ANNUAL
REPORT2017
Moving Food Forward
To our associates, our shareholders,
our customers, and our suppliers:
Fiscal 2017 continued to bring rapid change to the natural and organic industry, and UNFI
has continued to evolve to meet the needs of our retail customers and growing consumer
demand for healthy, fresh, locally sourced and differentiated products. The industry has
faced multiple challenges as our customers contend with consolidation and increased
competition across many new retail points.
WELL POSITIONED FOR GROWTH
Fortunately, we believe we are very well positioned to take advantage of growth
opportunities throughout the next fiscal year and beyond. Our scale, including our 33
distribution centers across North America and more than $9 billion in annual net sales,
and our unique infrastructure continue to provide customers with unparalleled access to
a wide range of products, including organic, “better-for-you,” specialty, vitamins, personal
care, pet, protein, dairy and produce. The natural and organic food industry is showing
robust growth and we are growing with and serving top retailers, eCommerce platforms
and foodservice customers. We have a strategy that we believe works and a strong balance
sheet that provides considerable flexibility for investing in our future.
In fiscal 2017, we successfully completed the integration of recent acquisitions, and
changed the way our sales team goes to market. Today we operate as a United Sales
Team calling on our customers through three regions representing all of our products and
services. We are helping our retail customers across varied formats, channels and product
offerings with merchandising, data analysis and category management. As we have done
for more than 40 years, we are adapting every day in order to add value and improve the way
we interact with our customers.
During calendar 2016, we acquired four companies, including Haddon House, Global Organic, NorCal and Gourmet Guru. By the end of our third quarter fiscal 2017, all four had been fully integrated. Acquisition integration is never easy, and these integrations were complicated, involving multiple product categories, facilities and geographies while on-boarding many new associates. While the hard work related to integration is behind us, we still have much work ahead. We are confident in our ability to optimize both the product offerings and service models of these acquired companies in order to enhance our Building out the Store strategy. Our expansion in perishable continues to be a strategic growth priority at UNFI and we remain steadfast in our commitment to growing our sales of fresh, protein and perimeter products.ECOMMERCE IS A HIGH PRIORITYWe believe eCommerce will be an exciting growth area for UNFI in fiscal 2018 and beyond. Our capabilities are expanding and by the end of fiscal 2018 we expect to have five fully deployed eCommerce fulfillment centers servicing a wide range of business customers. Our “endless aisle” service option for our customers makes UNFI a great eCommerce partner. Our eCommerce business is now approaching $300 million in net sales annually and it grew by more than 18% in fiscal 2017. Growing our eCommerce capabilities and sales is a high priority at UNFI.In fiscal 2017, the Company grew sales by nearly 10% and generated close to $225 million in free cash. Additionally, our focus on margin enhancement initiatives paid off and we delivered gross margin expansion. Our ability to deliver these results in the face of industry headwinds is a testament to our logistics capabilities, supply chain, balance sheet and scale. We believe this infrastructure will serve us well as demand for “better-for-you” products continues to grow.GUIDING A HEALTHIER ROAD AHEADWith significant change around us, we remain committed to promoting healthy, organic food systems, reducing our environmental impact and supporting the communities in which we operate. During fiscal 2017, the UNFI Foundation donated more than $553,107 to non-profit organizations in 18 states. In addition, our associates volunteered over 8,880 hours to service projects and UNFI donated more than 12 million pounds of food through Feeding America’s network of food banks. Also, we recycled more than 22,000 tons of waste, and in our distribution centers we diverted 81% of our operational waste from landfills, a 5% improvement over the prior year. This is an exciting time for UNFI. Consumer demand for natural and organic products remains robust and we have a strong pipeline of exciting opportunities. We believe our sourcing capabilities, our recent acquisitions, our strong balance sheet and demonstrated leadership within “better-for-you” distribution will provide growth opportunities with new and existing customers for many years to come.Moving Food Forward, Steven L. Spinner Chief Executive Officer and ChairmanFor a reconciliation of non-GAAP financial measures referenced herein, please refer to the Company’s Investor Relations website. 226,0259,274,4717,000,0006,000,0005,000,0004,000,0003,000,0002,000,0001,000,00008,000,0005-Year CAGR12.1%Growth241,9578,184,978 Fiscal Year 2012 2013 2014 2015 2016 2017 Fiscal Year 2012 2013 2014 2015 2016 2017 1yr Growth 15.6% 15.8% 12.0% 20.5% 3.5% 9.5% 1yr Growth/(Decline) 19.6% 19.6% 13.6% 14.8% (7.4%) 0.9%Net Sales (000’s)Operating Income (000’s)5,236,021155,1586,064,355185,4946,794,447210,7885-Year CAGR7.8%Growth050,000100,000150,000200,000250,00025,00075,000125,000175,000225,0008,470,286224,1099,000,00010,000,000 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X
__
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 29, 2017
or
For the transition period from _______ to _______
Commission File Number: 0-21531
UNITED NATURAL FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
05-0376157
(I.R.S. Employer
Identification No.)
313 Iron Horse Way, Providence, RI 02908
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (401) 528-8634
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange on which registered
NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No __
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes __ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No __
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No
__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K X
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer X
Non-accelerated Filer __ (Do not check if a smaller reporting company)
Emerging growth company __
Accelerated Filer __
Smaller Reporting Company __
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. __
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes __ No X
The aggregate market value of the common stock held by non-affiliates of the registrant was $2,330,251,353 based upon the closing price of the registrant's common stock
on the Nasdaq Global Select Market® on January 27, 2017. The number of shares of the registrant's common stock, par value $0.01 per share, outstanding as of September 14, 2017
was 50,623,646.
Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on December 13, 2017 are incorporated herein by reference into Part III of
this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
UNITED NATURAL FOODS, INC.
FORM 10-K
TABLE OF CONTENTS
Business
Section
Part I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Part IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
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ITEM 1. BUSINESS
PART I.
Unless otherwise specified, references to "United Natural Foods," "UNFI," "we," "us," "our" or "the Company" in this
Annual Report on Form 10-K ("Annual Report" or "Report") mean United Natural Foods, Inc. and all entities included in our
consolidated financial statements. See the consolidated financial statements and notes thereto included in "Item 8. Financial
Statements and Supplementary Data" of this Report for information regarding our financial performance.
Overview
We are a Delaware corporation based in Providence, Rhode Island, and we conduct business through our various wholly
owned subsidiaries. We believe we are a leading distributor based on sales of natural, organic and specialty foods and non-food
products in the United States and Canada, and that our thirty-three distribution centers, representing approximately 8.7 million
square feet of warehouse space, provide us with the largest capacity of any North American-based distributor principally focused
on the natural, organic and specialty products industry.
We were the first organic food distribution network in the United States designated as a "Certified Organic Distributor" by
Quality Assurance International, Inc. ("QAI"), an organic certifying agency accredited by the United States Department of
Agriculture ("USDA"). This process involved a comprehensive review by QAI of our operating and purchasing systems and
procedures. This certification covers all of our broadline distribution centers in the United States, except for facilities acquired in
connection with the acquisitions of Tony's Fine Foods ("Tony's"), Haddon House Food Products Inc. ("Haddon"), Nor-Cal Produce,
Inc. ("Nor-Cal") and Gourmet Guru Inc. ("Gourmet Guru"). Although not designated as a "Certified Organic Distributor" by QAI,
the three Tony's California locations are certified as Organic by the State of California Department of Public Health Food and
Drug Branch, and Nor-Cal is currently registered with the California Department of Food and Agriculture Organic Program as an
organic handler. In addition, our Canadian distribution centers in British Columbia, Ontario and Quebec all hold one of the
following organic distributor certifications: QAI, EcoCert Canada or ProCert Canada. Our distribution center located in Ontario
also offers a large selection of Kosher certified, non-organic products.
Since the formation of our predecessor in 1976, we have grown our business both organically and through acquisitions which
have expanded our distribution network, product selection and customer base. Since fiscal 2007, our net sales have increased at
a compounded annual growth rate of 12.9%. In recent years, our sales to existing and new customers have increased through the
continued growth of the natural and organic products industry in general; increased market share through our high-quality service
and broader product selection, including specialty products, the acquisition of, or merger with, natural, organic, conventional
produce and specialty product distributors; our efforts to increase the number of conventional supermarket customers to whom
we distribute products; the expansion of our existing distribution centers; the construction of new distribution centers; the
introduction of new products and the development of our own line of natural and organic branded products. Through these efforts,
we believe that we have broadened our geographic penetration, expanded our customer base, enhanced and diversified our product
selection and increased our market share.
Acquisitions
In July 2014, we completed the acquisition of all of the outstanding capital stock of Tony's, through our wholly-owned
subsidiary UNFI West, Inc. ("UNFI West"). With the completion of the transaction, Tony's became a wholly-owned subsidiary
and continues to operate as Tony's Fine Foods. Tony's is headquartered in West Sacramento, California and is a leading distributor
of perishable food products, including a wide array of specialty protein, cheese, deli, food service and bakery goods to retail and
specialty grocers, food service customers and other distribution companies principally located throughout the Western United
States, as well as Alaska and Hawaii.
During fiscal 2015, we began shipping customers both center of the store products and an enhanced selection of fresh,
perishable products. Our customers utilized both UNFI’s broadline and Tony's offerings, including grocery, refrigerated, protein,
specialty cheese and prepared foods. Our customers’ broad utilization supports our belief that there is significant value in UNFI's
position as a leading provider of logistics, distribution and category management for both center store and perimeter products.
In March 2016, the Company acquired certain assets of Global Organic/Specialty Source, Inc. and related affiliates
(collectively "Global Organic") through our wholly owned subsidiary Albert's Organics, Inc. ("Albert's"), in a cash transaction for
approximately $20.6 million. Global Organic is a distributor of organic fruits, vegetables, juices, milk, eggs, nuts, and coffee
located in Sarasota, Florida serving customer locations (many of which are independent retailers) across the Southeastern United
States. Global Organic's operations have been fully integrated into the existing Albert's business in the Southeastern United States.
In March 2016, the Company acquired all of the outstanding equity securities of Nor-Cal and an affiliated entity as well
as certain real estate, in a cash transaction for approximately $67.8 million. Nor-Cal is a distributor of conventional and organic
1
produce and other fresh products primarily to independent retailers in Northern California, with primary operations located in
West Sacramento, California. Our acquisition of Nor-Cal has aided in our efforts to expand our fresh offering, particularly with
conventional produce. Nor-Cal's operations have been combined with the existing Albert's business.
In May 2016, the Company completed its acquisition of all of the outstanding equity securities of Haddon and certain
affiliated entities and real estate for total cash consideration of approximately $217.5 million. Haddon is a distributor and
merchandiser of natural and organic and gourmet ethnic products throughout the Eastern United States. Haddon has a history of
providing quality high touch merchandising services to their customers. Haddon has a diverse, multi-channel customer base
including conventional supermarkets, gourmet food stores and independently owned product retailers. Our acquisition of Haddon
has expanded the product and service offering that we expect to play an important role in our ongoing strategy to build out our
gourmet and ethnic product categories. Haddon's operations have been combined with the Company's existing broadline natural,
organic and specialty distribution business in the United States.
In August 2016, the Company acquired all of the outstanding equity securities of Gourmet Guru in a cash transaction for
approximately $10.0 million, subject to customary post-closing adjustments. Gourmet Guru is a distributor and merchandiser of
fresh and organic food focusing on new and emerging brands. We believe that our acquisition of Gourmet Guru enhances our
strength in finding and cultivating emerging fresh and organic brands and further expands our presence in key urban markets.
Gourmet Guru's operations have been combined with the Company's existing broadline natural, organic and specialty distribution
business in the United States.
The ability to distribute specialty food items (including ethnic, kosher and gourmet products) has accelerated our expansion
into a number of high-growth business markets and allowed us to establish immediate market share in the fast-growing specialty
foods market. We have now integrated specialty food products and natural and organic specialty non-food items into all of our
broadline distribution centers across the United States and Canada. Due to our expansion into specialty foods, over the past several
fiscal years we have been awarded new business with a number of conventional supermarkets. We believe our acquisition of
Haddon has expanded our capabilities in the specialty category and we have expanded our offerings of specialty products to include
those products distributed by Haddon that we did not previously distribute to our customers. We believe that the distribution of
these products enhanced our conventional supermarket business channel and that our complementary product lines continue to
present opportunities for cross-selling.
Our Industry
The natural products industry encompasses a wide range of products including organic and non-organic foods, nutritional,
herbal and sports supplements, toiletries and personal care items, naturally-based cosmetics, natural/homeopathic medicines, pet
products and cleaning agents. According to The Natural Foods Merchandiser, a leading natural products industry trade publication,
sales for all types of natural products were $140.9 billion in calendar 2016, representing growth of $9.7 billion or approximately
7.4% from calendar 2015. According to The Specialty Food Association, a leading specialty food industry trade publication, sales
in calendar 2016 were $127.0 billion, representing growth of 15.0% from calendar 2014. We believe the growth of the natural and
specialty products industries is a result of the increasing demand by consumers for a healthy lifestyle, food safety and environmental
sustainability.
Our Operating Structure
Our operations are generally comprised of three principal operating divisions. These operating divisions are:
•
our wholesale division, which includes:
our broadline natural, organic and specialty distribution business in the United States, which includes our recent
acquisitions of Haddon and Gourmet Guru;
Tony's, which is a leading distributor of a wide array of specialty protein, cheese, deli, foodservice and bakery
goods, principally throughout the Western United States;
Albert's, which is a leading distributor of organically grown produce and non-produce perishable items within
the United States, which includes the operations of Global Organic and Nor-Cal, a distributor of organic and
conventional produce and non-produce perishable items principally in Northern California;
UNFI Canada, Inc. ("UNFI Canada"), which is our natural, organic and specialty distribution business in Canada;
and
Select Nutrition, which distributes vitamins, minerals and supplements;
•
our retail division, consisting of Earth Origins, which operates our twelve natural products retail stores within the United
States; and
2
•
our manufacturing and branded products divisions, consisting of:
Woodstock Farms Manufacturing, which specializes in importing, roasting, packaging and the distribution of
nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections; and
our Blue Marble Brands branded product lines.
Wholesale Division
In August 2016, we launched an initiative to reorganize our sales structure in the United States. This new structure is regional
and our broadline distribution business is now organized into three sales regions— our Atlantic Region, Central Region and Pacific
Region. We believe this initiative has brought our teams closer to retail operators and has contributed to us providing an exemplary
level of customer experience. Each region has a president responsible for all our products and services within the territory, including
fresh, grocery, wellness, e-commerce, food services, and ethnic gourmet. Territory managers in these regions now sell across our
complete lines of products. This change brings us to our customers more frequently with all of our service offerings and we
anticipate identifying and taking advantage of sales opportunities that result from our customers having a single point of contact
for all of our products and services. As of our 2017 fiscal year end, our Atlantic Region operated ten distribution centers, which
provided approximately 3.4 million square feet of warehouse space, our Central Region operated six distribution centers, which
provided approximately 2.2 million square feet of warehouse space, and our Pacific Region operated twelve distribution centers,
which provided approximately 2.8 million square feet of warehouse space.
Tony's operates out of four distribution centers strategically located on the West coast in California and Washington, providing
approximately 0.5 million square feet of warehouse space. In addition to the four Tony's facilities, the Company distributes Tony's
perishable products from certain of its other broadline distribution centers, including our Aurora, Colorado facility.
Albert's operates out of four distribution centers strategically located throughout the United States, providing approximately
0.2 million square feet of warehouse space.
UNFI Canada distributes natural, organic and specialty products in all of our product categories to all of our customers in
Canada. As of our 2017 fiscal year end, UNFI Canada operated four distribution centers, which provided approximately 0.3 million
square feet of warehouse space.
Through Select Nutrition, we distribute more than 14,000 health and beauty aids, vitamins, minerals and supplements from
distribution centers in Pennsylvania and California.
Certain of our distribution centers are shared by multiple operations within our wholesale division.
Retail Division
We operate twelve natural products retail stores within the United States, located primarily in Florida (with one location in
each of Maryland, Massachusetts and Rhode Island), through our subsidiary doing business as Earth Origins Market ("Earth
Origins"). We believe that our retail business serves as a natural complement to our distribution business because it enables us to
develop new marketing programs and improve customer service. We believe our natural products retail stores have a number of
advantages over their competitors, including our financial strength and marketing expertise, the purchasing power resulting from
group purchasing by stores within Earth Origins and the breadth of our product selection.
We believe that we benefit from certain advantages in acting as a distributor to our natural products retail stores, including
our ability to:
•
•
•
control the purchases made by these stores;
expand the number of high-growth, high-margin product categories, such as produce and prepared foods, within these
stores; and
stay abreast of the trends in the retail marketplace, which enables us to better anticipate and serve the needs of our
wholesale customers.
Additionally, as the primary natural products distributor to our retail locations, we realize significant economies of scale
and operating and buying efficiencies. As an operator of natural products retail stores, we also have the ability to test market select
products prior to offering them nationally. We can then evaluate consumer reaction to the product without incurring significant
inventory risk. We also are able to test new marketing and promotional programs within our stores prior to offering them to our
wholesale customer base.
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Manufacturing and Branded Products Divisions
Our subsidiary doing business as Woodstock Farms Manufacturing specializes in importing, roasting, packaging and the
distribution of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections for our customers and
in branded products of our own. Woodstock Farms Manufacturing sells items manufactured in bulk and through private label
packaging arrangements with large health food, supermarket and convenience store chains and independent owners.
We operate an organic (USDA and QAI) and kosher (Circle K) certified packaging, roasting, and processing facility in New
Jersey that is SQF (Safety Quality Food) level 2 certified.
Our Blue Marble Brands portfolio is a collection of 18 organic, natural and specialty food brands representing more than
900 unique products, which includes six specialty food brands representing 300 unique products obtained through our acquisition
of Haddon. We have a dedicated team of marketing, supply chain and sales professionals that have a passion to energize our retail
partners and provide consumers with affordable Non-GMO foods. Our unique Blue Marble Brands products are sold through our
wholesale division, third-party distributors and directly to retailers. Our Field Day® brand is primarily sold to customers in our
independent natural products retailer channel ("independent retailers"), and is meant to serve as a private label brand for independent
retailers to allow them to compete with conventional supermarkets and supernatural chains which often have their own private
label store brands.
Our Competitive Strengths
We believe we distinguish ourselves from our competitors through the following strengths:
We are a market leader with a nationwide presence in the United States and Canada.
We believe that we are the largest distributor of natural, organic and specialty foods and non-food products by sales in the
United States and Canada, and one of the few distributors capable of meeting the natural, organic and specialty product needs of
regional and local independent retailer customers, conventional supermarket chains, and our supernatural chain customer. The
acquisition of the Haddon facility in Howell Township, New Jersey, has provided additional space to serve the growing New York
City metropolitan market. The addition of this facility has allowed our other facilities to be deployed to further penetrate our
Northeastern, Mid-Atlantic and Southeastern markets. Also aiding in the Southeast is the acquisition of Haddon's facility in
Richburg, South Carolina, which further increased our capacity in the Southeastern United States. We believe the opening of our
facilities in Prescott, Wisconsin in April 2015, and Gilroy, California in February 2016, have allowed us to serve the markets in
and around Twin Cities, Minnesota, and California, respectively, with greater operational efficiencies. We believe that our network
of thirty-three distribution centers (including four in Canada) creates significant advantages over smaller national and regional
distributors. Our presence across the United States and Canada in many instances positions us to have locations closer to our
customers than our competitors, offer marketing and customer service programs across regions, offer a broader product selection
and provide operational excellence with high service levels and same day or next day on-time deliveries.
We are an efficient distributor.
We believe that our scale affords us significant benefits within a highly fragmented industry including volume purchasing
opportunities and warehouse and distribution efficiencies. Our continued growth has allowed us to expand our existing facilities
and open new facilities as we seek to achieve maximum operating efficiencies, including reduced fuel and other transportation
costs, and has created sufficient capacity for future growth. Some of the efficiency improvements we have instituted include the
centralization of general and administrative functions, the consolidation of systems applications among physical locations and
regions and the optimization of customer distribution routes. We have made significant investments in our people, facilities,
equipment and technology to broaden our footprint and enhance the efficiency of our operations. Key examples in the last several
years include the following:
•
•
•
•
•
In April 2015 we commenced operations at a new 300,000 square foot distribution center in Prescott, Wisconsin which
services the Twin Cities market.
In February 2016 we commenced operations at a new 400,000 square foot distribution center in Gilroy, California.
In connection with the acquisition of Global Organic in March 2016, we acquired additional distribution capacity adjacent
to our existing Sarasota, Florida facility, which increased distribution space by approximately 80,000 square feet.
In connection with the acquisition of Nor-Cal in March 2016, we acquired an 80,000 square foot distribution center in
West Sacramento, California.
In connection with the acquisition of Haddon in May 2016, we acquired a distribution center in each of New Jersey and
South Carolina with approximately 700,000 square feet of combined distribution space.
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We have extensive and long-standing customer relationships and provide superior service.
Throughout the 41 years of our and our predecessors' operations, we have developed long-standing customer relationships,
which we believe are among the strongest in our industry. We believe a key driver of our strong customer loyalty is our superior
service levels, which include accurate fulfillment of orders, timely product delivery, competitive prices and a high level of product
marketing support. Our average broadline distribution in-stock service level for fiscal 2017, measured as the percentage of items
ordered by customers that are delivered by the requested delivery date (excluding manufacturer out-of-stocks and discontinued
items), was approximately 98%. We believe that our high distribution service levels are attributable to our experienced inventory
planning and replenishment department and sophisticated warehousing, inventory control and distribution systems. Furthermore,
we offer next-day delivery service to a majority of our active customers and offer multiple deliveries each week to our largest
customers, which we believe differentiates us from many of our competitors.
We have an experienced, motivated management team.
Our management team has extensive experience in the retail and distribution business, including the natural, organic and
specialty product industries. On average, each of our ten executive officers has over twenty-eight years of experience in the retail,
natural products or food distribution industry. Furthermore, a significant portion of our management-level employees' compensation
is equity based or performance based, and, therefore management is incentivized to generate continued strong operating results
in the future.
Our Growth Strategy
We seek to maintain and enhance our position within the natural and organic industry in the United States and Canada and
to increase our market share in the specialty products industry. Since our formation, we have grown our business organically and
through the acquisition of a number of distributors and suppliers, which has expanded our distribution network, product selection
and customer base.
Beginning with our acquisition of Tony's in July 2014, our strategy shifted to focus more heavily on the growing market
of perishable food products and our "building out the store" strategy, which focuses on delivering more products sold in the
perimeter of our customers' stores. Our acquisitions of Haddon, Nor-Cal, Global Organic and Gourmet Guru continue this current
strategy, with the addition of gourmet ethnic products and conventional produce. Our strategic plan also includes the roll-out of
new technology including a national warehouse management and procurement system and transportation management system
upgrade. These steps and others are intended to promote operational efficiencies and further reduce our operating expenses to
offset the lower gross margins we expect with increased sales to the conventional supermarket and supernatural channels and from
sales of our fresh perishable products, some of which can sell for a lower gross margin than our other natural, organic and specialty
products.
To implement our growth strategy, we intend to continue increasing our market share of the growing natural and organic
products industry by expanding our customer base, increasing our share of existing customers' business and continuing to expand
and further penetrate new distribution territories. We have expanded our presence within the specialty industry by offering new
and existing customers a single wholesale distributor capable of meeting their specialty and natural and organic product needs on
a national or regional basis. Key elements of our strategy include:
Expanding Our Customer Base
As of July 29, 2017, we served more than 43,000 customer locations primarily in the United States and Canada. We believe
that our new sales reorganization initiative launched in fiscal 2017 will bring our teams closer to retail operators as region presidents
are now responsible for all our products and services and territory managers are now able to sell across our product lines, providing
an exemplary customer experience. We plan to expand our coverage of the natural and organic and specialty products industry by
cultivating new customer relationships within the industry and by further developing our existing channels of distribution, such
as independent natural products retailers, conventional supermarkets, mass market outlets, institutional foodservice providers,
buying clubs, restaurants and gourmet stores. With the coordinated distribution of our specialty products with our natural and
organic products, including our increased array of specialty protein, cheese, deli, food service and bakery offerings as a result of
our acquisition of Tony's and gourmet ethnic products as a result of our acquisition of Haddon, we believe that we have the
opportunity to increase the products we sell to existing customers and continue gaining market share in the conventional supermarket
channel as the result of our ability to offer an integrated and efficient distribution solution for our customers. In recent years, we
have gained new business from a number of conventional supermarket customers, including Harris Teeter and Wegmans, partially
as a result of our complementary product selection and acquisitions.
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Increasing Our Market Share of Existing Customers' Business
We believe that we are the primary distributor of natural and organic products to the majority of our natural products customer
base, including to Whole Foods Market, Inc. ("Whole Foods Market"), our largest customer. We seek to maintain our position as
the primary supplier for a majority of our customers, and to add to the number of customers for which we serve as primary supplier,
by offering the broadest product selection in our industry at competitive prices. We believe our new sales reorganization initiative
will help strengthen our relationships with new and existing customers and drive more customer touch points, demonstrating our
range. With the expansion of fresh, perishable and specialty product offerings, including proteins, cheeses and deli items as a result
of the Tony's acquisition, and ethnic and gourmet items as a result of the Haddon acquisition, we believe that we have the ability
to further meet our existing customers' needs for specialty foods and non-food products, representing an opportunity to continue
to grow within the conventional supermarket, supernatural and independent channels.
Continuing to Improve the Efficiency of Our Nationwide Distribution Network
We have invested significant capital in our distribution network and infrastructure over the past five fiscal years. In fiscal
2016, we completed our multi-year expansion plan, which included new distribution centers in Racine, Wisconsin, Hudson Valley,
New York, Prescott, Wisconsin, and Gilroy, California from which we began operations in June 2014, September 2014, April 2015
and February 2016, respectively. Based on our current operations and customers, we believe that we are unlikely to open or
commence construction on a new distribution center in the next twelve months.
We will strive to continue to maintain our focus on realizing efficiencies and economies of scale in purchasing, warehousing,
transportation and general and administrative functions, which, combined with transportation expense savings and incremental
fixed cost leverage, should lead to continued improvements in our operating performance.
Expanding into Other Distribution Channels and Geographic Markets
We believe that we will be successful in continuing to expand into the foodservice and e-commerce channels and we
will continue to seek to develop regional relationships and alliances with companies in the foodservice channel. Additionally,
we will seek to further develop our presence outside of the United States and Canada through our relationships with brokers
primarily in Asia and the Caribbean and seek other alliances in these regions. Within the e-commerce channel, we intend to
continue to partner with existing customers and others to expand our offerings to primary and secondary e-commerce
customers. We also plan to offer customers within our independent and conventional supermarket channels extended aisle
assortment capabilities and expand our ability to sell products to customers that might not have the purchasing volumes to be
serviced in a traditional manner.
Continuing to Selectively Pursue Opportunistic Acquisitions
Throughout our history, we have successfully identified, consummated and integrated multiple acquisitions. Since fiscal
2000, we have successfully completed nineteen acquisitions of distributors, manufacturers and suppliers, the most recent being
the acquisitions of Haddon, Global Organic and Nor-Cal during fiscal 2016 and Gourmet Guru in the first quarter of fiscal 2017.
We intend to continue to selectively pursue opportunistic acquisitions to expand the breadth of our distribution network, increase
our efficiency, procure beneficial customer relationships or add additional products and capabilities.
Continuing to Provide the Leading Distribution Solution
We believe that we provide a leading distribution solution to the natural, organic and specialty products industry through
our national presence, regional preferences, focus on customer service and breadth of product offerings. Our service levels, which
we believe to be the highest in our industry, are attributable to our experienced inventory planning and replenishment department
and our sophisticated warehousing, inventory control and distribution systems. See "Our Focus on Technology" below for more
information regarding our use of technology in our warehousing, inventory control and distribution systems.
We also offer our customers a selection of inventory management, merchandising, marketing, promotional and event
management services designed to increase sales and enhance customer satisfaction. These marketing services, which primarily
are utilized by customers in our independently owned natural products retailers channel and many of which are co-sponsored with
suppliers, include monthly and thematic circular programs, in-store signage and assistance in product display.
Our Customers
We serve more than 43,000 customer locations primarily located across the United States and Canada which we classify
into the following channels:
•
supernatural chains, which consist of chain accounts that are national in scope and carry greater than 90% natural products,
and at this time currently consists solely of Whole Foods Market;
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•
•
•
conventional supermarkets, which include accounts that also carry conventional products, and at this time currently
include chain accounts, supermarket independents, and gourmet and ethnic specialty stores;
independently owned natural products retailers, which include single store and chain accounts (excluding supernatural
chains, as defined above), which carry more than 90% natural products and buying clubs of consumer groups joined to
buy products; and
other, which includes foodservice, e-commerce and international customers outside of Canada.
We maintain long-standing customer relationships with independently-owned natural products retailers, supernatural chains
and supermarket chains. In addition, we emphasize our relationships with new customers, such as conventional supermarkets,
mass market outlets and gourmet stores, which are continually increasing their natural product offerings. The following were
included among our wholesale customers for fiscal 2017:
• Whole Foods Market, the largest supernatural chain in the United States and Canada; and
• Other customers, including Natural Grocers, Wegmans, Kroger, Earth Fare, Sprouts Farmers Market, Giant-Carlisle,
Stop & Shop, Giant-Landover, Giant Eagle, Hannaford, Harris Teeter, The Fresh Market, Market Basket, Shop-Rite,
Publix, Raley's, Lucky's, and Loblaws.
We have been the primary distributor to Whole Foods Market for more than nineteen years. Under the terms of our agreement
with Whole Foods Market, we serve as the primary distributor to Whole Foods Market in all of its regions in the United States.
Our agreement with Whole Foods Market expires on September 28, 2025. Whole Foods Market is our only customer that represented
more than 10% of total net sales in fiscal 2017, and accounted for approximately 33% of our net sales.
During fiscal 2017, our net sales by channel were adjusted to reflect changes in the classification of customer types from
acquisitions we consummated in the third and fourth quarters of fiscal 2016 and the first quarter of fiscal 2017. There was no
financial statement impact as a result of revising the classification of customer types. The following table lists the percentage of
net sales by customer type for the fiscal years ended July 29, 2017, July 30, 2016 and August 1, 2015:
Customer Type
Supernatural chains
Conventional supermarkets and mass market chains
Independently owned natural products retailers
Other
Percentage of Net Sales
2017
2016
2015
33%
30%
26%
11%
35%
27%
27%
11%
34%
29%
27%
10%
We distribute natural, organic and specialty foods and non-food products to customers located in the United States and
Canada, as well as to customers located in other foreign countries. Our total international net sales, including those by UNFI
Canada, represented approximately four percent of our net sales in fiscal 2017, fiscal 2016 and fiscal 2015. We believe that our
sales outside the United States, as a percentage of our total sales, will expand as we seek to continue to grow our Canadian
operations and our foodservice and e-commerce businesses, both of which include customers based outside of the United States.
