UNITED NATURAL FOODS INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information. Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to: • the impact and duration of the COVID-19 outbreak; • our dependence on principal customers; • our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends; • our ability to realize anticipated benefits of our acquisitions and dispositions, in particular, our acquisition of SUPERVALU INC. (“Supervalu”); • our reliance on the continued growth in sales of our higher margin natural and organic foods and non-food products in comparison to lower margin conventional grocery products; • increased competition in our industry as a result of increased distribution of natural, organic and specialty products, and direct distribution of those products by large retailers and online distributors; • the possibility that restructuring, asset impairment, and other charges and costs we may incur in connection with the sale or closure of our retail operations will exceed our current expectations; • increased competition as a result of continuing consolidation of retailers in the natural product industry and the growth of supernatural chains; • the addition or loss of significant customers or material changes to our relationships with these customers; • union-organizing activities that could cause labor relations difficulties and increased costs; • our ability to operate, and rely on third-parties to operate, reliable and secure technology systems; • the relatively low margins of our business; • moderated supplier promotional activity, including decreased forward buying opportunities; • our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company and to achieve efficiencies and cost savings from these efforts; • the potential for additional asset impairment charges; • our sensitivity to inflationary and deflationary pressures; • the potential for disruptions in our supply chain or our distribution capabilities by circumstances beyond our control, including a health epidemic; • the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise; • volatility in fuel costs; • volatility in foreign exchange rates; and • our ability to identify and successfully complete asset or business acquisitions. You should carefully review the risks described under “Part I. Item 1A Risk Factors” of our Annual Report on Form 10-K for the year ended August 1, 2020 as well as any other cautionary language in this Quarterly Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows. 30 Table of C ontents EXECUTIVE OVERVIEW Business Overview As a leading distributor of natural, organic, specialty, produce, and conventional grocery and non-food products, and provider of retailer services in the United States and Canada, we believe we are uniquely positioned to provide the broadest array of products and services to customers throughout North America. We offer more than 275,000 products consisting of national, regional and private label brands grouped into six product categories: grocery and general merchandise; produce; perishables and frozen foods; nutritional supplements and sports nutrition; bulk and food service products; and personal care items. Through our October 2018 acquisition of Supervalu, we are transforming into North America’s premier wholesaler with 55 distribution centers and warehouses representing approximately 29 million square feet of warehouse space. Our business is classified into two reportable segments: Wholesale and Retail; and also includes a manufacturing division and a branded product line division. Growth Drivers A key component of our business and growth strategy has been to acquire wholesalers differentiated by product offerings, service offerings and market area. In fiscal 2019, the acquisition of Supervalu accelerated our “build out the store” strategy, diversified our customer base, enabled cross-selling opportunities, expanded our market reach and scale, enhanced our technology, capacity and systems, and is expected to continue to deliver significant synergies and accelerate potential growth. We believe the Supervalu acquisition allowed us to better serve our wholesale customers’ needs and compete in the current environment by providing additional warehouse and transportation capacity, and enabled us to provide a broader array of products to our customers. As one of the largest wholesale grocery distributors in North America, and in light of the continued expansion of our distribution network and “build out the store” strategy, we believe we are well positioned to leverage our infrastructure in the current economic and social environment to continue to serve our customers and the communities in which we operate, and are actively pursuing new customers. We believe our significant scale and footprint will generate long-term shareholder value by positioning us to continue to grow sales of natural, organic, specialty, produce and conventional grocery and non-food products, including our Private Brands. We also believe we have an opportunity to sell additional services to our customers to help them more efficiently operate their business while leveraging the infrastructure investments we’ve made. Services often sold to our customers include coupon processing, consumer marketing, retail technology and payments and consumer services. We have realized and expect to continue to realize significant cost and revenue synergies from the acquisition of Supervalu by leveraging the scale and resources of the combined company, cross-selling to our customers, integrating our merchandising offerings into existing warehouses, optimizing our network footprint to lower our cost structure and eliminating redundant administrative costs. We expect the benefits of our significant scale, product and service offerings and nationwide footprint to attract new customers, such as Key Food Stores co-operative, Inc. (“Key Food”). On October 6, 2020, we announced UNFI had been selected as the primary grocery wholesaler by Key Food, a Co-Operative of 315 member-owned and corporate grocery stores located in the Northeast and Florida. UNFI’s supply agreement with Key Food has a term of 10 years with expected sales over that time period of approximately $10 billion. We have been the primary distributor to Whole Foods Market for more than 20 years. We 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. We currently operate 72 Retail grocery stores acquired in the Supervalu acquisition. We intend to maximize the value of these assets while, over time, thoughtfully and economically divesting these stores. However, we no longer expect to divest Retail within one year and, as a result, beginning in the fourth quarter of fiscal 2020, prior period information in our Condensed Consolidated Financial Statements included in this Quarterly Report has been revised to reclassify Retail from discontinued operations to continuing operations from information previously presented in its Quarterly Reports. This change in financial statement presentation resulted in the inclusion of Retail’s results of operations, financial position, cash flows and related disclosures within continuing operations. Prior periods presented in the Condensed Consolidated Financial Statements have been conformed to the current period presentation, resulting in Retail being presented in continuing operations for all periods. 