United Natural Foods(UNFI) - 2022 Q3 - Quarterly Report

Part I. Financial Information Financial Statements The company's financial statements for the period ended April 30, 2022, show an increase in total assets to $7.88 billion and a rise in total liabilities to $6.09 billion compared to July 31, 2021, with net sales growing to $7.24 billion and net income attributable to the company increasing to $67 million for the 13-week period, while operating activities used $31 million in cash for the 39-week period, a significant shift from the $336 million provided in the prior year Condensed Consolidated Balance Sheet Highlights (in millions) | Account | April 30, 2022 | July 31, 2021 | | :--- | :--- | :--- | | Total current assets | $3,980 | $3,550 | | Total assets | $7,878 | $7,525 | | Total current liabilities | $2,389 | $2,487 | | Long-term debt | $2,377 | $2,175 | | Total liabilities | $6,094 | $6,011 | | Total stockholders' equity | $1,784 | $1,514 | Condensed Consolidated Statement of Operations Highlights (in millions) | Metric | 13-Week Period Ended April 30, 2022 | 13-Week Period Ended May 1, 2021 | | :--- | :--- | :--- | | Net sales | $7,242 | $6,631 | | Gross profit | $1,012 | $970 | | Operating income | $123 | $92 | | Net income attributable to UNFI | $67 | $48 | | Diluted EPS | $1.10 | $0.80 | Condensed Consolidated Statement of Cash Flows Highlights (in millions) | Cash Flow Activity | 39-Week Period Ended April 30, 2022 | 39-Week Period Ended May 1, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(31) | $336 | | Net cash provided by (used in) investing activities | $45 | $(111) | | Net cash used in financing activities | $(7) | $(232) | | Net increase (decrease) in cash | $7 | $(7) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management reports a 9.2% increase in net sales for Q3 2022, driven by inflation and new business across all customer channels, with gross profit rising despite a decrease in gross margin rate from 14.6% to 14.0% due to a significant $72 million LIFO charge, while total liquidity stood at $909 million and total debt increased to $2.39 billion to fund working capital Results of Operations For Q3 2022, net sales increased 9.2% to $7.24 billion, driven by inflation and new business, with gross profit increasing by 4.3% to $1.01 billion despite a 60 basis point decline in gross margin rate to 14.0% due to a $72 million LIFO charge, and operating income boosted to $123 million by an $87 million gain on asset sale Net Sales by Customer Channel (in millions) | Customer Channel | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | Chains | $3,111 | $2,957 | 5.2% | | Independent retailers | $1,833 | $1,599 | 14.6% | | Supernatural | $1,468 | $1,287 | 14.1% | | Retail | $602 | $590 | 2.0% | | Other | $625 | $579 | 7.9% | | Total net sales | $7,242 | $6,631 | 9.2% | - The increase in net sales was primarily driven by inflation and new business from both existing and new customers, including the benefit of cross-selling, partially offset by supply chain challenges[147] - Gross margin rate decreased to 14.0% from 14.6% year-over-year, largely due to a LIFO charge of $72 million in Q3 2022 compared to just $5 million in Q3 2021, though excluding the LIFO charge, the gross margin rate actually increased to 15.0% from 14.7%, driven by improvements in the Wholesale segment[158] - The company recorded a pre-tax gain on sale of approximately $87 million in Q3 2022 from a sale-leaseback transaction of its Riverside, California distribution center[164] Segment Results In Q3 2022, the Wholesale segment's net sales grew by $610 million, and its Adjusted EBITDA increased by 3.0% to $171 million, driven by gross profit expansion that outpaced higher operating costs, while the Retail segment saw a modest 2.4% increase in identical store sales but its Adjusted EBITDA decreased by 39.1% to $14 million due to higher employee and occupancy costs Segment Performance - Q3 2022 vs Q3 2021 (in millions) | Segment | Net Sales Q3 2022 | Net Sales Q3 2021 | Adjusted EBITDA Q3 2022 | Adjusted EBITDA Q3 2021 | | :--- | :--- | :--- | :--- | :--- | | Wholesale | $6,977 | $6,367 | $171 | $166 | | Retail | $602 | $590 | $14 | $23 | - Wholesale's Adjusted EBITDA increase was driven by gross profit expansion (excluding LIFO), which was partially offset by a 58 basis point increase in the operating expense rate due to investments in transportation and labor[181] - Retail's Adjusted EBITDA decreased significantly due to higher operating expenses from increased employee and occupancy costs[182] Liquidity and Capital Resources As of April 30, 2022, the company had total liquidity of $909 million, consisting of $861 million in unused credit and $48 million in cash, with total debt increasing by $203 million to $2.39 billion to fund a $528 million increase in working capital, and cash flow from operations being a use of $31 million for the 39-week period, a stark contrast to the $338 million provided in the prior-year period - Total liquidity as of April 30, 2022 was $909 million, comprising $861 million of unused credit under the ABL facility and $48 million in