Our Marketing Services
We offer a variety of marketing services designed to increase sales for our customers and suppliers, including consumer and
trade marketing programs, as well as programs to support suppliers in understanding our markets. Trade and consumer marketing
programs are supplier-sponsored programs that cater to a broad range of retail formats. These programs are designed to educate
consumers, profile suppliers and increase sales for retailers, many of which do not have the resources necessary to conduct such
marketing programs independently.
Our consumer marketing programs include:
• multiple monthly, region-specific, consumer circular programs, with the participating retailer’s imprint featuring products
sold by the retailer to its customers. The monthly circular programs are structured to pass through the benefit of our
negotiated discounts and advertising allowances to the retailer, and also provide retailers with shelf tags corresponding
to each month's promotions. We also offer a web-based tool which retailers can use to produce highly customized circulars
and other marketing materials for their stores.
quarterly coupon programs featuring supplier sponsored coupons, for display and distribution by participating retailers.
a truck advertising program that allows our suppliers to purchase advertising space on the sides of our hundreds of trailers
traveling throughout the United States and Canada, increasing brand exposure to consumers.
•
•
7
Our trade marketing programs include:
wholesale biannual catalogs, which serve as a primary reference guide and ordering tool for retailers.
a Customer Portal advertising program that allows our suppliers to advertise directly to retailers using the portal.
a variety of programs with advertising focus on foodservice options designed to support accounts in that category.
programs designed to generate volume purchases and retail promotions.
•
•
•
•
• monthly specials catalogs that highlight promotions and new product introductions.
•
specialized catalogs for holiday and seasonal products.
Our supplier marketing programs include:
•
•
•
•
ClearVue®, an information sharing program designed to improve the transparency of information and drive efficiency
within the supply chain. With the availability of in-depth data and tailored reporting tools, participants are able to reduce
inventory balances with the elimination of forward buys, while improving service levels.
Supply Chain by ClearVue®, an information sharing program designed to provide heightened transparency to suppliers
through demand planning, forecasting and procurement insights. This program offers weekly and monthly reporting
enabling suppliers to identify areas of sales growth while pinpointing specific focuses in which the supplier can become
more profitable.
Supplier-In-Site (SIS), an information-sharing website that helps our suppliers better understand the independent natural
channel in order to generate mutually beneficial incremental sales in an efficient manner.
Growth incentive programs, supplier-focused high-level sales and marketing support for selected brands, which foster
our partnership by building incremental, mutually profitable sales for suppliers and us.
We keep current with the latest trends in the industry. Periodically, we conduct focus group sessions with certain key retailers
and suppliers to ascertain their needs and allow us to better service them. We also provide our customers with:
•
•
•
•
•
•
•
quarterly reports of trends in the natural and organic industry;
product data information such as best seller lists, store usage reports and catalogs;
assistance with store layout designs; new store design and equipment procurement;
planogramming, shelf and category management support;
in-store signage and promotional materials assistance with planning and setting up product displays;
shelf tags for products; and
a robust customer portal with product information, search and ordering capabilities, reports and publications.
Our Products
Our extensive selection of high-quality natural, organic and specialty foods and non-food products enables us to provide a
primary source of supply to a diverse base of customers whose product needs vary significantly. We offer more than 110,000 high-
quality natural, organic and specialty foods and non-food 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 foodservice products and personal care items. Our branded product lines address certain needs of our
customers, including providing a lower-cost label known as Field Day®.
We continuously evaluate potential new products based on both existing and anticipated trends in consumer preferences and
buying patterns. Our Retail Category Management and Supplier Relationship Management teams regularly attend regional and
national natural, organic, specialty, ethnic and gourmet product shows to review the latest products that are likely to be of interest
to retailers and consumers. We also utilize syndicated data as a compass to ensure that we are carrying the right mix of products
in each of our distribution centers. We make the majority of our new product decisions at the regional level and look to carry those
items through national distribution as we begin to spot an emerging trend or brand. We believe that our category review practices
at the local distribution center level allow our supplier relationship managers to react quickly to changing consumer preferences
and to evaluate new products and new product categories regionally. Additionally, as many of the new products that we offer are
marketed on a regional basis or in our own natural products retail stores prior to being offered nationally, this enables us to evaluate
consumer reaction to the products without incurring significant inventory risk. Furthermore, by exchanging regional product sales
information between our regions, we are able to make more informed and timely new product decisions in each region.
We maintain a comprehensive quality assurance program. All of the products we sell that are represented as "organic" are
required to be certified as such by an independent third-party agency. We maintain current certification affidavits on most organic
commodities and produce in order to verify the authenticity of the product. Most potential suppliers of organic products are required
to provide such third-party certifications to us before they are approved as suppliers.
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Our Suppliers
We purchase our products from more than 9,000 suppliers. The majority of our suppliers are based in the United States and
Canada, but we also source products from suppliers throughout Europe, Asia, Central America, South America, Africa and Australia.
We believe suppliers of natural and organic products seek to distribute their products through us because we provide access to a
large customer base across the United States and Canada, distribute the majority of the suppliers' products and offer a wide variety
of marketing programs to our customers to help sell the suppliers' products. Substantially all product categories that we distribute
are available from a number of suppliers and, therefore, we are not dependent on any single source of supply for any product
category. In addition, although we have exclusive distribution arrangements and vendor support programs with several suppliers,
none of our suppliers account for more than 5% of our total purchases in fiscal 2017.
We have positioned ourselves as one of the largest purchasers of organically grown bulk products in the natural and organic
products industry by centralizing our purchase of nuts, seeds, grains, flours and dried foods. As a result, we are able to negotiate
purchases from suppliers on the basis of volume and other considerations that may include discounted pricing or prompt payment
discounts. Furthermore, some of our purchase arrangements include the right of return to the supplier with respect to products that
we do not sell in a certain period of time. As described under "Our Products" above, each region is responsible for placing its own
orders and can select the products that it believes will most appeal to its customers, although each region is able to participate in
our company-wide purchasing programs. Our outstanding commitments for the purchase of inventory were approximately $16.3
million as of July 29, 2017.
Our Distribution System
We have carefully chosen the sites for our distribution centers to provide direct access to our regional markets. This proximity
allows us to reduce our transportation costs relative to those of our competitors that seek to service these customers from locations
that are often several hundred miles away. We believe that we incur lower inbound freight expense than our regional competitors
because our scale allows us to buy full and partial truckloads of products. Products are delivered to our distribution centers primarily
by our fleet of leased trucks, contract carriers and the suppliers themselves. When financially advantageous, we backhaul between
vendors or satellite, staging facilities and our distribution centers using our own trucks. Additionally, we generally can redistribute
overstocks and inventory imbalances between our distribution centers if needed, which helps to reduce out of stocks and to sell
perishable products prior to their expiration date.
The majority of our trucks are leased from a variety of national banks and are maintained by third party national leasing
companies such as Ryder Truck Leasing and Penske Truck Leasing, which in some cases maintain facilities on our premises for
the maintenance and service of these vehicles.
We ship certain orders for supplements or for items that are destined for areas outside of regular delivery routes through
United States Postal Service, the United Parcel Service and other independent carriers. Deliveries to areas outside the continental
United States and Canada are typically shipped by ocean-going containers on a weekly basis.
Our Focus on Technology
We have made significant investments in distribution, financial, information and warehouse management systems. We
continually evaluate and upgrade our management information systems at our regional operations in an effort to make the systems
more efficient, cost-effective and responsive to customer needs. These systems include functionality in radio frequency inventory
control, pick-to-voice systems, pick-to-light systems, computer-assisted order processing and slot locater/retrieval assignment
systems. At most of our receiving docks, warehouse associates attach computer-generated, preprinted locater tags to inbound
products. These tags contain the expiration date, locations, quantity, lot number and other information about the products in bar
code format. Customer returns are processed by scanning the UPC bar codes. We also employ a management information system
that enables us to lower our inbound transportation costs by making optimum use of our own fleet of trucks or by consolidating
deliveries into full truckloads. Orders from multiple suppliers and multiple distribution centers are consolidated into single
truckloads for efficient use of available vehicle capacity and return-haul trips. In addition, we utilize route efficiency software that
assists us in developing the most efficient routes for our outbound trucks. As part of our “one company” approach, we are in the
process of rolling out a national warehouse management and procurement system to convert our existing facilities into a single
warehouse management and supply chain platform ("WMS"). WMS supports our effort to integrate and nationalize processes
across the organization. We have successfully implemented the WMS system at fourteen of our facilities, most recently in Iowa
City, Iowa, Greenwood, Indiana, Dayville, Connecticut, Gilroy, California, Richburg, South Carolina, Howell, New Jersey, and
Atlanta, Georgia. We expect to complete the roll-out to all of our existing U.S. broadline facilities by the end of fiscal 2019.
Intellectual Property
We do not own or have the right to use any patent, trademark, trade name, license, franchise, or concession the loss of which
would have a material adverse effect on our results of operations or financial condition.
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Competition
Our largest competition comes from direct distribution, whereby a customer reaches a product volume level that justifies
distribution directly from the manufacturer in order to obtain a lower price. Our major wholesale distribution competitor in both
the United States and Canada is KeHE Distributors, LLC ("Kehe"). In addition to its natural and organic products, Kehe distributes
specialty food products and markets its own private label program. Kehe's subsidiary, Tree of Life, has also earned QAI certification.
We also compete in the United States and Canada with numerous smaller regional and local distributors of natural, organic, ethnic,
kosher, gourmet and other specialty foods that focus on niche or regional markets, and with national, regional and local distributors
of conventional groceries who have significantly expanded their natural and organic product offerings in recent years and companies
that distribute to their own retail facilities. Our customers also compete with online retailers and distributors of natural and organic
products that seek to sell products directly to customers.
We believe that distributors in the natural and specialty products industries primarily compete on distribution service levels,
product quality, depth of inventory selection, price and quality of customer service. We believe that we currently compete effectively
with respect to each of these factors.
Our natural products retail stores compete against other natural products outlets, supernatural chains, conventional
supermarkets, specialty stores and online retailers and distributors. We believe that retailers of natural products compete principally
on product quality and selection, price, customer service, knowledge of personnel and convenience of location. We believe that
we currently compete effectively with respect to each of these factors.
Government Regulation
Our operations and many of the products that we distribute in the United States are subject to regulation by state and local
health departments, the USDA and the United States Food and Drug Administration (the "FDA"), which generally impose standards
for product quality and sanitation and are responsible for the administration of bioterrorism legislation. In the United States, our
facilities generally are inspected at least once annually by state or federal authorities. For certain product lines, we are also subject
to the Federal Meat Inspection Act, the Poultry Products Inspection Act, the Perishable Agricultural Commodities Act, the Packers
and Stockyard Act and regulations promulgated by the USDA to interpret and implement these statutory provisions. The USDA
imposes standards for product safety, quality and sanitation through the federal meat and poultry inspection program.
In late 2010, the FDA Food Safety Modernization Act ("FSMA") was enacted. The FSMA represents a significant expansion
of food safety requirements and FDA food safety authorities and, among other things, requires that the FDA impose comprehensive,
prevention-based controls across the food supply chain, further regulates food products imported into the United States, and
provides the FDA with mandatory recall authority. The FSMA requires the FDA to undertake numerous rulemakings and to issue
numerous guidance documents, as well as reports, plans, standards, notices, and other tasks. As a result, implementation of the
legislation is ongoing and likely to take several years.
The Surface Transportation Board and the Federal Highway Administration regulate our trucking operations. In addition,
interstate motor carrier operations are subject to safety requirements prescribed by the United States Department of Transportation
and other relevant federal and state agencies. Such matters as weight and dimension of equipment are also subject to federal and
state regulations.
Many of our facilities in the U.S. and in Canada are subject to various environmental protection statutes and regulations,
including those relating to the use of water resources and the discharge of wastewater. Further, many of our distribution facilities
have ammonia-based refrigeration systems and tanks for the storage of diesel fuel, hydrogen fuel and other petroleum products
which are subject to laws regulating such systems and storage tanks. Moreover, in some of our facilities we, or third parties with
whom we contract, perform vehicle maintenance. Our policy is to comply with all applicable environmental and safety legal
requirements. We are subject to other federal, state, provincial and local provisions relating to the protection of the environment
or the discharge of materials; however, these provisions do not materially impact the use or operation of our facilities.
The failure to comply with applicable regulatory requirements could result in, among other things, administrative, civil, or
criminal penalties or fines, mandatory or voluntary product recalls, warning or untitled letters, cease and desist orders against
operations that are not in compliance, closure of facilities or operations, the loss, revocation, or modification of any existing
licenses, permits, registrations, or approvals, or the failure to obtain additional licenses, permits, registrations, or approvals in new
jurisdictions where we intend to do business, any of which could have a material adverse effect on our business, financial condition,
or results of operations. These laws and regulations may change in the future and we may incur material costs in our efforts to
comply with current or future laws and regulations or in any required product recalls.
We believe that we are in material compliance with all federal, provincial, state and local laws applicable to our operations.
10
Employees
As of July 29, 2017 we had approximately 9,700 full and part-time employees, 595 of whom (approximately 6.1%) are
covered by collective bargaining agreements at our Moreno Valley, California, Dayville, Connecticut, West Sacramento, California,
Auburn, Washington, Iowa City, Iowa and Concord, Ontario facilities. These agreements expire in March 2019, July 2019, March
2020, February 2021, July 2021, and February 2022, respectively. In addition, the employees at our Edison, New Jersey facility
continue to be covered by a collective bargaining agreement that expired in June, 2017 while we negotiate a new collective
bargaining agreement at this facility. We have in the past been the focus of union-organizing efforts, and we believe it is likely
that we will be the focus of similar efforts in the future.
As of August 1, 2017, our drivers in our Hudson Valley, New York facility are covered by a collective bargaining agreement,
expiring in July 2020.
In August 2017, the National Labor Relations Board certified the election results of our transportation employees in Moreno
Valley, California to be represented by the Teamsters union. We are in the process of negotiating a collective bargaining agreement
with these employees.
Seasonality
Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly
from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating
and growth strategies, personnel changes, demand for our products, supply shortages and general economic conditions.
Available Information
Our internet address is http://www.unfi.com. The contents of our website are not part of this Annual Report on Form 10-K,
and our internet address is included in this document as an inactive textual reference only. We make our Annual Report on Form 10-
K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") available free of charge through
our website as soon as reasonably practicable after we file such reports with, or furnish such reports to, the Securities and Exchange
Commission.
We have adopted a code of conduct and ethics that applies to our Chief Executive Officer, Chief Financial Officer and
employees within our finance operations and sales departments. Our code of conduct and ethics is publicly available on our website
at www.unfi.com and is available free of charge by writing to United Natural Foods, Inc., 313 Iron Horse Way, Providence, Rhode
Island 02908, Attn: Investor Relations. We intend to make any legally required disclosures regarding amendments to, or waivers
of, the provisions of the code of conduct and ethics on our website at www.unfi.com.
ITEM 1A. RISK FACTORS
Our business, financial condition and results of operations are subject to various risks and uncertainties, including those
described below and elsewhere in this Annual Report on Form 10-K. This section discusses factors that, individually or in the
aggregate, we think could cause our actual results to differ materially from expected and historical results. Our business, financial
condition or results of operations could be materially adversely affected by any of these risks.
We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand
that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete
discussion of all potential risks or uncertainties applicable to our business. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations—Forward-Looking Statements."
We depend heavily on our principal customers and our success is heavily dependent on our principal customers' ability to
grow their business.
Whole Foods Market accounted for approximately 33% of our net sales in fiscal 2017. We serve as the primary distributor
of natural, organic and specialty non-perishable products, and also distribute certain specialty protein, cheese, and deli items to
Whole Foods Market in all of its regions in the United States under the terms of our distribution agreement which expires on
September 28, 2025. Our ability to maintain a close mutually beneficial relationship with Whole Foods Market, which was acquired
by Amazon.com, Inc. in August 2017, is an important element to our continued growth.
The loss or cancellation of business from Whole Foods Market, including from increased distribution to their own facilities,
closures of their stores, reductions in the amount of products that Whole Food Market sells to its customers, or our failure to
comply with the terms of our distribution agreement with Whole Foods Market could materially and adversely affect our business,
financial condition or results of operations. Similarly, if Whole Foods Market is not able to grow its business, including as a result
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of a reduction in the level of discretionary spending by its customers or competition from other retailers or diverts purchases from
us beyond minimum amounts it is required to purchase under our distribution agreement, our business, financial condition or
results of operations may be materially and adversely affected.
In addition to our dependence on Whole Foods Market, we are also dependent upon sales to our conventional supermarket
customers. Net sales to these customers accounted for approximately 30% of our total net sales in fiscal 2017. To the extent that
customers in this group make decisions to utilize alternative sources of products, whether other distributors or through self
distribution, our business, financial condition or results of operations may be materially and adversely affected.
Our operations are sensitive to economic downturns.
The grocery industry is sensitive to national and regional economic conditions and the demand for the products that we
distribute, particularly our specialty products, may be adversely affected from time to time by economic downturns that impact
consumer spending, including discretionary spending. Future economic conditions such as employment levels, business conditions,
housing starts, interest rates, inflation rates, energy and fuel costs and tax rates could reduce consumer spending or change consumer
purchasing habits. Among these changes could be a reduction in the number of natural and organic products that consumers
purchase where there are non-organic, which we refer to as conventional, alternatives, given that many natural and organic products,
and particularly natural and organic foods, often have higher retail prices than do their conventional counterparts.
Our business is a low margin business and our profit margins may decrease due to consolidation in the grocery industry and
our focus on sales to the conventional supermarket channel.
The grocery distribution industry generally is characterized by relatively high volume of sales with relatively low profit
margins. The continuing consolidation of retailers in the natural products industry and the growth of supernatural chains may
reduce our profit margins in the future as more customers qualify for greater volume discounts, and we experience pricing pressures
from suppliers and retailers. Sales to customers within our supernatural chain and conventional supermarket channels generate a
lower gross margin than do sales to our independent customers. Many of these customers, including our largest customer, have
agreements with us that include volume discounts. As the amounts these customers purchase from us increase, the price that they
pay for the products they purchase is reduced, putting downward pressure on our gross margins on these sales. To compensate for
these lower gross margins, we must increase the amount of products we sell or reduce the expenses we incur to service these
customers. If we are unable to reduce our expenses as a percentage of net sales, including our expenses related to servicing this
lower gross margin business, our business, financial condition or results of operations could be materially and adversely impacted.
Our business may be sensitive to inflationary and deflationary pressures.
Many of our sales are at prices that are based on our product cost plus a percentage markup. As a result, volatile food costs
have a direct impact upon our profitability. Prolonged periods of product cost inflation and periods of rapidly increasing inflation
may have a negative impact on our profit margins and results of operations to the extent that we are unable to pass on all or a
portion of such product cost increases to our customers. In addition, product cost inflation may negatively impact the consumer
discretionary spending trends of our customers' customers, which could adversely affect our sales. Conversely, because many of
our sales are at prices that are based upon product cost plus a percentage markup, our profit levels may be negatively impacted
during periods of product cost deflation even though our gross profit as a percentage of net sales may remain relatively constant.
To compensate for lower gross margins, we, in turn, must reduce expenses that we incur to service our customers. If we are unable
to reduce our expenses as a percentage of net sales, our business, financial condition or results of operations could be materially
and adversely impacted.
Our customers generally are not obligated to continue purchasing products from us and larger customers that do have
multiyear contracts with us may terminate these contracts early in certain situations or choose not to renew or extend the contract
at its expiration.
Many of our customers buy from us under purchase orders, and we generally do not have agreements with or long-term
commitments from these customers for the purchase of products. We cannot assure you that these customers will maintain or
increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing
customer base. Decreases in our volumes or orders for products supplied by us for these customers with whom we do not have a
long-term contract may have a material adverse effect on our business, financial condition or results of operations.
We may have contracts with certain of our customers (as is the case with many of our conventional supermarket customers
and our supernatural chain customer) that obligate the customer to buy products from us for a particular period of time. Even in
this case, the contracts may not require the customer to purchase a minimum amount of products from us or the contracts may
afford the customer better pricing in the event that the volume of the customer’s purchases exceeds certain levels. If these customers
were to terminate these contracts prior to their scheduled termination, or if we or the customer elected not to renew or extend the
term of the contract at its expiration at least historical purchase levels, it may have a material adverse effect on our business,
12
financial condition or results of operations, including additional operational expenses to transition out of the business or to adjust
our staffing levels to account for the reduction in net sales.
We have significant competition from a variety of sources.
We operate in competitive markets and our future success will be largely dependent on our ability to provide quality
products and services at competitive prices. Bidding for contracts or arrangements with customers, particularly within the
supernatural chain and conventional supermarket channels, is highly competitive and we may market our services to a particular
customer over a long period of time before we are invited to bid. Our competition comes from a variety of sources, including other
distributors of natural products as well as specialty grocery and mass market grocery distributors and retail customers that have
their own distribution channels. Mass market grocery distributors in recent years have increased their emphasis on natural and
organic products and are now competing more directly with us and many conventional supermarket chains have increased self-
distribution of particular items that we sell or have increased their purchases of particular items that we sell directly from suppliers.
New competitors are also entering our markets as barriers to entry for new competitors are relatively low. For instance, more
natural and organic products are being sold in convenience stores and other big box retailers than was the case a few years ago
and many of these customers are being serviced by conventional distributors or are self-distributing. Some of the mass market
grocery distributors with whom we compete may have been in business longer than we have, may have substantially greater
financial and other resources than we have and may be better established in their markets. We also face indirect competition as a
result of the fact that our customers with physical locations face competition from online retailers and distributors that seek to sell
certain of the type of products we sell to our customers directly to consumers. We cannot assure you that our current or potential
competitors will not provide products or services comparable or superior to those provided by us or adapt more quickly than we
do to evolving industry trends or changing market requirements. It is also possible that alliances among competitors may develop
and rapidly acquire significant market share or that certain of our customers will increase distribution to their own retail facilities.
Increased competition may result in price reductions, reduced gross margins, lost business and loss of market share, any of which
could materially and adversely affect our business, financial condition or results of operations.
We cannot provide assurance that we will be able to compete effectively against current and future competitors.
We may not realize the anticipated benefits from our acquisitions of Global Organic, Nor-Cal, Haddon and Gourmet Guru.
We cannot assure you that our acquisitions of Global Organic, Nor-Cal, Haddon or Gourmet Guru will enhance our financial
performance. Our ability to achieve the expected benefits of these acquisitions will depend on, among other things, our ability to
effectively translate our business strategies into a new set of products, our ability to retain and assimilate the acquired businesses'
employees, our ability to retain customers and suppliers on terms similar to those in place with the acquired businesses, our ability
to expand the products we offer in many of our markets to include the products distributed by these businesses, the adequacy of
our implementation plans, our ability to maintain our financial and internal controls and systems as we expand our operations, the
ability of our management to oversee and operate effectively the combined operations and our ability to achieve desired operating
efficiencies and sales goals. The integration of the businesses that we acquired might also cause us to incur unforeseen costs, which
would lower our future earnings and would prevent us from realizing the expected benefits of these acquisitions. Failure to achieve
these anticipated benefits could result in a reduction in the price of our common stock as well as in increased costs, decreases in
the amount of expected revenues and diversion of management’s time and energy and could materially and adversely impact our
business, financial condition and operating results.
Our investment in information technology may not result in the anticipated benefits.
In our attempt to reduce operating expenses and increase operating efficiencies, we have aggressively invested in the
development and implementation of new information technology. Based on our currently anticipated timeline, we expect to
complete the roll-out of our warehouse management system and transportation management system within our existing U.S.
broadline facilities by the end of fiscal 2019. While we currently believe this timeline will be met, we may not be able to implement
these technological changes in the time frame that we have planned and delays in implementation could negatively impact our
business, financial condition or results of operations. In addition, the costs to make these changes may exceed our estimates and
will exceed the benefits during the early stages of implementation. Even if we are able to implement the changes in accordance
with our current plans, and within our current cost estimates, we may not be able to achieve the expected efficiencies and cost
savings from this investment, which could have a material adverse effect on our business, financial condition or results of operations.
Moreover, as we implement information technology enhancements, disruptions in our business may be created (including disruption
with our customers) which may have a material adverse effect on our business, financial condition or results of operations.
Failure by us to develop and operate a reliable technology platform could negatively impact our business.
Our ability to decrease costs and increase profits, as well as our ability to serve customers most effectively, depends on the
reliability of our technology platform. We use software and other technology systems, among other things, to generate and select
orders, to load and route trucks and to monitor and manage our business on a day-to-day basis. Any disruption to these computer
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systems could adversely impact our customer service, decrease the volume of our business and result in increased costs negatively
affecting our business, financial condition or results of operations.
We have experienced losses due to the uncollectability of accounts receivable in the past and could experience increases in
such losses in the future if our customers are unable to timely pay their debts to us.
Certain of our customers have from time to time experienced bankruptcy, insolvency and/or an inability to pay their debts
to us as they come due. If our customers suffer significant financial difficulty, they may be unable to pay their debts to us timely
or at all, which could have a material adverse effect on our results of operations. It is possible that customers may reject their
contractual obligations to us under bankruptcy laws or otherwise. Significant customer bankruptcies could further adversely affect
our revenues and increase our operating expenses by requiring larger provisions for bad debt. In addition, even when our contracts
with these customers are not rejected, if customers are unable to meet their obligations on a timely basis, it could adversely affect
our ability to collect receivables. Further, we may have to negotiate significant discounts and/or extended financing terms with
these customers in such a situation, each of which could have a material adverse effect on our business, financial condition, results
of operations or cash flows. During periods of economic weakness, small to medium-sized businesses, like many of our
independently owned natural products retailer customers, may be impacted more severely and more quickly than larger businesses.
Similarly, these smaller businesses may be more likely to be more severely impacted by events outside of their control, like
significant weather events. Consequently, the ability of such businesses to repay their obligations to us may deteriorate, and in
some cases this deterioration may occur quickly, which could materially and adversely impact our business, financial condition
or results of operations.
Our acquisition strategy may adversely affect our business.
A portion of our past growth has been achieved through acquisitions of, or mergers with, other distributors of natural, organic
and specialty products. We also continually evaluate opportunities to acquire other companies. We believe that there are risks
related to acquiring companies, including an inability to successfully identify suitable acquisition candidates or consummate such
potential acquisitions. To the extent that our future growth includes acquisitions, we cannot assure you that we will not overpay
for acquisitions, lose key employees of acquired companies, or fail to achieve potential synergies or expansion into new markets
as a result of our acquisitions. Therefore, future acquisitions, if any, may have a material adverse effect on our results of operations,
particularly in periods immediately following the consummation of those transactions while the operations of the acquired business
are being integrated with our operations. Achieving the benefits of acquisitions depends on timely, efficient and successful execution
of a number of post-acquisition events, including, among other things:
• maintaining the customer and supplier base;
•
•
•
optimizing delivery routes;
coordinating administrative, distribution and finance functions; and
integrating management information systems and personnel.
The integration process could divert the attention of management and any difficulties or problems encountered in the transition
process could have a material adverse effect on our business, financial condition or results of operations. In particular, the integration
process may temporarily redirect resources previously focused on reducing product cost and operating expenses, resulting in lower
gross profits in relation to sales. In addition, the process of combining companies could cause the interruption of, or a loss of
momentum and operating profits in, the activities of the respective businesses, which could have an adverse effect on their combined
operations.
In connection with acquisitions of businesses in the future, if any, we may decide to consolidate the operations of any acquired
businesses with our existing operations or make other changes with respect to the acquired businesses, which could result in special
charges or other expenses. Our results of operations also may be adversely affected by expenses we incur in making acquisitions,
by amortization of acquisition-related intangible assets with definite lives and by additional depreciation and amortization
attributable to acquired assets. Any of the businesses we acquire may also have liabilities or adverse operating issues, including
some that we fail to discover before the acquisition, and our indemnity for such liabilities may also be limited. Additionally, our
ability to make any future acquisitions may depend upon obtaining additional financing. We may not be able to obtain additional
financing on acceptable terms or at all. To the extent that we seek to acquire other businesses in exchange for our common stock,
fluctuations in our stock price could have a material adverse effect on our ability to complete acquisitions.
Our business strategy of increasing our sales of fresh, perishable items, which we accelerated with our acquisitions of Tony’s,
Global Organic and Nor-Cal, may not produce the results that we expect.
A key element of our current growth strategy is to increase the amount of fresh, perishable products that we distribute. We
believe that the ability to distribute these products that are typically found in the perimeter of our customers’ stores, in addition
to the products we have historically distributed, will differentiate us from our competitors and increase demand for our products.
We accelerated this strategy with our acquisitions of Tony’s, Global Organic and Nor-Cal. If we are unable to grow this portion
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of our business and manage that growth effectively, our business, financial condition and results of operations may be materially
and adversely affected.
We may have difficulty managing our growth.
The growth in the size of our business and operations has placed, and is expected to continue to place, a significant strain
on our management. Our future growth may be limited by our inability to retain existing customers, make acquisitions, successfully
integrate acquired entities or significant new customers, implement information systems initiatives, acquire or timely construct
new distribution centers or expand our existing distribution centers, or adequately manage our personnel. Our future growth is
limited in part by the size and location of our distribution centers. As we near maximum utilization of a given facility or maximize
our processing capacity, operations may be constrained and inefficiencies have been and may be created, which could adversely
affect our results of operations unless the facility is expanded, volume is shifted to another facility or additional processing capacity
is added. Conversely, if we add additional facilities, expand existing operations or facilities, or fail to retain existing business,
excess capacity may be created. Any excess capacity may also create inefficiencies and adversely affect our results of operations,
including as a result of incurring additional operating costs for these facilities before demand for products to be supplied from
these facilities rises to a sufficient level. We cannot assure you that we will be able to successfully expand our existing distribution
centers or open new distribution centers in new or existing markets if needed to accommodate or facilitate growth. Even if we are
able to expand our distribution network, our ability to compete effectively and to manage future growth, if any, will depend on
our ability to continue to implement and improve operational, financial and management information systems, including our
warehouse management systems, on a timely basis and to expand, train, motivate and manage our work force. We cannot assure
you that our existing personnel, systems, procedures and controls will be adequate to support the future growth of our operations.
Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition or results
of operations.
Increased fuel costs may adversely affect our results of operations.
Increased fuel costs may have a negative impact on our results of operations. The high cost of diesel fuel can increase the
price we pay for products as well as the costs we incur to deliver products to our customers. These factors, in turn, may negatively
impact our net sales, margins, operating expenses and operating results. To manage this risk, we have in the past periodically
entered, and may in the future periodically enter, into heating oil derivative contracts to hedge a portion of our projected diesel
fuel requirements. Heating crude oil prices have a highly correlated relationship to diesel fuel prices, making these derivatives
effective in offsetting changes in the cost of diesel fuel. We are not party to any commodity swap agreements and, as a result, our
exposure to volatility in the price of diesel fuel has increased relative to our exposure to volatility in prior periods in which we
had outstanding heating oil derivative contracts. We do not enter into fuel hedge contracts for speculative purposes. We have in
the past, and may in the future, periodically enter into forward purchase commitments for a portion of our projected monthly diesel
fuel requirements at fixed prices. As of July 29, 2017, we had no forward diesel fuel commitments. We also maintain a fuel
surcharge program which allows us to pass some of our higher fuel costs through to our customers. We cannot guarantee that we
will continue to be able to pass a comparable proportion or any of our higher fuel costs to our customers in the future, which may
adversely affect our business, financial condition or results of operations.
