¢the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise; â¢our ability to maintain food quality and safety; â¢volatility in fuel costs; â¢volatility in foreign exchange rates; and â¢our ability to identify and successfully complete asset or business acquisitions. You should carefully review the risks described under Part I. Item 1A. Risk Factors, as well as any other cautionary language in this Annual Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows. EXECUTIVE OVERVIEW Business Overview As a leading distributor of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services to retailers in
the United Statesand Canada, we believe we are uniquely positioned to provide the broadest array of products and services to customers throughout North America. We offer nearly 300,000 products consisting of national, regional and private label brands grouped into six product categories: grocery and general merchandise; produce; perishables and frozen foods; nutritional supplements and sports nutrition; bulk and food service products; and personal care items. We believe we are North America'spremier wholesaler with 57 distribution centers and warehouses representing approximately 30 million square feet of warehouse space. We are a coast-to-coast distributor with customers in all fifty states as well as all ten provinces in Canada, making us a desirable partner for retailers and consumer product manufacturers. We believe our total product assortment and service offerings are unmatched by our wholesale competitors. We plan to aggressively pursue new business opportunities to independent retailers who operate diverse formats, regional and national chains, as well as international customers with wide-ranging needs. Our business is classified into two reportable segments: Wholesale and Retail; and also includes a manufacturing division and a branded product line division. Over the past two years, we have substantially completed the integration of Supervalu and have turned our focus to transforming the business for further future growth. Our operating performance in fiscal 2021 benefited from the shift in food-at-home consumption resulting from the continued impacts of the COVID-19 global pandemic, and we expect to continue to benefit from ongoing changes in consumer purchasing behavior. Late in fiscal 2021, we introduced our Fuel the Future strategy with the mission of making our customers stronger, our supply chain better and our food solutions more inspired. Fuel the Future is composed of six strategic pillars, which are detailed in Part I. Item 1. Business. 28 -------------------------------------------------------------------------------- Table of Contents Collectively, the tactics and plans behind each pillar are meant to capitalize on our unique position in the food distribution industry, including the number and location of distribution centers we operate, the array of services and the data driven insights that we are able to customize for each of our customers, our innovation platforms and the growth potential we see in each, our commitment to our people and the planet, the positioning of our retail operations, and our focus on delivering returns for our shareholders. We also introduced our ValuePath initiative early in fiscal 2021, pursuant to which we plan to improve operating performance through various initiatives planned to be implemented through the end of fiscal 2023. We plan to re-invest a portion of these operating savings in the business to drive market share gains, accelerate innovation, invest in automation and maintain competitive wage scales for our frontline workers.
We will continue to use free cash flow to reduce outstanding debt and we are committed to improving our financial leverage.
A key component of our historical growth has been to acquire distribution companies differentiated by product offerings, service offerings and market area. In fiscal 2019, the acquisition of Supervalu accelerated our "build out the store" strategy, diversified our customer base, enabled cross-selling opportunities, expanded our market reach and scale, enhanced our technology, capacity and systems, and is expected to continue to deliver cost savings and accelerate growth. We believe the Supervalu acquisition allows us to better serve our wholesale customers' needs and compete in the current environment by providing additional warehouse and transportation capacity, which has enabled us to provide a broader array of products to our customers. As one of the largest wholesale grocery distributors in
North America, and in light of the continued expansion of our distribution network and "build out the store" strategy, we believe we are well positioned to leverage our infrastructure in the current economic and social environment to continue to serve our customers and the communities in which we operate, and are actively pursuing new customers. We recently introduced our Fuel the Future strategy, which we believe will further accelerate our growth through increasing sales of products and services, providing tailored, data-driven solutions to help our existing customers run their business more efficiently and contributing to new customer acquisitions. We believe the key drivers for growth through new customers will come from the benefits of our significant scale, product and service offerings, and nationwide footprint, which we believe were demonstrated by the following larger customer developments in fiscal 2021. â¢We've recently begun delivering product to Key Food Storesco-operative, Inc. ("Key Food"), a Co-Operative of over 300 grocery stores, after being selected as Key Food's primary wholesaler. Our supply agreement with Key Food has a term of 10 years with expected sales over that period of approximately $10 billion. â¢We have been the primary distributor to Whole Foods Marketfor more than 20 years. On March 3, 2021, we entered into an amendment to our distribution agreement dated October 30, 2015. The amendment extended the term of the distribution agreement from September 28, 2025to September 27, 2027.
Trends and other factors affecting our business
Our results are impacted by macroeconomic and demographic trends, and changes in the food distribution market structure and changes in trends in consumer behavior. Over the past several decades, total food expenditures on a constant dollar basis within
the United Stateshas continued to increase, and the focus in recent decades on natural, organic and specialty foods has benefited the Company; however, consumer spending in the food-away-from-home industry had increased steadily as a percentage of total food expenditures. This trend paused during the 2008 recession, and then continued to increase. In general, economic recessions usually result in higher food-at-home expenditures, which would be expected to benefit our customers and result in higher sales. In fiscal 2020 and continuing into fiscal 2021, the COVID-19 pandemic, which we refer to as the pandemic, led to a significant increase in food-at-home expenditures as a percentage of total food expenditures. We experienced increases in Net sales and Gross profit due to higher Wholesale customer purchases. Retail experienced similar trend increases in Net sales and Gross profit from sales to end consumers. We expect that food-at-home expenditures as a percentage of total food expenditures will remain elevated in the near term compared to pre-pandemic levels. We believe that changes in work being done outside of the traditional office setting will continue to contribute to more food being consumed at home. The pandemic also drove significant growth in eCommerce utilization by grocery consumers, and we expect that trend to continue. We expect to benefit from this trend through the growth of our traditional eCommerce customers, our Community Marketplace, an online marketplace connecting suppliers and retailers, and EasyOptions, which directly services non-traditional customers, such as bakeries or yoga studios, and through customers adopting our turnkey eCommerce platform. 29 -------------------------------------------------------------------------------- Table of Contents We expect to continue to benefit from elevated sales as compared to historical periods prior to the pandemic while food-at-home expenditures as a percentage of total food expenditures remains higher than recent historical periods prior to the pandemic. Trends in increased sales and gross margin benefits have lessened since the initial onset of the pandemic. The ultimate impact on our results is uncertain and dependent upon future developments, including the severity and duration of the pandemic, including any resurgence of infection rates and new variants with higher transmissibility, any economic downturn, actions taken by governmental authorities and other third parties in response to the pandemic such as social distancing orders or companies' remote work policies, the impact on capital and financial markets, food-at-home purchasing levels and other consumer trends, each of which is uncertain and rapidly changing. Any of these disruptions could adversely impact our business and results of operations. Considerable uncertainty remains regarding the future impact of the pandemic on our business. We are also impacted by changes in food distribution trends affecting our Wholesale customers, such as direct store deliveries and other methods of distribution. Our Wholesale customers manage their businesses independently and operate in a competitive environment. We seek to obtain security interests and other credit support in connection with the financial accommodations we extend these customers; however, we may incur additional credit or inventory charges related to our customers, as we expect the competitive environment to continue to lead to financial stress on some customers. The magnitude of these risks increases as the size of our Wholesale customers increases. We recently began experiencing a tighter operating labor market for our warehouse and driver associates, which has caused additional reliance and higher costs from third-party resources, and incremental hiring and wage costs. We believe this operating environment has been impacted by labor force availability and the pandemic. We are working to implement actions to fill open roles and maintain existing and future employment levels.
Distribution center network
Network optimization and construction
Pacific Northwest, we completed the consolidation of the volume of five distribution centers and their related supporting off-site storage facilities into two distribution centers during fiscal 2020. We expect to achieve synergies and cost savings through eliminating inefficiencies, including incurring lower operating, shrink and off-site storage expenses. We also expect that the optimization of the Pacific Northwestdistribution network will help deliver meaningful synergies contemplated in the Supervalu acquisition. We expanded the Ridgefield, WAdistribution center to enhance customer product offerings, create more efficient inventory management, streamline operations and incorporate greater technology to deliver a better customer experience. We are now supplying customers served by former Pacific Northwestlocations from our Centralia, WA, Ridgefield, WAand Gilroy, CAdistribution centers. In order to maintain and stabilize service levels of these higher volume Pacific Northwestdistribution centers, we incurred incremental operating costs in fiscal 2021 that we believe temporarily reduced the realization of synergy benefits from this network consolidation. To support our continued growth within southern California, we began operating a newly leased facility in Riverside, CAwith approximately 1.2 million square feet upon completion of its construction in the fourth quarter of fiscal 2020. This facility provides significant capacity to service our customers in this market. On February 24, 2020, we executed a purchase option with a delayed purchase provision to acquire the real property of this distribution center for approximately $152 million. We entered into an agreement to monetize the real property of this location through a sale-leaseback transaction, which is contingent upon the acquisition of the facility that we expect will occur on or before June 2022. In fiscal 2022, we started operating our Allentown, PAdistribution center with a capacity of 1.3 million square feet that will be utilized to service Key Food and other customers in that facility's geographical area. We expect to incur initial start-up costs and operating losses in fiscal 2022 as the volume in this facility ramps up to match it's expected full operating capacity.
We continue to evaluate our distribution center network to optimize its performance and expect to incur additional expenses related to any future network realignments and strive to both minimize these costs and obtain new business to further improve the network. efficiency of our distribution network undergoing transformation.
