United Natural Foods, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
UNFI is a distributor of natural, organic, specialty, produce and conventional grocery and non-food products, with related support services in the United States and Canada. The filing covers the 53-week fiscal year ended August 3, 2019; fiscal 2018 had 52 weeks. Results are significantly affected by the October 22, 2018 acquisition of SUPERVALU Inc. for approximately $2.3 billion, including assumed debt and liabilities.
- The combined company operated 63 distribution centers and warehouses representing approximately 32.2 million square feet and served approximately 30,000 customer locations.
- Whole Foods Market remained the largest customer, representing approximately 21% of fiscal 2019 net sales. Its distribution agreement expires September 28, 2025.
- UNFI classified the acquired Cub Foods and Shoppers retail operations as discontinued operations and intended to divest them.
Financial performance and key metrics
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $21.387 billion | $10.227 billion |
| Gross profit | $2.785 billion | $1.523 billion |
| Gross margin | 13.02% | 14.89% |
| Operating income (loss) | $(291.0) million | $227.2 million |
| Operating margin | (1.36)% | 2.22% |
| Net income (loss) from continuing operations | $(350.7) million | $165.7 million |
| Net income (loss) attributable to UNFI | $(285.0) million | $165.7 million |
| Diluted earnings (loss) per share | $(5.56) | $3.26 |
| Adjusted EBITDA | $562.5 million | $361.6 million |
- Supervalu contributed approximately $10.47 billion of continuing-operations net sales for the 41 weeks after acquisition.
- Fiscal 2019 included a $292.8 million goodwill impairment charge related to the Supervalu Wholesale reporting unit, $153.5 million of restructuring, acquisition and integration expenses, and a $24.1 million LIFO charge.
- Income from discontinued operations was $65.8 million after tax on $2.094 billion of net sales.
- Net cash provided by operating activities was $284.5 million, including $175.1 million from continuing operations and $109.4 million from discontinued operations.
- Capital expenditures were $207.8 million, compared with $44.6 million in fiscal 2018.
- Cash and cash equivalents were $45.3 million, including $42.4 million attributable to continuing operations, at year-end. Working capital was $1.459 billion.
Debt, liquidity and capital structure
- Total debt, including the current portion, was $2.906 billion at August 3, 2019, compared with $318.8 million a year earlier. The increase primarily financed the Supervalu acquisition.
- Debt consisted principally of $1.865 billion outstanding under the Term Loan Facility and $1.080 billion under the ABL Credit Facility, net of applicable issuance costs and discounts.
- Remaining ABL availability was $919.2 million at year-end, with $76.2 million of outstanding letters of credit.
- Fiscal 2020 scheduled debt maturities were $102.7 million, excluding potential mandatory prepayments. Capital lease payments were expected to be approximately $24.7 million.
- The company had $2.2 billion of interest-rate swaps that effectively fixed portions of LIBOR-based debt; the swaps had a net liability fair value of $76.6 million.
- The company paid no dividend and stated that it had no current intention to pay cash dividends.
Material changes versus the prior comparable period
- Reported sales more than doubled, increasing 109% primarily because of the Supervalu acquisition and the additional fiscal week. Supermarket-channel sales increased to $12.505 billion from $2.820 billion.
- Whole Foods sales increased 17% to approximately $4.393 billion, while its share of total sales declined from 37% to 21% because of the broader Supervalu customer base.
- Gross margin declined 187 basis points, reflecting customer mix, the LIFO charge, and the absence of a $20.9 million favorable inventory-accrual estimate change recorded in fiscal 2018.
- Operating results shifted from profit to loss due to goodwill impairment, integration and restructuring costs, increased depreciation and amortization, higher distribution costs and substantially higher interest expense.
- Interest expense increased to $180.0 million from $16.0 million because of acquisition-related borrowing, lease obligations and financing costs.
- Fiscal 2019 operating cash flow increased from continuing operations, primarily because of inventory reductions and cash acquired with Supervalu, but cash used in investing activities increased to $2.259 billion, including $2.292 billion for the acquisition.
- UNFI adopted LIFO for certain legacy UNFI inventories, reducing fiscal 2019 continuing-operations net income by approximately $11.0 million after tax.
Guidance, outlook, commentary and unusual items
- Management expected the competitive environment to remain challenging and anticipated continued margin compression, but believed cost savings and cross-selling opportunities could offset the pressure.
- Management planned continued integration of Supervalu, distribution-network optimization, cost-synergy realization, national warehouse-management and procurement systems, and expansion or automation of distribution facilities.
- Additional integration and restructuring costs were expected in fiscal 2020, including potential costs associated with retail divestitures, headcount reductions, store closures, severance and multiemployer pension obligations.
- The Pacific Northwest network was being consolidated from five distribution centers into two. Management expected future savings but had not completed all closures as of year-end.
- The company expected to fund fiscal 2020 debt maturities through internally generated funds, asset-sale proceeds, ABL borrowings or new debt issuance.
- As of August 3, 2019, the Supervalu purchase-price allocation remained preliminary. Changes to acquired asset and liability valuations could change goodwill and the recorded impairment charge.
- On August 1–2, 2019, UNFI initiated a lump-sum settlement window for certain SUPERVALU Retirement Plan participants. Payments were expected around November 1, 2019 and were expected to require a pension-plan remeasurement.
- UNFI adopted the new lease standard on August 4, 2019 and estimated recognition of approximately $1.1 billion of operating lease liabilities and corresponding right-of-use assets, with no material expected impact on earnings or cash flows.
Principal risks and contingencies
- Dependence on Whole Foods Market and other large supermarket customers; customers may self-distribute, change suppliers, reduce purchases or terminate arrangements.
- Low-margin, highly competitive grocery distribution industry, including pricing pressure, retailer consolidation, e-commerce and direct manufacturer distribution.
- Execution risk in integrating Supervalu, realizing synergies, optimizing distribution capacity and implementing technology systems.
- High leverage, variable-rate debt, restrictive covenants, refinancing requirements and exposure to interest-rate changes.
- Potential additional goodwill or long-lived-asset impairment charges.
- Underfunded single-employer and multiemployer pension plans, potential withdrawal liabilities and labor negotiations involving approximately 4,800 employees covered by collective bargaining agreements.
- Supply-chain disruptions, vendor out-of-stocks, product recalls, food-safety matters, fuel costs, tariffs, weather and inflation or deflation.
- Pending litigation included opioid-related claims, a False Claims Act matter involving pharmacy pricing, and a putative class action concerning fuel surcharges. Management recorded no material accrual for these proceedings and could not estimate a reasonably possible loss range for the latter two matters.
- Contractual obligations totaled approximately $6.264 billion, including $3.003 billion of debt principal, $1.732 billion of operating leases, $913 million of debt interest and $74 million of multiemployer plan withdrawal liabilities.
Most important facts for investors to verify
- Progress toward Supervalu integration, distribution-center consolidation and the timing and magnitude of promised cost synergies.
- Post-acquisition organic sales, customer retention, gross-margin trends and the effect of Whole Foods purchasing levels.
- Debt repayment, refinancing of the 364-day tranche, mandatory excess-cash-flow prepayments and covenant headroom.
- Final Supervalu purchase-price allocation and whether additional goodwill or asset impairment charges are required.
- Cash generation after capital expenditures, working-capital needs, interest expense and discontinued-operation cash flows.
- Proceeds and liabilities associated with divesting the remaining Cub Foods and Shoppers retail operations.
- Potential exposure from pension obligations, multiemployer withdrawals, pending litigation and assigned lease guarantees.