Disruption of our distribution network could adversely affect our business.
Damage or disruption to our distribution capabilities due to weather, natural disaster, fire, terrorism, pandemic, strikes, the
financial and/or operational instability of key suppliers, or other reasons could impair our ability to distribute our products. To the
extent that we are unable, or it is not financially feasible, to mitigate the likelihood or potential impact of such events, or to manage
effectively such events if they occur, there could be an adverse effect on our business, financial condition or results of operations.
The cost of the capital available to us and limitations on our ability to access additional capital may have a material adverse
effect on our business, financial condition or results of operations.
Historically, acquisitions and capital expenditures have been a large component of our growth. We anticipate that
acquisitions and capital expenditures will continue to be important to our growth in the future. As a result, increases in the cost
of capital available to us, which could result from us not being in compliance with fixed charge coverage ratio covenants under
our amended and restated revolving credit facility, or our inability to access additional capital to finance acquisitions and capital
expenditures through borrowed funds could restrict our ability to grow our business organically or through acquisitions, which
could have a material adverse effect on our business, financial condition or results of operations.
In addition, our profit margins depend on strategic investment buying initiatives, such as discounted bulk purchases,
which require spending significant amounts of working capital up-front to purchase products that we then sell over a multi-month
time period. Therefore, increases in the cost of capital available to us or our inability to access additional capital through borrowed
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funds could restrict our ability to engage in strategic investment buying initiatives, which could reduce our profit margins and
have a material adverse effect on our business, financial condition or results of operations.
Our debt agreements contain restrictive covenants that may limit our operating flexibility.
Our debt agreements underlying our amended and restated revolving credit facility and Term Loan Agreement contain
financial covenants and other restrictions that limit our operating flexibility, limit our flexibility in planning for or reacting to
changes in our business and make us more vulnerable to economic downturns and competitive pressures. Our indebtedness could
have significant negative consequences, including:
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increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing;
limiting our ability to pursue certain acquisitions;
limiting our flexibility in planning for or reacting to changes in our business and the industry in which we compete; and
placing us at a competitive disadvantage compared to competitors with less leverage or better access to capital resources.
In addition, our amended and restated revolving credit facility and the Term Loan Agreement each require that we comply
with various financial tests and impose certain restrictions on us, including among other things, restrictions on our ability to incur
additional indebtedness, create liens on assets, make loans or investments or pay dividends. Failure to comply with these covenants
could have a material adverse effect on our business, financial condition or results of operations.
Our operating results are subject to significant fluctuations.
Our operating results may vary significantly from period to period due to:
demand for our products, including as a result of seasonal fluctuations;
changes in our operating expenses, including fuel and insurance expenses;
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• management's ability to execute our business and growth strategies;
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changes in customer preferences, including levels of enthusiasm for health, fitness and environmental issues;
public perception of the benefits of natural and organic products when compared to similar conventional products;
fluctuation of natural product prices due to competitive pressures;
the addition or loss of significant customers;
personnel changes;
general economic conditions, including inflation;
supply shortages, including a lack of an adequate supply of high-quality livestock or agricultural products due to poor
growing conditions, water shortages, natural disasters or otherwise;
volatility in prices of high-quality livestock or agricultural products resulting from poor growing conditions, water
shortages, natural disasters or otherwise; and
future acquisitions, particularly in periods immediately following the consummation of such acquisition transactions
while the operations of the acquired businesses are being integrated into our operations.
•
•
Due to the foregoing factors, we believe that period-to-period comparisons of our operating results may not necessarily be
meaningful and that such comparisons cannot be relied upon as indicators of future performance.
Conditions beyond our control can interrupt our supplies and alter our product costs.
The majority of our suppliers are based in the United States and Canada, but we also source products from suppliers throughout
Europe, Asia, Central America, South America, Africa and Australia. For the most part, we do not have long-term contracts with
our suppliers committing them to provide products to us. Although our purchasing volume can provide benefits when dealing with
suppliers, suppliers may not provide the products needed by us in the quantities and at the prices requested. We are also subject
to delays caused by interruption in production and increases in product costs based on conditions outside of our control. These
conditions include work slowdowns, work interruptions, strikes or other job actions by employees of suppliers, short-term weather
conditions or more prolonged climate change, crop conditions, product recalls, water shortages, transportation interruptions,
unavailability of fuel or increases in fuel costs, competitive demands, raw material shortages and natural disasters or other
catastrophic events (including, but not limited to food-borne illnesses). As demand for natural and organic products has increased
and the distribution channels into which these products are sold have expanded, we have continued to experience higher levels of
manufacturer out-of-stocks causing us to incur higher operating expenses as we moved products around our distribution facilities
as we sought to keep our service level high, and we cannot be sure when this trend will end or whether it will recur during future
years. As the consumer demand for natural and organic products has increased, certain retailers and other producers have entered
the market and attempted to buy certain raw materials directly, limiting their availability to be used in certain vendor products.
Further, increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our
supply chain or impact demand for our products, including the specialty protein and cheese products sold by Tony's. For example,
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until the last two years, weather patterns had resulted in lower than normal levels of precipitation in key agricultural states such
as California, impacting the price of water and corresponding prices of food products grown in states facing drought conditions.
The impact of sustained droughts is uncertain and could result in volatile input costs. Input costs could increase at any point in
time for a large portion of the products that we sell for a prolonged period. Conversely, in years where rainfall levels are abundant
product costs, particularly in our perishable and produce businesses, may decline and the results of this product cost deflation
could negatively impact our results of operations. Our inability to obtain adequate products as a result of any of the foregoing
factors or otherwise could mean that we could not fulfill our obligations to customers, and customers may turn to other distributors.
In that case, our financial condition, results of operations and business could be materially and adversely affected.
Changes in relationships with our vendors may adversely affect our profitability.
We cooperatively engage in a variety of promotional programs with our vendors. We manage these programs to maintain
or improve our margins and increase sales. A reduction or change in promotional spending by our vendors (including as a result
of increased demand for natural and organic products) could have a significant impact on our profitability. We depend heavily on
our ability to purchase merchandise in sufficient quantities at competitive prices. We have no assurances of continued supply,
pricing, or access to new products and any vendor could at any time change the terms upon which it sells to us or discontinue
selling to us.
We are subject to significant governmental regulation.
Our business is highly regulated at the federal, state and local levels and our products and distribution operations require
various licenses, permits and approvals. In particular:
•
•
•
the products that we distribute in the United States are subject to inspection by the FDA;
our warehouse and distribution centers are subject to inspection by the USDA and state health authorities; and
the United States Department of Transportation and the United States Federal Highway Administration regulate our
United States trucking operations.
Our Canadian operations are similarly subject to extensive regulation, including the English and French dual labeling
requirements applicable to products that we distribute in Canada. The loss or revocation of any existing licenses, permits or
approvals or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where we intend to do business
could have a material adverse effect on our business, financial condition or results of operations. In addition, as a distributor and
manufacturer of natural, organic, and specialty foods, we are subject to increasing governmental scrutiny of and public awareness
regarding food safety and the sale, packaging and marketing of natural and organic products. Compliance with these laws may
impose a significant burden on our operations. If we were to manufacture or distribute foods that are or are perceived to be
contaminated, any resulting product recalls could have an adverse effect on our business, financial condition or results of operations.
Additionally, concern over climate change, including the impact of global warming, has led to significant United States and
international legislative and regulatory efforts to limit greenhouse gas emissions. Increased regulation regarding greenhouse gas
emissions, especially diesel engine emissions, could impose substantial costs on us. These costs include an increase in the cost of
the fuel and other energy we purchase and capital costs associated with updating or replacing our vehicles prematurely. Until the
timing, scope and extent of such regulation becomes known, we cannot predict its effect on our results of operations. It is reasonably
possible, however, that it could impose material costs on us which we may be unable to pass on to our customers.
If we fail to comply with applicable laws and regulations or encounter disagreements with respect to our contracts subject
to governmental regulations, including those referred to above, we may be subject to investigations, criminal sanctions or civil
remedies, including fines, injunctions, prohibitions on exporting, seizures or debarments from contracting with the
government. The cost of compliance or the consequences of non-compliance, including debarments, could have a material adverse
effect on our business and results of operations. In addition, governmental units may make changes in the regulatory frameworks
within which we operate that may require either the corporation as a whole or individual businesses to incur substantial increases
in costs in order to comply with such laws and regulations.
Product liability claims could have an adverse effect on our business.
We face an inherent risk of exposure to product liability claims if the products we manufacture or sell cause injury or illness.
In addition, meat, seafood, cheese, poultry and other products that we distribute could be subject to recall because they are, or are
alleged to be, contaminated, spoiled or inappropriately labeled. Our meat and poultry products may be subject to contamination
by disease-producing organisms, or pathogens, such as Listeria monocytogenes, Salmonella and generic E.coli. These pathogens
are generally found in the environment, and as a result, there is a risk that they, as a result of food processing, could be present in
the meat and poultry products we distribute. These pathogens can also be introduced as a result of improper handling at the
consumer level. These risks may be controlled, although not eliminated, by adherence to good manufacturing practices and finished
product testing. We have little, if any, control over proper handling before we receive the product or once the product has been
shipped to our customers. We may be subject to liability, which could be substantial, because of actual or alleged contamination
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in products manufactured or sold by us, including products sold by companies before we acquired them. We have, and the companies
we have acquired have had, liability insurance with respect to product liability claims. This insurance may not continue to be
available at a reasonable cost or at all, and may not be adequate to cover product liability claims against us or against companies
we have acquired. We generally seek contractual indemnification from manufacturers, but any such indemnification is limited, as
a practical matter, to the creditworthiness of the indemnifying party. If we or any of our acquired companies do not have adequate
insurance or contractual indemnification available, product liability claims and costs associated with product recalls, including a
loss of business, could have a material adverse effect on our business, financial condition or results of operations.
A cybersecurity incident and other technology disruptions could negatively impact our business and our relationships with
customers.
We use computers in substantially all aspects of our business operations. We also use mobile devices, social networking
and other online activities to connect with our employees, suppliers, business partners and our customers. Such uses give rise to
cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information. Our
business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual
property, including customers’ and suppliers' personal information, private information about employees, and financial and strategic
information about the Company and its business partners. Further, as we pursue our strategy to grow through acquisitions and to
pursue new initiatives that improve our operations and cost structure, we are also expanding and improving our information
technologies, resulting in a larger technological presence and corresponding exposure to cybersecurity risk. If we fail to assess
and identify cybersecurity risks associated with acquisitions and new initiatives, we may become increasingly vulnerable to such
risks. Additionally, while we have implemented measures to prevent security breaches and cyber incidents, our preventative
measures and incident response efforts may not be entirely effective. The theft, destruction, loss, misappropriation, or release of
sensitive and/or confidential information or intellectual property, or interference with our information technology systems or the
technology systems of third parties on which we rely, could result in business disruption, negative publicity, brand damage, violation
of privacy laws, loss of customers, potential liability and competitive disadvantage all of which could have a material adverse
effect on our business, financial condition or results of operations.
We are dependent on a number of key executives.
Management of our business is substantially dependent upon the services of certain key management employees. Loss of
the services of any officers or any other key management employee could have a material adverse effect on our business, financial
condition or results of operations.
Union-organizing activities could cause labor relations difficulties.
Refer to "Employees" in "Item 1. Business" for detail about our employees covered by collective bargaining agreements. If
we are not able to renew these agreements or are required to make significant changes to these agreements, our relationship with
these employees may become fractured or we may incur additional expenses which could have a material adverse effect on our
business, financial condition, or results of operations. We have in the past been the focus of union-organizing efforts, and we
believe it is likely that we will be the focus of similar efforts in the future.
As we increase our employee base and broaden our distribution operations to new geographic markets, our increased visibility
could result in increased or expanded union-organizing efforts. In the event we are unable to negotiate contract renewals with our
union associates, we could be subject to work stoppages. In that event, it would be necessary for us to hire replacement workers
to continue to meet our obligations to our customers. The costs to hire replacement workers and employ effective security measures
could negatively impact the profitability of any such facility, and depending on the length of time that we are required to employ
replacement workers and security measures these costs could be significant and could have a material adverse effect on our business,
financial condition or results of operations.
In August 2017, the National Labor Relations Board certified the election results of our transportation employees in Moreno
Valley, California to be represented by the Teamsters union. We are in the process of negotiating a collective bargaining agreement
with these employees. The terms of this agreement could cause our expenses at this facility to increase, negatively impacting the
results of operations at this facility.
We may fail to establish sufficient insurance reserves and adequately estimate for future workers' compensation and automobile
liabilities.
We are primarily self-insured for workers' compensation and general and automobile liability insurance. We believe that
our workers' compensation and automobile insurance coverage is customary for businesses of our size and type. However, there
are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure. These
losses, should they occur, could have a material adverse effect on our business, financial condition or results of operations. In
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addition, the cost of workers' compensation insurance and automobile insurance fluctuates based upon our historical trends, market
conditions and availability.
Any projection of losses concerning workers' compensation and automobile insurance 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 losses incurred are greater than those anticipated, our reserves may be insufficient and
additional costs could be recorded in our consolidated financial statements. If we suffer a substantial loss that is not covered by
our self-insurance reserves, the loss and attendant expenses could harm our business and operating results. We have purchased
stop loss coverage from third parties, which limits our exposure above the amounts we have self-insured.
Adverse judgments or settlements resulting from legal proceedings in which we may be involved in the normal course of our
business could reduce our profits or limit our ability to operate our business.
In the normal course of our business, we are involved in various legal proceedings. The outcome of these proceedings cannot
be predicted. If any of these proceedings were to be determined adversely to us or a settlement involving a payment of a material
sum of money were to occur, it could materially and adversely affect our results of operations or ability to operate our business.
Additionally, we could become the subject of future claims by third parties, including our employees, our investors, or regulators.
Any significant adverse judgments or settlements would reduce our profits and could limit our ability to operate our business.
Further, we may incur costs related to claims for which we have appropriate third-party indemnity, but such third parties fail to
fulfill their contractual obligations.
The market price for our common stock may be volatile.
At times, there has been significant volatility in the market price of our common stock. In addition, the market price of our
common stock could fluctuate substantially in the future in response to a number of factors, including the following:
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our quarterly operating results or the operating results of other distributors of organic or natural food and non-food
products and of supernatural chains and conventional supermarkets and other of our customers;
the addition or loss of significant customers or significant events affecting our significant customers;
changes in general conditions in the economy, the financial markets or the organic or natural food and non-food product
distribution industries;
changes in financial estimates or recommendations by stock market analysts regarding us or our competitors;
announcements by us or our competitors of significant acquisitions;
increases in labor, energy, fuel costs or the costs of food products;
natural disasters, severe weather conditions or other developments affecting us or our competitors;
publication of research reports about us, the benefits of organic and natural products, or the organic or natural food and
non-food product distribution industries generally;
changes in market valuations of similar companies;
additions or departures of key management personnel;
actions by institutional stockholders; and
speculation in the press or investment community.
In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had
a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance.
These broad market fluctuations may materially adversely affect our stock price, regardless of our operating results.
A failure of our internal control over financial reporting could materially impact our business or stock price.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. An
internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal
control systems, internal control over financial reporting may not prevent or detect misstatements. Any failure to maintain an
effective system of internal control over financial reporting could limit our ability to report our financial results accurately and
timely or to detect and prevent fraud, and could expose us to litigation or adversely affect the market price of our common stock.
See Part II, “Item 9A. Controls and Procedures - Management’s Report on Internal Control over Financial Reporting,” of this
report for additional information regarding our internal control over financial reporting.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
We maintained thirty-three distribution centers at July 29, 2017 which were utilized by our wholesale segment. These
facilities, including offsite storage space, consisted of an aggregate of approximately 8.7 million square feet of storage space,
which we believe represents the largest capacity of any distributor within the United States that is principally engaged in the
distribution of natural, organic and specialty products.
Set forth below for each of our distribution centers is its location and the expiration of leases as of July 29, 2017 for those
distribution centers that we do not own.
Location
Atlanta, Georgia*
Auburn, California*
Auburn, Washington
Aurora, Colorado
Burnaby, British Columbia
Charlotte, North Carolina
Chesterfield, New Hampshire*
Dayville, Connecticut*
Gilroy, California
Greenwood, Indiana*
Howell Township, New Jersey
Hudson Valley, New York*
Iowa City, Iowa*
Lancaster, Texas
Logan Township, New Jersey
Montreal, Quebec
Moreno Valley, California
Philadelphia, Pennsylvania
Prescott, Wisconsin
Racine, Wisconsin*
Richburg, South Carolina
Richmond, British Columbia
Ridgefield, Washington
Ridgefield, Washington*
Rocklin, California*
Sarasota, Florida
Truckee, California
Vaughan, Ontario
Vernon, California*
West Sacramento, California
West Sacramento, California
York, Pennsylvania
Yuba City, California
Lease Expiration
Owned
Owned
August 2019
October 2033
December 2022
September 2019
Owned
Owned
Owned
Owned
Owned
Owned
Owned
July 2020
March 2028
July 2022
July 2018
January 2020
Owned
Owned
Owned
August 2022
September 2019
Owned
Owned
July 2022
August 2020
November 2021
Owned
Owned
Owned
May 2020
September 2021
*The properties noted above are mortgaged under and encumbered by our Term Loan Agreement initially entered into on
August 14, 2014.
We lease facilities to operate twelve natural products retail stores through our retail division, Earth Origins, in Florida,
Maryland, Massachusetts and Rhode Island, each with various lease expiration dates. As of the end of our 2016 fiscal year, we
decided to close two of these locations, one in Maryland and one in Florida, and we closed these stores during the first quarter of
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fiscal 2017. We also lease a processing and manufacturing facility in Edison, New Jersey for our manufacturing and branded
products division with a lease expiration date of July 31, 2023.
We lease office space in Pleasanton, California, San Francisco, California, Santa Cruz, California, Chesterfield, New
Hampshire, Uniondale, New York, Brooklyn, New York, Richmond, Virginia, Medford, New Jersey, Wayne, Pennsylvania,
Lincoln, Rhode Island and Providence, Rhode Island, the site of our corporate headquarters. Our new shared services center will
be located in Lincoln, Rhode Island and we will begin our transition into the new space in the first quarter of fiscal 2018. Our
leases have been entered into upon terms that we believe to be reasonable and customary.
We lease warehouse facilities in West Sacramento, California that we acquired in connection with our acquisition of Tony's.
This facility is currently being subleased under an agreement that expires concurrently with our lease termination in April 2018.
We also lease offsite storage space near certain of our distribution facilities.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in routine litigation or other legal proceedings that arise in the ordinary course of our
business. There are no pending material legal proceedings to which we are a party or to which our property is subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
21
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq Global Select Market® under the symbol "UNFI." Our common stock began
trading on the Nasdaq Stock Market® on November 1, 1996.
The following table sets forth, for the fiscal periods indicated, the high and low sale prices per share of our common stock
on the Nasdaq Global Select Market®:
Fiscal 2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
High
Low
$
$
50.06
49.39
45.99
42.38
55.69
52.07
43.02
52.18
38.55
40.81
39.47
34.60
44.05
33.85
29.75
33.16
On July 29, 2017, we had 78 stockholders of record. The number of record holders may not be representative of the number
of beneficial holders of our common stock because depositories, brokers or other nominees hold many shares.
We have never declared or paid any cash dividends on our capital stock. We anticipate that all of our earnings in the foreseeable
future will be retained to finance the continued growth and development of our business, and we have no current intention to pay
cash dividends. Our future dividend policy will depend on our earnings, capital requirements and financial condition, requirements
of the financing agreements to which we are then a party and other factors considered relevant by our Board of Directors.
Additionally, the terms of our amended and restated revolving credit facility and Term Loan Agreement restrict us from making
any cash dividends unless certain conditions and financial tests are met.
Comparative Stock Performance
The graph below compares the cumulative total stockholder return on our common stock for the last five fiscal years with
the cumulative total return on (i) an index of Food Distributors and Wholesalers and (ii) The NASDAQ Composite Index. The
comparison assumes the investment of $100 on July 28, 2012 in our common stock and in each of the indices and, in each case,
assumes reinvestment of all dividends. The stock price performance shown below is not necessarily indicative of future
performance.
The index of Food Distributors and Wholesalers includes SuperValu, Inc. and SYSCO Corporation.
This performance graph shall not be deemed "soliciting material" or be deemed to be "filed" for purposes of Section 18 of
the Exchange Act or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference
into any of our filings under the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act.
22
COMPARISION OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among United Natural Foods, Inc., the NASDAQ Composite Index,
and Index of Food Distributors and Wholesalers
* $100 invested on 7/28/12 in UNFI common stock or 7/28/12 in the relevant index, including reinvestment of dividends.
Index calculated on a month-end basis.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are derived from our consolidated financial statements, which have
been audited by KPMG LLP, our independent registered public accounting firm. The historical results are not necessarily indicative
of results to be expected for any future period. The following selected consolidated financial data should be read in conjunction
with and is qualified by reference to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-
K.
23
Consolidated Statement of Income Data: (1) (2)
July 29,
2017
July 30,
2016
August 1,
2015
August 2,
2014
$
$
$
$
$
(In thousands, except per share data)
9,274,471
7,845,550
1,428,921
1,202,896
226,025
214,423
84,268
130,155
2.57
2.56
958,683
2,886,563
$
$
$
$
$
8,470,286
7,190,935
1,279,351
1,055,242
224,109
208,222
82,456
125,766
2.50
2.50
991,468
2,852,155
$
$
$
$
$
8,184,978
6,924,463
1,260,515
1,018,558
241,957
229,769
91,035
138,734
2.77
2.76
1,018,437
2,540,994
$
$
$
$
$
6,794,447
5,666,802
1,127,645
916,857
210,788
207,408
81,926
125,482
2.53
2.52
850,006
2,284,446
August 3,
2013
(53 weeks)
6,064,355
5,040,323
1,024,032
839,582
184,450
173,072
65,865
107,207
2.18
2.17
712,506
1,725,463
$
$
$
$
$
Net sales
Cost of sales
Gross profit
Total operating expenses
Operating income
Income before income taxes
Provision for income taxes
Net income
Basic per share data:
Net income
Diluted per share data:
Net income
Consolidated Balance Sheet Data: (2) (3)
Working capital
Total assets
Total long-term debt and capital leases,
excluding current portion
149,863
161,739
172,949
32,510
33,091
Total stockholders' equity
$
1,681,921
$
1,519,504
$
1,381,088
$
1,238,919
$
1,094,701
(1) Includes the effect of acquisitions from the respective dates of acquisition.
(2) Periods prior to the year ended July 30, 2016 have been restated for immaterial corrections for identified errors in
accounting for early payment discounts on inventory purchases.
(3) Amounts have been adjusted for the reclassification of debt issuance costs resulting from the Company's early adoption
of Accounting Standards Update No. 2015-03, Interest- Imputation of Interest (Subtopic 835-30), in the fourth quarter
of fiscal 2016.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and
the notes thereto appearing elsewhere in this Annual Report on Form 10-K.
Forward-Looking Statements
This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (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," "plans," "seek," "should," "will," and "would," or similar words. Statements that contain
these words 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. 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:
24
•
•
•
•
•
•
•
•
our ability to retain customers of Haddon House Food Products, Inc. ("Haddon"), Nor-Cal Produce, Inc. ("Nor-Cal"),
Global Organic/Specialty Source, Inc. ("Global Organic") and Gourmet Guru, Inc. ("Gourmet Guru") and their affiliated
entities that we purchased on terms similar to those in place prior to our acquisition of these businesses;
our dependence on principal customers;
our sensitivity to general economic conditions, including the current economic environment;
changes in disposable income levels and consumer spending trends;
our ability to reduce our expenses in amounts sufficient to offset our increased focus on sales to conventional supermarkets
and the resulting lower gross margins on those sales;
our reliance on the continued growth in sales of natural and organic foods and non-food products in comparison to
conventional products;
increased competition in our industry as a result of increased distribution of natural, organic and specialty products by
conventional grocery distributors and direct distribution of those products by large retailers and online distributors;
our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and
our transportation management system across the Company;
the addition or loss of significant customers or material changes to our relationships with these customers;
volatility in fuel costs;
volatility in foreign exchange rates;
our sensitivity to inflationary and deflationary pressures;
the relatively low margins and economic sensitivity of our business;
the potential for disruptions in our supply chain by circumstances beyond our control;
the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise;
consumer demand for natural and organic products outpacing suppliers’ ability to produce these products;
•
•
•
•
•
•
•
•
• moderated supplier promotional activity, including decreased forward buying opportunities;
•
•
union-organizing activities that could cause labor relations difficulties and increased costs;
the ability to identify and successfully complete acquisitions of other natural, organic and specialty food and non-food
products distributors;
• management's allocation of capital and the timing of capital expenditures;
•
our ability to successfully integrate and deploy our operational initiatives to achieve synergies from the acquisitions of
Global Organic, Nor-Cal, Haddon and Gourmet Guru;
our ability to realize the anticipated benefits from our restructuring program in conjunction with various cost saving and
efficiency initiatives, including acquisition integration, severance and transition related costs, as well as the anticipated
opening of the Company's shared services center, all within the cost estimates and timing currently contemplated; and
the potential for business disruptions in connection with the anticipated opening of the Company’s shared services center.
•
•
This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended
to be exhaustive. 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 on Form 10-K, as the occurrence of any of these events could have an adverse effect,
which may be material, on our business, results of operations and financial condition.
Overview
We believe we are a leading national distributor based on sales of natural, organic and specialty foods and non-food products
in the United States and Canada and that our thirty-three distribution centers, representing approximately 8.7 million square feet
of warehouse space, provide us with the largest capacity of any North American-based distributor in the natural, organic and
specialty products industry. We offer more than 110,000 high-quality natural, organic and specialty foods and non-food products,
consisting of national brands, regional brands, private label and master distribution products, in 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 serve more than 43,000 customer locations primarily located across the United States and
Canada, the majority of which can be classified into one of the following categories: independently owned natural products retailers,
which include buying clubs; supernatural chains, which consist solely of Whole Foods Market; conventional supermarkets, which
include mass market chains; and other which includes foodservice and international customers outside of Canada.
Our operations are generally comprised of three principal operating divisions. These operating divisions are:
•
our wholesale division, which includes:
our broadline natural, organic and specialty distribution business in the United States, which includes our recent
acquisitions of Haddon and Gourmet Guru;
Tony's, which is a leading distributor of a wide array of specialty protein, cheese, deli, foodservice and bakery
goods, principally throughout the Western United States;
25
Albert's, which is a leading distributor of organically grown produce and non-produce perishable items within
the United States, which includes the operations of Global Organic and Nor-Cal, a distributor of organic and
conventional produce and non-produce perishable items principally in Northern California;
UNFI Canada, Inc. ("UNFI Canada"), which is our natural, organic and specialty distribution business in Canada;
and
Select Nutrition, which distributes vitamins, minerals and supplements;
•
•
our retail division, consisting of Earth Origins, which operates our twelve natural products retail stores within the United
States; and
our manufacturing and branded products divisions, consisting of:
Woodstock Farms Manufacturing, which specializes in importing, roasting, packaging and the distribution of
nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections; and
our Blue Marble Brands branded product lines.
In recent years, our sales to existing and new customers have increased through the continued growth of the natural and
organic products industry in general, increased market share as a result of our high quality service and a broader product selection,
including specialty products, and the acquisition of, or merger with, natural and specialty products distributors, the expansion of
our existing distribution centers; the construction of new distribution centers; the introduction of new products and the development
of our own line of natural and organic branded products. Through these efforts, we believe that we have been able to broaden our
geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share.
Our strategic plan is focused on increasing the type of products we distribute to our customers, including perishable products and
conventional produce. As part of our “one company” approach, we are in the process of rolling out a national warehouse management
and procurement system to convert our existing facilities into a single warehouse management and supply chain platform ("WMS").
We have successfully implemented the WMS system at fourteen of our facilities including most recently in Iowa City, Iowa,
Greenwood, Indiana, Dayville, Connecticut, Gilroy, California, Richburg, South Carolina, Howell, New Jersey, and Atlanta,
Georgia. We expect to complete the roll-out to all of our existing U.S. broadline facilities by the end of fiscal 2019. These steps
and others are intended to promote operational efficiencies and further reduce our operating expenses as a percentage of net sales
as we attempt to offset the lower gross margins we expect to generate by increased sales to the supernatural and conventional
supermarket channels and as a result of additional competition in our business.
We have been the primary distributor to Whole Foods Market for more than nineteen years. We have and continue to serve
as the primary distributor to Whole Foods Market in all of its regions in the United States pursuant to a distribution agreement
that expires on September 28, 2025. Whole Foods Market accounted for approximately 33% and 35% of our net sales for the years
ended July 29, 2017 and July 30, 2016, respectively.
In March 2016, the Company acquired certain assets of Global Organic and related affiliates through our wholly owned
subsidiary Albert's, in a cash transaction for approximately $20.6 million. Global Organic is located in Sarasota, Florida serving
customer locations (many of which are independent retailers) across the Southeastern United States. Global Organic's operations
have been fully integrated into the existing Albert's business in the Southeastern United States.
In March 2016, the Company acquired all of the outstanding equity securities of Nor-Cal and an affiliated entity as well as
certain real estate, in a cash transaction for approximately $67.8 million. Nor-Cal is a distributor with primary operations located
in West Sacramento, California. Our acquisition of Nor-Cal has aided us in our efforts to expand our fresh offering, particularly
within conventional produce. Nor-Cal's operations have been combined with the existing Albert's business.
In May 2016, the Company completed its acquisition of all of the outstanding equity securities of Haddon and certain affiliated
entities and real estate for total cash consideration of approximately $217.5 million. Haddon is a distributor and merchandiser of
natural and organic and gourmet ethnic products primarily throughout the Eastern United States. Haddon has a history of providing
quality high touch merchandising services to their customers. Haddon has a diverse, multi-channel customer base including
conventional supermarkets, gourmet food stores and independently owned product retailers. Our acquisition of Haddon has
expanded the product and service offering that we expect to play an important role in our ongoing strategy to build out our gourmet
and ethnic product categories. Haddon's operations have been combined with the Company's existing broadline natural, organic
and specialty distribution business in the United States.
In August 2016, the Company acquired all of the outstanding equity securities of Gourmet Guru in a cash transaction for
approximately $10.0 million, subject to customary post-closing adjustments. Gourmet Guru is a distributor and merchandiser of
fresh and organic food focusing on new and emerging brands. We believe that our acquisition of Gourmet Guru enhances our
strength in finding and cultivating emerging fresh and organic brands and further expands our presence in key urban markets.
26
Gourmet Guru's operations have been combined with the Company's existing broadline natural, organic and specialty distribution
business in the United States.
The ability to distribute specialty food items (including ethnic, kosher and gourmet) has accelerated our expansion into a
number of high-growth business markets and allowed us to establish immediate market share in the fast-growing specialty foods
market. We have now integrated specialty food products and natural and organic specialty non-food products into all of our
broadline distribution centers across the United States and Canada. Due to our expansion into specialty foods, over the past several
years we have been awarded new business with a number of conventional supermarkets that we previously had not done business
with because we did not distribute specialty products. We believe our acquisition of Haddon has expanded our capabilities in the
specialty category and we have expanded our offerings of specialty products to include those products distributed by Haddon that
we did not previously distribute to our customers. We believe that distribution of these products enhances our conventional
supermarket business channel and that our complementary product lines continue to present opportunities for cross-selling.