Network technology efficiency
As part of our "one company" approach, we are in the process of converting to a single national warehouse management and procurement system to integrate our existing facilities onto one nationalized platform across the organization. We continue to focus on the automation of our new or expanded distribution centers that are at different stages of construction and implementation. These steps and others are intended to promote operational efficiencies and improve operating expenses as a percentage of net sales. 30
We currently operate 74 continuing operations Retail grocery stores, including 53
Cub Foodscorporate stores and 21 Shoppers Food Warehousestores. In addition, we supply another 27 Cub Foodsstores operated by our Wholesale customers through franchise and LLC arrangements. We operate 81 pharmacies primarily within the stores we operate and the stores of our franchisees. In addition, we operate 22 "Cub Wine and Spirit" and "Cub Liquor" stores. We had previously announced our intention to thoughtfully and economically divest our retail businesses acquired as part of the Supervalu acquisition to focus on our core Wholesale distribution business. At this time, we do not have any current plans to divest our Retail business. We continue to strive to maximize the operating value of Retail. As part of that strategy, our new strategic focus is to invest in our stores and optimize our operations to be customer centric. We continue to remodel and upgrade our stores, while investing in eCommerce growth in the form of click-and-collect, delivery, and technology investments, such as mobile customer applications. Part of our optimization efforts included updating our benefit plan offerings to a defined contribution plan as a replacement for a multiemployer pension plans to which we contribute pursuant to three Cub Foodscollective bargaining agreements. In fiscal 2021, we withdrew from participating in three Retail multiemployer pension plans, resulting in a $63 millionwithdrawal charge, which is recorded within Operating expenses within our Consolidated Statements of Operations, Other long-term liabilities on the Consolidated Balance Sheets and within changes in operating assets and liabilities within Accrued expenses and other liabilities in the Consolidated Statements of Cash Flows. As part of our optimization efforts, we are continuing to evaluate various options to address our off-balance sheet liability under certain of our Retail multiemployer pension plans, which actions may result in significant costs or charges. The extent of these costs and charges will be determined based on outcomes achieved under the process undertaken to minimize or eliminate the liability for the respective multiemployer pension plan. As we continue to work to find solutions to under-funded multiemployer pension plans, it is possible we could incur withdrawal liabilities for certain additional multiemployer pension plan obligations in the future as we actively bargain collective agreements with a number of our unions in due course. Beyond this immaterial plan, at this time, however, we are 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. A withdrawal from a multiemployer pension plan may result in an obligation to make material payments over an extended period of time or one-time lump sum payments on a net present value basis. In the fourth quarter of fiscal 2021, we determined we no longer met the held for sale criterion for a probable sale to be completed within 12 months for two of the four Shoppers retail stores that were previously included within discontinued operations due to the criterion being met as of the Supervalu acquisition date. We revised our Consolidated Financial Statements to reclassify these stores from discontinued operations to continuing operations. This change in financial statement presentation resulted in the inclusion of these stores' results of operations, financial position, cash flows and related disclosures within continuing operations for all periods presented in the Consolidated Financial Statements and presented below. In addition, in order to present these stores' results of operations within continuing operations, Wholesale sales to these additional Retail stores have been eliminated upon consolidation. Our discontinued operations as of the end of the fourth quarter of fiscal 2021 include two Shoppers stores, and for historical periods, results of discontinued operations include the Hornbacher's and Shop 'n Save and Shop 'n Save East retail banners, which were divested in fiscal 2019, and Shoppers stores that were sold or closed in fiscal 2020 and fiscal 2021. In addition, cash flows from discontinued operations include real estate sales related to those historical retail operations. These retail assets have been classified as held for sale as of the Supervalu acquisition date, and the results of operations, financial position and cash flows directly attributable to these operations are reported within discontinued operations in our Consolidated Financial Statements for all periods presented. Services Agreement In connection with the sale of Save-A-Lot on December 5, 2016, Supervalu entered into a services agreement (the "Services Agreement") with Moran Foods, LLC, the entity that operates the Save-A-Lot business. Pursuant to the Services Agreement, we provide certain technical, human resources, finance and other operational services to Save-A-Lot for a term of five years, on the terms and subject to the conditions set forth therein. During fiscal 2021, we earned $17 millionunder the Services Agreement, which was recorded within Net sales. We expect that services provided under the Services Agreement will wind down at or near the end of the initial term in December 2021. At that time, we will lose the revenue associated with this agreement, and any fixed or variable costs associated with servicing this agreement not eliminated concurrently with the decline in revenue, would result in decreased operating profit. 31 -------------------------------------------------------------------------------- Table of Contents Impact of Inflation or Deflation We monitor product cost inflation and deflation and evaluate whether to absorb cost increases or decreases, or pass on pricing changes to our customers. We experienced a mix of inflation and deflation across product categories during fiscal 2021 and 2020. In the aggregate across our businesses and taking into account the mix of products, management estimates our businesses experienced cost inflation of approximately one percent in fiscal 2021. Cost inflation and deflation estimates are based on individual like items sold during the periods being compared. Changes in merchandising, customer buying habits and competitive pressures create inherent difficulties in measuring the impact of inflation and deflation on Net sales and Gross profit. Absent any changes in units sold or the mix of units sold, deflation has the effect of decreasing sales. Under the last-in, first out ("LIFO") method of inventory accounting, product cost increases are recognized within Cost of sales based on expected year-end inventory quantities and costs, which has the effect of decreasing Gross profit and the carrying value of inventory during periods of inflation. Composition of Consolidated Statements of Operations and Business Performance Assessment Net sales Our net sales consist primarily of product sales of natural, organic, specialty, produce and conventional grocery and non-food products, and support services revenue from retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue. Net sales also include amounts charged by us to customers for shipping and handling and fuel surcharges. Cost of sales and Gross profit The principal components of our cost of sales include the amounts paid to suppliers for product sold, plus transportation costs necessary to bring the product to, or move product between, our distribution centers and retail stores, partially offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers' products. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses. Operating expenses Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation, and amortization expense. These expenses include the departmental expenses of warehousing, delivery, purchasing, receiving, selecting and outbound transportation expenses. Restructuring, acquisition and integration expenses Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, change-in-control related charges, facility closure asset impairment charges and costs, stock-based compensation acceleration charges and acquisition and integration expenses. Integration expenses include certain professional consulting expenses related to business transformation and incremental expenses related to combining facilities required to optimize our distribution network as a result of acquisitions. Interest expense, net Interest expense, net includes primarily interest expense on long-term debt, net of capitalized interest, loss on debt extinguishment, interest expense on finance lease obligations, amortization of financing costs and discounts, and interest income.
Net income from periodic benefits, excluding cost of services Net income from periodic benefits, excluding the cost of services, reflects the recognition of expected returns on employee benefit plan assets in excess of employee costs. interest.
Adjusted EBITDA Our Consolidated Financial Statements are prepared and presented in accordance with generally accepted accounting principles in
the United States("GAAP"). In addition to the GAAP results, we consider certain non-GAAP financial measures to assess the performance of our business and understand underlying operating performance and core business trends, which we use to facilitate operating performance comparisons of our business on a consistent basis over time. Adjusted EBITDA is provided as a supplement to our results of operations and related analysis, and should not be considered superior to, a substitute for or an alternative to, any financial measure of performance prepared and presented in accordance with GAAP. Adjusted EBITDA excludes certain items because they are non-cash items or are items that do not reflect management's assessment of ongoing business performance. 32 -------------------------------------------------------------------------------- Table of Contents We believe Adjusted EBITDA is useful to investors and financial institutions because it provides additional information regarding factors and trends affecting our business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and because of its importance as a measure of underlying operating performance, as the primary compensation performance measure under certain compensation programs and plans. We believe Adjusted EBITDA is reflective of factors that affect our underlying operating performance and facilitate operating performance comparisons of our business on a consistent basis over time. Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Certain adjustments to our GAAP financial measures reflected below exclude items that may be considered recurring in nature and may be reflected in our financial results for the foreseeable future. These measurements and items may be different from non-GAAP financial measures used by other companies. Adjusted EBITDA should be reviewed in conjunction with our results reported in accordance with GAAP in this Annual Report.
There are significant limitations to the use of Adjusted EBITDA as a financial measure, including, but not limited to, the fact that it does not reflect the cost of cash outlays for capital assets or certain other contractual commitments, finance lease obligations and debt service charges, income taxes and any impact of changes in working capital.