cash[186] - Total debt increased by $203 million from July 31, 2021, to $2.39 billion, mainly due to increased borrowings under the ABL Credit Facility to fund working capital increases[186] - Subsequent to the quarter, on June 3, 2022, the company entered into a new $2.6 billion ABL Credit Facility, replacing the previous $2.1 billion facility, with the new facility maturing in 2027 and transitioning from LIBOR to SOFR as the benchmark interest rate[58][192] Cash Flow Summary (in millions) | Cash Flow Activity | 39-Week Period Ended April 30, 2022 | 39-Week Period Ended May 1, 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(31) | $338 | | Net cash provided by (used in) investing activities | $45 | $(112) | | Net cash used in financing activities | $(7) | $(232) | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposures stem from fluctuations in interest rates on its borrowings and interest rate swap agreements, as well as price increases in diesel fuel, with no material changes to these exposures since the last Annual Report, except for the transition from LIBOR to SOFR - Primary market risks are from interest rate fluctuations on borrowings and swaps, and diesel fuel price increases[212] - The company has transitioned its debt and derivative instruments from LIBOR to SOFR as a benchmark interest rate, as disclosed in Notes 7 and 8[212] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of April 30, 2022, with no material changes to the company's internal control over financial reporting during the third quarter of fiscal 2022 - The CEO and CFO concluded that as of the evaluation date (April 30, 2022), the company's disclosure controls and procedures were effective[213] - No changes in internal control over financial reporting occurred during the third quarter of fiscal 2022 that materially affected, or are reasonably likely to materially affect, internal controls[214] Part II. Other Information Legal Proceedings The company is involved in several legal proceedings, notably approximately 43 lawsuits consolidated in an MDL related to the national opioid epidemic, and a qui tam action under the False Claims Act regarding prescription drug pricing for government healthcare programs, which is currently pending a petition for writ of certiorari with the U.S. Supreme Court - UNFI is a defendant in approximately 43 lawsuits consolidated in an MDL related to the national opioid epidemic, with the company being defended and indemnified by New Albertson's in a majority of these cases[101] - The company is subject to a qui tam action (United States ex rel. Schutte and Yarberry v. Supervalu) alleging violations of the False Claims Act related to overcharging government healthcare programs, with relators filing a petition for a writ of certiorari with the U.S. Supreme Court on April 1, 2022, after lower courts ruled in the company's favor[103] Risk Factors There have been no material changes to the company's risk factors as disclosed in its Annual Report on Form 10-K for the year ended July 31, 2021 - No material changes to risk factors from the company's most recent Annual Report were reported[217] Unregistered Sales of Equity Securities and Use of Proceeds The company has a $200 million share repurchase program, authorized in October 2017, with $176 million remaining available as of April 30, 2022, though no shares were repurchased under this program during the third quarter of fiscal 2022, with 157,117 shares acquired during the quarter to cover taxes from the vesting of employee restricted stock awards - As of April 30, 2022, $176 million remains authorized under the company's share repurchase program, with no shares repurchased under the program during the quarter[209][220] Issuer Purchases of Equity Securities (Q3 2022) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 30 - Mar 5, 2022 | 144,950 | $40.48 | | Mar 6 - Apr 2, 2022 | 8,822 | $40.04 | | Apr 3 - Apr 30, 2022 | 3,345 | $43.84 | | Total | 157,117 | $40.53 | - The shares purchased represent deemed surrenders by employees to cover taxes from the vesting of restricted stock awards, not open market repurchases under the publicly announced program[220] Other Information On June 3, 2022, subsequent to the quarter's end, the company entered into a new $2.6 billion secured asset-based revolving credit facility (2022 ABL Loan Agreement), which replaced its previous facility, and also amended its term loan agreement to change the reference rate from LIBOR to Term SOFR - On June 3, 2022, the company entered into a new $2.6 billion ABL Loan Agreement, replacing its prior facility[221] - On June 3, 2022, the company amended its term loan agreement to replace the LIBOR reference rate with Term SOFR[222] Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to credit agreements, CEO and CFO certifications as required by the Sarbanes-Oxley Act, and the financial statements formatted in Inline XBRL - Key exhibits filed include Amendment No. 3 to the Term Loan Agreement and the new Loan Agreement for the ABL facility, both dated June 3, 2022[223] - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act were also filed[223]