To maintain our market leadership and improve our operating efficiencies, we seek to continually:
•
•
•
•
•
•
•
•
•
expand our marketing and customer service programs across regions;
expand our national purchasing opportunities;
offer a broader product selection than our competitors;
offer operational excellence with high service levels and a higher percentage of on-time deliveries than our competitors;
centralize general and administrative functions to reduce expenses;
consolidate systems applications among physical locations and regions;
increase our investment in people, facilities, equipment and technology;
integrate administrative and accounting functions; and
reduce the geographic overlap between regions.
Our continued growth has allowed us to expand our existing facilities and open new facilities in an effort to achieve increasing
operating efficiencies. We have made significant capital expenditures and incurred considerable expenses in connection with the
opening and expansion of our facilities. At July 29, 2017, our distribution capacity totaled approximately 8.7 million square feet.
We have completed our multi-year expansion plan, which included new distribution centers in Racine, Wisconsin, Hudson Valley,
New York, Prescott, Wisconsin, and Gilroy, California from which we began operations in June 2014, September 2014, April 2015
and February 2016, respectively. Based on our current operations and customers, we believe that we are unlikely to open or
commence construction on a new distribution center in the next twelve months.
Our net sales consist primarily of sales of natural, organic and specialty products to retailers, adjusted for customer volume
discounts, returns and allowances. Net sales also consist of amounts charged by us to customers for shipping and handling and
fuel surcharges. The principal components of our cost of sales include the amounts paid to suppliers for product sold, plus the cost
of transportation necessary to bring the product to our distribution centers, offset by consideration received from suppliers in
connection with the purchase or promotion of the suppliers' products. Cost of sales also includes amounts incurred by us at our
manufacturing subsidiary, Woodstock Farms Manufacturing, for inbound transportation costs and for depreciation for
manufacturing equipment. 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. We include purchasing,
receiving, selecting and outbound transportation expenses within our operating expenses rather than in our cost of sales. Total
operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance,
administrative, share-based compensation, depreciation and amortization expense. Other expenses (income) include interest on
our outstanding indebtedness, including the financing obligation related to our Aurora, Colorado distribution center and the lease
for office space for our corporate headquarters in Providence, Rhode Island, interest income and miscellaneous income and
expenses.
27
Results of Operations
The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net
sales:
Net sales
Cost of sales
Gross profit
Operating expenses
Restructuring and asset impairment expenses
Total operating expenses
Operating income
Other expense (income):
Interest expense
Interest income
Other, net
Total other expense, net
Income before income taxes
Provision for income taxes
Net income
* Total reflects rounding
July 29,
2017
100.0 %
84.6 %
15.4 %
12.9 %
0.1 %
13.0 %
2.4 %
0.2 %
— %
(0.1)%
0.1 %
2.3 %
0.9 %
1.4 %
Fiscal year ended
July 30,
2016
100.0 %
84.9 %
15.1 %
12.4 %
0.1 %
12.5 %
2.6 %
August 1,
2015
100.0 %
84.6 %
15.4 %
12.4 %
— %
12.4 %
3.0 %
0.2 %
— %
— %
0.2 %
2.5 % *
1.0 %
1.5 %
0.2 %
— %
— %
0.1 % *
2.8 % *
1.1 %
1.7 %
Fiscal year ended July 29, 2017 compared to fiscal year ended July 30, 2016
Net Sales
Our net sales for the fiscal year ended July 29, 2017 increased approximately 9.5%, or $804.2 million, to $9.27 billion from
$8.47 billion for the fiscal year ended July 30, 2016. The year-over-year increase in net sales was primarily due to growth in our
wholesale segment of $815.0 million. Net sales for fiscal 2017 were positively impacted by acquisitions we consummated in the
third and fourth quarters of fiscal 2016 and the first quarter of fiscal 2017 but were negatively impacted by broad based food retail
softness, the rationalization of business in conjunction with margin enhancement initiatives and a lack of inflation. Our net sales
for the fiscal year ended July 30, 2016 were favorably impacted by moderate price inflation of approximately 1% during the year.
Our net sales by customer type for the fiscal years ended July 29, 2017 and July 30, 2016 were as follows (in millions):
Customer Type
Supernatural chains
Conventional supermarkets
Independently owned natural products retailers
Other
Total
2017
Net Sales
% of Total
Net Sales
2016
Net Sales
% of Total
Net Sales
$
$
3,096
2,747
2,427
1,004
9,274
33% $
30%
26%
11%
100% $
2,951
2,288
2,291
940
8,470
35%
27%
27%
11%
100%
During fiscal 2017, our net sales by channel were adjusted to reflect changes in the classification of customer types from
acquisitions we consummated in the third and fourth quarters of fiscal 2016 and the first quarter of fiscal 2017. There was no
financial statement impact as a result of revising the classification of customer types. As a result of this adjustment, net sales to
our conventional supermarket and other channels for the fiscal year ended July 30, 2016 increased approximately $29 million and
$6 million, respectively, compared to the previously reported amounts, while net sales to the independent retailer channel for the
fiscal year ended July 30, 2016 decreased approximately $35 million compared to the previously reported amounts.
Whole Foods Market is our only supernatural chain customer, and net sales to Whole Foods Market for the fiscal year ended
July 29, 2017 increased by approximately $145 million, or 4.9%, over the prior year and accounted for approximately 33% and
28
35% of our total net sales for the fiscal years ended July 29, 2017 and July 30, 2016, respectively. The increase in net sales to
Whole Foods Market is primarily due to new store openings offset in part by lower year over year same store sales at Whole Foods
Market.
Net sales to conventional supermarkets for the fiscal year ended July 29, 2017 increased by approximately $459 million, or
20.1%, from fiscal 2016 and represented approximately 30% and 27% of total net sales in fiscal 2017 and fiscal 2016, respectively.
The increase in net sales to conventional supermarkets was primarily driven by net sales resulting from our acquisition of Haddon
in the fourth quarter of fiscal 2016.
Net sales to our independent retailer channel increased by approximately $136 million, or 5.9%, during the fiscal year ended
July 29, 2017 compared to the fiscal year ended July 30, 2016, and accounted for 26% and 27% of our total net sales in fiscal
2017 and fiscal 2016, respectively. The increase in net sales in this channel is primarily attributable to net sales from our acquisitions
during fiscal 2016 and the first quarter of fiscal 2017 as well as growth in our wholesale division, which includes our broadline
distribution business.
Other net sales, which include sales to foodservice customers and sales from the United States to other countries, as well as
sales through our e-commerce division, branded product lines, retail division, manufacturing division, and our brokerage business,
increased by approximately $64 million, or 6.8%, during the fiscal year ended July 29, 2017 over the prior fiscal year and accounted
for approximately 11% of total net sales in both fiscal 2017 and fiscal 2016. The increase in other net sales is attributable to
expanded sales to our new and existing foodservice partners and growth in our e-commerce business, as well as net sales resulting
from our acquisition of Haddon in the fourth quarter of fiscal 2016.
As we continue to aggressively pursue new customers, expand relationships with existing customers and pursue opportunistic
acquisitions, we expect net sales for fiscal 2018 to grow over fiscal 2017. We believe that the integration of our specialty business
into our national platform has allowed us to attract customers that we would not have been able to attract without that business
and will continue to allow us to pursue a broader array of customers as many customers seek a single source for their natural,
organic and specialty products. We believe that our acquisitions of Haddon, Nor-Cal, Global Organic and Gourmet Guru have
also enhanced our ability to offer our customers a more comprehensive set of products than many of our competitors. We believe
that our projected net sales growth will come from both sales to new customers (including as a result of acquisitions) and an
increase in the number of products that we sell to existing customers. We expect that most of this net sales growth will occur in
our lower gross margin supernatural and conventional supermarket channels. Although sales to these customers typically generate
lower gross margins than sales to customers within our independent retailer channel, they also typically carry a lower average cost
to serve than sales to our independent customers.
Cost of Sales and Gross Profit
Our gross profit increased approximately 11.7%, or $149.6 million, to $1.43 billion for the fiscal year ended July 29, 2017,
from $1.28 billion for the fiscal year ended July 30, 2016. Our gross profit as a percentage of net sales was 15.4% for the fiscal
year ended July 29, 2017 and 15.1% for the fiscal year ended July 30, 2016. The increase in gross profit as a percentage of net
sales was primarily driven by margin enhancement initiatives and the favorable impact of acquisitions, partially offset by a lack
of inflation and competitive pricing pressure.
Operating Expenses
Our total operating expenses increased approximately 14.0%, or $147.7 million, to $1.20 billion for the fiscal year ended
July 29, 2017, from $1.06 billion for the fiscal year ended July 30, 2016. As a percentage of net sales, total operating expenses
increased to approximately 13.0% for the fiscal year ended July 29, 2017, from approximately 12.5% for the fiscal year ended
July 30, 2016. The increase in total operating expenses was primarily attributable to the acquired businesses, which generally have
a higher cost to serve their customers. Additionally, the increase was driven by $6.9 million of restructuring expenses as well as
higher depreciation and amortization and incentive and stock-based compensation expense, which was partially offset by costs
incurred in fiscal 2016 that did not recur in fiscal 2017, including $1.8 million of bad debt expense related to outstanding receivables
for a customer who declared bankruptcy in the first quarter of fiscal 2016, $2.2 million of acquisition related costs and $2.5 million
of startup costs related to the Company's Gilroy, California facility. Operating expenses for fiscal 2016 also included $5.6 million in
restructuring and asset impairment expense.
Total operating expenses for fiscal 2017 include share-based compensation expense of $25.7 million, compared to $15.3
million in fiscal 2016. This increase was primarily due to an increase in performance-based compensation expense related to our
long-term incentive plan for members of our executive leadership team. The Company did not record share-based compensation
expense related to performance-based share awards in fiscal 2016, as a result of performance measures not being attained at the
end of the fiscal year and the resulting forfeiture of these awards. For more information, refer to Note 3 "Equity Plans" to our
Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on
Form 10-K.
29
In the face of various industry headwinds that could pressure our gross margin, including increased competition from
self-distribution and industry consolidation, we continue to seek measures to reduce operating expenses as a percentage of net
sales, primarily through improved efficiencies in our supply chain and improvements to our information technology infrastructure,
including our ongoing WMS platform improvements. The opening of our new shared services center, which we expect to begin
to transition into in the first quarter of fiscal 2018, and various cost saving and efficiency initiatives are also expected to contribute
to reduced expenses once these initiatives have been fully implemented. We expect that a portion of these operating expense
improvements will be offset by increased levels of depreciation and amortization as a result of the significant amount of acquisitions
we consummated in fiscal 2016 and fiscal 2017.
Operating Income
Reflecting the factors described above, operating income increased approximately 0.9%, or $1.9 million, to $226.0 million
for the fiscal year ended July 29, 2017, from $224.1 million for the fiscal year ended July 30, 2016. As a percentage of net sales,
operating income was 2.4% and 2.6% for the fiscal years ended July 29, 2017 and July 30, 2016, respectively.
Other Expense (Income)
Other expense, net decreased $4.3 million to $11.6 million for the fiscal year ended July 29, 2017, from $15.9 million for
the fiscal year ended July 30, 2016. Interest expense for the fiscal year ended July 29, 2017 increased to $17.1 million from $16.3
million in the fiscal year ended July 30, 2016. The increase in interest expense was primarily due to additional borrowings for
acquisitions made in the second half of fiscal 2016. Interest income for the fiscal year ended July 29, 2017 decreased to $0.4
million from $1.1 million in the fiscal year ended July 30, 2016. Other income for the fiscal year ended July 29, 2017 was $5.2
million, compared to other expense of $0.7 million for the fiscal year ended July 30, 2016. The increase in other income was
primarily driven by a $6.1 million gain recorded during the fourth quarter of fiscal 2017 related to the sale of the Company's stake
in Kicking Horse Coffee.
Provision for Income Taxes
Our effective income tax rate was 39.3% and 39.6% for the fiscal years ended July 29, 2017 and July 30, 2016, respectively.
The decrease in the effective income tax rate for the fiscal year ended July 29, 2017 was primarily due to the claiming of solar
and research and development tax credits that were not available in the prior year. Beginning in the first quarter of 2018, our
income tax rate will be affected by the adoption of a recently issued accounting pronouncement related to the accounting for share-
based payment transactions. For more information related to this accounting pronouncement, see Note 1 to our consolidated
financial statements appearing elsewhere in this report.
Net Income
Reflecting the factors described in more detail above, net income increased $4.4 million to $130.2 million, or $2.56 per
diluted share, for the fiscal year ended July 29, 2017, compared to $125.8 million, or $2.50 per diluted share for the fiscal year
ended July 30, 2016.
Fiscal year ended July 30, 2016 compared to fiscal year ended August 1, 2015
Net Sales
Our net sales for the fiscal year ended July 30, 2016 increased approximately 3.5%, or $285.3 million, to $8.47 billion from
$8.18 billion for the fiscal year ended August 1, 2015. The year-over-year increase in net sales was primarily due to growth in our
wholesale segment of $296.0 million. We experienced net sales organic growth (sales growth excluding the impact of fiscal year
2016 acquisitions) of 1.5% over fiscal 2015 due to the continued growth of the natural and organic products industry in general,
increased market share as a result of our focus on service and value added services, and a broader selection of products, including
specialty foods. Net sales growth for fiscal 2016 was negatively impacted in part by the termination of our distribution relationship
with a large conventional supermarket customer in September 2015. Net sales for the fiscal year ended July 30, 2016 was favorably
impacted by the acquisitions of Nor-Cal and Haddon which contributed approximately $51.4 million and $100.4 million of net
sales, respectively. Our net sales for the fiscal year ended July 30, 2016 were also favorably impacted by moderate price inflation
of approximately 1% during the year.
30
Our net sales by customer type for the fiscal years ended July 30, 2016 and August 1, 2015 were as follows (in millions):
Customer Type
Supernatural chains
Conventional supermarkets
Independently owned natural products retailers
Other
Total
2016
Net Sales
% of Total
Net Sales
2015
Net Sales
% of Total
Net Sales
$
$
2,951
2,288
2,291
940
8,470
35% $
27%
27%
11%
100% $
2,812
2,399
2,175
799
8,185
34%
29%
27%
10%
100%
During fiscal 2017, our net sales by channel were adjusted to reflect changes in the classification of customer types from
acquisitions we consummated in the third and fourth quarters of fiscal 2016 and the first quarter of fiscal 2017. There was no
financial statement impact as a result of revising the classification of customer types in either year. For the fiscal year ended July
30, 2016, net sales to our conventional supermarket and other channels increased approximately $29 million and $6 million,
respectively, compared to the previously reported amounts, while this adjustment caused net sales to the independent retailer
channel to decrease approximately $35 million compared to the previously reported amounts.
Whole Foods Market is our only supernatural chain customer, and net sales to Whole Foods Market for the fiscal year ended
July 30, 2016 increased by approximately $139 million or 4.9% over the prior year and accounted for approximately 35% and
34% of our total net sales for the fiscal years ended July 30, 2016 and August 1, 2015, respectively. The increase in net sales to
Whole Foods Market was primarily due to new store openings offset in part by lower year over year same store sales at Whole
Foods Market.
Net sales to conventional supermarkets for the fiscal year ended July 30, 2016 decreased by approximately $111 million, or
4.6% from fiscal 2015 and represented approximately 27% and 29% of total net sales in fiscal 2016 and fiscal 2015, respectively.
The decrease in net sales to conventional supermarkets was due in part to the termination of our distribution relationship with a
large conventional supermarket customer in September 2015, offset in part by increased sales to certain of our other existing
conventional supermarket customers and sales to new conventional supermarket customers that we added, including through
acquisitions, since fiscal 2015.
Net sales to our independent retailer channel increased by approximately $116 million, or 5.3% during the fiscal year ended
July 30, 2016 compared to the fiscal year ended August 1, 2015, and accounted for 27% of our total net sales for each of fiscal
2016 and fiscal 2015. The increase in net sales in this channel was primarily attributable to net sales from our acquisitions during
fiscal 2016 as well as growth in our wholesale division, which includes our broadline distribution business.
Other net sales, which included sales to foodservice, e-commerce sales and sales from the United States to other countries,
as well as sales through our retail division, manufacturing division, and our branded product lines, increased by approximately
$141 million or 17.6% during the fiscal year ended July 30, 2016 over the prior fiscal year and accounted for approximately 11%
of total net sales in fiscal 2016 as compared to 10% in fiscal 2015. The increase in other net sales was attributable to expanded
sales to our existing foodservice partners and growth in our e-commerce business.
Cost of Sales and Gross Profit
Our gross profit increased approximately 1.5%, or $18.8 million, to $1.28 billion for the fiscal year ended July 30, 2016,
from $1.26 billion for the fiscal year ended August 1, 2015. Our gross profit as a percentage of net sales was 15.1% for the fiscal
year ended July 30, 2016 and 15.4% for the fiscal year ended August 1, 2015. The decrease in gross profit as a percentage of net
sales was primarily due to competitive pricing pressures, moderated supplier promotional activity, a reduction in fuel surcharges
and the unfavorable impact of foreign exchange for our Canadian business, offset, in part, by a benefit from fiscal 2016 acquisitions
compared to the prior year.
Operating Expenses
Our total operating expenses increased approximately 3.6%, or $36.7 million, to $1.06 billion for the fiscal year ended
July 30, 2016, from $1.02 billion for the fiscal year ended August 1, 2015. As a percentage of net sales, total operating expenses
increased to approximately 12.5% for the fiscal year ended July 30, 2016, from approximately 12.4% for the fiscal year ended
August 1, 2015. The increase in total operating expenses for the fiscal year ended July 30, 2016 was primarily due to an increase
in net sales and the additional costs to service higher sales volume. Operating expenses for fiscal 2016 also included the impact
of $4.8 million of severance and other transition costs related to the Company's restructuring plan, $0.8 million of restructuring
and impairment costs related to the Company's retail business recorded in the fourth quarter of fiscal 2016, $1.8 million of bad
debt expense related to outstanding receivables for a customer who declared bankruptcy in the first quarter of fiscal 2016, $2.2
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million of acquisition costs, $2.4 million of amortization of intangibles from current year acquisitions, and $2.5 million of startup
costs related to the Company's Gilroy, California facility. Total operating expenses for fiscal 2015 included startup costs of
approximately $3.0 million related to the Company's Hudson Valley, New York, Auburn, California and Prescott, Wisconsin
facilities, $0.6 million associated with the write-off of an intangible asset related to the Company's Canadian division, which was
acquired in 2010, a $0.2 million restructuring charge related to the closure of the Company's Aux Mille facility located in Quebec,
Canada, and approximately $0.3 million in costs related to the Company's acquisition of Tony's, offset in part by a $0.8 million
energy grant received related to the Company's Hudson Valley, New York facility.
Total operating expenses for fiscal 2016 include share-based compensation expense of $15.3 million, compared to $14.0
million in fiscal 2015. The Company did not record share-based compensation expense related to performance-based share awards
in fiscal 2016, including compensation expense with respect to the long-term incentive awards with performance metrics tied to
fiscal 2016 results, as a result of performance measures not being attained at the end of the fiscal year and the resulting forfeiture
of these awards. The Company recognized a benefit of $1.0 million related to performance-based share awards for the fiscal year
ended August 1, 2015 due to the reversal of share-based compensation expense recorded in fiscal 2014 caused by performance
measures not being attained as of the end of fiscal 2015 and the resulting forfeiture of these awards. See Note 3 "Equity Plans"
to our Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual
Report on Form 10-K.
Operating Income
Operating income decreased approximately 7.4%, or $17.8 million, to $224.1 million for the fiscal year ended July 30, 2016,
from $242.0 million for the fiscal year ended August 1, 2015. As a percentage of net sales, operating income was 2.6% and 3.0%
for the fiscal years ended July 30, 2016 and August 1, 2015, respectively.
Other Expense (Income)
Other expense, net increased $3.7 million to $15.9 million for the fiscal year ended July 30, 2016, from $12.2 million for
the fiscal year ended August 1, 2015. Interest expense for the fiscal year ended July 30, 2016 increased to $16.3 million from
$14.5 million in the fiscal year ended August 1, 2015. This increase was primarily due to an increase in borrowings over the prior
year, as we utilized borrowings under our amended and restated revolving credit facility to finance our acquisitions in fiscal 2016.
Interest income for the fiscal year ended July 30, 2016 increased to $1.1 million from $0.4 million in the fiscal year ended August 1,
2015. Other income for the fiscal year ended July 30, 2016 included a gain of $4.2 million associated with a transfer of land at
the Company's Prescott, Wisconsin facility.
Provision for Income Taxes
Our effective income tax rate was 39.6% for each of the fiscal years ended July 30, 2016 and August 1, 2015.
Net Income
Reflecting the factors described in more detail above, net income decreased $13.0 million to $125.8 million, or $2.50 per
diluted share, for the fiscal year ended July 30, 2016, compared to $138.7 million, or $2.76 per diluted share for the fiscal year
ended August 1, 2015.
Liquidity and Capital Resources
We finance our day to day operations and growth primarily with cash flows from operations, borrowings under our amended
and restated revolving credit facility, operating leases, a capital lease, a finance lease, trade payables and bank indebtedness. In
addition, from time to time, we may issue equity and debt securities to finance our operations and acquisitions. We believe that
our cash on hand and available credit through our amended and restated revolving credit facility as discussed below is sufficient
for our operations and planned capital expenditures over the next twelve months. We intend to continue to utilize cash generated
from operations to fund acquisitions, fund investment in working capital and capital expenditure needs and reduce our debt levels.
We intend to manage capital expenditures to approximately 0.6% to 0.7% of net sales for fiscal 2018. We expect to finance
requirements with cash generated from operations and borrowings under our amended and restated revolving credit facility. Our
planned capital projects for fiscal 2018 will be focused on continuing the implementation of our information technology projects
across the Company that we believe will provide us with increased efficiency and the capacity to continue to support the growth
of our customer base. Future investments and acquisitions may be financed through equity issuances, long-term debt or borrowings
under our amended and restated revolving credit facility.
The Company has not recorded a tax provision for U.S. tax purposes on UNFI Canada’s profits as it has no assessable profits
arising in or derived from the United States and we intend to indefinitely reinvest accumulated earnings in the UNFI Canada
operations.
32
On April 29, 2016, we entered into the Third Amended and Restated Loan and Security Agreement (the “Third A&R Credit
Agreement”) amending and restating certain terms and provisions of our revolving credit facility, which increased the maximum
borrowings under the amended and restated revolving credit facility and extended the maturity date to April 29, 2021. Up to $850.0
million is available to our U.S. subsidiaries and up to $50.0 million is available to UNFI Canada. After giving effect to the Third
A&R Credit Agreement, the amended and restated revolving credit facility provides an option to increase the U.S. or Canadian
revolving commitments by up to an additional $600.0 million (but in not less than $10.0 million increments) subject to certain
customary conditions and the lenders committing to provide the increase in funding.
The borrowings of the U.S. portion of the amended and restated revolving credit facility, after giving effect to the Third A&R
Credit Agreement, accrued interest, at the base rate plus an applicable margin of 0.25% or LIBOR rate plus an applicable margin
of 1.25% for the twelve month period ended April 29, 2017, with interest thereafter accruing at the Company's option, at either
(i) a base rate (generally defined as the highest of (x) the Bank of America Business Capital prime rate, (y) the average overnight
federal funds effective rate plus one-half percent (0.50%) per annum and (z) one-month LIBOR plus one percent (1%) per annum)
plus an applicable margin that varies depending on daily average aggregate availability, or (ii) the LIBOR rate plus an applicable
margin that varies depending on daily average aggregate availability. The borrowings on the Canadian portion of the credit facility
accrued interest at the Canadian prime rate plus an applicable margin of 0.25% or a bankers' acceptance equivalent rate plus an
applicable margin of 1.25% for the twelve month period ended April 29, 2017. After April 29, 2017, the borrowings on the Canadian
portion of the credit facility accrue interest, at the Company's option, at either (i) a Canadian prime rate (generally defined as the
highest of (x) 0.50% over 30-day Reuters Canadian Deposit Offering Rate ("CDOR") for bankers' acceptances, (y) the prime rate
of Bank of America, N.A.'s Canada branch, and (z) a bankers' acceptance equivalent rate for a one month interest period plus
1.00%) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) a bankers' acceptance
equivalent rate of the rate of interest per annum equal to the annual rates applicable to Canadian Dollar bankers' acceptances on
the "CDOR Page" of Reuter Monitor Money Rates Service, plus five basis points, and an applicable margin that varies depending
on daily average aggregate availability. Unutilized commitments are subject to an annual fee in the amount of 0.30% if the total
outstanding borrowings are less than 25% of the aggregate commitments, or a per annum fee of 0.25% if such total outstanding
borrowings are 25% or more of the aggregate commitments. The Company is also required to pay a letter of credit fronting fee
to each letter of credit issuer equal to 0.125% per annum of the stated amount of each such letter of credit (or such other amount
as may be mutually agreed by the borrowers under the facility and the applicable letter of credit issuer), as well as a fee to all
lenders equal to the applicable margin for LIBOR or bankers’ acceptance equivalent rate loans, as applicable, times the average
daily stated amount of all outstanding letters of credit.
As of July 29, 2017, the Company's borrowing base, which is calculated based on eligible accounts receivable and inventory
levels, net of $6.5 million of reserves, was $883.8 million. As of July 29, 2017, the Company had $223.6 million of borrowings
outstanding under the Company's amended and restated revolving credit facility and $33.5 million in letter of credit commitments
which reduced the Company's available borrowing capacity under the revolving credit facility on a dollar for dollar basis. The
Company's resulting remaining availability was approximately $626.7 million as of July 29, 2017.
The revolving credit facility, as amended and restated, subjects us to a springing minimum fixed charge coverage ratio (as
defined in the Third A&R Credit Agreement) of 1.0 to 1.0 calculated at the end of each of our fiscal quarters on a rolling four
quarter basis when the adjusted aggregate availability (as defined in the Third A&R Credit Agreement) is less than the greater of
(i) $60.0 million and (ii) 10% of the aggregate borrowing base. We were not subject to the fixed charge coverage ratio covenant
under the Third A&R Credit Agreement during the fiscal year ended July 29, 2017.
The revolving credit facility also allows for the lenders thereunder to syndicate the credit facility to other banks and lending
institutions. The Company has pledged the majority of its and its subsidiaries' accounts receivable and inventory for its obligations
under the amended and restated revolving credit facility.
On August 14, 2014, we and certain of our subsidiaries entered into a real estate backed term loan agreement (the "Term
Loan Agreement"). The total initial borrowings under our term loan facility were $150.0 million. We are required to make $2.5
million principal payments quarterly, which began on November 1, 2014. Under the Term Loan Agreement, at our option we may
request the establishment of one or more new term loan commitments in increments of at least $10.0 million, but not to exceed
$50.0 million in total, subject to the approval of the Lenders electing to participate in such incremental loans and the satisfaction
of the conditions required by the Term Loan Agreement. We will be required to make quarterly principal payments on these
incremental borrowings in accordance with the terms of the Term Loan Agreement. Proceeds from this Term Loan Agreement
were used to pay down borrowings on our amended and restated revolving credit facility.
On April 29, 2016, the Company entered into a First Amendment Agreement (the “Term Loan Amendment”) to the Term
Loan Agreement. The Term Loan Amendment was entered into to reflect the changes to the amended and restated revolving credit
facility reflected in the Third A&R Credit Agreement. The Term Loan Agreement will terminate on the earlier of (a) August 14,
2022 and (b) the date that is ninety days prior to the termination date of our amended and restated revolving credit facility. Under
33
the Term Loan Agreement, the borrowers at their option may request the establishment of one or more new term loan commitments
in increments of at least $10.0 million, but not to exceed $50.0 million in total, subject to the approval of the lenders electing to
participate in such incremental loans and the satisfaction of the conditions required by the Term Loan Agreement. The borrowers
will be required to make quarterly principal payments on these incremental borrowings in accordance with the terms of the Term
Loan Agreement.
On September 1, 2016, the Company entered into a Second Amendment Agreement (the "Second Amendment") to the
Term Loan Agreement which amended the Term Loan Agreement to adjust the applicable margin charged to borrowings thereunder.
As amended by the Second Amendment, borrowings under the Term Loan Agreement bear interest at rates that, at the Company's
option, can be either: (1) a base rate generally defined as the sum of (i) the highest of (x) the Administrative Agent's prime rate,
(y) the average overnight federal funds effective rate plus 0.50% and (z) one-month LIBOR plus one percent (1%) per annum and
(ii) a margin of 0.75%; or, (2) a LIBOR rate generally defined as the sum of (i) LIBOR (as published by Reuters or other commercially
available source) for one, two, three or six months or, if approved by all affected lenders, nine months (all as selected by the
Company), and (ii) a margin of 1.75%. Interest accrued on borrowings under the Term Loan Agreement is payable in arrears.
Interest accrued on any LIBOR loan is payable on the last day of the interest period applicable to the loan and, with respect to any
LIBOR loan of more than three (3) months, on the last day of every three (3) months of such interest period. Interest accrued on
base rate loans is payable on the first day of every month. The Company is also required to pay certain customary fees to the
Administrative Agent. The borrowers’ obligations under the Term Loan Agreement are secured by certain parcels of the borrowers’
real property.
The Term Loan Agreement includes financial covenants that require (i) the ratio of our consolidated EBITDA (as defined
in the Term Loan Agreement) minus the unfinanced portion of Capital Expenditures (as defined in the Term Loan Agreement) to
our consolidated Fixed Charges (as defined in the Term Loan Agreement) to be at least 1.20 to 1.00 as of the end of any period of
four fiscal quarters, (ii) the ratio of our Consolidated Funded Debt (as defined in the Term Loan Agreement) to our EBITDA for
the four fiscal quarters most recently ended to be not more than 3.00 to 1.00 as of the end of any fiscal quarter and (iii) the ratio,
expressed as a percentage, of our outstanding principal balance under the Loans (as defined in the Term Loan Agreement), divided
by the Mortgaged Property Value (as defined in the Term Loan Agreement) to be not more than 75% at any time. As of July 29,
2017, the Company was in compliance with the financial covenants of the Term Loan Agreement.
On January 23, 2015, the Company entered into a forward starting interest rate swap agreement with an effective date
of August 3, 2015, which expires in August 2022 concurrent with the scheduled maturity of our Term Loan Agreement. This
interest rate swap agreement had an initial notional amount of $140 million and provides for the Company to pay interest for a
seven-year period at a fixed rate of 1.795% while receiving interest for the same period at the one-month LIBOR on the same
notional principal amount. The interest rate swap agreement has an amortizing notional amount which adjusts down substantially
on the dates payments are due on the underlying term loan. The interest rate swap has been entered into as a hedge against LIBOR
movements on $120 million of the variable rate indebtedness under the Term Loan Agreement at one-month LIBOR plus 1.00%
and a margin of 1.50%, thereby fixing our effective rate on the notional amount at 4.295%. The swap agreement qualifies as an
“effective” hedge under Accounting Standards Codification ("ASC") 815 Derivatives and Hedging.