We define Adjusted EBITDA as a consolidated measure inclusive of continuing and discontinued operations results, which we reconcile by adding Net income (loss) from continuing operations, less net income attributable to noncontrolling interests, plus non-operating income and expenses, including Net periodic benefit income, excluding service cost, Interest expense, net and Other, net, plus Provision (benefit) for income taxes and Depreciation and amortization all calculated in accordance with GAAP, plus adjustments for Share-based compensation, Restructuring, acquisition and integration related expenses,
Goodwillimpairment charges, (Gain) loss on sale of assets, certain legal charges and gains, certain other non-cash charges or other items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in a manner consistent with the results of continuing operations, outlined above. The changes to the definition of Adjusted EBITDA from prior periods reflect changes to line item references in our Consolidated Financial Statements, which do not impact the calculation of Adjusted EBITDA. 33 -------------------------------------------------------------------------------- Table of Contents Assessment of Our Business Results The following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods indicated. We have revised the following table for the prior period presentation of two discontinued operations stores moved to continuing operations as discussed in Note 1-Significant Accounting Policies within Part II, Item 8 of this Annual Report. Increase (Decrease) 2021 2020 2019 (in millions) (52 weeks) (52 weeks) (53 weeks) 2021 2020 Net sales $ 26,950 $ 26,559 $ 22,341 $ 391 $ 4,218Cost of sales 23,011 22,670 19,121 341 3,549 Gross profit 3,939 3,889 3,220 50 669 Operating expenses 3,593 3,552 2,976 41 576 Goodwill impairment charges - 425 293 (425) 132 Restructuring, acquisition and integration related expenses 56 87 148 (31) (61) (Gain) loss on sale of assets (4) 18 (1) (22) 19 Operating income (loss) 294 (193) (196) 487 3 Net periodic benefit income, excluding service cost (85) (39) (35) (46) (4) Interest expense, net 204 192 181 12 11 Other, net (8) (4) (1) (4) (3) Income (loss) from continuing operations before income taxes 183 (342) (341) 525 (1) Provision (benefit) for income taxes 34 (91) (59) 125 (32) Net income (loss) from continuing operations 149 (251) (282) 400 31 Income (loss) from discontinued operations, net of tax 6 (18) (3) 24 (15) Net income (loss) including noncontrolling interests 155 (269) (285) 424 16 Less net income attributable to noncontrolling interests (6) (5) - (1) (5) Net income (loss) attributable to United Natural Foods, Inc. $ 149 $ (274) $ (285) $ 423 $ 11Adjusted EBITDA $ 746 $ 673 $ 563 $ 73 $ 11034
-------------------------------------------------------------------------------- Table of Contents The following table reconciles Adjusted EBITDA to Net income (loss) from continuing operations and to Income (loss) from discontinued operations, net of tax. 2021 2020 2019 (in millions) (52 weeks) (52 weeks) (53 weeks) Net income (loss) from continuing operations
Adjustments to net income from continuing operations (net loss): less net income attributable to non-controlling interests
(6) (5) - Net periodic benefit income, excluding service cost(1) (85) (39) (35) Interest expense, net 204 192 181 Other, net (8) (4) (1) Provision (benefit) for income taxes(2) 34 (91) (59) Depreciation and amortization 285 282 248 Share-based compensation 49 34 40 Goodwill impairment charges(3) - 425 293
Costs related to restructuring, acquisitions and integrations (4)
56 87 148 (Gain) loss on sale of assets(5) (4) 18 (1) Multiemployer pension plan withdrawal charges(6) 63 - - Notes receivable charges(7) - 13 - Inventory fair value adjustment(8) - - 10 Legal reserve charge, net of settlement income(9) - 1 (1) Other retail expense(10) 5 1 - Adjusted EBITDA of continuing operations 742 663 541 Adjusted EBITDA of discontinued operations(11) 4 10 22 Adjusted EBITDA
Profit (loss) from discontinued operations, net of tax (11)
$ (18) $ (3)Adjustments to discontinued operations net income (loss): Benefit for income taxes (1) (5) (3) Restructuring, store closure and other charges, net(12) (1) 33 28 Adjusted EBITDA of discontinued operations(11) $ 4
(1)Fiscal 2021 includes a postretirement settlement gain of
$17 millionassociated with the termination of remaining corporate plans. Fiscal 2020 includes a lump sum defined benefit pension plan settlement expense of $11 millionassociated with the acceleration of a portion of the accumulated unrecognized actuarial loss as a result of the lump sum settlement payments. (2)Fiscal 2020 includes the tax benefit from the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which includes the impact of tax loss carrybacks to 35% tax years allowed under the CARES Act. (3)Fiscal 2020 primarily reflects a goodwill impairment charge attributable to a reorganization of our reporting units and a sustained decrease in market capitalization and enterprise value of the Company, resulting in a decline in the estimated fair value of the U.S.Wholesale reporting unit. In addition, this charge includes a goodwill finalization charge attributable to the Supervalu acquisition and an asset impairment charge. Fiscal 2019 reflects a goodwill impairment charge attributable to the Supervalu acquisition. Refer to Note 6- Goodwilland Intangible Assets, Net in Part II, Item 8 of this Annual Report for additional information. (4)Fiscal 2021 primarily reflects costs associated with advisory and transformational activities as we position our business for further value-creation post Supervalu acquisition, as well as costs associated with distribution center consolidations. Fiscal 2020 primarily reflects Shoppers asset impairment charges, closed property and distribution center impairment charges and costs, and administrative fees associated with integration activities. Fiscal 2019 primarily reflects expenses resulting from the acquisition of Supervalu and acquisition and integration expenses, including employee-related costs. Refer to Note 4-Restructuring, Acquisition and Integration Related Expenses in Part II, Item 8 of this Annual Report for additional information. (5)Fiscal 2020 primarily reflects a $50 millionaccumulated depreciation and amortization charge related to the requirement to move Retail from discontinued operations to continuing operations, partially offset by $32 millionof gains on the sale of distribution centers and other assets. (6)Fiscal 2021 includes charges related to withdrawal liabilities from three Retail multiemployer pension plans. (7)Reflects reserves and charges for notes receivable issued by the Supervalu business prior to its acquisition to finance the purchase of stores by its customers. (8)Reflects a non-cash charge related to the step-up of inventory values as part of purchase accounting. (9)Reflects a charge to settle a legal proceeding and income received to settle a separate legal proceeding. (10)Reflects expenses associated with event-specific damages to certain retail stores. 35 -------------------------------------------------------------------------------- Table of Contents (11)We believe the inclusion of discontinued operations results within Adjusted EBITDA provides investors a meaningful measure of performance. (12)Amounts represent store closure charges and costs, operational wind-down and inventory charges, and asset impairment charges related to discontinued operations. Fiscal 2021 also reflects income related to a severance benefit amount.
RESULTS OF OPERATIONS
Our net sales by customer channel was as follows (in millions except percentages): 2021 2020(1) Increase (Decrease) Customer Channel(1) (52 weeks) (52 weeks) $ % Chains
$ 12,104 $ 12,010 $ 940.8 % Independent retailers 6,638 6,699 (61) (0.9) % Supernatural 5,050 4,720 330 7.0 % Retail 2,442 2,375 67 2.8 % Other 2,300 2,324 (24) (1.0) % Eliminations (1,584) (1,569) (15) 1.0 % Total net sales $ 26,950 $ 26,559 $ 3911.5 % (1)Refer to Note 3-Revenue Recognition in Part II, Item 8 of this Annual Report for our channel definitions and for information regarding the recast of sales by customer channel to align with the current period presentation. Our net sales for fiscal 2021 increased 1.5% from fiscal 2020. The increase in net sales for fiscal 2021 was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from certain customers and business lost prior to the pandemic.
Chain net sales increased primarily due to growth in sales to existing customers, including demand for downtown stores and natural products driven by consumer response to the pandemic, partially offset by lower sales from some customers and business losses before the pandemic.
Independent retailers net sales decreased primarily due to lower existing store sales driven by a decline in demand for center store and natural products compared to last year's elevated demand due to a strong initial response to the pandemic, and lower sales from certain customers and stores lost prior to the pandemic. Supernatural net sales increased primarily due to growth in existing store sales related to the pandemic and increased sales to new stores, partially offset by the impact of categories that have been adversely impacted by the pandemic, such as bulk and ingredients used for prepared foods. Retail's net sales increased primarily due to a 2.9% increase in identical store sales from higher average basket sizes related to the pandemic. The increase in Retail sales included the benefit of a 52.3% increase in eCommerce sales at
Cub Foods. Other net sales decreased primarily due to a 20% (or $71 million) decline in sales to food service customers resulting from the lower purchases due to the pandemic and a decrease in military sales, for which we have intentionally resigned certain business, which were partially offset by an increase of $161 millionin sales to eCommerce customers.
Net sales of disposals increased primarily as a result of increased wholesale retail sales.
36 -------------------------------------------------------------------------------- Table of Contents Cost of Sales and Gross Profit Our gross profit increased
$50 million, or 1.3%, to $3,939 millionin fiscal 2021, from $3,889 millionin fiscal 2020. Our gross profit as a percentage of net sales decreased slightly to 14.62% in fiscal 2021 compared to 14.64% in fiscal 2020. The increase in gross profit dollar growth was primarily driven by higher Wholesale and Retail sales volume. The slight decrease in gross profit rate included lower Wholesale margin including the mix effect from larger customers, partially offset by an increase due to mix from the Retail segment representing a greater percentage of total net sales and lower levels of promotional activity.
Operating expenses increased
$41 million, or 1.2%, to $3,593 million, or 13.33% of net sales, in fiscal 2021 compared to $3,552 million, or 13.37% of net sales, in fiscal 2020. Operating expense in fiscal 2021 included a $63 millionRetail multiemployer pension plan withdrawal charge discussed further above. Operating expenses in fiscal 2020 included $27 millionof bad debt expense associated with customer bankruptcies and $20 millionof charges and expenses, primarily related to customer notes receivable, surplus property depreciation and a legal reserve charge. The remaining 10 basis point decrease in operating expenses as a percent of net sales was driven by prior-year pandemic costs, including temporary higher pandemic compensation costs for our front line workers, estimated to be approximately $57 millionor 21 basis points, which was partially offset by higher operating costs related to starting up three distribution centers in the Pacific Northwestand our Allentowndistribution center during fiscal 2021. Operating expenses also included share-based compensation expense of $49 millionand $34 millionfor fiscal 2021 and 2020, respectively.