On June 7, 2016, the Company entered into two pay fixed and receive floating interest rate swap agreements to effectively
fix the underlying variable rate debt on the Company’s amended and restated revolving credit facility. The first agreement has an
effective date of June 9, 2016 and expires in June of 2019. This interest rate swap agreement has a notional principal amount of
$50.0 million and provides for the Company to pay interest for a three-year period at a fixed annual rate of 0.8725% while receiving
interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the
amended and restated revolving credit facility, effectively fixes the interest rate on the $50.0 million notional amount. The second
agreement has an effective date of June 9, 2016 and expires concurrent with the scheduled maturity of our amended and restated
revolving credit facility in April of 2021. This interest rate swap agreement has a notional principal amount of $25.0 million and
provides for the Company to pay interest for a five-year period at a fixed rate of 1.065% while receiving interest for the same
period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the amended and restated
revolving credit facility, effectively fixes the interest rate on the $25.0 million notional amount.
On June 24, 2016, the Company entered into two additional pay fixed and receive floating interest rate swap agreements
to effectively fix the underlying variable rate debt on the Company’s amended and restated revolving credit facility. The first
agreement has an effective date of July 24, 2016 and expires in June of 2019. This interest rate swap agreement has a notional
principal amount of $50.0 million and provides for the Company to pay interest for a three year period at a fixed annual rate
of 0.7265% while receiving interest for the same period at one-month LIBOR on the same notional principal amount. This swap,
in conjunction with the amended and restated revolving credit facility, effectively fixes the interest rate on the $50.0 million notional
amount. The second agreement has an effective date of July 24, 2016 and expires concurrent with the scheduled maturity of our
amended and restated revolving credit facility in April of 2021. This interest rate swap agreement has a notional principal amount
of $25.0 million and provides for the Company to pay interest for a five year period at a fixed rate of 0.9260% while receiving
34
interest for the same period at one-month LIBOR on the same notional principal amount. This swap, in conjunction with the
amended and restated revolving credit facility, effectively fixes the interest rate on the $25.0 million notional amount.
Our capital expenditures for the 2017 fiscal year were $56.1 million, compared to $41.4 million for fiscal 2016, an increase
of $14.7 million. We believe that our capital requirements for fiscal 2018 will be between $53 million and $73 million. We expect
to finance these requirements with cash generated from operations and borrowings under our amended and restated revolving
credit facility. Our planned capital projects will provide technology that we believe will provide us with increased efficiency and
the capacity to continue to support the growth of our customer base and also relate to the buildout of our shared services center.
We believe that our capital requirements after fiscal 2018 will be consistent with our anticipated fiscal 2018 requirements, as a
percentage of net sales, although we plan to continue to invest in technology and we may need to expand our facilities if customer
demand continues to grow. We anticipate that future investments and acquisitions will be financed through our amended and
restated revolving credit facility, or with the issuance of equity or long-term debt, negotiated at the time of the potential acquisition.
Net cash provided by operations was $280.8 million for the fiscal year ended July 29, 2017, a decrease of $15.8 million
from the $296.6 million provided by operations for the year ended July 30, 2016. The primary reasons for the net cash provided
by operating activities for fiscal 2017 were net income for the year of $130.2 million, which included depreciation and amortization
of $86.1 million, and an increase in accounts payable of $90.2 million, offset by an increase in accounts receivable of $38.8 million.
Net cash provided by operations of $296.6 million for the year ended July 30, 2016 was primarily due to net income for the year
of $125.8 million, which included depreciation and amortization of $71.0 million, a decrease in accounts receivable of $29.4
million and increases in accounts payable and accrued expenses of $14.4 million and $13.1 million, respectively.
Days in inventory was 48 days at July 29, 2017 compared to 49 days at July 30, 2016. Days sales outstanding increased
from 20 at July 30, 2016 to 21 days at July 29, 2017. Working capital decreased by $32.8 million, or 3.3%, to $958.7 million at
July 29, 2017, compared to working capital of $991.5 million at July 30, 2016, primarily as a result of an increase in accounts
payable.
Net cash used in investing activities decreased approximately $291.0 million to $60.0 million for the fiscal year ended
July 29, 2017, compared to $350.9 million for the fiscal year ended July 30, 2016. This decrease was primarily driven by our three
acquisitions in fiscal 2016 with aggregate purchase prices of $306.7 million as compared to one acquisition in fiscal 2017 for $9.2
million.
Net cash used in financing activities was $224.6 million for the fiscal year ended July 29, 2017. We present proceeds and
borrowings related to the Company's amended and restated revolving credit facility on a gross basis. The net cash used in financing
activities was primarily due to repayments of borrowings under our amended and restated revolving credit line and long-term debt
of $418.7 million and $11.5 million, respectively, partially offset by proceeds from borrowings under our revolving credit line of
$215.7 million. Net cash provided by financing activities was $56.3 million for the fiscal year ended July 30, 2016 and was
primarily due to borrowings used to fund fiscal 2016 acquisitions, partially offset by repayments of our revolving credit line and
long-term debt of $646.5 million and $11.3 million, respectively.
From time-to-time we enter into fixed price fuel supply agreements. As of July 29, 2017, we were not a party to any such
agreements. As of July 30, 2016, we had entered into agreements which required us to purchase a total of approximately 6.1 million
gallons of diesel fuel at prices ranging from $1.76 to $3.18 per gallon through December 2016. All of these fixed price fuel
agreements qualified and were accounted for under the "normal purchase" exception under ASC 815, Derivatives and Hedging
as physical deliveries occurred rather than net settlements, and therefore the fuel purchases under these contracts have been
expensed as incurred and included within operating expenses.
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. The Securities
and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our
financial condition and results and require our most difficult, complex or subjective judgments or estimates. Based on this definition,
we believe our critical accounting policies are: (i) determining our reserves for the self-insured portions of our workers'
compensation and automobile liabilities, (ii) valuing assets and liabilities acquired in business combinations; (iii) valuing goodwill
and intangible assets; and (iv) income taxes. For all financial statement periods presented, there have been no material modifications
to the application of these critical accounting policies.
Insurance reserves
We are primarily self-insured for workers' compensation and general and automobile liability insurance. It is our policy to
record the self-insured portions of our workers' compensation 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
35
reported. Any projection of losses concerning workers' compensation and automobile liability 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 and automobile
liabilities totaled $22.8 million and $23.4 million as of July 29, 2017 and July 30, 2016, respectively.
Valuation of assets and liabilities acquired in a business combination
We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and
liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. Goodwill represents the
excess of cost over the fair value of net assets acquired in a business combination. The judgments made in determining the estimated
fair value assigned to each class of assets acquired, as well as the estimated useful life of each asset, can materially impact the net
income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through
impairment charges, if the asset becomes impaired in the future. In determining the estimated fair value for intangible assets, we
typically utilize the income approach, which discounts the projected future net cash flow using an appropriate discount rate that
reflects the risks associated with such projected future cash flow.
Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have
different useful lives and certain assets may even be considered to have indefinite useful lives. Intangible assets determined to
have an indefinite useful life are reassessed periodically based on the expected use of the asset by us, legal or contractual provisions
that may affect the useful life or renewal or extension of the asset’s contractual life without substantial cost, and the effects of
demand, competition and other economic factors.
Valuation of goodwill and intangible assets
We are required to test goodwill for impairment at least annually, and between annual tests if events occur or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have elected to
perform our annual tests for indications of goodwill impairment as of the first day of the fourth quarter of each fiscal year. We test
for goodwill impairment at the reporting unit level, which is at or one level below the operating segment level. Beginning in fiscal
2012, the first step in our annual assessment of each of our reporting units is a qualitative assessment as allowed under Accounting
Standards Update ("ASU") No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment
("ASU 2011-08"), unless we believe it is more likely than not that a reporting unit's fair value is less than the carrying value. In
order to qualify for an exclusion from the quantitative goodwill test, the thresholds used by the Company for this determination
are that a reporting unit must (1) have passed its previous quantitative test with a margin of calculated fair value versus carrying
value of at least 20%, (2) have had a quantitative test within the past five years, (3) have had no significant changes to its working
capital structure, (4) have current year income which is at least 85% of prior year amounts, and (5) present no other factors to be
considered as outlined in ASU 2011-08. For reporting units which do not meet this exclusion, the quantitative goodwill impairment
analysis is performed. This analysis involves comparing each reporting unit's estimated fair value to its carrying value, including
goodwill. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions
used in the discounted cash flow analysis. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is
considered not to be impaired and no further testing is required. If the carrying value exceeds estimated fair value, there is an
indication of impairment, which is measured as described below.
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-04, Intangibles, Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates the second step of the quantitative goodwill
impairment test and no longer requires a hypothetical purchase price allocation to measure goodwill impairment. Instead, the
impairment charge for each reporting unit is measured using the difference between the carrying amount and fair value of the
reporting unit. The ASU is effective for public companies with interim periods and fiscal years beginning after December 15,
2019, which for the Company would be the first quarter of fiscal 2021, with early adoption permitted. The Company elected to
early adopt this ASU as part of its fiscal 2017 annual goodwill impairment test, with no impact of adoption in the consolidated
financial statements.
As of July 29, 2017, our annual assessment of each of our reporting units indicated that no impairment of goodwill existed.
Approximately 95.1% of our goodwill is within our wholesale reporting segment. Total goodwill as of July 29, 2017 and July 30,
2016 was $371.3 million and $366.2 million, respectively. Refer to Note 1, "Significant Accounting Policies", to our Consolidated
Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K
for further detail.
Intangible assets with indefinite lives are tested for impairment at least annually as of the first day of the fourth fiscal quarter
and if events occur or circumstances change that would indicate that the value of the asset may be impaired. In accordance with
ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU
36
No. 2012-02"), we analyzed several qualitative factors to determine whether it was more likely than not that an indefinite-lived
intangible asset was impaired as a basis for determining whether it is necessary to perform the quantitative impairment test.
Impairment would be measured as the difference between the fair value of the asset and its carrying value. As of July 29, 2017,
our annual assessment of each of our intangible assets with indefinite lives indicated that no impairment existed. Total indefinite
lived intangible assets as of July 29, 2017 and July 30, 2016 were $55.8 million and $55.7 million, respectively.
Intangible assets and other long lived assets with finite lives are tested for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Cash flows expected to be generated by the related assets
are estimated over the asset's useful life based on updated projections. If the evaluation indicates that the carrying amount of the
asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow model. During the
fiscal year ended July 30, 2016, impairment charges of $0.4 million, and $0.3 million were recorded related to the closure of a
Canadian facility and the closure of two retail stores at Earth Origins, respectively. During the fiscal year ended August 1, 2015,
an impairment charge of $0.6 million was recognized in connection with the closure of a Canadian facility. Total finite-lived
intangible assets as of July 29, 2017 and July 30, 2016 were $152.5 million and $166.6 million, respectively.
The assessment of the recoverability of goodwill and intangible assets will be impacted if estimated future cash flows are
not achieved.
Income Taxes
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 in income 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
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.
Commitments and Contingencies
The following schedule summarizes our contractual obligations and commercial commitments as of July 29, 2017:
Inventory purchase commitments
Notes payable (1)
Long-term debt (2)
Deferred compensation
Long-term non-capitalized leases
Total
Total
Less than
One Year
1–3
Years
3–5
Years
Thereafter
Payments Due by Period
$
16,320
$
16,320
(in thousands)
$
— $
223,612
163,442
7,706
255,291
666,371
$
$
—
12,128
1,067
63,212
92,727
$
—
25,257
2,086
99,576
126,919
$
— $
223,612
96,755
1,483
54,060
375,910
$
—
—
29,302
3,070
38,443
70,815
(1) The notes payable obligations shown reflect the expiration of the credit facility, not necessarily the underlying
individual borrowings. Notes payable does not include outstanding letters of credit of approximately $33.5 million at July 29,
2017 or approximately $9.3 million in interest payments (including unused lines fees) projected to be due in future years (less
than 1 year – $3.1 million; 1?3 years – $5.7 million; and 3-5 years – $0.5 million) based on the variable rates in effect at July 29,
2017. Variable rates, as well as outstanding principal balances, could change in future periods. See "Liquidity and Capital Resources"
above and Note 7 "Notes Payable" to our Consolidated Financial Statements included in "Item 8. Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K for a discussion of our credit facility.
37
(2) Long-term debt does not include interest payments projected to be due in future years related to our capital lease
obligations and real-estate backed Term Loan Agreement, which amount to approximately $24.6 million and $13.6 million,
respectively (less than 1 year - $7.3 million; 1-3 years - $13.7 million; 3-5 years - $10.4 million; thereafter - $6.9 million). See
Note 8 "Long-Term Debt" to our Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary
Data" of this Annual Report on Form 10-K for a discussion of our long-term debt.
Included in other liabilities in the consolidated balance sheet at July 29, 2017 are uncertain tax positions including potential
interest and penalties of $0.5 million that have been taken or are expected to be taken in various income tax returns. The Company
does not know the ultimate resolution of these uncertain tax positions and as such, does not know the ultimate timing of payments
related to this liability. Accordingly, these amounts are not included in the table above.
Seasonality
Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly
from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating
and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions.
Recently Issued Financial Accounting Standards
For a discussion of recently issued financial accounting standards, refer to Note 1, "Significant Accounting Policies," to
our Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report
on Form 10-K for further detail.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to interest rate fluctuations on our borrowings. As more fully described in Note 9 "Fair Value Measurements"
to the Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report
on Form 10-K, we have used interest rate swap agreements to modify certain of our variable rate obligations to fixed rate obligations.
At July 29, 2017, we had long-term floating rate debt under our amended and restated revolving credit facility of $223.6
million and our real-estate backed Term Loan of $120.0 million, gross of deferred financing costs, and long-term fixed rate debt
of $43.4 million, representing 88.8% and 11.2%, respectively, of our long-term borrowings. At July 30, 2016, we had long-term
floating rate debt under our amended and restated revolving credit facility of $426.5 million and our real-estate backed Term Loan
of $130.0 million, gross of deferred financing costs, and long-term fixed rate debt of $45.1 million, representing 92.5% and 7.5%,
respectively, of our long-term borrowings. Holding other debt levels constant, a 25 basis point increase in interest rates would
change the unrealized fair market value of our fixed rate debt by approximately $0.6 million and $0.7 million for the fiscal years
ended July 29, 2017 and July 30, 2016, respectively.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed below are filed as part of this Annual Report on Form 10-K.
INDEX TO FINANCIAL STATEMENTS
United Natural Foods, Inc. and Subsidiaries:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
40
41
42
43
44
45
46
39
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
United Natural Foods, Inc.:
We have audited the accompanying consolidated balance sheets of United Natural Foods, Inc. and subsidiaries (“UNFI”) as of
July 29, 2017 and July 30, 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity,
and cash flows for each of the years in the three-year period ended July 29, 2017. We also have audited UNFI’s internal control
over financial reporting as of July 29, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). UNFI’s management is responsible for
these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements
and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of United Natural Foods, Inc. and subsidiaries as of July 29, 2017 and July 30, 2016, and the results of their operations and their
cash flows for each of the years in the three-year period ended July 29, 2017, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, United Natural Foods, Inc. maintained, in all material respects, effective internal control over
financial reporting as of July 29, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) .
Providence, Rhode Island
September 26, 2017
40
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
July 29,
2017
July 30,
2016
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance of $13,939 and $9,638, respectively
$
$
15,414
525,636
Inventories
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net of accumulated amortization of $49,926 and $34,315, respectively
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current portion of long-term debt
Total current liabilities
Notes payable
Deferred income taxes
Other long-term liabilities
Long-term debt, excluding current portion
Total liabilities
Commitments and contingencies (Note 10)
Stockholders' equity:
18,593
489,708
1,021,663
35,228
45,998
1,611,190
616,605
366,168
222,314
35,878
1,031,690
40,635
49,295
1,662,670
602,090
371,259
208,289
42,255
$
2,886,563
$
2,852,155
$
534,616
$
157,243
12,128
703,987
223,612
98,833
28,347
149,863
445,430
162,438
11,854
619,722
426,519
95,220
29,451
161,739
1,204,642
1,332,651
Preferred stock, $0.01 par value, authorized 5,000 shares; none issued or outstanding
—
—
Common stock, $0.01 par value, authorized 100,000 shares; 50,622 issued and outstanding
shares at July 29, 2017; 50,383 issued and outstanding shares at July 30, 2016
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
506
460,011
(13,963)
1,235,367
1,681,921
2,886,563
$
504
436,167
(22,379)
1,105,212
1,519,504
2,852,155
$
See accompanying notes to consolidated financial statements.
41
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Net sales
Cost of sales
Gross profit
Operating expenses
Restructuring and asset impairment expenses
Total operating expenses
Operating income
Other expense (income):
Interest expense
Interest income
Other, net
Total other expense, net
Income before income taxes
Provision for income taxes
Net income
Basic per share data:
Net income
Weighted average basic shares of common stock
Diluted per share data:
Net income
Weighted average diluted shares of common stock
Fiscal year ended
July 29,
2017
9,274,471
$
July 30,
2016
8,470,286
August 1,
2015
8,184,978
$
$
7,845,550
1,428,921
1,196,032
6,864
1,202,896
226,025
7,190,935
1,279,351
1,049,690
5,552
1,055,242
224,109
6,924,463
1,260,515
1,017,755
803
1,018,558
241,957
17,114
(360)
(5,152)
11,602
214,423
84,268
130,155
2.57
50,570
$
$
16,259
(1,115)
743
15,887
208,222
82,456
125,766
2.50
50,313
$
$
2.56
$
2.50
$
50,775
50,399
14,498
(356)
(1,954)
12,188
229,769
91,035
138,734
2.77
50,021
2.76
50,267
$
$
$
See accompanying notes to consolidated financial statements.
42
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Fiscal year ended
July 30,
2016
125,766
August 1,
2015
138,734
$
$
205
(3,141)
(2,936) $
$
122,830
(13,852)
(439)
(14,291)
124,443
Net income
Other comprehensive income (loss):
Foreign currency translation adjustments
Change in fair value of swap agreements, net of tax
Total other comprehensive income (loss)
Total comprehensive income
July 29,
2017
130,155
3,537
4,879
8,416
138,571
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
43
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
Treasury Stock
(In thousands)
Shares
Amount
Shares
Amount
Additional
Paid in
Capital
Unallocated
Shares of
ESOP
Accumulated
Other
Comprehensive
(Loss) Income
Retained
Earnings
Total
Stockholders'
Equity
Balances at August 2,
2014
Allocation of shares to
ESOP
Stock option exercises
and restricted stock
vestings, net
Share-based
compensation
Tax benefit associated
with stock plans
Fair value of swap
agreement, net of tax
Foreign currency
translation
Net income
Balances at August 1,
2015
Stock option exercises
and restricted stock
vestings, net
Share-based
compensation
Share-based
compensation /
restructuring costs
Tax deficit associated
with stock plans
Fair value of swap
agreements, net of tax
Foreign currency
translation
Net income
Balances at July 30,
2016
Stock option exercises
and restricted stock
vestings, net
Share-based
compensation
Share-based
compensation /
restructuring costs
Tax deficit associated
with stock plans
Fair value of swap
agreements, net of tax
Foreign currency
translation
Net income
Balances at July 29,
2017
49,771
$
498
— $
— $ 402,875
$
(14) $
(5,152) $ 840,712
$1,238,919
325
3
14
982
13,981
2,746
14
985
13,981
2,746
(439)
(13,852)
138,734
138,734
(439)
(13,852)
50,096
$
501
— $
— $ 420,584
$
— $
(19,443) $ 979,446
$1,381,088
287
3
291
15,308
67
(83)
294
15,308
67
(83)
(3,141)
205
125,766
125,766
(3,141)
205
50,383
$
504
— $
— $ 436,167
$
— $
(22,379) $ 1,105,212
$1,519,504
239
2
—
—
(1,041)
25,675
530
(1,320)
(1,039)
25,675
530
(1,320)
4,879
3,537
130,155
130,155
4,879
3,537
50,622
$
506
— $
— $ 460,011
$
— $
(13,963) $ 1,235,367
$1,681,921
See accompanying notes to consolidated financial statements.
44
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Deferred income tax (benefit) expense
Share-based compensation
Excess tax deficit (benefit) from share-based payment arrangements
Loss (gain) on disposals of property and equipment
Restructuring and asset impairment
Gain associated with acquisition of land
Gain associated with disposal of investment
Provision for doubtful accounts
Non-cash interest (income) expense
Changes in assets and liabilities, net of acquired companies:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Purchases of acquired businesses, net of cash acquired
Long-term investment
Proceeds from disposal of investment
Payment of company owned life insurance premiums
Proceeds from disposals of property and equipment
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under revolving credit line
Repayments of borrowings under revolving credit line
Proceeds from borrowings of long-term debt
Repayments of long-term debt
(Decrease) increase in bank overdraft
Proceeds from exercise of stock options
Payment of employee restricted stock tax withholdings
Excess tax (deficit) benefit from share-based payment arrangements
Capitalized debt issuance costs
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash flow information:
Non-cash financing activity
Non-cash investing activity
Cash paid for interest
Cash paid for federal and state income taxes, net of refunds
Fiscal year ended
July 29,
2017
July 30,
2016
August 1,
2015
$
130,155
$
125,766
$
138,734
86,051
(1,891)
25,675
1,320
943
640
—
(6,106)
5,728
175
(38,757)
(6,929)
(6,383)
90,217
(62)
280,776
(56,112)
(9,207)
(2,000)
9,192
(2,000)
168
(59,959)
215,662
(418,693)
—
(11,546)
(7,445)
274
(1,313)
(1,320)
(180)
(224,561)
565
71,006
12,480
15,308
83
458
758
—
—
6,426
(106)
29,417
2,113
5,381
14,379
13,140
296,609
(41,375)
(306,724)
—
—
(2,925)
109
(350,915)
709,972
(646,481)
—
(11,255)
6,063
2,011
(1,717)
(83)
(2,164)
56,346
(827)
(3,179)
18,593
15,414
$
— $
— $
$
$
17,115
78,984
1,213
17,380
18,593
$
— $
— $
$
$
16,696
67,028
$
$
$
$
$
63,800
15,339
13,981
(2,746)
(499)
803
(2,824)
—
5,059
389
(42,257)
(153,701)
4,541
16,001
(7,756)
48,864
(129,134)
(8,036)
(3,000)
—
(2,925)
1,026
(142,069)
728,316
(779,461)
150,000
(11,197)
5,003
3,415
(2,430)
2,746
(1,965)
94,427
42
1,264
16,116
17,380
14,088
14,088
14,632
72,357
See accompanying notes to consolidated financial statements.
45
UNITED NATURAL FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
United Natural Foods, Inc. and its subsidiaries (the "Company") is a leading distributor and retailer of natural, organic and
specialty products. The Company sells its products primarily throughout the United States and Canada.
(b) Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have
been reclassified to conform to the current year's presentation.
The fiscal year of the Company ends on the Saturday closest to July 31. Fiscal 2017, 2016 and 2015 ended on July 29, 2017,
July 30, 2016 and August 1, 2015, respectively. Fiscal 2017, 2016 and 2015 contained 52 weeks. Each of the Company's interim
quarters within fiscal 2017 and fiscal 2016 consisted of 13 weeks.
Net sales consist primarily of sales of natural, organic and specialty products to retailers, adjusted for customer volume
discounts, returns and allowances. Net sales also include amounts charged by the Company to customers for shipping and handling,
and fuel surcharges. The principal components of cost of sales include the amounts paid to suppliers for product sold, plus the
cost of transportation necessary to bring the product to the Company's distribution facilities, offset by consideration received from
suppliers in connection with the purchase or promotion of the suppliers' products. Cost of sales also includes amounts incurred
by the Company's manufacturing subsidiary, United Natural Trading LLC, which does business as Woodstock Farms
Manufacturing, for inbound transportation costs and depreciation for manufacturing equipment, offset by consideration received
from suppliers in connection with the purchase or promotion of the suppliers' products. Operating expenses include salaries and
wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation
and amortization expense. Operating expenses also include depreciation expense related to the wholesale and retail divisions.
Other expense (income) includes interest on outstanding indebtedness, interest income and miscellaneous income and expenses.
(c) Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect amounts reported therein. Due to
the inherent uncertainty involved in making estimates, actual results reported in future periods may be based on amounts that
differ from those estimates.
(d) Cash Equivalents
Cash equivalents consist of highly liquid investments with original maturities of three months or less.
(e) Inventories and Cost of Sales
Inventories consist primarily of finished goods and are stated at the lower of cost or market, with cost being determined
using the first-in, first-out (FIFO) method. Allowances received from suppliers are recorded as reductions in cost of sales upon
the sale of the related products.
(f) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Equipment under capital leases
is stated at the lower of the present value of minimum lease payments at the inception of the lease or the fair value of the asset.
Property and equipment includes the non-cash expenditures made by the landlord for the Aurora, Colorado distribution center in
addition to office space utilized as the Company's Corporate headquarters in Providence, Rhode Island as the lease qualifies for
capital lease treatment pursuant to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
840, Leases. Property and equipment also includes accumulated depreciation with respect to these items. Refer to Note 8, Long-
Term Debt, for additional information.
Applicable interest charges incurred during the construction of new facilities may be capitalized as one of the elements of
cost and are amortized over the assets' estimated useful lives. The Company capitalized $0.4 million of interest during the fiscal
year ended July 30, 2016 related to the construction of a new distribution center in Gilroy, California which began operations in
46
February 2016, and $0.5 million of interest during the fiscal year ended August 1, 2015 related to the construction of new distribution
centers in Prescott, Wisconsin and Gilroy, California. The Company did not capitalize interest during the fiscal year ended July 29,
2017.
Property and equipment consisted of the following at July 29, 2017 and July 30, 2016:
Land
Buildings and improvements
Leasehold improvements
Warehouse equipment
Office equipment
Computer software
Motor vehicles
Construction in progress
Less accumulated depreciation and amortization
Net property and equipment
Original
Estimated
Useful Lives
(Years)
2017
2016
(In thousands, except years)
$
20-40
5-20
3-30
3-10
3-7
3-7
$
52,989
396,733
138,466
173,591
95,794
147,647
4,657
17,968
1,027,845
425,755
$
602,090
$
52,641
403,822
136,758
163,494
55,915
146,766
4,597
15,018
979,011
362,406
616,605
Depreciation expense amounted to $69.8 million, $61.1 million and $55.0 million for the fiscal years ended July 29, 2017,
July 30, 2016 and August 1, 2015, respectively.
(g) Income Taxes
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 in income in the period
that includes the enactment date.
(h) Long-Lived Assets
Management reviews long-lived assets, including definite-lived intangible assets, for indicators of impairment whenever
events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Cash flows expected to
be generated by the related assets are estimated over the assets' useful lives based on updated projections. If the evaluation indicates
that the carrying amount of an asset may not be recoverable, the potential impairment is measured based on a fair value discounted
cash flow model.
(i) Goodwill and Intangible Assets
We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and
liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. Goodwill represents the
excess of cost over the fair value of net assets acquired in a business combination. In determining the estimated fair value for
intangible assets, we typically utilize the income approach, which discounts the projected future net cash flow using an appropriate
discount rate that reflects the risks associated with such projected future cash flow. Refer to Note 2, Acquisitions, for further detail
on the valuation of goodwill and intangible assets related to specific acquisitions.
Goodwill and other intangible assets with indefinite lives are not amortized. Intangible assets with definite lives are amortized
on a straight-line basis over the following lives:
Customer relationships
Non-competition agreements
Trademarks and tradenames
47
7-20 years
1-10 years
4-10 years
Goodwill is assigned to the reporting units that are expected to benefit from the synergies of the business combination that
generated the goodwill. The Company is required to test goodwill for impairment at least annually, and between annual tests if
events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. The Company has elected to perform its annual tests for indications of goodwill impairment as of the first day of the
fourth quarter of each fiscal year.
The Company's reporting units are at or one level below the operating segment level. Approximately 95.1% of the Company's
goodwill is within its wholesale reporting segment as of July 29, 2017. In accordance with Accounting Standards Update ("ASU")
No. 2011-08, Intangibles- Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011-08"), the Company is
allowed to perform a qualitative assessment for goodwill impairment unless it believes it is more likely than not that a reporting
unit's fair value is less than the carrying value. The thresholds used by the Company for this determination in fiscal 2017 were for
any reporting units that (1) have passed their previous quantitative test with a margin of calculated fair value versus carrying value
of at least 20%, (2) have had a quantitative test within the past five years, (3) have had no significant changes to their working
capital structure, (4) have current year income which is at least 85% of prior year amounts, and (5) present no other factors to be
considered as outlined in ASU 2011-08. Based on the qualitative assessment performed for fiscal 2017, three of the Company's
five reporting units met these thresholds. As these reporting units have passed their previous quantitative tests within the past 5
years, the reporting units' net income has not decreased more than 15% and their working capital requirements have not increased
significantly, no quantitative testing was performed on these reporting units as part of the annual test in fiscal 2017.
For the reporting units that did not meet the thresholds above for fiscal 2017, the Company performed a quantitative goodwill
impairment analysis. The first step to identify impairment involves comparing the reporting unit's estimated fair value to its carrying
value, including goodwill. The reporting units regularly prepare discrete operating forecasts and use these forecasts as the basis
for the assumptions used in the discounted cash flow analysis which is the basis for the fair value analysis. If the estimated fair
value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired and no further testing is required.
This was the case for the reporting units that required a quantitative test for the annual assessment in fiscal 2017. Had the carrying
value exceeded estimated fair value for this unit, there would have been impairment. In January 2017, the FASB issued ASU
2017-04, Intangibles, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates the
second step of the quantitative goodwill impairment test and no longer requires a hypothetical purchase price allocation to measure
goodwill impairment. Instead, the impairment charge for each reporting unit is measured using the difference between the carrying
amount and fair value of the reporting unit. The ASU is effective for public companies with interim periods and fiscal years
beginning after December 15, 2019, which for the Company would be the first quarter of fiscal 2021, with early adoption permitted.
The Company elected to early adopt this ASU as part of its fiscal 2017 annual goodwill impairment test, with no impact of adoption
in the consolidated financial statements, since the estimated fair values of the reporting units subject to the quantitative test exceeded
their carrying values.
Intangible assets with indefinite lives are tested for impairment at least annually as of the first day of the fourth fiscal quarter
and if events occur or circumstances change that would indicate that the value of the asset may be impaired. Impairment is measured
as the difference between the fair value of the asset and its carrying value.
In accordance with ASU No. 2012-02, Intangibles- Goodwill and Other (Topic 350): Testing Indefinite Lived Intangible
Assets for Impairment, the Company is allowed to perform a qualitative assessment for intangible asset impairment unless it
believes it is more likely than not that an intangible asset's fair value is less than the carrying value. The thresholds used by the
Company for this determination in the fourth quarter of fiscal 2017 were for any intangible assets (or groups of assets) that (1) have
passed their previous quantitative test with a margin of calculated fair value versus carrying value of at least 20%, (2) have had a
quantitative test performed within the past five years, and (3) have current year income which is at least 85% of the immediately
preceding fiscal year's amounts. The Company's only indefinite lived intangible assets are the branded product line asset group.
During fiscal 2017, the Company's annual qualitative assessment of its indefinite lived intangible assets indicated that no impairment
existed.
During fiscal 2015, the Company ceased operations at its Canadian facility located in Scotstown, Quebec which was acquired
in 2010. In connection with this closure, the Company recognized an impairment of $0.6 million during the first quarter of fiscal
2015 representing the remaining unamortized value of an intangible asset.
48
The changes in the carrying amount of goodwill and the amount allocated by reportable segment for the years presented are
as follows (in thousands):
Goodwill as of August 2, 2015
Goodwill from prior fiscal year business combinations
Change in foreign exchange rates
Goodwill as of July 30, 2016
Goodwill from current fiscal year business combinations
Goodwill adjustment for prior fiscal year business combinations
Change in foreign exchange rates
$
$
Wholesale
Other
Total
248,909
$
17,731
$
266,640
99,142
92
348,143
10,102
(6,093)
1,082
294
—
$
$
18,025
—
—
—
99,436
92
366,168
10,102
(6,093)
1,082
Goodwill as of July 29, 2017
$
353,234
$
18,025
$
371,259
The following table presents the detail of the Company's other intangible assets (in thousands):
July 29, 2017
July 30, 2016
Gross Carrying
Amount
Accumulated
Amortization
Net
Gross Carrying
Amount
Accumulated
Amortization
Net
Amortizing intangible assets:
Customer relationships
Non-compete agreements
Trademarks and tradenames
Total amortizing intangible assets
Indefinite lived intangible assets:
Trademarks and tradenames
Total
$
$
197,852
2,900
1,700
202,452
$
48,044
1,334
$ 149,808
1,566
$
548
1,152
49,926
152,526
$
196,313
2,900
1,700
200,913
33,447
753
$ 162,866
2,147
115
1,585
34,315
166,598
55,763
258,215
$
—
49,926
55,763
$ 208,289
$
55,716
256,629
$
—
34,315
55,716
$ 222,314
Amortization expense was $15.2 million, $8.9 million and $7.8 million for the fiscal years ended July 29, 2017, July 30,
2016 and August 1, 2015, respectively. The estimated future amortization expense for each of the next five fiscal years and thereafter
on definite lived intangible assets existing as of July 29, 2017 is shown below:
Fiscal Year:
2018
2019
2020
2021
2022
2023 and thereafter
(j) Investments
(In thousands)
14,981
$
14,440
13,813
12,908
11,582
84,802
152,526
$
The Company has long term investments in unconsolidated entities which it accounts for using either the cost method or
the equity method of accounting. Investments in which the Company cannot exercise significant influence over the operating and
financial policies of the investee are recorded at their historical cost. Investments where the Company has the ability to exercise
significant influence over the investee are accounted for using the equity method, with income or loss attributable to the Company
from the investee adjusting the carrying value of the investment and recorded in the Company’s consolidated statements of income.
The Company's cost and equity method investments are evaluated for other than temporary impairment in accordance with ASC
320 Investments — Debt and Equity Securities. The carrying values of both cost and equity method investments were not material
as of July 29, 2017 and July 30, 2016, either individually or in the aggregate, and are included within "Other Assets" in the
Company’s consolidated balance sheets. Income attributable to the Company from investments accounted for using the equity
method is recorded in “Other, net,” within "Other expense (income)," in the Company's consolidated statements of income, as
these amounts were not material for the fiscal years ended July 29, 2017, July 30, 2016 and August 1, 2015.
49
On May 24, 2017, the Company sold its stake in Kicking Horse Coffee, a Canadian roaster and marketer of organic and fair
trade coffee, which was accounted for using the cost method of accounting. As a result of the sale, the Company recognized a pre-
tax gain of $6.1 million, which is included in “Other, net” in the consolidated statements of income.
(k) Revenue Recognition and Concentration of Credit Risk
The Company records revenue upon delivery of products. Revenues are recorded net of applicable sales discounts and
estimated sales returns. Sales incentives provided to customers are accounted for as reductions in revenue as the related revenue
is recorded. The Company's sales are primarily to customers located throughout the United States and Canada.
Whole Foods Market, Inc. was the Company's largest customer in each fiscal year presented. Whole Foods Market, Inc.
accounted for approximately 33%, 35% and 34% of the Company's net sales for the fiscal years ended July 29, 2017, July 30,
2016 and August 1, 2015, respectively. There were no other customers that individually generated 10% or more of the Company's
net sales during those periods.
(l) Accounts Receivable and Related Allowance for Doubtful Accounts
Accounts receivable primarily consist of trade receivables from customers and receivables from suppliers in connection
with the purchase or promotion of the suppliers' products. The Company analyzes customer creditworthiness, accounts receivable
balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of its allowance for doubtful
accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are conducted
using either cash-on-delivery terms, or the account is closely monitored so that as agreed upon payments are received, orders are
released; a failure to pay results in held or canceled orders.
(m) Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments including cash and cash equivalents, accounts receivable,
accounts payable and certain accrued expenses approximate fair value due to the short-term nature of these instruments.
The following estimated fair value amounts have been determined by the Company using available market information and
appropriate valuation methodologies. Refer to Note 9, Fair Value Measurements, for additional information regarding the fair
value hierarchy. The fair value of notes payable and long-term debt are based on the instruments' interest rate, terms, maturity date
and collateral, if any, in comparison to the Company's incremental borrowing rate for similar financial instruments. However,
considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
Assets:
Cash and cash equivalents
Accounts receivable
Notes receivable
Liabilities:
Accounts payable
Notes payable
Long-term debt, including current portion
(n) Notes Receivable, Trade
July 29, 2017
July 30, 2016
Carrying Value
Fair Value
Carrying Value
Fair Value
$
$
15,414
525,636
2,359
534,616
223,612
161,991
(In thousands)
$
15,414
525,636
2,359
534,616
223,612
169,058
$
18,593
489,708
3,709
445,430
426,519
173,593
18,593
489,708
3,709
445,430
426,519
182,790
The Company issues trade notes receivable to certain customers under two basic circumstances: inventory purchases for
initial store openings and overdue accounts receivable. Notes issued in connection with store openings are generally receivable
over a period not to exceed thirty-six months. Notes issued in connection with overdue accounts receivable may extend for periods
greater than one year. All notes are issued at a market interest rate and contain certain guarantees and collateral assignments in
favor of the Company.
50
(o) Share-Based Compensation
The Company accounts for its share-based compensation in accordance with ASC 718, Stock Compensation. ASC 718
requires the recognition of the fair value of share-based compensation in net income. The Company has four share-based employee
compensation plans, which are described more fully in Note 3. Share-based compensation consists of stock options, restricted
stock units and performance units. Stock options are granted to employees and directors at exercise prices equal to the fair market
value of the Company's stock at the dates of grant. Generally, stock options and restricted stock units granted to employees vest
ratably over 4 years from the grant date and grants to members of the Company's Board of Directors vest ratably over 6 months
with one half vesting immediately. The Company recognizes share-based compensation expense on a straight-line basis over the
requisite service period of the individual grants. The Company's President and Chief Executive Officer and its other executive
officers or members of senior management have been granted performance units which vest, when and if earned, in accordance
with the terms of the related performance unit award agreements. The Company recognizes share-based compensation expense
based on the target number of shares of common stock and the Company’s stock price on the date of grant and subsequently adjusts
expense based on actual and forecasted performance compared to planned targets.
ASC 718 also requires that compensation expense be recognized for only the portion of share-based awards that are expected
to vest. Therefore, the Company applies estimated forfeiture rates that are derived from historical employee and director termination
activity to reduce the amount of compensation expense recognized. If the actual forfeitures differ from the estimate, additional
adjustments to compensation expense may be required in future periods.
The Company receives an income tax deduction for restricted stock awards and restricted stock units when they vest and
for non-qualified stock options exercised by employees equal to the excess of the fair market value of its common stock on the
vesting or exercise date over the exercised price. Excess tax benefits (tax benefits resulting from tax deductions in excess of
compensation cost recognized) and tax deficit (tax deficit resulting from compensation cost recognized in excess of tax deductions)
are presented as a cash inflow or outflow provided by financing activities in the accompanying consolidated statement of cash
flows.
(p) Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated by adding the dilutive potential common shares to the weighted average
number of common shares that were outstanding during the period. For purposes of the diluted earnings per share calculation,
outstanding stock options, restricted stock units and performance-based awards, if applicable, are considered common stock
equivalents, using the treasury stock method. A reconciliation of the weighted average number of shares outstanding used in the
computation of the basic and diluted earnings per share for all periods presented follows:
Basic weighted average shares outstanding
Net effect of dilutive common stock equivalents based upon the treasury
stock method
Diluted weighted average shares outstanding
Potential anti-dilutive share-based payment awards excluded from the
computation above
(q) Comprehensive Income (Loss)
July 29,
2017
Fiscal year ended
July 30,
2016
(In thousands)
August 1,
2015
50,570
205
50,775
44
50,313
86
50,399
84
50,021
246
50,267
7
Comprehensive income (loss) is reported in accordance with ASU No. 2013-02, and includes net income and the change in
other comprehensive income (loss). Other comprehensive income (loss) is comprised of the net change in fair value of derivative
instruments designated as cash flow hedges, as well as foreign currency translation related to the translation of UNFI Canada, Inc.
("UNFI Canada") from the functional currency of Canadian dollars to U.S. dollar reporting currency. For all periods presented,
the Company displays comprehensive income (loss) and its components in the consolidated statements of comprehensive income.
51
(r) Derivative Financial Instruments
The Company is exposed to market risks arising from changes in interest rates, fuel costs, and with the operation of UNFI
Canada, foreign currency exchange rates. The Company uses derivatives principally in the management of interest rate and fuel
price exposure. From time to time the Company may use contracts to hedge transactions in foreign currency. The Company does
not utilize derivatives that contain leverage features. For derivative transactions accounted for as hedges, on the date the Company
enters into the derivative transaction, the exposure is identified. The Company formally documents all relationships between
hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge transaction.
In this documentation, the Company specifically identifies the asset, liability, firm commitment, forecasted transaction, or net
investment that has been designated as the hedged item and states how the hedging instrument is expected to reduce the risks
related to the hedged item. The Company measures effectiveness of its hedging relationships both at hedge inception and on an
ongoing basis as needed.
(s) Shipping and Handling Fees and Costs
The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated
with inbound freight are generally recorded in cost of sales, whereas shipping and handling costs for selecting, quality assurance,
and outbound transportation are recorded in operating expenses. Outbound shipping and handling costs totaled $517.2 million,
$467.5 million and $452.9 million for the fiscal years ended July 29, 2017, July 30, 2016 and August 1, 2015, respectively.
(t) Reserves for Self-Insurance
The Company is primarily self-insured for workers' compensation and general and automobile liability insurance. It is the
Company's policy to record the self-insured portion of workers' compensation and automobile liabilities based upon actuarial
methods to estimate the future cost of claims and related expenses that have been reported but not settled, and that have been
incurred but not yet reported.
(u) Operating Lease Expenses
The Company records lease expense via the straight-line method. For leases with step rent provisions whereby the rental
payments increase over the life of the lease, and for leases where the Company receives rent-free periods, the Company recognizes
expense based on a straight-line basis based on the total minimum lease payments to be made over the expected lease term.
(v) Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04, Intangibles, Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment. This ASU no longer requires a hypothetical purchase price allocation to measure goodwill impairment.
Instead, impairment is measured using the difference between the carrying amount and fair value of the reporting unit. The ASU
is effective for public companies with interim periods and fiscal years beginning after December 15, 2019, which for the Company
is the first quarter of the fiscal year ending July 31, 2021, with early adoption permitted. The Company early adopted this ASU
in connection with its annual goodwill impairment test performed in the fourth quarter of fiscal 2017. The adoption of this ASU
did not have an impact on the Company's consolidated financial statements. Refer to "(i) Goodwill and Intangible Assets" in this
note for further information.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments, to address eight specific cash flow issues with the objective of reducing the existing diversity in
practice. The eight specific issues are (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon Debt
Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate
of the Borrowing; (3) Contingent Consideration Payments Made after a Businesses Combination; (4) Proceeds from the Settlement
of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life
Insurance Policies; (6) Distributions Received from Equity Method Investees; (7) Beneficial Interests in Securitization
Transactions; and (8) Separately Identifiable Cash and Application of the Predominance Principle. The ASU is effective for public
companies with interim and fiscal years beginning after December 15, 2018, which for the Company will be the first quarter of
the fiscal year ending August 1, 2020. The Company is in the process of evaluating the impact that this new guidance will have
on the Company's consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting, which is intended to improve the accounting for share-based payment transactions
as part of the FASB's simplification initiative. This ASU will change aspects of accounting for share-based payment award
transactions including accounting for income taxes, the classification of excess tax benefits and the classification of employee
taxes paid when shares are withheld for tax-withholding purposes on the statement of cash flows, forfeitures, and minimum
52
statutory tax withholding requirements. The ASU is effective for public companies with interim and fiscal years beginning after
December 15, 2016, which for the Company will be the first quarter of the fiscal year ending July 28, 2018. Early adoption is
permitted provided that the entire ASU is adopted. The Company has not yet adopted this standard, but if the Company had adopted
this standard in fiscal 2017, the result would have been a reclassification from additional paid-in capital to income tax expense.
For fiscal 2017 and fiscal 2016, the result would have increased current year income tax expense by $1.3 million and $0.1 million,
respectively, and for fiscal 2015, the result would have decreased income tax expense by $2.7 million.
In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842), which will require companies as the lessee to
recognize lease assets and liabilities for leases formerly classified as operating leases. The ASU is effective for public companies
with interim and annual periods in fiscal years beginning after December 15, 2018, which for the Company will be the first quarter
of the fiscal year ending August 1, 2020. The Company is in the process of evaluating the impact that this new guidance will have
on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-1, Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Liabilities, which will change the income statement impact of equity investments, and
the recognition of changes in fair value of financial liabilities when the fair value option is elected. The ASU is effective for public
companies with interim and annual periods in fiscal years beginning after December 15, 2017, which for the Company will be the
first quarter of the fiscal year ending August 3, 2019. We do not expect the adoption of this guidance to have a significant impact
on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires
entities with a classified balance sheet to present all deferred tax assets and liabilities as noncurrent. The new pronouncement is
effective for public companies with annual periods, and interim periods within those periods, beginning after December 15, 2016,
which for the Company will be the first quarter of the fiscal year ending July 28, 2018. Early adoption at the beginning of an
interim or annual period is permitted. The Company has not yet adopted this standard, but if the Company had adopted this standard
in fiscal 2017, the result would have been a reclassification from current deferred income tax assets to noncurrent deferred income
tax liabilities of $40.6 million and $35.2 million as of July 29, 2017 and July 30, 2016, respectively.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, (Topic 606), which has been
updated by multiple amending ASUs and supersedes existing revenue recognition requirements. The core principle of the new
guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The collective
guidance is effective for public companies with annual periods, and interim periods within those periods, beginning after December
15, 2017, which for the Company will be the first quarter of the fiscal year ending August 3, 2019. The new standard permits
either of the following implementation approaches: (i) a full retrospective application with restatement of each period presented
in the financial statements with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative
effect of adopting the guidance recognized as of the date of initial application. The Company expects to adopt this new guidance
in the first quarter of fiscal 2019 and is currently in the process of selecting a transition method and evaluating the impact of its
adoption on the Company's consolidated financial statements and accounting policies. As part of our assessment work to-date, we
have formed an implementation work team, conducted training sessions on the new ASU’s revenue recognition model, substantially
completed our scoping of revenue streams under the new ASU, begun documentation of potential impacts of the ASU on our
revenue streams and are in the planning stages of our contract review. Additionally, we have begun our review of the enhanced
disclosure requirements under this new standard.
2.
ACQUISITIONS
Wholesale Segment - Wholesale Distribution Acquisitions
Global Organic/Specialty Source, Inc. On March 7, 2016, the Company acquired certain assets of Global Organic/
Specialty Source Inc. and related affiliates (collectively "Global Organic") through its wholly owned subsidiary Albert's Organics,
Inc. ("Albert's"). Global Organic is a distributor of organic fruits, vegetables, juices, milk, eggs, nuts, and coffee located in Sarasota,
Florida serving customer locations across the Southeastern United States. Total cash consideration related to this acquisition was
approximately $20.6 million. The fair value of identifiable intangible assets acquired was determined by using an income approach.
The identifiable intangible asset recorded consisted of customer lists of $7.4 million, which are being amortized on a straight-line
basis over an estimated useful life of approximately ten years.
Nor-Cal Produce, Inc. On March 31, 2016 the Company acquired all of the outstanding stock of Nor-Cal Produce, Inc.
("Nor-Cal") and an affiliated entity as well as certain real estate. Nor-Cal is a distributor of conventional and organic produce and
other fresh products in Northern California, with primary operations located in West Sacramento, California. Total cash
consideration related to this acquisition was approximately $67.8 million.
53
The fair value of the identifiable intangible assets acquired was determined by using an income approach. The identifiable
intangible assets include customer lists of $30.3 million, a tradename with an estimated fair value of $1.0 million, and a non-
compete with an estimated fair value of $0.5 million, which are being amortized on a straight-line basis over estimated useful
lives of approximately thirteen years, five years and five years, respectively. Significant assumptions utilized in the income approach
were based on company-specific information and projections, which are not observable in the market and are thus considered
Level 3 measurements as defined by authoritative guidance. The goodwill of $36.5 million represents the future economic benefits
expected to arise that could not be individually identified and separately recognized. During the second quarter of fiscal 2017, the
Company recorded a $2.9 million adjustment to the opening balance sheet which decreased goodwill and deferred income tax
liabilities. During the third quarter of fiscal 2017, the Company recorded a $0.1 million adjustment, which decreased goodwill
and liabilities, and completed the final net working capital adjustment resulting in cash received of $0.8 million by the Company,
which also decreased goodwill and the total purchase price. The Company finalized its purchase accounting during the third quarter
of fiscal 2017. Net sales attributed to Nor-Cal from the date of acquisition through the fiscal year ended July 30, 2016 were $51.4
million.
The following table summarizes the consideration paid for the acquisition and the amounts of assets acquired and liabilities
assumed as of the acquisition date:
(in thousands)
Accounts receivable
Inventories
Property and equipment
Other assets
Customer relationships
Tradename
Non-compete
Goodwill
Total assets
Liabilities
Total purchase price
Preliminary as of
July 30, 2016
$
$
$
8,483
1,902
10,029
125
30,300
1,000
500
40,342
92,681
24,101
68,580
Adjustments in
Current Fiscal Year
$
— $
—
—
—
—
—
—
(3,825)
(3,825) $
(3,028)
(797) $
$
$
Final Opening
Balance Sheet as of
July 29, 2017
8,483
1,902
10,029
125
30,300
1,000
500
36,517
88,856
21,073
67,783
Haddon House Food Products, Inc. On May 13, 2016 the Company acquired all of the outstanding equity securities of
Haddon House Food Products, Inc. (“Haddon”) and certain affiliated entities and real estate. Haddon is a distributor and
merchandiser of natural and organic and gourmet ethnic products throughout the Eastern United States. Haddon has a diverse,
multi-channel customer base including conventional supermarkets, gourmet food stores and independently owned product retailers.
Total cash consideration related to this acquisition was approximately $217.5 million.
The value of the identifiable intangible assets acquired was determined by using an income approach. The identifiable
intangible assets include customer relationships with an estimated fair value of $62.7 million, the Haddon tradename with an
estimated fair value of $0.7 million, non-compete agreements with an estimated fair value of $0.7 million, and a trademark asset
related to Haddon-owned branded product lines with an estimated fair value of $2.0 million. The customer relationship intangible
asset is currently being amortized on a straight-line basis over an estimated useful life of approximately thirteen years, the Haddon
tradename is being amortized over an estimated useful life of approximately three years, the non-compete agreements that the
Company received from the owners of Haddon are being amortized over the five-year term of the agreements, and the Haddon
trademark asset associated with its branded product lines is estimated to have an indefinite useful life. Significant assumptions
utilized in the income approach were based on company-specific and market participant information and projections, which are
not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance. The goodwill
of $43.6 million represents the future economic benefits expected to arise that could not be individually identified and separately
recognized. Net sales attributed to Haddon from the date of acquisition through the fiscal year ended July 30, 2016 were $100.4
million.
During the second quarter of fiscal 2017, the Company recorded a reduction to goodwill of approximately $1.6 million
related to a net working capital adjustment. During the fourth quarter of fiscal 2017, the Company finalized its purchase accounting
54
related to the Haddon acquisition. The following table summarizes the consideration paid for the acquisition and the amounts of
assets acquired and liabilities assumed as of the acquisition date:
(in thousands)
Accounts receivable
Other receivable
Inventories
Prepaid expenses and other current assets
Property and equipment
Other assets
Customer relationships
Tradename
Non-compete
Other intangible assets
Goodwill
Total assets
Liabilities
Total purchase price
Preliminary as of
July 30, 2016
$
$
$
40,434
3,621
46,138
1,645
54,501
280
62,700
700
700
2,000
45,851
258,570
39,510
219,060
Adjustments in
Current Fiscal Year
$
(300) $
—
302
99
—
—
—
—
—
—
(2,266)
(2,165) $
(600)
(1,565) $
$
$
Final Opening
Balance Sheet as of
July 29, 2017
40,134
3,621
46,440
1,744
54,501
280
62,700
700
700
2,000
43,585
256,405
38,910
217,495
Gourmet Guru, Inc. On August 10, 2016, the Company acquired all of the outstanding equity securities of Gourmet Guru,
Inc. ("Gourmet Guru"). Gourmet Guru is a distributor and merchandiser of fresh and organic food focusing on new and emerging
brands. Total cash consideration related to this acquisition was approximately $10.0 million, subject to certain customary post-
closing adjustments. During the second quarter of fiscal 2017, the Company recorded a reduction to goodwill of approximately
$0.1 million related to finalizing the net working capital adjustment. During the third quarter of fiscal 2017, the Company recorded
a $0.5 million adjustment to the opening balance sheet, which increased goodwill and accrued expenses and decreased property
and equipment. The fair value of identifiable intangible assets acquired was determined by using an income approach. The
identifiable intangible asset recorded based on a provisional valuation consisted of customer lists of $1.0 million, which are being
amortized on a straight-line basis over an estimated useful life of approximately two years. The goodwill of $10.1 million represents
the future economic benefits expected to arise that could not be individually identified and separately recognized. The Company
intends to finalize its purchase accounting with respect to Gourmet Guru in the first quarter of fiscal 2018.
Cash paid for Global Organic, Nor-Cal, Haddon and Gourmet Guru was financed through borrowings under the Company’s
amended and restated revolving credit facility. Acquisition costs have been expensed as incurred within "operating expenses" in
the consolidated statements of income. Acquisition costs related to these acquisitions were de minimis for the year ended July 29,
2017 and $2.1 million for the year ended July 30, 2016. The results of the acquired businesses' operations have been included in
the consolidated financial statements since the applicable date of acquisitions. Operations for these acquisitions have been combined
with the Company's existing wholesale distribution business and therefore results are not separable from the rest of the wholesale
distribution business. The Company has not furnished pro forma financial information relating to these acquisitions as such
information is not material to the Company's financial results.
Tony's Fine Foods. During the fourth quarter of fiscal 2015, the Company finalized its purchase accounting related to
the Company's acquisition of all of the outstanding capital stock of Tony's Fine Foods (“Tony’s”) in the fourth quarter of fiscal
2014. Of the total purchase price of approximately $202.7 million, approximately $196.5 million was paid in cash. The remaining
portion of the purchase price for Tony's was paid with approximately 112,000 shares of the Company’s common stock.
Acquisition costs related to the Tony's acquisition were approximately $0.3 million for the fiscal year ended August 1,
2015 and have been expensed as incurred and are included within "Operating Expenses" in the Consolidated Statements of Income.
The results of Tony's operations have been included in the consolidated financial statements since the date of acquisition.
3.
EQUITY PLANS
The Company has three equity incentive plans that provide for the issuance of stock options: the 2002 Stock Incentive Plan
(the "2002 Plan"), the 2004 Equity Incentive Plan, as amended (the "2004 Plan"), and the 2012 Equity Incentive Plan, as amended
and restated (the "2012 Plan") (collectively, the "Plans"). The maximum term of all incentive and non-statutory stock options or
55
share awards granted under the Plans is 4 years. There were 2,800,000 shares authorized for grant under the 2002 Plan and 1,250,000
under the 2012 Plan prior to December 16, 2015, when the 2012 Plan was amended to increase shares available for issuance by
2,000,000. There were 1,054,267 remaining shares authorized for grant under the 2004 Plan as of December 16, 2010, the effective
date when the 2004 Plan was amended to allow for the award of stock options. Prior to the expiration of the applicable plan, these
shares may be used to issue stock options, restricted stock, restricted stock units or performance based awards to employees,
officers, directors and others. As of July 29, 2017, 1,389,248 shares were available for grant under the 2012 Plan. The authorization
for new grants under the 2002 Plan and 2004 Plan has expired.
The Company recognized total share-based compensation expense of $25.7 million for the fiscal year ended July 29, 2017,
compared to $15.3 million and $14.0 million for the fiscal years ended July 30, 2016 and August 1, 2015, respectively. For the
fiscal year ended July 29, 2017, share-based compensation expense related to performance-based share awards was $9.0 million.
For the fiscal year ended July 30, 2016, the Company did not record share-based compensation expense related to performance-
based share awards, including compensation expense related to performance units with vestings tied to Company's performance
in fiscal 2016, as a result of performance measures not being attained at the end of the fiscal year and the resulting forfeiture of
these awards. The Company recognized a benefit of $1.0 million related to performance-based share awards for the fiscal year
ended August 1, 2015 due to the reversal of share-based compensation expense recorded in fiscal 2014 caused by performance
measures not being attained as of the end of fiscal 2015 and the resulting forfeiture of these awards.
Vesting requirements for awards under the Plans are generally at the discretion of the Company's Board of Directors, or the
Compensation Committee thereof, and for time vesting awards are typically four equal annual installments for employees and two
equal installments for non-employee directors with the first installment on the date of grant and the second installment on the six
month anniversary of the grant date. As of July 29, 2017, there was $38.6 million of total unrecognized compensation cost related
to outstanding share-based compensation arrangements (including stock options, restricted stock units and performance-based
restricted stock units). This cost is expected to be recognized over a weighted-average period of 2.4 years.
Restricted Stock Units
The fair value of restricted stock units and performance share units are determined based on the number of units granted
and the quoted price of the Company's common stock as of the grant date. The following summary presents information regarding
restricted stock units and performance units under the Plans as of July 29, 2017 and changes during the fiscal year then ended:
Outstanding at July 30, 2016
Granted
Vested
Forfeited
Outstanding at July 29, 2017
Number
of Shares
$
733,797
1,107,526
$
(420,098) $
(151,114) $
$
1,270,111
Weighted
Average
Grant-Date
Fair Value
55.55
40.16
50.14
50.16
44.56
The total intrinsic value of restricted stock units vested was $10.5 million, $12.3 million and $17.3 million during the fiscal
years ended July 29, 2017, July 30, 2016 and August 1, 2015, respectively.
During fiscal 2017, the Company granted 397,242 performance share units to its executives (subject to the issuance of
221,242 additional shares if the Company's performance exceeds specified targeted levels) with a weighted average grant-date
fair value of $40.82. As of the fiscal year ended July 29, 2017, 150,396 of these performance share units vested based on the
Company's earnings per diluted share, adjusted EBITDA and adjusted ROIC, with an estimated intrinsic value of approximately
$5.7 million using the Company stock price as of July 28, 2017. Of the performance share units granted during fiscal 2017, 252,290
are tied to the Company's performance in the fiscal years ending July 28, 2018 and August 3, 2019.
No performance share units vested during the fiscal years ended July 30, 2016 and August 1, 2015.
Stock Options
The fair value of stock option grants were estimated at the date of grant using the Black-Scholes option pricing model. Black-
Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and expected life. Expected volatilities
utilized in the model are based on the historical volatility of the Company's stock price. The risk-free interest rate is derived from
the U.S. Treasury yield curve in effect at the time of grant. The model incorporates exercise and post-vesting forfeiture assumptions
based on an analysis of historical data. The expected term is derived from historical information and other factors.
56
The Company did not grant stock options in fiscal 2017. The following summary presents the weighted average assumptions
used for stock options granted in fiscal 2016 and 2015:
Expected volatility
Dividend yield
Risk free interest rate
Expected term (in years)
Fiscal year ended
July 30,
2016
August 1,
2015
27.5%
—%
1.3%
4.0
26.2%
—%
1.4%
4.0
The following summary presents information regarding outstanding stock options as of July 29, 2017 and changes during
the fiscal year then ended with regard to options under the Plans:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Number
of Options
Outstanding at beginning of year
Exercised
Forfeited
Cancelled
Outstanding at end of year
Exercisable at end of year
343,629
$
(8,510) $
(2,572) $
(3,858) $
$
$
328,689
265,847
49.13
32.20
64.55
42.82
49.52
47.05
5.0 years $
4.4 years $
868,658
868,658
The weighted average grant-date fair value of options granted during the fiscal years ended July 30, 2016 and August 1,
2015 was $15.59 and $14.82, respectively. The aggregate intrinsic value of options exercised during the fiscal years ended July 29,
2017, July 30, 2016, and August 1, 2015, was $0.1 million, $2.6 million and $3.1 million, respectively.
4.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE
The allowance for doubtful accounts and notes receivable consists of the following:
Balance at beginning of year
Additions charged to costs and expenses
Deductions
Other adjustments
Balance at end of year
5.
RESTRUCTURING ACTIVITIES
Fiscal year ended
July 29,
2017
July 30,
2016
August 1,
2015
(In thousands)
8,493
$
6,426
(3,689)
—
11,230
$
$
$
11,230
5,728
(2,449)
—
14,509
$
$
8,294
5,059
(4,590)
(270)
8,493
Fiscal 2017 Cost Saving and Efficiency Initiatives. During fiscal 2017, the Company announced a restructuring program
in conjunction with various cost saving and efficiency initiatives, including the planned opening of a shared services center. The
Company recorded total restructuring costs of $6.9 million during the fiscal year ended July 29, 2017, of which $6.6 million was
primarily related to severance and other employee separation and transition costs and $0.3 million was due to an early lease
termination and facility closing costs for its Gourmet Guru facility in Bronx, New York.
57
The following is a summary of the restructuring costs the Company recorded in fiscal 2017, as well as the remaining liability as
of July 29, 2017 (in thousands):
Severance and other employee separation and transition costs
Early lease termination and facility closing costs
Total
$
$
6,606
258
6,864
Restructuring
Costs Recorded
in Fiscal 2017
Payments
and Other
Adjustments
(2,308)
(258)
(2,566)
$
$
Restructuring Cost
Liability as of
July 29, 2017
$
$
4,298
—
4,298
Fiscal 2016 Cost-Saving Measures. During the fourth quarter of fiscal 2015, the Company announced that its contract
as a distributor to Albertsons Companies, Inc., which includes the Albertsons, Safeway and Eastern Supermarket chains, would
terminate on September 20, 2015 rather than upon the original contract end date of July 31, 2016. During fiscal 2016, the Company
implemented Company-wide cost-saving measures in response to this lost business which resulted in total restructuring costs
of $4.4 million, all of which was recorded during the first half of fiscal 2016. There were no additional costs recorded related to
these cost-savings initiatives in fiscal 2016. These initiatives resulted in a reduction of employees across the Company, the majority
of which were terminated during the first quarter of fiscal 2016. The total work-force reduction charge of $3.4 million recorded
during fiscal 2016 was primarily related to severance and fringe benefits. In addition to workforce reduction charges, the Company
recorded $0.9 million during fiscal 2016 for costs due to an early lease termination and facility closure and operational transfer
costs associated with these initiatives.