Goodwill impairment charges
During fiscal 2020 we recorded
$425 millionof goodwill and asset impairment charges, which reflected $422 millionfrom an impairment charge on the remaining goodwill attributable to the U.S.Wholesale reporting unit, $2 millionrelated to purchase accounting adjustments to finalize the opening balance sheet goodwill and $1 millionof other asset impairment charges. Refer to Note 6- Goodwilland Intangible Assets, Net in Part II, Item 8 of this Annual Report for additional information.
Expenses related to restructuring, acquisition and integration
Restructuring, acquisition and integration related expenses were
$56 millionfor fiscal 2021, which included $50 millionof integration costs primarily associated with advisory and transformational activities as we position our business for further value creation following the Supervalu acquisition and $6 millionof closed property charges. Expenses for fiscal 2020 were $87 million, which primarily included $42 millionof integration related costs, $40 millionof closed property reserve charges related to the divestiture of retail banners and $5 millionof primarily employee related separation costs.
(Gain) Loss on sale of assets
Gain on sale of assets was
$4 millionin fiscal 2021, which increased $22 millionfrom a loss on sale of assets of $18 millionin fiscal 2020. Loss on sale of assets in fiscal 2020 included an accumulated depreciation and amortization charge of $50 millionrelated to the requirement to move Retail from discontinued operations to continuing operations, which was partially offset by $32 millionof gains on the sale of distribution centers and other assets. Operating Income (Loss) Reflecting the factors described above, operating income increased $487 millionto $294 millionfor fiscal 2021, from an operating loss of $193 millionfor fiscal 2020. The increase in operating income was primarily driven by the fiscal 2020 goodwill impairment charge, an increase in Gross profit and lower Restructuring, acquisition and integration related expenses discussed above, which was partially offset by an increase in Operating expenses.
Net income from periodic services, excluding service charges
Net periodic benefit income, excluding service cost increased
$46 millionto $85 millionfor fiscal 2021, from $39 millionin fiscal 2020. The increase in Net periodic benefit income, excluding service cost was primarily driven by lower interest costs from a lower discount rate utilized in the measurement of pension liabilities, a $17 millionsettlement gain for the purchase of an irrevocable annuity to settle participant's post-employment obligations in fiscal 2021, and a lump sum defined benefit pension plan settlement charge of $11 millionin fiscal 2020. 37 --------------------------------------------------------------------------------
Table of Contents Interest Expense, Net 2021 2020 Increase (in millions) (52 weeks) (52 weeks) (Decrease) Interest expense on long-term debt, net of capitalized interest
$ 143 $ 166 $ (23)Interest expense on finance lease obligations 19 12 7 Amortization of financing costs and discounts 13 15 (2) Loss on debt extinguishment 30 - 30 Interest income (1) (1) - Interest expense, net $ 204 $ 192$ 12
The decrease in interest expense on long-term debt for fiscal 2021 compared to fiscal 2020 is mainly due to the decrease in outstanding debt.
The increase in interest expense on finance leases during fiscal year 2021 primarily reflects interest on a distribution center for which we have executed a call option with a provision for deferred purchase.
The increase in loss on debt extinguishment costs primarily reflects the acceleration of unamortized debt issuance costs and original issue discounts related to mandatory and voluntary prepayments on the Term Loan Facility made in fiscal 2021. Refer to Note 9-Long-Term Debt in Part II, Item 8 of this Annual Report for further information.
Provision (benefit) for income taxes
The effective income tax rate for continuing operations was an expense of 18.6% compared to a benefit of 26.6% on pre-tax losses for fiscal 2021 and 2020, respectively. The fiscal 2020 effective tax rate was primarily driven by the impact of non-deductible goodwill impairment charges recorded in fiscal 2020, partially offset by the net operating loss ("NOL") carryback provisions of the CARES Act. For fiscal 2021, the effective tax rate was reduced by solar and employment tax credits, including the tax credit impact of a fiscal 2021 investment in an equity method partnership, the recognition of previously unrecognized tax benefits, excess tax deductions attributable to share-based compensation and inventory deductions, as well as the impact of favorable return-to-provision adjustments.
Income (loss) from discontinued operations, net of tax
The results of discontinued operations for fiscal 2021 reflect net sales of
$42 millionfor which we recognized $14 millionof gross profit and $6 millionof Income from discontinued operations, net of tax. Net sales, gross profit and operating expenses of discontinued operations decreased $142 million, $39 millionand $34 million, respectively, for the fiscal 2021 as compared to fiscal 2020 primarily due to a lower operating store base due to closures and sales that occurred in fiscal 2020. Discontinued operations for fiscal 2020 included $33 millionof charges and costs primarily related to store closures charges and expenses, and asset impairment charges related to exited locations.
Refer to Note 18 – Discontinued operations in Part II, Section 8 of this annual report for more information on these discontinued operations.
Net income (loss) attributable to
Reflecting the factors described in more detail above, Net income attributable to
United Natural Foods, Inc.was $149 million, or $2.48per diluted common share, for fiscal 2021, compared to a net loss of $274 million, or $5.10per diluted common share, for fiscal 2020. 38 -------------------------------------------------------------------------------- Table of Contents Fiscal year ended August 1, 2020(fiscal 2020) compared to fiscal year ended August 3, 2019(fiscal 2019) Within our results of operations we have estimated the impact of the additional week in fiscal 2019 and the acquisition of Supervalu, where applicable and estimable, to provide comparable financial results on a year-over-year basis. The impact of the 53rd week in fiscal 2019 discussed below represents an estimate of the contribution from the additional week in fiscal 2019 and is calculated by taking one-fifth of the respective metrics for the last five-week period, within the 14-week fourth quarter of fiscal 2019. The quantification of Supervalu's impact on our results of operations presented below is to discuss the incremental impact of Supervalu, and provide analysis of our underlying business for year-over-year comparability purposes. References to legacy company results are presented to provide a comparative results analysis excluding the Supervalu acquired business impacts.
The requirement to move two of the four remaining Shoppers stores from discontinued operations to continuing operations in fiscal 2021 necessitated the revision of historical financial information to conform to the current period presentation. Accordingly, the following comparison of results has been updated.
Our net sales by customer channel were as follows (in millions excluding percentages):
2020(1) 2019(1) Increase (Decrease) Customer Channel(1) (52 weeks) (53 weeks) $ % Chains
$ 12,010 $ 9,769$ 2,241 22.9 % Independent retailers 6,699 5,536 1,163 21.0 % Supernatural 4,720 4,394 326 7.4 % Retail 2,375 1,687 688 40.8 % Other 2,324 2,087 237 11.4 % Eliminations (1,569) (1,132) (437) 38.6 % Total net sales $ 26,559 $ 22,341$ 4,218 18.9 %
(1) Refer to Note 3-Revenue Recognition in Part II, Point 8 of this annual report for our channel definitions and additional information.
Our net sales for fiscal 2020 increased approximately 19% from fiscal 2019. The increase in net sales for fiscal 2020 was driven by incremental Supervalu net sales from the first quarter of fiscal 2020, as Supervalu was only included in our results for approximately one week in the first quarter of fiscal 2019, of approximately
$3,345 millionand was partially offset by $475 millionfrom an incremental 53rd week in fiscal 2019. The remaining underlying net sales increased $1,348 millionor 6.2%. Chains net sales increased primarily due to $1,892 millionof an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $213 million. The remaining increase of $562 millionwas primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers' response to the COVID-19 pandemic, partially offset by lower sales from previously lost customers and business prior to the pandemic. Independent retailers net sales increased primarily due to $971 millionof an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019, of $120 million. The remaining increase of $312 millionwas primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers response to the COVID-19 pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic. Supernatural net sales increased primarily due to increased sales related to the COVID-19 pandemic, growth in existing and new product categories, and increased sales to existing and new stores prior to the pandemic, partially offset by the impact of categories that have been adversely impacted by COVID such as bulk and ingredients used for prepared foods and the estimated impact from the 53rd week in fiscal 2019 of $84 million. Retail's net sales increased primarily due to $495 millionof an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $40 million. The remaining increase of $233 millionwas driven by increased identical store sales related to the COVID-19 pandemic. 39 -------------------------------------------------------------------------------- Table of Contents Other net sales increased primarily due to $267 millionof an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $42 million. The remaining increase of $12 millionis primarily due to an increase in eCommerce and other, partially offset by a 23% (or $104 million) decline in sales to foodservice customers, whose purchases slowed due to the COVID-19 pandemic based on their locations being temporarily closed.
Net sales eliminations increased mainly due to
Cost of sales and gross profit
Our gross profit increased
$669 million, or 20.8%, to $3,889 millionin fiscal 2020, from $3,220 millionin fiscal 2019. Our gross profit as a percentage of net sales increased to 14.64% in fiscal 2020 compared to 14.41% in fiscal 2019. Our gross profit for fiscal 2020 included an incremental 12 weeks of gross profit from the acquired Supervalu business estimated as approximately $480 millionand fiscal 2019 included an estimated increase in gross profit from the 53rd week of $69 million. The remaining increase in gross profit of $258 millionwas primarily driven by higher Wholesale and Retail sales volume. The 23 basis point increase in gross profit rate was driven by a 92 basis point increase in Retail gross profit as a percent of its net sales, which was driven by lower promotional activity and contributed to a segment business mix impact that increased overall gross profit rate. This increase was partially offset by a 12 basis point decrease in Wholesale gross profit as a percent of its net sales, and included a decrease due to lower gross profit rates on conventional products.
Operating expenses increased
$576 million, or 19.4%, to $3,552 million, or 13.37% of net sales, in fiscal 2020 compared to $2,976 million, or 13.32% of net sales, in fiscal 2019. The increase in operating expenses as a percentage of net sales was driven by 25 basis points of higher incentive compensation, including temporary COVID-19 compensation expense and 13 basis points of higher bad debt expense primarily from customer bankruptcies prior to the pandemic, which were partially offset by 31 basis points of lower other employee costs driven by lower salaries and benefits expenses. Operating expenses decreased by $65 millionfrom the impact of the additional 53rd week in fiscal 2019.
Goodwill impairment charges
During fiscal 2020 we recorded
$425 millionof goodwill and asset impairment charges, which reflects $422 millionfrom an impairment charge on the remaining goodwill attributable to the U.S.Wholesale reporting unit, $2 millionrelated to purchase accounting adjustments to finalize the opening balance sheet goodwill and $1 millionof other asset impairment charges. During fiscal 2019 we recorded a $293 milliongoodwill impairment charge, which reflects the preliminary goodwill impairment based on the preliminary fair value of net assets assigned, which was finalized in the first quarter of fiscal 2020. The goodwill impairment charge recorded in fiscal 2019 was subject to further 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. The estimates and assumptions were subject to change during the measurement period (up to one year from the acquisition date).
Expenses related to restructuring, acquisition and integration
Restructuring, acquisition and integration related expenses were
$87 millionfor fiscal 2020 and primarily included $42 millionof integration related costs, $40 millionof closed property reserve charges related to the divestiture of retail banners and $5 millionof primarily employee related separation costs. Expenses incurred in fiscal 2019 primarily related to $74 millionof employee related costs and charges due to severance, settlement of outstanding equity awards and benefits costs, $51 millionof other acquisition and integration related costs and $23 millionof closed property reserve charges primarily related to the divestiture of retail banners.
Loss (gain) on sale of assets
Loss on sale of assets increased
$19 millionto $18 millionin fiscal 2020 from a gain on sale of assets of $1 millionin fiscal 2019. Loss on sale of assets in fiscal 2020 included an accumulated depreciation and amortization charge of $50 millionrelated to the requirement to move Retail from discontinued operations to continuing operations, which was partially offset by gains on sales of distribution centers and a retail accounting services business. 40
Reflecting the factors described above, operating loss decreased
$3 millionto an operating loss of $193 millionfor fiscal 2020, from an operating loss of $196 millionfor fiscal 2019. The decrease in operating loss was driven by gross profit increases in excess of operating expense increases, lower restructuring, acquisition and integration related expenses, partially offset by a higher goodwill impairment charge and a higher loss on sale of assets. The fiscal 2020 and fiscal 2019 operating loss includes $6 millionand $10 million, respectively, of operating lease rent expense and $2 millionand $4 million, respectively, of depreciation and amortization expenses 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. In addition, continuing operations operating loss includes certain retail related overhead costs that are related to retail but are required to be presented within continuing operations.
Net income from periodic services, excluding service charges
Net periodic benefit income, excluding service cost increased
$4 millionto $39 millionfor fiscal 2020, from $35 millionin fiscal 2019. Net periodic benefit income for fiscal 2020 includes $11 millionof non-cash pension settlement charges primarily from the lump sum pension settlement offering completed in fiscal 2020. Fiscal 2019 net periodic benefit income reflects a partial year due to the acquisition of Supervalu near the end of the first quarter of fiscal 2019. Interest Expense, Net 2020 2019 Increase (in millions) (52 weeks) (53 weeks) (Decrease) Interest expense on long-term debt, net of capitalized interest $ 166 $ 147$ 19 Interest expense on finance and direct financing lease obligations 12 16 (4) Amortization of financing costs and discounts 15 13 2 Loss on debt extinguishment - 5 (5) Interest income (1) - (1) Interest expense, net $ 192 $ 181$ 11 The increase in interest expense on long-term debt for fiscal 2020 compared to fiscal 2019 was primarily due to an increase in average outstanding debt driven by the Supervalu acquisition financing executed near the end of the first quarter of fiscal 2019. Interest on finance and direct financing leases decreased primarily due to the adoption of the new lease accounting standard, ASC 842, in fiscal 2020. Beginning in the third quarter of fiscal 2020, interest on financing leases includes interest expense related to a distribution center for which we executed a purchase option with a delayed purchase provision.
Advantage for income taxes
The effective income tax rate for continuing operations was a benefit of 26.6% and 17.3% on pre-tax losses for fiscal 2020 and 2019, respectively. The increase in the benefit rate for fiscal 2020 was primarily driven by the NOL carryback provisions of the CARES Act.
(Loss) Income from discontinued operations, net of tax
The results of operations for fiscal 2020 reflect net sales of
$184 millionfor which we recognized $53 millionof gross profit and a loss from discontinued operations, net of tax of $18 million. As noted above, pre-tax loss from discontinued operations excludes $6 millionof operating lease rent expense related to stores within discontinued operations, but for which GAAP requires the expense to be included within continuing operations. In addition, store closure charges related to leases are recorded within continuing operations. Discontinued operations included $33 millionof restructuring expenses primarily related to Shoppers store closures expenses related to employee costs and wind-down expenses, and asset impairment charges. In addition, gross profit of discontinued operations included inventory charges from store closures. As of the end of fiscal 2020, discontinued operations consisted of only five Shoppers stores. 41 -------------------------------------------------------------------------------- Table of Contents Net sales, gross profit and operating expenses of discontinued operations decreased $223 million, $64 millionand $55 million, respectively, for the fiscal 2020 as compared to fiscal 2019 primarily due to closed and sold Shoppers stores, results from the Hornbacher's retail banner, which was sold in December 2019, and the closed Shop 'n Save East stores, which were partially offset by the partial year in 2019 due to the timing of the Supervalu acquisition.
Net loss attributable to
Reflecting the factors described in more detail above, we incurred a net loss attributable to
United Natural Foods, Inc.of $274 million, or $5.10per diluted common share, for fiscal 2020, compared to net income of $285 million, or $5.56per diluted common share, for fiscal 2019. As described in more detail within Note 12-Share-Based Awards in Part II, Item 8 of this Annual Report, in fiscal 2020 and 2019 we issued approximately 1.3 million and 2.0 million shares of common stock, respectively, to fund the settlement of time-vesting replacement award obligations from the Supervalu acquisition.
Segment operating results
In evaluating financial performance in each business segment, management primarily uses Net sales and Adjusted EBITDA of its business segments as discussed and reconciled within Note 16-Business Segments within Part II, Item 8 of this Annual Report and the above table within the Executive Overview section. The following tables set forth Net sales and Adjusted EBITDA by segment for the periods indicated. Increase (Decrease) 2021 2020 2019 (in millions) (52 weeks) (52 weeks) (53 weeks) 2021 2020 Net sales: Wholesale
$ 25,873 $ 25,525 $ 21,551 $ 348 $ 3,974Retail 2,442 2,375 1,687 67 688 Other 219 228 235 (9) (7) Eliminations (1,584) (1,569) (1,132) (15) (437) Total Net sales $ 26,950 $ 26,559 $ 22,341 $ 391 $ 4,218Continuing operations Adjusted EBITDA: Wholesale $ 654 $ 593 $ 465 $ 61 $ 128Retail 96 88 35 8 53 Other (9) (16) 42 7 (58) Eliminations 1 (2) (1) 3 (1) Total continuing operations Adjusted EBITDA $ 742 $ 663 $ 541 $ 79 $ 122Net Sales
Wholesale net sales increased in FY2021 compared to FY2020, mainly due to the growth of the Supernatural and Chains channels, which was partially offset mainly by the decline in sales of the independent retailers. See the discussion on net sales above for more information.
Retail net sales increased for fiscal 2021 compared to fiscal 2020, mainly due to a 2.9% increase in identical store sales compared to the higher average basket size linked to the pandemic.
Wholesale's net sales increased in fiscal 2020 as compared to fiscal 2019 driven by an incremental 12 weeks of net sales from the acquired Supervalu business of approximately
$3,123 millionand was partially offset by $455 millionfrom an incremental 53rd week in fiscal 2019, with the remaining increase primarily due to growth in sales to existing customers in the Chains, Supernatural and Independent retailers channels. Sales growth was primarily driven by demand for center store and natural products from customers response to the COVID-19 pandemic, and was partially offset by lower sales from previously lost customers and stores prior to the pandemic. 42 -------------------------------------------------------------------------------- Table of Contents Retail's net sales increased for fiscal 2020 as compared to fiscal 2019 primarily due to $495 millionof an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $40 million. The remaining increase was driven by increased identical store sales related to the COVID-19 pandemic. All Retail net sales related to the acquired Supervalu business. The increase in net sales eliminations in fiscal 2021 and 2020 was primarily due to an increase in Wholesale sales to our Retail banners, which are eliminated upon consolidation. Adjusted EBITDA Wholesale's Adjusted EBITDA increased 10% in fiscal 2021 as compared to fiscal 2020. Wholesale's gross profit dollar growth for fiscal 2021 was $26 millionand gross profit rate decreased 7 basis points driven by the mix effect from larger customers. Wholesale's operating expense decreased $36 million, which excludes depreciation and amortization, stock-based compensation and other adjustments outlined in Note 16-Business Segments, driven by prior-year pandemic costs, including temporary higher pandemic compensation costs for our front line workers, which was partially offset by higher operating costs related to starting up three distribution centers in the Pacific Northwestand our Allentowndistribution center during fiscal 2021. Wholesale's depreciation expense decreased $15 millioncompared to fiscal 2020. Retail's Adjusted EBITDA increased 9% in fiscal 2021 as compared to fiscal 2020. The increase was driven by leveraged sales growth from increases in food-at-home purchases that drove sales at our stores. Retail's gross profit dollar growth for fiscal 2021 was $28 millionand its gross profit rate increased 41 basis points from lower promotional activity. Retail's operating expense, which excludes depreciation and amortization, stock-based compensation and other adjustments as outlined in Note 16-Business Segments, increased $19 millionprimarily due to higher employee related costs to support higher sales. Retail's depreciation and amortization expense increased $25 millioncompared to fiscal 2020 primarily related to assets previously classified as held for sale that were moved to continuing operations in the fourth quarter of fiscal 2020 for which we were required to begin recording depreciation and amortization expense.