Earth Origins Market. During the fourth quarter of fiscal 2016, the Company recorded restructuring and impairment
charges of $0.8 million related to the Company's Earth Origins Market ("Earth Origins") retail business. The Company made the
decision during the fourth quarter of fiscal 2016 to close two of its stores, one store located in Florida and the other located in
Maryland, which resulted in restructuring costs of $0.5 million primarily related to severance and closure costs. The stores were
closed during the first quarter of fiscal 2017. In addition, the Company recorded a total impairment charge of $0.3 million during
fiscal 2016 on long-lived assets.
Canadian facility closure. During fiscal 2015, the Company ceased operations at its Canadian facility located in Scotstown,
Quebec which was acquired in 2010. In connection with this closure, the Company recognized an impairment of $0.6 million
during the first quarter of fiscal 2015 representing the remaining unamortized balance of an intangible asset. During the second
quarter of fiscal 2015, the Company recognized a restructuring charge of $0.2 million in connection with this closure. Additionally,
during the second quarter of fiscal 2016, the Company recognized an additional impairment charge of $0.4 million related to the
long lived assets at the facility.
The following is a summary of the restructuring costs the Company recorded in fiscal 2016 related to the termination of
its distribution arrangement with a large customer, the closing of two of its Earth Origins Market stores and the closing of a
Canadian facility. The remaining liability as of the fiscal year ended July 29, 2017 was de minimis.
(in thousands)
Cost saving measures:
Severance
Early lease termination and facility closing costs
Operational transfer costs
Earth Origins:
Severance
Store closing costs
Total
58
Restructuring
Costs Recorded
in Fiscal 2016
$
$
3,443
368
570
41
443
4,865
The following is a summary of the impairment costs the Company recorded in fiscal 2016:
(in thousands)
Canadian facility closure
Earth Origins store
Total
Impairment
Costs
$
$
413
274
687
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of July 29, 2017 and July 30, 2016 consisted of the following:
(in thousands)
Accrued salaries and employee benefits
Workers' compensation and automobile liabilities
Interest rate swap liability
Other
Total accrued expenses and other current liabilities
7. NOTES PAYABLE
July 29,
2017
July 30,
2016
$
$
63,937
$
22,774
308
70,224
157,243
$
58,832
23,448
5,917
74,241
162,438
On April 29, 2016, the Company entered into the Third Amended and Restated Loan and Security Agreement (the "Third
A&R Credit Agreement") amending and restating certain terms and provisions of its revolving credit facility which increased the
maximum borrowings under the amended and restated revolving credit facility and extended the maturity date to April 29, 2021.
Up to $850.0 million is available to the Company's U.S. subsidiaries and up to $50.0 million is available to UNFI Canada. After
giving effect to the Third A&R Credit Agreement, the amended and restated revolving credit facility provides an option to increase
the U.S. or Canadian revolving commitments by up to an additional $600.0 million (but in not less than $10.0 million increments)
subject to certain customary conditions and the lenders committing to provide the increase in funding.
The borrowings of the U.S. portion of the amended and restated revolving credit facility, after giving effect to the Third
A&R Credit Agreement, accrued interest, at the base rate plus an applicable margin of 0.25% or LIBOR rate plus an applicable
margin of 1.25% for the twelve month period ended April 29, 2017, with interest thereafter accruing at the Company's option, at
either (i) a base rate (generally defined as the highest of (x) the Bank of America Business Capital prime rate, (y) the average
overnight federal funds effective rate plus one-half percent (0.50%) per annum and (z) one-month LIBOR plus one percent (1%)
per annum) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) the LIBOR rate plus
an applicable margin that varies depending on daily average aggregate availability. The borrowings on the Canadian portion of
the credit facility accrued interest at the Canadian prime rate plus an applicable margin of 0.25% or a bankers' acceptance equivalent
rate plus an applicable margin of 1.25% for the twelve month period ended April 29, 2017. After April 29, 2017, the borrowings
on the Canadian portion of the credit facility accrue interest, at the Company's option, at either (i) a Canadian prime rate (generally
defined as the highest of (x) 0.50% over 30-day Reuters Canadian Deposit Offering Rate ("CDOR") for bankers' acceptances,
(y) the prime rate of Bank of America, N.A.'s Canada branch, and (z) a bankers' acceptance equivalent rate for a one month interest
period plus 1.00%) plus an applicable margin that varies depending on daily average aggregate availability, or (ii) a bankers'
acceptance equivalent rate of the rate of interest per annum equal to the annual rates applicable to Canadian Dollar bankers'
acceptances on the "CDOR Page" of Reuter Monitor Money Rates Service, plus five basis points, and an applicable margin that
varies depending on daily average aggregate availability. Unutilized commitments are subject to an annual fee in the amount of
0.30% if the total outstanding borrowings are less than 25% of the aggregate commitments, or a per annum fee of 0.25% if such
total outstanding borrowings are 25% or more of the aggregate commitments. The Company is also required to pay a letter of
credit fronting fee to each letter of credit issuer equal to 0.125% per annum of the stated amount of each such letter of credit (or
such other amount as may be mutually agreed by the borrowers under the facility and the applicable letter of credit issuer), as well
as a fee to all lenders equal to the applicable margin for LIBOR or bankers’ acceptance equivalent rate loans, as applicable, times
the average daily stated amount of all outstanding letters of credit.
As of July 29, 2017, the Company's borrowing base, which is calculated based on eligible accounts receivable and inventory
levels, net of $6.5 million of reserves, was $883.8 million. As of July 29, 2017, the Company had $223.6 million of borrowings
outstanding under the Company's amended and restated revolving credit facility and $33.5 million in letter of credit commitments
which reduced the Company's available borrowing capacity under the revolving credit facility on a dollar for dollar basis. The
Company's resulting remaining availability was approximately $626.7 million as of July 29, 2017.
59
The revolving credit facility, as amended and restated, subjects the Company to a springing minimum fixed charge
coverage ratio (as defined in the Third A&R Credit Agreement) of 1.0 to 1.0 calculated at the end of each of our fiscal quarters
on a rolling four quarter basis when the adjusted aggregate availability (as defined in the Third A&R Credit Agreement) is less
than the greater of (i) $60.0 million and (ii) 10% of the aggregate borrowing base. The Company was not subject to the fixed
charge coverage ratio covenant under the amended and restated credit agreement during the fiscal year ended July 29, 2017.
The credit facility also allows for the lenders thereunder to syndicate the credit facility to other banks and lending institutions.
The Company has pledged the majority of its and its subsidiaries' accounts receivable and inventory for its obligations under the
amended and restated revolving credit facility.
8. LONG-TERM DEBT
On August 14, 2014, the Company and certain of its subsidiaries entered into a real estate backed term loan agreement
(the "Term Loan Agreement"). The total initial borrowings under the Term Loan Agreement were $150.0 million. The Company
is required to make $2.5 million principal payments quarterly, which began on November 1, 2014. Under the Term Loan Agreement,
the Company at its option may request the establishment of one or more new term loan commitments in increments of at least
$10.0 million, but not to exceed $50.0 million in total, subject to the approval of the lenders electing to participate in such incremental
loans and the satisfaction of the conditions required by the Term Loan Agreement. The Company will be required to make quarterly
principal payments on these incremental borrowings in accordance with the terms of the Term Loan Agreement. Proceeds from
this Term Loan Agreement were used to pay down borrowings on the Company's amended and restated revolving credit facility.
On April 29, 2016, the Company entered into a First Amendment Agreement (the “Term Loan Amendment”) to the Term
Loan Agreement. The Term Loan Amendment was entered into to reflect the changes to the amended and restated revolving credit
facility reflected in the Amendment. The Term Loan Agreement will terminate on the earlier of (a) August 14, 2022 and (b) the
date that is ninety days prior to the termination date of the Company’s amended and restated revolving credit agreement. Under
the Term Loan Agreement, the borrowers at their option may request the establishment of one or more new term loan commitments
in increments of at least $10.0 million, but not to exceed $50.0 million in total, subject to the approval of the lenders electing to
participate in such incremental loans and the satisfaction of the conditions required by the Term Loan Agreement. The borrowers
will be required to make quarterly principal payments on these incremental borrowings in accordance with the terms of the Term
Loan Agreement.
On September 1, 2016, the Company entered into a Second Amendment Agreement (the "Second Amendment") to the
Term Loan Agreement. The Second Amendment was entered into to adjust the applicable margin charged to borrowings under
the Term Loan Agreement. As amended by the Second Amendment, borrowings under the Term Loan Agreement bear interest at
rates that, at the Company's option, can be either: (1) a base rate generally defined as the sum of (i) the highest of (x) the administrative
agent's prime rate, (y) the average overnight federal funds effective rate plus 0.50% and (z) one-month LIBOR plus one percent
(1%) per annum and (ii) a margin of 0.75%; or, (2) a LIBOR rate generally defined as the sum of (i) LIBOR (as published by
Reuters or other commercially available sources) for one, two, three or six months or, if approved by all affected lenders, nine
months (all as selected by the Company), and (ii) a margin of 1.75%. Interest accrued on borrowings under the Term Loan Agreement
is payable in arrears. Interest accrued on any LIBOR loan is payable on the last day of the interest period applicable to the loan
and, with respect to any LIBOR loan of more than three (3) months, on the last day of every three (3) months of such interest
period. Interest accrued on base rate loans is payable on the first day of every month. The Company is also required to pay certain
customary fees to the administrative agent. The borrowers' obligations under the Term Loan Agreement are secured by certain
parcels of the borrowers' real property.
The Term Loan Agreement includes financial covenants that require (i) the ratio of the Company’s consolidated EBITDA
(as defined in the Term Loan Agreement) minus the unfinanced portion of Capital Expenditures (as defined in the Term Loan
Agreement) to the Company’s consolidated Fixed Charges (as defined in the Term Loan Agreement) to be at least 1.20 to 1.00 as
of the end of any period of four fiscal quarters, (ii) the ratio of the Company’s Consolidated Funded Debt (as defined in the Term
Loan Agreement) to the Company’s EBITDA for the four fiscal quarters most recently ended to be not more than 3.00 to 1.00 as
of the end of any fiscal quarter and (iii) the ratio, expressed as a percentage, of the Company’s outstanding principal balance under
the Loans (as defined in the Term Loan Agreement), divided by the Mortgaged Property Value (as defined in the Term Loan
Agreement) to be not more than 75% at any time. The Company was in compliance with these covenants during the fiscal year
ended July 29, 2017.
During the fiscal year ended August 1, 2015, the Company entered into an amendment to an existing lease agreement
for the office space utilized as the Company's corporate headquarters in Providence, Rhode Island. The amendment provides for
additional office space to be utilized by the Company and extends the lease term for an additional 10 years. The lease currently
qualifies for capital lease treatment pursuant to ASC 840, Leases, and the estimated fair value of the building is recorded on the
60
balance sheet with the capital lease obligation included in long-term debt. A portion of each lease payment reduces the amount of
the lease obligation, and a portion is recorded as interest expense at an effective rate of approximately 12.38%.
During the fiscal year ended July 28, 2012, the Company entered into a lease agreement for a new distribution facility
in Aurora, Colorado. As of the fiscal year ended August 3, 2013, actual construction costs exceeded the construction allowance
as defined by the lease agreement, and therefore, the Company determined it met the criteria for continuing involvement pursuant
to ASC 840, Leases, and applied the financing method to account for this transaction. Under the financing method, the book value
of the distribution facility and related accumulated depreciation remains on the balance sheet. The construction allowance is
recorded as a financing obligation in long-term debt. A portion of each lease payment will reduce the amount of the financing
obligation, and a portion will be recorded as interest expense at an effective rate of approximately 7.32%.
As of July 29, 2017 and July 30, 2016, the Company's long-term debt consisted of the following:
July 29,
2017
July 30,
2016
(In thousands)
Financing obligation, due monthly, and maturing in October 2028 at an effective interest rate
of 7.32%
$
30,368
$
31,502
Capital lease, Providence, Rhode Island corporate headquarters, due monthly, and maturing
in April 2025 at an effective interest rate of 12.38%
Real-estate backed Term Loan Agreement, due quarterly (1)
Less: current installments
Long-term debt, excluding current installments
13,074
118,549
161,991
12,128
149,863
$
$
13,643
128,448
173,593
11,854
161,739
$
$
(1) Real-estate backed Term Loan Agreement balance is shown net of debt issuance costs of $1.5 million and $1.6 million as of
July 29, 2017 and July 30, 2016, respectively, due to the Company's adoption of ASU No. 2015-03 in the fourth quarter of
fiscal 2016.
Aggregate maturities of long-term debt for the next five years and thereafter are as follows at July 29, 2017:
Year
2018
2019
2020
2021
2022
2023 and thereafter
(In thousands)
12,128
$
12,441
12,816
93,203
3,552
29,302
$
163,442
9.
FAIR VALUE MEASUREMENTS
The Company utilizes ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), for financial assets and liabilities
and for non-financial assets and liabilities that are recognized or disclosed at fair value on at least an annual basis. ASC 820 defines
fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact
and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer
restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels
of inputs that may be used to measure fair value:
• Level 1 Inputs—Unadjusted quoted prices in active markets for identical assets or liabilities.
• Level 2 Inputs—Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through
correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices
for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing
61
•
methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and
volatility, can be corroborated by readily observable market data.
Level 3 Inputs—One or more significant inputs that are unobservable and supported by little or no market activity, and
that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value
measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques,
and significant management judgment or estimation.
Hedging of Interest Rate Risk
The Company manages its debt portfolio with interest rate swaps from time to time to achieve an overall desired
position of fixed and floating rates. Details of outstanding swap agreements as of July 29, 2017, which are all pay fixed and
receive floating, are as follows:
Swap Maturity
Notional Value
(in millions)
Pay Fixed
Rate
Receive Floating
Rate
June 9, 2019
June 24, 2019
April 29, 2021
April 29, 2021
August 3, 2022
$
$
$
$
$
50.0
50.0
25.0
25.0
122.5
0.8725% One-Month LIBOR
0.7265% One-Month LIBOR
1.0650% One-Month LIBOR
0.9260% One-Month LIBOR
1.7950% One-Month LIBOR
Floating Rate
Reset Terms
Monthly
Monthly
Monthly
Monthly
Monthly
Interest rate swap agreements are entered into for periods consistent with related underlying exposures and do not constitute
positions independent of those exposures. The Company’s interest rate swap agreements are designated as a cash flow hedges at
July 29, 2017 and are reflected at their fair values of $2.5 million included in "Other Assets" and $0.3 million included in "Accrued
Expenses and Other Current Liabilities" in the consolidated balance sheet.
The Company uses the “Hypothetical Derivative Method” described in ASC 815, Derivatives and Hedging ("ASC 815"),
for quarterly prospective and retrospective assessments of hedge effectiveness, as well as for measurements of hedge
ineffectiveness. Under this method, the Company assesses the effectiveness of each hedging relationship by comparing the changes
in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged transactions. The
effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of
earnings) and subsequently reclassified to earnings in interest income when the hedged transactions affect earnings. Ineffectiveness
resulting from the hedge is recorded as a gain or loss in the consolidated statement of income as part of other income. The Company
did not have any hedge ineffectiveness recognized in earnings during the fiscal year ended July 29, 2017. The Company also
monitors the risk of counterparty default on an ongoing basis and noted that the counterparties are reputable financial institutions.
Financial Instruments
The following table provides the fair value hierarchy for financial assets and liabilities measured on a recurring basis as of July 29,
2017 and July 30, 2016:
(In thousands)
Assets
Interest Rate Swap
Liabilities:
Interest Rate Swap
Fair Value at July 29, 2017
Fair Value at July 30, 2016
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
— $
2,491
—
(308)
—
—
—
—
— $
(5,917)
—
—
The fair value of the Company's other financial instruments including cash and cash equivalents, accounts receivable, notes
receivable, accounts payable and certain accrued expenses are derived using Level 2 inputs and approximate carrying amounts
due to the short-term nature of these instruments. The fair value of notes payable approximate carrying amounts as they are variable
rate instruments. The carrying amount of notes payable approximates fair value as interest rates on the credit facility approximates
current market rates (level 2 criteria).
The following estimated fair value amounts have been determined by the Company using available market information and
appropriate valuation methodologies taking into account the instruments' interest rate, terms, maturity date and collateral, if any,
in comparison to the Company's incremental borrowing rate for similar financial instruments and are therefore deemed Level 2
inputs. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly,
62
the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market
exchange.
(In thousands)
Liabilities
July 29, 2017
July 30, 2016
Carrying Value
Fair Value
Carrying Value
Fair Value
Long term debt, including current portion
$
161,991
$
169,058
$
173,593
$
182,790
Fuel Supply Agreements
From time to time the Company is a party to fixed price fuel supply agreements. During the fiscal year ended July 29, 2017,
the Company did not enter in any such agreements. During the fiscal year ended July 30, 2016, the Company entered into several
agreements which required it to purchase a portion of its diesel fuel each month at fixed prices through December 2016. These
fixed price fuel agreements qualify for the "normal purchase" exception under ASC 815; therefore, the fuel purchases under these
contracts are expensed as incurred and included within operating expenses.
10. COMMITMENTS AND CONTINGENCIES
The Company leases various facilities and equipment under operating lease agreements with varying terms. Most of the
leases contain renewal options and purchase options at several specific dates throughout the terms of the leases.
Rent and other lease expense for the fiscal years ended July 29, 2017, July 30, 2016 and August 1, 2015 totaled approximately
$74.9 million, $65.4 million and $74.8 million, respectively.
Future minimum annual fixed payments required under non-cancelable operating leases having an original term of more
than one year as of July 29, 2017 are as follows:
Fiscal Year
2018
2019
2020
2021
2022
2023 and thereafter
(In thousands)
63,212
$
55,353
44,223
28,726
25,334
38,443
255,291
$
As of July 29, 2017, outstanding commitments for the purchase of inventory were approximately $16.3 million. The Company
had outstanding letters of credit of approximately $33.5 million at July 29, 2017. The Company did not have any outstanding
commitments for the purchase of diesel fuel as of July 29, 2017.
The Company may from time to time be involved in various claims and legal actions arising in the ordinary course of
business. In the opinion of management, amounts accrued, as well as the total amount of reasonably possible losses with respect
to such matters, individually and in the aggregate, are not deemed to be material to the Company's consolidated financial position
or results of operations. Legal expenses incurred in connection with claims and legal actions are expensed as incurred.
11. RETIREMENT PLANS
Retirement Plan
The Company has a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code, the United
Natural Foods, Inc. Retirement Plan (the "Retirement Plan"). In order to become a participant in the Retirement Plan, employees
must meet certain eligibility requirements as described in the Retirement Plan document. In addition to amounts contributed to
the Retirement Plan by employees, the Company makes contributions to the Retirement Plan on behalf of the employees. The
Company also contributes to multiple multi-employer plans for certain of its associates that are represented by unions, including
the Millbrook Distribution Services Union Retirement Plan, which obligation was assumed as part of an acquisition during fiscal
2008. The Company's contributions to its Retirement Plan were approximately $10.1 million, $7.3 million, and $6.4 million for
the fiscal years ended July 29, 2017, July 30, 2016 and August 1, 2015, respectively.
63
Deferred Compensation and Supplemental Retirement Plans
The Company's non-employee directors and certain of its employees are eligible to participate in the United Natural Foods
Deferred Compensation Plan and the United Natural Foods Deferred Stock Plan (collectively the "Deferral Plans"). The Deferral
Plans are nonqualified deferred compensation plans which are administered by the Company's Compensation Committee of the
Board of Directors. The Deferral Plans were established to provide participants with the opportunity to defer the receipt of all or
a portion of their compensation to a non-qualified retirement plan in amounts greater than the amount permitted to be deferred
under the Company's 401(k) Plan. The Company believes that this is an appropriate benefit because (i) it operates to place employees
and non-employee directors in the same position as other employees who are not affected by Internal Revenue Code limits placed
on plans such as the Company's 401(k) Plan; (ii) does not substantially increase the Company's financial obligations to its employees
and directors (there are no employer matching contributions, only a crediting of deemed earnings); and (iii) provides additional
incentives to the Company's employees and directors, since amounts set aside by the employees and directors are subject to the
claims of the Company's creditors until paid. Under the Deferral Plans, only the payment of the compensation earned by the
participant is deferred and there is no deferral of the expense in the Company's financial statements related to the participants'
earnings; the Company records the related compensation expense in the year in which the compensation is earned by the participants.
Under the Deferred Stock Plan, which was frozen to new deferrals effective January 1, 2007, each eligible participant could
elect to defer between 0% and 100% of restricted stock awards granted during the election calendar year. Effective January 1,
2007, each participant may elect to defer up to 100% of their restricted share unit awards, performance shares and performance
units under the Deferred Compensation Plan. Under the Deferred Compensation Plan, each participant may also elect to defer a
minimum of $1,000 and a maximum of 90% of base salary and 100% of director fees, employee bonuses and commissions, as
applicable, earned by the participants for the calendar year. Participants' cash-derived deferrals accrue earnings and appreciation
based on the performance of mutual funds selected by the participant. The value of equity-based awards deferred under the Deferred
Compensation and Deferred Stock Plans are based upon the performance of the Company's common stock.
The Millbrook Deferred Compensation Plan and the Millbrook Supplemental Retirement Plan were assumed by the Company
as part of an acquisition during fiscal 2008. Deferred compensation relates to a compensation arrangement implemented in 1984
by a predecessor of the acquired company in the form of a non-qualified defined benefit plan and a supplemental retirement plan
which permitted former officers and certain management employees, at the time, to defer portions of their compensation to earn
specified maximum benefits upon retirement. The future obligations, which are fixed in accordance with the plans, have been
recorded at a discount rate of 5.7%. These plans do not allow new participants, and there are no active employees subject to these
plans.
In an effort to provide for the benefits associated with the Deferral Plans and the Millbrook Deferred Compensation Plan,
the Company owns whole-life insurance contracts on the plan participants. The cash surrender value of these policies included in
Other Assets in the Consolidated Balance Sheet was $21.5 million and $18.1 million at July 29, 2017 and July 30, 2016, respectively.
The changes in the cash surrender value of these policies are recorded as a gain or loss in Other, net within "Other expense
(income)," in the Company's consolidated statements of income.
At July 29, 2017, total future obligations including interest, assuming commencement of payments at an individual's
retirement age, as defined under the deferred compensation arrangement, were as follows:
Fiscal Year
2018
2019
2020
2021
2022
2023 and thereafter
12. INCOME TAXES
(In thousands)
1,067
$
1,146
940
787
696
3,070
7,706
$
For the fiscal year ended July 29, 2017, income (loss) before income taxes consists of $211.5 million from U.S. operations
and $2.9 million from foreign operations. For the fiscal year ended July 30, 2016, income before income taxes consists of $208.8
million from U.S. operations and $(0.6) million from foreign operations. For the fiscal year ended August 1, 2015, income before
income taxes consists of $227.4 million from U.S. operations and $2.4 million from foreign operations.
64
Total federal and state income tax (benefit) expense consists of the following:
Fiscal year ended July 29, 2017
U.S. Federal
State & Local
Foreign
Fiscal year ended July 30, 2016
U.S. Federal
State & Local
Foreign
Fiscal year ended August 1, 2015
U.S. Federal
State & Local
Foreign
Current
Deferred
Total
(In thousands)
$
$
$
$
$
$
$
$
$
$
$
70,669
14,653
837
86,159
57,157
12,718
101
69,976
60,848
14,119
729
(1,874) $
(82)
65
(1,891) $
$
$
$
11,383
1,310
(213)
12,480
13,209
2,098
32
75,696
$
15,339
$
68,795
14,571
902
84,268
68,540
14,028
(112)
82,456
74,057
16,217
761
91,035
Total income tax expense (benefit) was different than the amounts computed using the United States statutory income tax
rate of 35% applied to income before income taxes as a result of the following:
Computed "expected" tax expense
State and local income tax, net of Federal income tax benefit
Non-deductible expenses
Tax effect of share-based compensation
General business credits
Other, net
Total income tax expense
Fiscal year ended
July 29,
2017
July 30,
2016
August 1,
2015
$
75,048
(In thousands)
72,878
$
$
9,694
1,951
29
(915)
(1,539)
84,268
$
9,412
1,549
86
(135)
(1,334)
82,456
$
$
80,419
10,547
1,551
165
(365)
(1,282)
91,035
The income tax expense (benefit) for the years ended July 29, 2017, July 30, 2016 and August 1, 2015 was allocated as follows:
Income tax expense
Stockholders' equity, difference between compensation expense for tax
purposes and amounts recognized for financial statement purposes
Other comprehensive income
July 29,
2017
July 30,
2016
August 1,
2015
(In thousands)
82,456
$
83
(2,050)
80,489
$
$
$
84,268
1,320
3,222
88,810
$
$
91,035
(2,746)
(293)
87,996
65
The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets and deferred tax
liabilities at July 29, 2017 and July 30, 2016 are presented below:
Deferred tax assets:
Inventories, principally due to additional costs inventoried for tax purposes
Compensation and benefits related
Accounts receivable, principally due to allowances for uncollectible accounts
Accrued expenses
Net operating loss carryforwards
Interest rate swap agreements
Other deferred tax assets
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation
Intangible assets
Interest rate swap agreements
Other
Total deferred tax liabilities
Net deferred tax liabilities
Current deferred income tax assets
Non-current deferred income tax liabilities
July 29,
2017
July 30,
2016
(In thousands)
$
$
$
9,416
35,482
5,639
4,466
940
—
—
55,943
—
55,943
59,414
53,633
876
218
10,682
25,453
4,734
7,519
1,059
2,343
29
51,819
—
51,819
62,030
48,996
—
785
114,141
(58,198) $
40,635
$
(98,833)
(58,198) $
111,811
(59,992)
35,228
(95,220)
(59,992)
$
$
$
$
$
$
In assessing the need to establish a valuation reserve for the recoverability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers
relevant evidence, both positive and negative, to determine the need for a valuation allowance. Information evaluated includes
the Company's financial position and results of operations for the current and preceding years, the availability of deferred tax
liabilities and tax carrybacks, as well as an evaluation of currently available information about future years. As of July 29, 2017,
the Company has sufficient taxable income in the federal carryback period and anticipates sufficient future taxable income over
the periods in which the deferred tax assets are deductible. The Company also has the availability of future reversals of taxable
temporary differences that are expected to generate taxable income in the future. Therefore, the ultimate realization of deferred
tax assets for federal and state tax purposes appears more likely than not at July 29, 2017 and correspondingly no valuation
allowance has been established.
At July 29, 2017, the Company had net operating loss carryforwards of approximately $2.6 million for federal income tax
purposes. The federal carryforwards are subject to an annual limitation of approximately $0.3 million under Internal Revenue
Code Section 382. The carryforwards expire at various times between fiscal years 2018 and 2028.
The Company and its subsidiaries file income tax returns in the United States federal jurisdiction and in various state
jurisdictions. UNFI Canada files income tax returns in Canada and certain of its provinces. U.S. federal income tax examination
years prior to 2014 have either statutorily or administratively been closed with the Internal Revenue Service, and with limited
exception, the fiscal tax years that remain subject to examination by state jurisdictions range from the Company's fiscal 2013 to
fiscal 2016.
The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense.
For the fiscal year ended July 29, 2017, the net tax benefit realized in the consolidated statement of income was de minimis. For
the fiscal year ended July 30, 2016, the net tax benefit realized by the Company in the consolidated statement of income was de
minimis. For the fiscal year ended August 1, 2015, the Company recognized net tax benefits of $0.5 million in its consolidated
statement of income.
66
The retained earnings of the Company's non-U.S. subsidiary that have not been subject to U.S. tax are $18.5 million at
July 29, 2017. The Company considers these unremitted earnings to be indefinitely reinvested; therefore, we have not provided
a deferred tax liability for any residual U.S. tax that may be due upon repatriation of these earnings. Because of the effect of U.S.
foreign tax credits, it is not practicable to estimate the amount of tax that might be payable on these earnings in the event they no
longer are indefinitely reinvested.
13. BUSINESS SEGMENTS
The Company has several operating divisions aggregated under the wholesale segment, which is the Company's only
reportable segment. These operating divisions have similar products and services, customer channels, distribution methods and
historical margins. The wholesale segment is engaged in the national distribution of natural, organic and specialty foods, produce
and related products in the United States and Canada. The Company has additional operating divisions that do not meet the
quantitative thresholds for reportable segments and are therefore aggregated under the caption of "Other." "Other" includes a retail
division, which engages in the sale of natural foods and related products to the general public through retail storefronts on the east
coast of the United States, a manufacturing division, which engages in importing, roasting, packaging and distributing of nuts,
dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections, the Company's branded product lines, and
the Company's brokerage business, which markets various products on behalf of food vendors directly and exclusively to the
Company's customers. "Other" also includes certain corporate operating expenses that are not allocated to operating divisions,
which include, among other expenses, stock based compensation, depreciation, and salaries, retainers, and other related expenses
of certain officers and all directors. As the Company continues to expand its business and serve its customers through our national
platform, these corporate expense amounts have increased, which is the primary driver behind the increasing operating losses
within the "Other" category below. Non-operating expenses that are not allocated to the operating divisions are under the caption
of "Unallocated Expenses." The Company does not record its revenues for financial reporting purposes by product group, and it
is therefore impracticable for the Company to report them accordingly. The Company has long-lived assets of $27.3 million held
in Canada as of July 29, 2017.
Beginning in the first quarter of fiscal 2017, a change in how the Company's chief operating decision maker assesses
performance and allocates resources resulted in a change in how the Company allocates a portion of its corporate operating
expenses, which were previously reported under the caption of "Other," in order to better support segment operations. The following
table sets forth certain financial information for the Company's business segments. Prior year amounts have been reclassified to
conform to current year presentation and include the impact of a change in the allocation of certain corporate operating expenses
between the captions "Other" and "Wholesale." The amount reclassified is not considered to be material and is consistent with
management's assessment of segment performance in fiscal 2017.