Adjusted EBITDA improved 44% in fiscal 2021, primarily due to lower incentive compensation costs.
Wholesale's Adjusted EBITDA increased 28% in fiscal 2020 as compared to fiscal 2019. The increase was driven by leveraged sales growth, particularly in the second half of fiscal 2020 from increases in food-at-home purchases that drove sales to our customers, an incremental 12 weeks of Adjusted EBITDA from the acquired Supervalu business. Gross profit dollar growth for fiscal 2020 was
$469 millionwith a gross profit rate decrease of approximately 8 basis points, which outpaced operating expense increases, which excludes depreciation and amortization, stock-based compensation and other adjustments outlined in Note 16-Business Segments, of $342 million. Operating expense rate decrease of approximately 29 basis points primarily driven by lower trucking expense, partially offset by higher temporary incentive pay and operating costs related to the COVID-19 pandemic and higher bad debt expense prior to the COVID-19 pandemic. Wholesale depreciation expense increased $39 millionto $267 milliondue to an incremental 12 weeks of depreciation and amortization expense from the Supervalu acquisition. Retail's Adjusted EBITDA increased 151% in fiscal 2020 as compared to fiscal 2019. The increase was driven by higher sales volume from the impacts of the COVID-19 pandemic and the incremental 12 weeks of Adjusted EBITDA from the acquired Supervalu business, fixed and variable cost leveraging and lower promotional activity. Gross profit dollar growth for fiscal 2020 was $200 millionwith gross profit rate increase of approximately 90 basis points from lower promotional activity. Operating expense growth, which excludes depreciation and amortization, stock-based compensation and other adjustments outlined in Note 16-Business Segments, of $142 millionwith an operating expense rate decrease of 93 basis points driven by variable cost leveraging partially offset by higher temporary incentive pay and operating costs related to the COVID-19 pandemic. Retail depreciation and amortization expense for fiscal 2020 and 2019 relate to finance lease amortization expense associated with leases previously amortizing in continuing operations as they were not previously classified as held for sale.
Other Adjusted EBITDA decreased 138% in fiscal 2020, primarily due to higher incentive compensation costs.
43 -------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES
â¢Total liquidity as of
July 31, 2021was $1.32 billionand consisted of the following: â¢Unused credit under our revolving line of credit was $1,280 millionas of July 31, 2021, which increased $45 millionfrom $1,235 millionas of August 1, 2020, primarily due to net payments made on the ABL Credit Facility as cash flow generated from the business was utilized to reduce outstanding debt. This net reduction of the outstanding balance under the ABL Credit Facility in fiscal 2021 was net of incremental borrowings under the facility used to fund certain mandatory and voluntary prepayments on the Term Loan Facility (as discussed below). â¢Cash and cash equivalents was $41 millionas of July 31, 2021, which decreased $6 millionfrom $47 millionas of August 1, 2020. â¢Our total debt decreased $310 millionto $2,188 millionas of July 31, 2021from $2,498 millionas of August 1, 2020, primarily driven by net positive cash flows from operating activities and asset dispositions, partially offset by payments for capital expenditures during fiscal 2021. â¢In fiscal 2021, we amended our Term Loan Agreement to, among other things, reduce the applicable margin for LIBOR and base rate loans under the Term Loan Facility by 75 basis points. â¢In fiscal 2021, we made voluntary prepayments of $186 millionon the Term Loan Facility funded with incremental borrowings under the ABL Credit Facility that will reduce our interest costs. â¢In fiscal 2021, we issued $500 millionof unsecured 6.750% Senior Notes due October 15, 2028(the "Senior Notes") and utilized the net proceeds and borrowings under the ABL Credit Facility to make a $500 millionprepayment on our Term Loan Facility. In addition, during fiscal 2021, we made $85 millionof additional repayments under the Term Loan Facility, including a mandatory repayment of $72 millionrelated to Excess Cash Flow (as defined in the Term Loan Agreement) generated in fiscal 2020, as required under the Term Loan Agreement and prepayments of $13 millionwith asset sale proceeds. â¢In fiscal 2022, scheduled debt maturities are expected to be $14 million. We are also obligated to make payments to reduce finance lease obligations, including a payment to acquire the Riverside, CAdistribution center in fiscal 2022, which we expect to fund with the proceeds of a concurrent sale-leaseback transaction in fiscal 2022. Based on our Consolidated First Lien Net Leverage Ratio (as defined in the Term Loan Agreement) at the end of fiscal 2021, no prepayment from Excess Cash Flow in fiscal 2021 is required to be made in fiscal 2022. â¢Working capital decreased $272 millionto $1,063 millionas of July 31, 2021from $1,335 millionas of August 1, 2020, primarily due to the contractual requirement to acquire the Riverside, CAdistribution center discussed above reflected in the current portion of finance lease liabilities and accrued expenses, and the collection of tax refunds related to prior year tax returns, partially offset by a reduction of the current portion of long-term debt resulting from the Term Loan Facility Excess Cash Flow prepayment described above.
Sources and uses of species
We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds and proceeds from the sale of surplus and/or non-core assets. A significant reduction in operating earnings or the incurrence of operating losses could have a negative impact on our operating cash flow, which may limit our ability to pay down our outstanding indebtedness as planned. Our credit facilities are secured by a substantial portion of our total assets. We expect to be able to fund debt maturities through fiscal 2022 with internally generated fund, proceeds from asset sales or borrowings under the ABL Credit Facility. Our primary sources of liquidity are from internally generated funds and from borrowing capacity under the ABL Credit Facility. We believe our short-term and long-term financing abilities are adequate as a supplement to internally generated cash flows to satisfy debt obligations and fund capital expenditures as opportunities arise. Our continued access to short-term and long-term financing through credit markets depends on numerous factors, including the condition of the credit markets and our results of operations, cash flows, financial position and credit ratings. Primary uses of cash include debt service, capital expenditures, working capital maintenance and income tax payments. We typically finance working capital needs with cash provided from operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories. 44 -------------------------------------------------------------------------------- Table of Contents We currently do not pay a dividend on our common stock, and have no current plans to do so. In addition, we are limited in the aggregate amount of dividends that we may pay under the terms of our Term Loan Facility, ABL Credit Facility, and Senior Notes. Subject to certain limitations contained in our debt agreements and as market conditions warrant, we may from time to time refinance indebtedness that we have incurred, including through the incurrence or repayment of loans under existing or new credit facilities or the issuance or repayment of debt securities. Proceeds from the sale of any properties mortgaged and encumbered under our Term Loan Facility are required to be used to make additional Term Loan Facility payments or to be reinvested in the business.
During fiscal 2021, we repaid a net
$56 millionunder the ABL Credit Facility, repaid $771 millionon the Term Loan Facility related to mandatory and voluntary prepayments, and issued $500 millionof Senior Notes. Refer to Note 9-Long-Term Debt in Part II, Item 8 of this Annual Report for a detailed discussion of the provisions of our credit facilities and certain long-term debt agreements and additional information. Our Term Loan Agreement and Senior Notes do not include any financial maintenance covenants. Our ABL Loan Agreement subjects us 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, if the adjusted aggregate availability (as defined in the ABL Loan Agreement) is ever less than the greater of (i) $235 millionand (ii) 10% of the aggregate borrowing base. We have not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement, including through the filing date of this Annual Report. The Term Loan Agreement, ABL Loan Agreement and Senior Notes contain certain operational and informational covenants customary for debt securities of these types that limit our and our restricted subsidiaries' ability to, among other things, incur debt, declare or pay dividends or make other distributions to our stockholders, transfer or sell assets, create liens on our assets, engage in transactions with affiliates, and merge, consolidate or sell all or substantially all of our and our subsidiaries' assets on a consolidated basis. We were in compliance with all such covenants for all periods presented. If we fail to comply with any of these covenants, we may be in default under the applicable debt agreement, and all amounts due thereunder may become immediately due and payable. The following chart outlines our scheduled debt maturities by fiscal year, which excludes debt prepayments that may be required from proceeds from sales of mortgaged properties beyond fiscal 2022 (as defined in the Term Loan Agreement). Based on our Consolidated First Lien Net Leverage Ratio at the end of fiscal 2021, no prepayment from Excess Cash Flow in fiscal 2021 is required to be made in fiscal 2022. [[Image Removed: unfi-20210731_g3.jpg]] 45
-------------------------------------------------------------------------------- Table of Contents Derivatives and Hedging Activity We enter into interest rate swap contracts from time to time to mitigate our exposure to changes in market interest rates as part of our strategy to manage our 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. As of
July 31, 2021, we had an aggregate of $1,233 millionof floating rate notional debt subject to active interest rate swap contracts, which effectively hedge the LIBOR component of our interest rate payments through pay fixed and receive floating interest rate swap agreements. These fixed rates range from 1.795% to 2.959%, with maturities between August 2022and October 2025. The fair value of these interest rate derivatives represents a total net liability of $75 millionand are subject to volatility based on changes in market interest rates. In fiscal 2021, we paid $17 millionto terminate or novate $1,204 millionof interest rate swap contracts over our floating rate notional debt. The termination payments reflect the amount of accumulated other comprehensive loss that will continue to be amortized into interest expense over the original interest rate swap contract terms as long as the hedged interest rate transactions are still probable of occurring. See Note 8-Derivatives in Part II, Item 8 and -Interest Rate Risk within Item 7A of this Annual Report for additional information. From time-to-time, we enter into fixed price fuel supply agreements and foreign currency hedges. As of July 31, 2021, we had fixed price fuel contracts outstanding and foreign currency forward agreements outstanding. Gains and losses and the outstanding assets and liabilities from these arrangements are insignificant.
Payments for capital expenditures
Our capital expenditures increased
$137 millionin fiscal 2021 to $310 millioncompared to $173 millionfor fiscal 2020, primarily due to the new Allentown, PAdistribution center investment in fiscal 2021 compared to the Riverside, CAdistribution center investments in fiscal 2020, as well as higher distribution center improvements, including automation, and higher information technology investments. Fiscal 2022 capital spending is expected to be approximately $300 millionand include projects that optimize and expand our distribution network, technology platform investments and the remaining investments in the Allentown, PAdistribution center. In addition to this fiscal 2022 capital spending, we expect to spend another $152 millionto acquire the real property of the Riverside, CAdistribution center, which we expect to fund with the proceeds of a concurrent sale-leaseback transaction. We expect to finance fiscal 2022 capital expenditures requirements with cash generated from operations and borrowings under our ABL Credit Facility. Longer term, capital spending is expected to be at or below 1.0% of net sales. Future investments may be financed through long-term debt or borrowings under our ABL Credit Facility. 46
Table of Contents The following table shows our capital expenditures by type over the past three years.
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Cash flow information
The following summarizes our consolidated statements of cash flows:
Increase (Decrease) 2021 2020 2019 (in millions) (52 weeks) (52 weeks) (53 weeks) 2021 2020 Net cash provided by operating activities of continuing operations
Net cash used in investing activities of continuing operations
(239) (28) (2,341) (211) 2,313 Net cash (used in) provided by financing activities (384) (453) 1,996 69 (2,449) Net cash flows from discontinued operations 2 27 74 (25) (47) Effect of exchange rate on cash 1 (1) - 2 (1) Net (decrease) increase in cash and cash equivalents (6) 2 22 (8) (20) Cash and cash equivalents, at beginning of period 47 45 23 2 22 Cash and cash equivalents at end of period, including discontinued operations
Fiscal year 2021 compared to fiscal year 2020
The increase in net cash provided by operating activities of continuing operations was primarily due to lower levels of cash invested in net working capital provided primarily due to the higher use of cash in fiscal 2020 due to credit extended on continued sales growth and build inventories in excess of accounts payable increases. In addition, we had higher cash flow from pre-tax earnings excluding non-cash impairments, restructuring charges, net periodic benefit income, multiemployer pension plan charges and other expenses, and incurred lower cash interest expense. The increase in net cash used in investing activities of continuing operations was primarily due to higher payments for capital expenditures discussed below and lower proceeds from asset sales, including from distribution center sales related to optimizing our distribution network, primarily those in the Pacific region. The decrease in net cash used in financing activities of continuing operations was primarily due to less cash available from operating activities, net of cash used in investing activities, to reduce our outstanding debt. 47 -------------------------------------------------------------------------------- Table of Contents The decrease in cash flows from discontinued operations was primarily due to higher cash provided by investing activities from the sale of property in fiscal 2020 that did not recur in 2021.
Fiscal year 2020 compared to fiscal year 2019
The increase in net cash provided by operating activities of continuing operations was primarily due to higher amounts of cash provided in fiscal 2020 related to higher earnings before the goodwill impairment charges and depreciation and amortization expense, cash received from income taxes in fiscal 2020 compared to cash paid for income taxes in fiscal 2019, and lower payments for assumed liabilities and transaction costs, which were partially offset by uses of cash to build inventory. In fiscal 2019, we benefited from the reduction of the seasonally high levels of inventory and accounts receivable at the time of the Supervalu acquisition; however, these cash inflows were offset in part by decreases from cash payments made in fiscal 2019 for assumed liabilities and the payment of transaction costs from the Supervalu acquisition, including transaction-related expenses, accrued employee costs, and restructuring costs associated with reductions in force. The decrease in net cash used in investing activities of continuing operations was primarily due to
$2,292 millionof cash paid to purchase Supervalu in fiscal 2019 and $55 millionof lower cash payments for capital expenditures, partially offset by $32 millionof less cash received from the sale of property and equipment, primarily due to lower cash received from the sale of distribution centers. In fiscal 2019, we received cash from the sale and leaseback of two distribution centers, one of which was a shorter-term lease related to the exit of that facility. In fiscal 2020, we received cash proceeds from the sale of five distribution centers, one of which contained a shorter-term leaseback related to the exit of that facility. The decrease in net cash provided by financing activities of continuing operations was primarily due to fiscal 2019 borrowings on long-term debt to finance the Supervalu acquisition, and a net decrease in cash provided by the revolving credit facility borrowings of $1,193 million, which was driven by borrowings to finance the Supervalu acquisition in fiscal 2019, offset in part by net payments made in fiscal 2020 from operating activities cash flows in excess of investing activities. These decreases in cash provided by financing activities, were offset in part by a decrease in payments of long-term debt and finance lease obligations of $658 milliondriven by the repayment of acquired senior notes in fiscal 2019 and $63 millionof payments for debt issuance costs in fiscal 2019. Net cash flows from discontinued operations primarily include investing activity cash flows from asset sales and operating activity cash flows from operating income of the retail disposal groups. The decrease in net cash flows from discontinued operations is primarily due to higher proceeds received in fiscal 2019 related to the sale of retail locations, including Hornbacher's, than proceeds received in fiscal 2020, including proceeds from the sale of a former dedicated retail distribution center and retail stores.
Other obligations and commitments
Our principal contractual obligations and commitments consist of obligations under our long term debt, interest on long-term debt, operating and finance leases, purchase obligations, self-insurance liabilities and multiemployer plan withdrawals. Refer to Note 9-Long-Term Debt, Note 11-Leases, Note 13-Benefit Plans, Note 1-Significant Accounting Policies and Note 17-Commitments, Contingencies and Off-Balance Sheet Arrangements to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for more information on the nature and timing of obligations for debt, leases, benefit plans, self-insurance and purchase obligations, respectively. The future amount and timing of interest expense payments are expected to vary with the amount and then prevailing contractual interest rates over our debt as discussed in -Interest Rate Risk within Item 7A of this Annual Report. 48
Pension obligations and other post-retirement benefits
$2 millionand $9 millionto our defined benefit pension and other postretirement benefit plans, respectively, in fiscal 2021. In fiscal 2022, no minimum pension contributions are required to be made under the Unified Grocers, Inc.Cash Balance Plan or the SUPERVALU INC.Retirement Plan under Employee Retirement Income Security Act of 1974, as amended ("ERISA"). An insignificant amount of contributions are expected to be made to defined benefit pension plans and postretirement benefit plans in fiscal 2022. We fund our defined benefit pension plans based on the minimum contribution amount required under ERISA, the Pension Protection Act of 2006 and other applicable laws, as determined by us, including our external actuarial consultant, and additional contributions made at our discretion. We 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. We assess the relative attractiveness of the use of cash to accelerate contributions considering such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required Pension Benefit Guaranty Corporationvariable rate premiums or in order to achieve exemption from participant notices of underfunding.
Off-balance sheet multi-company pension plans
We contribute 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 unions that are parties to the collective bargaining agreement. Based on the assessment of the most recent information available from the multiemployer plans, we believe that most of the plans to which we contribute are underfunded. We are only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability to us. Our contributions can fluctuate from year to year due to store closures, employer participation within the respective plans and reductions in headcount. Our contributions to these plans could increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of our collective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, we could trigger a partial or complete withdrawal that could require us to record a withdrawal liability obligation and make withdrawal liability payments to the fund. Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized continuing and discontinued operations expense, of
$48 million, $52 millionand $41 millionin fiscal 2021, 2020 and 2019, respectively. In fiscal 2022, we expect to contribute approximately $46 millionto multiemployer plans related to continuing operations, subject to the outcome of collective bargaining and capital market conditions. We expect required cash payments to fund multiemployer pension plans from which we have withdrawn from to be immaterial in any one fiscal year, which would exclude any payments that may be agreed to on a lump sum basis to satisfy existing withdrawal liabilities. Any future withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP. Any triggered withdrawal obligation could result in a material charge and payment obligations that would be required to be made over an extended period of time. We also make contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating expenses could increase in the future.
Refer to Note 13 – Benefit Plans in Part II, Section 8 of this Annual Report for more information on the plans in which we participate.