67
The following table reflects business segment information for the periods indicated (in thousands):
Wholesale
Other
Eliminations
(In thousands)
Unallocated
(Income)/
Expenses
Consolidated
Fiscal year ended July 29, 2017
Net sales
$
9,210,815
$
232,192
$
(168,536) $
— $
9,274,471
Restructuring and asset impairment
expenses
Operating income (loss)
Interest expense
Interest income
Other, net
Income before income taxes
Depreciation and amortization
Capital expenditures
Goodwill
Total assets
Fiscal year ended July 30, 2016
2,922
247,419
—
—
—
83,063
53,328
353,234
2,724,069
3,942
(21,857)
—
—
—
2,988
2,784
18,025
203,154
—
463
—
—
—
—
—
—
(40,660)
Net sales
8,395,821
238,691
(164,226)
Restructuring and asset impairment
expenses
Operating income (loss)
Interest expense
Interest income
Other, net
Income before income taxes
Depreciation and amortization
Capital expenditures
Goodwill
Total assets
Fiscal year ended August 1, 2015
2,811
228,476
—
—
—
68,278
39,464
348,143
2,672,620
2,741
(3,488)
—
—
—
2,728
1,911
18,025
201,603
—
(879)
—
—
—
—
—
—
(22,068)
Net sales
8,099,818
225,520
(140,360)
Restructuring and asset impairment
expenses
Operating income (loss)
Interest expense
Interest income
Other, net
Income before income taxes
Depreciation and amortization
Capital expenditures
Goodwill
Total assets
803
234,525
—
—
—
64,452
125,217
248,909
—
8,394
—
—
—
(652)
3,917
17,731
2,369,490
189,149
—
(962)
—
—
—
—
—
—
(17,645)
—
—
17,114
(360)
(5,152)
—
—
—
—
—
—
—
16,259
(1,115)
743
—
—
—
—
—
—
—
14,498
(356)
(1,954)
—
—
—
—
6,864
226,025
17,114
(360)
(5,152)
214,423
86,051
56,112
371,259
2,886,563
8,470,286
5,552
224,109
16,259
(1,115)
743
208,222
71,006
41,375
366,168
2,852,155
8,184,978
803
241,957
14,498
(356)
(1,954)
229,769
63,800
129,134
266,640
2,540,994
68
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth certain key interim financial information for the fiscal years ended July 29, 2017 and July 30,
2016:
2017
Net sales
Gross profit
Income before income taxes
Net income
Per common share income
Basic:
Diluted:
Weighted average basic
Shares outstanding
Weighted average diluted
Shares outstanding
Market Price
High
Low
2016
Net sales
Gross profit
Income before income taxes
Net income
Per common share income
Basic:
Diluted:
Weighted average basic
Shares outstanding
Weighted average diluted
Shares outstanding
Market Price
High
Low
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
(In thousands except per share data)
$ 2,278,364
349,016
$ 2,285,518
344,945
$ 2,369,556
366,361
$ 2,341,033
368,599
$ 9,274,471
1,428,921
48,533
29,217
42,028
25,482
60,325
36,587
63,537
38,869
214,423
130,155
$
$
$
$
0.58
0.58
$
$
0.50
0.50
$
$
0.72
0.72
$
$
0.77
0.76
$
$
2.57
2.56
50,475
50,587
50,601
50,617
50,570
50,599
50,755
50,801
50,947
50,775
50.06
38.55
$
$
49.39
40.81
$
$
45.99
39.47
$
$
42.38
34.60
$
$
50.06
34.60
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full Year
(In thousands except per share data)
$ 2,076,649
$ 2,047,712
$ 2,132,104
$ 2,213,821
$ 8,470,286
313,937
50,135
30,131
297,518
37,742
22,683
322,433
62,676
38,271
345,463
1,279,351
57,669
34,681
208,222
125,766
$
$
$
$
0.60
0.60
$
$
0.45
0.45
$
$
0.76
0.76
$
$
0.69
0.69
$
$
2.50
2.50
50,194
50,326
50,350
50,381
50,313
50,313
50,388
50,379
50,516
50,399
55.69
44.05
$
$
52.07
33.85
$
$
43.02
29.75
$
$
52.18
33.16
$
$
55.69
29.75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
69
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K (the
"Evaluation Date"). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective.
Management's Annual Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process
designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of
Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our
internal control over financial reporting as of July 29, 2017. In making this assessment, our management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control-Integrated Framework
(2013 framework). Based on its assessment, our management concluded that, as of July 29, 2017, our internal control over financial
reporting was effective based on those criteria at the reasonable assurance level.
Report of the Independent Registered Public Accounting Firm.
The effectiveness of our internal control over financial reporting as of July 29, 2017 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in its attestation report which is included in "Item 8. Financial Statements
and Supplementary Data" of this Annual Report on Form 10-K.
Changes in Internal Controls Over Financial Reporting
No change in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)or 15d-15(f))
occurred during the fiscal quarter ended July 29, 2017 that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
70
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item will be contained, in part, in our Definitive Proxy Statement on Schedule 14A for our
Annual Meeting of Stockholders to be held on December 13, 2017 (the "2017 Proxy Statement") under the captions "Directors
and Nominees for Director," "Executive Officers of the Company," "Section 16(a) Beneficial Ownership Reporting Compliance,"
and "Committees of the Board of Directors—Audit Committee" and is incorporated herein by this reference.
We have adopted a code of conduct and ethics that applies to our Chief Executive Officer, Chief Financial Officer, and
employees within our finance, operations, and sales departments. Our code of conduct and ethics is publicly available on our
website at www.unfi.com and is available free of charge by writing to United Natural Foods, Inc., 313 Iron Horse Way, Providence,
Rhode Island 02908, Attn: Investor Relations. We intend to make any legally required disclosures regarding amendments to, or
waivers of, the provisions of the code of conduct and ethics on our website at www.unfi.com. Please note that our website address
is provided as an inactive textual reference only.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the 2017 Proxy Statement under the captions "Non-employee
Director Compensation," "Executive Compensation", "Compensation Discussion and Analysis", "Compensation Committee
Interlocks and Insider Participation" and "Report of the Compensation Committee" and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item will be contained, in part, in the 2017 Proxy Statement under the caption "Stock
Ownership of Certain Beneficial Owners and Management", and is incorporated herein by this reference.
The following table provides certain information with respect to equity awards under our equity compensation plans as of
July 29, 2017.
Plan Category
Plans approved by stockholders
Plans not approved by
stockholders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in the second column)
1,598,800 (1) $
69,549 (3)
1,668,349
$
49.52 (1)
— (3)
49.52
1,389,248 (2)
—
1,389,248
(1) Includes 944,997 restricted stock units under the 2012 Plan, 252,290 performance-based restricted stock units under the
2012 Plan and 130,457 stock options under the 2012 Plan, 72,824 restricted stock units under the 2004 Plan, 80,070 stock
options under the 2004 Plan and 118,162 stock options under the 2002 Plan. Restricted stock units and performance stock
units do not have an exercise price because their value is dependent upon continued employment over a period of time
or the achievement of certain performance goals, and are to be settled for shares of common stock. Accordingly, they
have been disregarded for purposes of computing the weighted-average exercise price.
(2) All shares were available for issuance under the 2012 Plan. The 2012 Plan authorizes grants in the form of stock options,
stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units or a combination
thereof but includes limits on the number of awards that may be issued in the form of restricted shares or units. The
number of shares remaining available for future issuances assumes that, with respect to outstanding performance-based
restricted stock units, the vesting criteria will be achieved at the target level.
(3) Consists of phantom stock units outstanding under the United Natural Foods Inc. Deferred Compensation Plan. See note
11 "Retirement Plans" to our Consolidated Financial Statements included in "Item 8. Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K for more information. Phantom stock units do not have an
exercise price because the units may be settled only for shares of common stock on a one-for-one basis at a future date
as outlined in the plan.
71
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be contained in the 2017 Proxy Statement under the caption "Certain Relationships
and Related Transactions" and "Director Independence" and is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained in the 2017 Proxy Statement under the caption "Fees Paid to
KPMG LLP" and is incorporated herein by this reference.
72
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as a part of this Annual Report on Form 10-K.
PART IV.
1. Financial Statements. The Financial Statements listed in the Index to Financial Statements in Item 8 hereof
are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedules. All schedules have been omitted because they are either not required or the
information required is included in our consolidated financial statements or the notes thereto included in Item 8 hereof.
3. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this
Annual Report on Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
73
EXHIBIT INDEX
Exhibit No.
2.1
Description
Asset Purchase Agreement, dated May 10, 2010, by and among UNFI Canada, Inc., a subsidiary of the Registrant,
with SunOpta Inc. and its wholly owned subsidiary, Drive Organics Corp. (incorporated by reference to the
Registrant's Current Report on Form 8-K, filed on May 11, 2010 (File No. 1-15723)). (Pursuant to Item 601(b)(2)
of Regulation S-K, the schedules and exhibits have been omitted from this filing.)
2.2
3.1
3.2
4.1
10.1**
10.2**
10.3**
10.4**
10.5**
10.6**
10.7**
10.8**
10.9**
Amendment No 1., dated June 4, 2010, to the Asset Purchase Agreement dated May 10, 2010, by and among UNFI
Canada, Inc., a subsidiary of the Registrant, with SunOpta Inc. and its wholly owned subsidiary, Drive Organics
Corp. (incorporated by reference to the Registrant's Current Report on Form 8-K, filed on June 10, 2010 (File No.
1-15723)).
Certificate of Incorporation of the Registrant, as amended (restated for SEC filing purposes only) (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 1, 2015 (File No.
1-15723)).
Third Amended and Restated Bylaws of the Registrant (incorporated by reference to the Registrant's Current Report
on Form 8-K, filed on September 12, 2016 (File No. 1-15723)).
Specimen Certificate for shares of Common Stock, $0.01 par value, of the Registrant (incorporated by reference
to the Registrant's Annual Report on Form 10-K for the year ended August 1, 2009 (File No. 1-15723)).
Amended and Restated 1996 Stock Option Plan (incorporated by reference to the Registrant's Definitive Proxy
Statement for the year ended July 31, 2000 (File No. 1-15723)).
Amendment No. 1 to Amended and Restated 1996 Stock Option Plan (incorporated by reference to the Registrant's
Definitive Proxy Statement for the year ended July 31, 2000 (File No. 1-15723)).
Amendment No. 2 to Amended and Restated 1996 Stock Option Plan (incorporated by reference to the Registrant's
Definitive Proxy Statement for the year ended July 31, 2000 (File No. 1-15723)).
2002 Stock Incentive Plan (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year
ended July 31, 2003 (File No. 1-15723)).
United Natural Foods, Inc. Amended and Restated 2004 Equity Incentive Plan (incorporated by reference to the
Registrant's Current Report on Form 8-K, filed on December 21, 2010 (File No. 1-15723)).
Form of Restricted Stock Agreement, pursuant to the Amended and Restated 2004 Equity Incentive Plan
(incorporated by reference to the Registrant's Registration Statement on Form S-8 POS (File No. 333-123462)).
Form of Restricted Unit Award Agreement, pursuant to the Amended and Restated 2004 Equity Incentive Plan
(incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended July 31, 2010 (File
No. 1-15723)).
Form of Non-Statutory Stock Option Award Agreement, pursuant to the Amended and Restated 2004 Equity
Incentive Plan (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended
July 31, 2010 (File No. 1-15723)).
Form of Restricted Stock Unit Award Agreement, pursuant to the Amended and Restated 2004 Equity Incentive
Plan (Employee) (incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended
July 28, 2012 (File No. 1-15723)).
74
Exhibit No.
10.10**
Description
Form of Restricted Stock Unit Award Agreement, pursuant to the Amended and Restated 2004 Equity Incentive
Plan (Director) (incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended July
28, 2012 (File No. 1-15723)).
10.11**
10.12**
10.13**
Form of Non-Statutory Stock Option Award Agreement, pursuant to the 2002 Stock Incentive Plan (Employee)
(incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended July 28, 2012 (File
No. 1-15723)).
Form of Non-Statutory Stock Option Award Agreement, pursuant to the Amended and Restated 2004 Equity
Incentive Plan (Director) (incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year
ended July 28, 2012 (File No. 1-15723)).
Form of Non-Statutory Stock Option Award Agreement, pursuant to the Amended and Restated 2004 Equity
Incentive Plan (Employee) (incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year
ended July 28, 2012 (File No. 1-15723)).
10.14**
United Natural Foods, Inc. 2012 Equity Incentive Plan (incorporated by reference to the Registrant's Current Report
on Form 8-K filed on December 18, 2012 (File No. 1-15723)) (the “2012 Equity Plan”).
10.15**
10.16**
10.17**
10.18**
10.19**
10.20**
10.21**
Form of Terms and Conditions of Grant of Non-Statutory Stock Options to Employee, pursuant to the 2012 Equity
Plan (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 26,
2013 (File No. 1-15723)).
Form of Terms and Conditions of Grant of Non-Statutory Stock Options to Director, pursuant to the 2012 Equity
Plan (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 26,
2013 (File No. 1-15723)).
Form of Terms and Conditions of Grant of Restricted Share Units to Employee, pursuant to the 2012 Equity Plan
(incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 26,
2013) (File No. 1-15723).
Form of Terms and Conditions of Grant of Restricted Share Units to Director, pursuant to the 2012 Equity Plan
(incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 26,
2013) (File No. 1-15723).
Terms and Conditions of Grant of Non-Statutory Stock Options to Employee, pursuant to the 2012 Equity Plan,
effective September 17, 2015, between Michael P. Zechmeister, Senior Vice President and Chief Financial Officer ,
and the Registrant (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2015 (File No. 1-15723)).
Terms and Conditions of Grant of Restricted Share Units to Employee, pursuant to the 2012 Equity Plan, effective
September 17, 2015, between Michael P. Zechmeister, Senior Vice President and Chief Financial Officer, and the
Registrant (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
October 31, 2015 (File No. 1-15723)).
United Natural Foods, Inc. Amended and Restated 2012 Equity Incentive Plan (incorporated by reference to the
Registrant’s Definitive Proxy Statement on Schedule 14A for the Registrant’s Annual Meeting of Stockholders held
on December 16, 2015 (File No. 1-15723)) (the “A&R 2012 Equity Plan”).
75
Exhibit No.
10.22**
Description
Form of Terms and Conditions of Grant of (Pro-Rata Vesting) Restricted Share Units to Employee, pursuant to the
A&R 2012 Equity Plan (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year
ended July 30, 2016 (File No. 1-15723)).
10.23**
10.24**
10.25**
10.26**
10.27**
Form of Terms and Conditions of Grant of (Cliff Vesting) Restricted Share Units to Employee, pursuant to the A&R
2012 Equity Plan (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended
July 30, 2016 (File No. 1-15723)).
Form of Terms and Conditions of Grant of Restricted Share Units to Director, pursuant to the A&R 2012 Equity
Plan (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended July 30, 2016
(File No. 1-15723)).
Fiscal 2016 Senior Management Cash Incentive Plan (incorporated by reference to the Registrant’s Annual Report
on Form 10-K for the year ended August 1, 2015 (File No. 1-15723)).
Fiscal 2017 Senior Management Annual Cash Incentive Plan (incorporated by reference to the Registrant’s Current
Report on Form 8-K filed on November 2, 2016 (File No. 1-15723)).
United Natural Foods, Inc. Deferred Compensation Plan (incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended July 30, 2011 (File No. 1-15723)).
10.28**
United Natural Foods, Inc. Deferred Stock Plan (incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended July 30, 2011(File No. 1-15723)).
10.29**
10.30
10.31
10.32
10.33**
10.34**
10.35**
10.36**
Offer Letter, dated August 7, 2015, between Michael P. Zechmeister, Senior Vice President and Chief Financial
Officer, and the Registrant (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended October 31, 2015 (File No. 1-15723)).
Form Indemnification Agreement for Directors and Officers (incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended May 2, 2009 (File No. 1-15723)).
Form of Modification of Indemnification Agreement (incorporated by reference to the Registrant's Annual Report
on Form 10-K for the year ended August 3, 2013 (File No. 1-15723)).
Revised Form Indemnification Agreement for Directors and Officers (incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended August 3, 2013 (File No. 1-15723)).
Form of Change in Control Agreement between the Registrant and Craig Smith and Christopher Testa (incorporated
by reference to the Registrant's Annual Report on Form 10-K for the year ended July 31, 2010 (File No. 1-15723)).
Form of Severance Agreement between the Registrant and each of Michael Funk, Craig Smith, Christopher Testa,
and Joseph J. Traficanti (incorporated by reference to the Registrant's Current Report on Form 8-K, filed on April 7,
2008 (File No. 1-15723)).
Severance Agreement between the Registrant and Michael P. Zechmeister, Senior Vice President and Chief Financial
Officer, dated April 20, 2016 (incorporated by reference to the Registrant's Annual Report on Form 10-K for the
year ended July 30, 2016 (File No. 1-15723)).
Change in Control Agreement between the Registrant and Michael P. Zechmeister, Senior Vice President and Chief
Financial Officer, dated April 20, 2016 (incorporated by reference to the Registrant's Annual Report on Form 10-
K for the year ended July 30, 2016 (File No. 1-15723)).
76
Exhibit No.
10.37
10.38+
10.39+
10.40+
10.41+
10.42
10.43 **
10.44**
10.45**
10.46**
10.47
10.48
10.49
Description
Real Estate Term Notes between the Registrant and City National Bank, dated April 28, 2000 (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the year ended July 31, 2000 (File No. 1-15723)).
Agreement for the Distribution of Products between the Registrant and Whole Foods Market Distribution, Inc.,
effective September 28, 2015 (incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended October 31, 2015 (File No. 1-15723)).
Third Amended and Restated Loan and Security Agreement dated April 29, 2016, by and among United Natural
Foods, Inc. and United Natural Foods West, Inc. as U.S. Borrowers, UNFI Canada, Inc., as Canadian Borrowers,
the Lenders party thereto, Bank of America, N.A. as Administrative Agent for the Lenders, Bank of America, N.A.
(acting through its Canada branch), as Canadian Agent for the Lenders and the other parties thereto (incorporated
by reference to the Registrant's Current Report on Form 8-K, filed on April 29, 2016 (File No. 1-15723)).
Term Loan Agreement dated August 12, 2014, by and among United Natural Foods, Inc. and Albert's Organics,
Inc., as Borrowers, the Lenders party thereto, Bank of America, N.A. as Administrative Agent for the Lenders, and
the other parties thereto (incorporated by reference to the Registrant's Current Report on Form 8-K, filed on August
20, 2014 (File No. 1-15723)).
First Amendment Agreement dated April 29, 2016, by and among United Natural Foods, Inc. and Albert’s
Organics, Inc. as Borrowers, the Lenders that are party to the Term Loan Agreement dated August 14, 2014, and
Bank of America, N.A., as Administrative Agent, and the other parties thereto (incorporated by reference to the
Registrant's Current Report on Form 8-K, filed on April 29, 2016 (File No. 1-15723)).
Second Amendment Agreement dated September 1, 2016, by and among United Natural Foods, Inc. and Albert’s
Organics, Inc. as Borrowers, the Lenders that are party to the Term Loan Agreement dated August 14, 2014, and
Bank of America, N.A., as Administrative Agent, and the other parties thereto (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the year ended July 30, 2016 (File No. 1-15723)).
Form of Performance-Based Vesting Restricted Share Unit Award Agreement, pursuant to the 2012 Equity Plan
(incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended August 2, 2014 (File
No. 1-15723)).
Form of Two-Year Performance-Based Vesting Restricted Share Unit Award Agreement, pursuant to the A&R 2012
Equity Plan (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended July
30, 2016 (File No. 1-15723)).
Form of One-Year CEO Performance-Based Restricted Share Unit Award Agreement, pursuant to the A&R 2012
Equity Plan (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended July
30, 2016 (File No. 1-15723)).
Form of One-Year Performance-Based Vesting Restricted Share Unit Award Agreement, pursuant to the A&R 2012
Equity Plan (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended July
30, 2016 (File No. 1-15723)).
Lease between ALCO Cityside Federal LLC, and the Registrant, dated October 14, 2008 (incorporated by reference
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 1, 2010 (File No. 1-15723)).
Amendment to Lease between ALCO Cityside Federal LLC, and the Registrant, dated May 12, 2009 (incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 1, 2010 (File No.
1-15723)).
Second Amendment to Lease between ALCO Cityside Federal LLC and the Registrant, dated May 10, 2011
(incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31,
2015 (File No. 1-15723)).
77
Exhibit No.
10.50
Description
Third Amendment to Lease between ALCO Cityside Federal LLC and the Registrant, dated August 7, 2013
(incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31,
2015 (File No. 1-15723)).
10.51
10.52**
10.53**
10.54**
10.55**
10.56**
10.57**
10.58**
Fourth Amendment to Lease between ALCO Cityside Federal LLC and the Registrant, dated October 20, 2014
(incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31,
2015 (File No. 1-15723)).
Employment Agreement, dated as of October 28, 2016, by and among United Natural Foods, Inc., and Steven L.
Spinner (incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on November 2, 2016
(File No. 1-15723)).
Form of Restricted Share Unit Award Agreement pursuant to the A&R 2012 Equity Plan (incorporated by reference
to the Registrant’s Current Report on Form 8-K, filed on November 2, 2016 (File No. 1-15723)).
Form of Restricted Share Unit Award Agreement pursuant to the A&R 2012 Equity Plan (incorporated by reference
to the Registrant’s Current Report on Form 8-K, filed on November 2, 2016 (File No. 1-15723)).
Form of Performance-Based Vesting Restricted Share Unit Award Agreement pursuant to the A&R 2012 Equity
Plan (incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on November 2, 2016 (File
No. 1-15723)).
Form of Performance-Based Vesting Restricted Share Unit Award Agreement pursuant to the A&R 2012 Equity
Plan (incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on November 2, 2016 (File
No. 1-15723)).
Form of Severance Agreement between the Registrant and each of Christopher Testa, Danielle Benedict, Eric Dorne,
Paul Green, Sean Griffin, John Hummel, Joseph Traficanti, and Michael Zechmeister (incorporated by reference
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 28, 2017 (File No. 1-15723)).
Form of Change in Control Agreement between the Registrant and each of Christopher Testa, Danielle Benedict,
Eric Dorne, Paul Green, Sean Griffin, John Hummel, Joseph Traficanti, and Michael Zechmeister (incorporated
by reference to the Registrant’s Quarterly Report on Form 8-K, filed on December 22, 2016 (File No. 1-15723)).
10.59* **
10.60* **
10.61* **
Form of Terms and Conditions of Grant of Restricted Share Units to Employee pursuant to the A&R 2012 Equity
Plan.
Form of Performance-Based Vesting Restricted Share Unit Award Agreement, pursuant to the A&R 2012 Equity
Plan.
Fiscal 2018 Senior Management Annual Cash Incentive Plan.
21*
23.1*
31.1*
31.2*
32.1*
32.2*
101*
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
The following materials from the United Natural Foods, Inc.'s Annual Report on Form 10-K for the fiscal year
ended July 29, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance
Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv)
Consolidated Statement of Stockholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to
Consolidated Financial Statements.
* Filed herewith.
** Denotes a management contract or compensatory plan or arrangement.
+ Confidential treatment has been requested and granted with respect to certain portions of this exhibit pursuant to Rule 24b-2 of
the Securities Exchange Act of 1934, as amended. Omitted portions have been filed separately with the United States Securities
and Exchange Commission.
78
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
UNITED NATURAL FOODS, INC.
/s/ MICHAEL P. ZECHMEISTER
Michael P. Zechmeister
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: September 26, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
/s/ STEVEN L. SPINNER
Steven L. Spinner
/s/ MICHAEL P. ZECHMEISTER
Michael P. Zechmeister
/s/ ERIC F. ARTZ
Eric F. Artz
/s/ ANN TORRE BATES
Ann Torre Bates
/s/ DENISE M. CLARK
Denise M. Clark
/s/ DAPHNE J. DUFRESNE
Daphne J. Dufresne
/s/ MICHAEL S. FUNK
Michael S. Funk
/s/ JAMES P. HEFFERNAN
James P. Heffernan
/s/ PETER A. ROY
Peter A. Roy
Title
President, Chief Executive Officer and Chairman
(Principal Executive Officer)
Date
September 26, 2017
Chief Financial Officer (Principal Financial and
Accounting Officer)
September 26, 2017
September 26, 2017
September 26, 2017
September 26, 2017
September 26, 2017
September 26, 2017
September 26, 2017
September 26, 2017
Director
Director
Director
Director
Director
Director
Director
79
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
NAME
Albert's Organics, Inc.
Blue Marble Brands, LLC
DS & DJ Realty, LLC
Fromages de France, Inc
Gourmet Guru, Inc.
Natural Retail Group, Inc. (d/b/a Earth Origins Market)
Nor-Cal Produce, Inc.
SCTC, LLC
Select Nutrition, LLC
Tony's Fine Foods
Tutto Pronte
UNFI Canada, Inc.
UNFI Transport, LLC
United Natural Foods West, Inc.
United Natural Trading, LLC (d/b/a Woodstock Farms Manufacturing)
JURISDICTION OF
INCORPORATION/ORGANIZATION
California
Delaware
Florida
California
New York
Delaware
California
Florida
Delaware
California
California
Canada
Delaware
California
Delaware
8(cid:19)
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
United Natural Foods, Inc.:
We consent to the incorporation by reference in the registration statement (No. 333-161800 and 333-51167) on Form S-3 of
United Natural Foods, Inc. and (No. 333-208695, 333-161845, 333-161884, 333-56652, 333-106217, 333-123462, and
333-185637) on Form S-8 of United Natural Foods, Inc. of our report dated September 26, 2017, with respect to the
consolidated balance sheets of United Natural Foods, Inc. as of July 29, 2017 and July 30, 2016, and the related consolidated
statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year
period ended July 29, 2017, and the effectiveness of internal control over financial reporting as of July 29, 2017, which report
appears in the July 29, 2017 annual report on Form 10-K of United Natural Foods, Inc.
Providence, Rhode Island
September 26, 2017
8(cid:20)
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven L. Spinner, certify that:
Exhibit 31.1
I have reviewed this annual report on Form 10-K of United Natural Foods, Inc.;
(cid:20)(cid:17)
(cid:21)(cid:17) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(cid:22)(cid:17) Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
(cid:23)(cid:17) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(cid:11)(cid:68)(cid:12) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(cid:11)(cid:69)(cid:12) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(cid:11)(cid:70)(cid:12) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(cid:11)(cid:71)(cid:12) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
(cid:24)(cid:17) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(cid:11)(cid:68)(cid:12) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(cid:11)(cid:69)(cid:12) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Dated: September 26, 2017
/s/ STEVEN L. SPINNER
Steven L. Spinner
Chief Executive Officer
Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
8(cid:21)
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael P. Zechmeister, certify that:
Exhibit 31.2
I have reviewed this annual report on Form 10-K of United Natural Foods, Inc.;
(cid:20)(cid:17)
(cid:21)(cid:17) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
(cid:22)(cid:17) Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
(cid:23)(cid:17) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(cid:11)(cid:68)(cid:12) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(cid:11)(cid:69)(cid:12) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(cid:11)(cid:70)(cid:12) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(cid:11)(cid:71)(cid:12) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial
reporting; and
(cid:24)(cid:17) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(cid:11)(cid:68)(cid:12) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(cid:11)(cid:69)(cid:12) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Dated: September 26, 2017
/s/ MICHAEL P. ZECHMEISTER
Michael P. Zechmeister
Chief Financial Officer
Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
8(cid:22)
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, in his capacity as the Chief Executive Officer of United Natural Foods, Inc., a Delaware corporation
(the "Company"), hereby certifies that the Annual Report of the Company on Form 10-K for the period ended July 29, 2017
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information
contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Exhibit 32.1
/s/ STEVEN L. SPINNER
Steven L. Spinner
Chief Executive Officer
September 26, 2017
Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
8(cid:23)
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
The undersigned, in his capacity as the Chief Financial Officer of United Natural Foods, Inc., a Delaware corporation
(the "Company"), hereby certifies that the Annual Report of the Company on Form 10-K for the period ended July 29, 2017
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information
contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ MICHAEL P. ZECHMEISTER
Michael P. Zechmeister
Chief Financial Officer
September 26, 2017
Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
8(cid:24)
Corporate Information
Executive Officers
Independent Registered
About United Natural Foods
United Natural Foods, Inc. is celebrating its 40-year
Public Accounting Firm
anniversary of delivering healthier food options to
STEVEN L. SPINNER
Chief Executive Officer
and Chairman
DANIELLE M. BENEDICT
Chief Human Resources Officer
ERIC A. DORNE
Chief Administrative and
Information Officer
PAUL S. GREEN
President, Pacific Region
SEAN F. GRIFFIN
Chief Operating Officer
JOHN M. HUMMEL
President, Central Region
CRAIG H. SMITH
Senior Vice President, Fresh Sales
CHRISTOPHER P. TESTA
President, Atlantic Region
JOSEPH J. TRAFICANTI
Senior Vice President, General Counsel,
Chief Compliance Officer and Corporate
Secretary
MIKE ZECHMEISTER
Chief Financial Officer
Corporate Address
UNITED NATURAL FOODS, INC.
313 Iron Horse Way
Providence, RI 02908
Board of Directors
STEVEN L. SPINNER
Chief Executive Officer
and Chairman
KPMG LLP
One Financial Plaza, Suite 2300
Providence, RI 02903
(401) 421-6600
Transfer Agent
CONTINENTAL STOCK
TRANSFER & TRUST COMPANY
1 State Street, 30th Floor
New York, NY 10004
General Counsel
JOSEPH J. TRAFICANTI
United Natural Foods, Inc.
(401) 528-8634
SEC Counsel
BASS, BERRY & SIMS PLC
150 Third Avenue South, Suite 2800
Nashville, TN 37201
(615) 742-6200
Investor Contact
MIKE ZECHMEISTER
Chief Financial Officer
United Natural Foods, Inc.
(401) 528-8634
DAPHNE J. DUFRESNE
Director
ERIC F. ARTZ
Director
MICHAEL S. FUNK
Director
ANN TORRE BATES
Director
JAMES P. HEFFERNAN
Lead Independent Director
DENISE M. CL ARK
Director
PETER A. ROY
Director
more people. The Company carries and distributes
more than 110,000 products to more than 43,000
customer locations throughout the United States and
Canada. United Natural Foods, Inc. serves a wide
variety of sales channels including conventional
supermarket chains, natural product superstores,
independent retailers, eCommerce and food service.
For more information on United Natural Foods, Inc.,
visit the Company’s website at www.unfi.com.
Stockholder Information
FORM 10-K/INVESTOR CONTACT
A copy of United Natural Foods’ Form 10-K, as
filed with the Securities and Exchange Commission
(but excluding exhibits) is available without charge to
stockholders upon written request. Exhibits will be
provided upon written request and payment of
an appropriate processing fee. These requests, and
other investor inquiries, should be directed to Investor
Relations at the Company’s corporate address on the
back cover of this report or via email at
InvestorRelations@unfi.com.
ANNUAL MEETING
The annual meeting of stockholders of United
Natural Foods, Inc. will be held on Wednesday,
December 13, 2017 at 4 pm local time at the
Providence Marriott Downtown, 1 Orms Street,
Providence, RI 02904 and on the internet through
a virtual web conference at:
www.virtualshareholdermeeting.com/unfi2017.
Stockholders of record as of the close of business
on October 16, 2017 will be entitled to vote at
this meeting.
Annual Report 2017
UNFI, 313 Iron Horse Way Providence, RI 02908
www.unfi.com ©2017 United Natural Foods, Inc. UNFI and the UNFI logo are federally registered trademarks of United Natural Foods, Inc.