49 -------------------------------------------------------------------------------- Table of Contents Share Repurchases On
October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200 millionof our outstanding common stock. The repurchase program is scheduled to expire upon our repurchase of shares of our common stock having an aggregate purchase price of $200 million. We did not repurchase any shares of our common stock in fiscal 2021 or 2020 pursuant to the share repurchase program. As of July 31, 2021, we have $176 millionremaining authorized under the share repurchase program. We do not expect to purchase shares under the share repurchase program during fiscal 2022. Additionally, our ABL Credit Facility, Term Loan Facility and Senior Notes contain terms that limit our ability to repurchase common stock above certain levels unless certain conditions and financial tests are met.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Management believes the following critical accounting policies reflect our more subjective or complex judgments and estimates used in the preparation of our Consolidated Financial Statements.
Inventories are valued at the lower of cost or market. Substantially all of our inventory consists of finished goods. Inventories are recorded net of vendor allowances and cash discounts. We evaluate inventory shortages (shrink) throughout each fiscal year based on actual physical counts in our facilities. The majority of our inventory is costed under the LIFO method, which allows for 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. If the first-in, first-out method had been used, Inventories, net, would have been higher by approximately
$67 millionand $43 millionfor fiscal 2021 and 2020, respectively. As of July 31, 2021, approximately $1.8 billionor 76 percent of inventory was valued under the LIFO method, before the application of a LIFO reserve, and primarily included grocery, frozen food and general merchandise products, with the remaining inventory valued under the first-in, first-out method and primarily included meat, dairy and deli products.
We receive funds from many of the vendors whose products we buy for resale. These vendor funds are generally provided to increase the purchasing and sell-through of the related products. We receive vendor funds for a variety of merchandising activities: placement of the vendors' products in our advertising; display of the vendors' products in prominent locations in our stores; supporting the introduction of new products into our stores and distribution centers; exclusivity rights in certain categories; and to compensate for temporary price reductions offered to customers on products held for sale. We also receive 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, although some of the contracts have terms of longer than one year. We recognize vendor funds for merchandising activities as a reduction of Cost of sales when the related products are sold, unless it has been determined that a discrete identifiable benefit has been provided to the vendor, in which case the related amounts are recognized within Net sales and represent less than one half of one percent of total Net sales. 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 reductions to the value of on-hand inventory. The amount and timing of recognition of vendor funds as well as the amount of vendor funds to be recognized as a reduction to ending inventory requires management judgment and estimates. Management determines these amounts based on estimates of current year purchase volume using forecast and historical data, and a review of average inventory turnover data. These judgments and estimates impact our reported gross profit, operating income and inventory amounts. The historical estimates have been reliable in the past, and we believe our methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant changes in the level of vendor support. However, if such changes were to occur, cost of sales and net sales could change, depending on the specific vendors involved. If vendor advertising allowances were substantially reduced or eliminated, we would consider changing the volume, type and frequency of the advertising, which could increase or decrease our advertising expense. 50 -------------------------------------------------------------------------------- Table of Contents Benefit plans We sponsor pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. Pension benefits associated with these plans are generally based on each participant's years of service, compensation, and age at retirement or termination. Our defined benefit pension plans and certain supplemental executive retirement plans were closed to new participants and service crediting. While we believe the valuation methods used to determine the fair value of plan assets 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 estimate of fair value at the reporting date. The determination of our obligation and related expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management's selection of certain actuarial assumptions used in calculating these amounts. These assumptions include, among other things, the discount rate and the expected long-term rate of return on plan assets. We measure our defined benefit pension and other postretirement plan obligations as of the nearest calendar month end. Refer to Note 13-Benefit Plans in Part II, Item 8 of this Annual Report for information related to the actuarial assumptions used in determining pension and postretirement healthcare liabilities and expenses.
We review and select the discount rate to be used in connection with our pension and other postretirement obligations annually. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. We set our rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. We utilize the "full yield curve" approach for determining the interest and service cost components of net periodic benefit cost for defined benefit pension and other postretirement benefit plans. Under this method, the discount rate assumption used in the interest and service cost components of net periodic benefit cost is built through applying the specific spot rates along the yield curve used in the determination of the benefit obligation described above, to the relevant projected future cash flows of our pension and other postretirement benefit plans. We believe the "full yield curve" approach reflects a greater correlation between projected benefit cash flows and the corresponding yield curve spot rates and provides a more precise measurement of interest and service costs. Each 25 basis point reduction in the discount rate would increase our projected pension benefit obligation by
$62 million, as of July 31, 2021, and for fiscal 2022 would increase Net periodic benefit income by approximately $4 million.
Expected rate of return on plan assets
Our expected long-term rate of return on plan assets assumption is determined based on the portfolio's actual and target composition, current market conditions, forward-looking return and risk assumptions by asset class, and historical long-term investment performance. The assumed long-term rate of return on pension assets ranged from 5.00 percent to 5.50 percent for fiscal 2021. The 10-year rolling average annualized return for the
SUPERVALU INC.Retirement Plan is approximately 8.07 percent based on returns from 2012 to 2021. In accordance with GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods. Each 25 basis point reduction in expected return on plan assets would decrease Net periodic benefit income for fiscal 2022 by approximately $5 million.
Amortization of gains and losses
We recognize the amortization of net actuarial loss on the
SUPERVALU INC.Retirement Plan and the Unified Grocers, Inc.Cash Balance Plan over the remaining life expectancy of inactive participants based on our determination that almost all of the defined benefit pension plan participants are inactive and the plan is frozen to new participants. For the purposes of inactive participants, we utilized an over approximately 90 percent threshold established under our policy. Multiemployer pension plans
We contribute to various multi-employer pension plans based on collective agreement obligations. These multi-employer pension plans provide retirement benefits to members based on their service with contributing employers. Benefits are paid from assets held in trust for this purpose. Trustees are generally responsible for determining the level of benefits to be provided to members as well as matters such as the investment of assets and administration of plans.
We continue to evaluate and address our potential exposure to under-funded multi-employer pension plans as it relates to our associates who are or were beneficiaries of these plans. In the future, we may consider opportunities to limit the Company's exposure to under-funded multi-employer pension obligations by moving our active associates in such plans to defined contribution plans, and withdrawing from the pension plan or continuing to participate in the plans for prior obligations. In fiscal 2021, we incurred a
$63 millioncharge for obligations related to withdrawal liabilities for three Retail multiemployer pension plans where our active associates moved to defined contribution plans for future benefits. As we continue to work to find solutions to under-funded multiemployer pension plans, it is possible we could incur withdrawal liabilities for certain additional multiemployer pension plan obligations. As we continue to work to find solutions to under-funded multiemployer pension plans, it is possible we could incur withdrawal liabilities for certain additional multiemployer pension plan obligations in the future as we actively bargain collective agreements with a number of our unions in due course. We continue to evaluate our exposure to under-funded multiemployer pension plans. Although these liabilities are not a direct obligation or an on-balance sheet liability of ours, addressing these uncertainties requires judgment in the timing of expense recognition when we determine our commitment is probable and estimable.
Refer to Note 13 – Employee benefit plans of this annual report for more information on our participation in these multi-employer pension plans and on the actuarial assumptions used to determine pension commitments and expenses and other additional expenses. of retirement.
We are primarily self-insured for workers' compensation, general and automobile liability insurance. It is our policy to record the self-insured portions of our workers' compensation, general and automobile liabilities based upon actuarial methods of estimating the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported. Any projection of losses concerning these liabilities is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting litigation trends, benefit level changes and claim settlement patterns. If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our Consolidated Financial Statements. Accruals for workers' compensation, general and automobile liabilities totaled
$103 millionand $101 millionas of July 31, 2021and August 1, 2020, respectively.
The recoverability of long-lived assets
We review long-lived assets, including definite-lived intangible assets at least annually, and on an interim basis if events occur or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We evaluate these assets at the asset-group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Cash flows expected to be generated by the related assets are estimated over the assets' useful lives based on updated projections. When the undiscounted future cash flows are not sufficient to recover an asset's carrying amount, the fair value is compared to the carrying value to determine the loss to be recorded. Estimates of future cash flows and expected sales prices are judgements based on the Company's experience and knowledge of operations. These estimates project cash flows several years into the future and include assumptions on variables such as changes in supply contracts, macroeconomic impacts and market competition.
We did not identify any impairment in fiscal 2021 as part of our quarterly procedures or our annual assessment of impairment.
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized within the provision for income tax in the period that includes the enactment date. The calculation of the Company's tax liabilities includes addressing uncertainties in the application of complex tax regulations and is based on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Addressing these uncertainties requires judgment and estimates; however, actual results could differ, and we may be exposed to losses or gains. Our effective tax rate in a given financial statement period could be affected based on favorable or 52
Table of Contents unfavorable tax settlements. Unfavorable tax settlements will generally require the use of cash and may result in an increase to our effective tax rate in the period of resolution. Favorable tax settlements may be recognized as a reduction to our effective tax rate in the period of resolution. The Company regularly reviews its deferred tax assets for recoverability to evaluate whether it is more likely than not that they will be realized. In making this evaluation, the Company considers the statutory recovery periods for the assets, along with available sources of future taxable income, including reversals of existing and future taxable temporary differences, tax planning strategies, history of taxable income and projections of future income. The Company gives more significance to objectively verifiable evidence, such as the existence of deferred tax liabilities that are forecast to generate taxable income within the relevant carryover periods and a history of earnings. A valuation allowance is provided when the Company concludes, based on all available evidence, that it is more likely than not that the deferred tax assets will not be realized during the applicable recovery period. Recently Issued Financial Accounting Standards For a discussion of recently issued financial accounting standards, refer to Note 2-Recently Adopted and Issued Accounting Pronouncements in Part II, Item 8 of this Annual Report for further detail.
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