31 Table of C ontents Other Factors Affecting our Business Our results are impacted by macroeconomic and demographic trends, and changes in the food distribution market structure. Over the past several decades, total food expenditures on a constant dollar basis within the United States has continued to increase in total, and the focus in recent decades on natural, organic and specialty foods has benefited the Company; however, consumer spending in the food-away-from-home industry had increased steadily as a percentage of total food expenditures. This trend paused during the 2008 recession, and then continued to increase. In fiscal 2020, the COVID-19 pandemic caused a significant increase in food-at-home expenditures as a percentage of total food expenditures. We expect that food-at-home expenditures as a percentage of total food expenditures will remain higher than recent years until consumer behaviors return to pre-pandemic patterns. We believe that changes in work being done outside of the traditional office setting will contribute to more food being consumed at home. Many large corporations have announced long-term or permanent changes that allow their workforce to work from home. In addition, the elevated levels of unemployment and underemployment due to the pandemic are expected to persist for some time and even after the near-term impact of COVID-19 has passed. In general, economic recessions usually result in higher food-at home expenditures, which would be expected to continue to benefit our customers and result in higher sales. The COVID-19 pandemic also drove significant growth in e-commerce utilization by grocery consumers, and we expect that trend to continue. We expect to benefit from this trend through the growth of our traditional eCommerce customers, our EasyOptions, a business-verified buyer’s site for retailers, which directly services non-traditional customers, such as bakeries or yoga studios, and through customers adopting our turnkey e-commerce platform. We are also impacted by changes in food distribution trends affecting our Wholesale customers, such as direct store deliveries and other methods of distribution. Our Wholesale customers manage their businesses independently and operate in a competitive environment. We seek to obtain security interests and other credit support in connection with the financial accommodations we extend these customers; however, we may incur additional credit or inventory charges related to our customers, as we expect the competitive environment to continue to lead to financial stress on some customers. The magnitude of these risks increases as the size of our Wholesale customers increases. COVID-19 Impact Beginning in the third quarter of fiscal 2020, we took actions to respond to the pandemic, support our associates’ safety and well-being and maximize our logistics network to serve the communities we supply. In fiscal 2020, and continuing into fiscal 2021, we experienced a year-over-year increase in sales and gross profit due to higher Wholesale customer purchases driven by higher food-at-home expenditures, as a result of the economic and social responses to the COVID-19 pandemic. We have been able to leverage fixed operating and administrative expenses, which were partially offset by incremental costs related to COVID-19, including additional costs for safety protocols and procedures at our distribution centers and retail stores. Our business model allows us to leverage sales increases, and provided growth in operating earnings margin, as we leveraged the fixed and variable costs of our supply chain network and administrative expenses. Despite incremental labor and operating costs, additional volume experienced by our distribution network and retail stores drove higher leverage on fixed facility costs, semi-variable costs and general and administrative expenses. We expect to continue to benefit from sales and margin growth as compared to historical periods while food-at-home expenditures as a percentage of total food expenditures remains higher than recent historical precedent, and higher on a year-over-year basis. Trends in increased sales and gross margin benefits have lessened since the initial onset of the COVID-19 pandemic. In addition, as discussed below in the section “Impact of Inflation or Deflation” and above in the section “Other Factors Affecting our Business,” we could also be affected by changes in product mix and product category inflation changes, especially if customers change their purchasing habits as a result of sustained downturns in the U.S. and Canadian economies. The ultimate impact on our results is dependent upon the severity and duration of the COVID-19 pandemic and any economic downturn, food-at-home purchasing levels and actions taken by governmental authorities and other third parties in response to the pandemic, each of which is uncertain and rapidly changing. Any of these disruptions could adversely impact our business and results of operations. Considerable uncertainty remains regarding the future impact of the COVID-19 pandemic on our business, which is discussed further in Part I. Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended August 1, 2020. 32 Table of C ontents Distribution Center Network Network Optimization and Construction Within the Pacific Northwest, we completed the consolidation of the volume of five distribution centers and their related supporting off-site storage facilities into two distribution centers during fiscal 2020. We expect to achieve synergies and cost savings through eliminating inefficiencies, including incurring lower operating, shrink and off-site storage expenses. We also expect that the optimization of the Pacific Northwest distribution network will help deliver meaningful synergies contemplated in the Supervalu acquisition. We expanded the Ridgefield, WA distribution center to enhance customer product offerings, create more efficient inventory management, streamline operations and incorporate greater technology to deliver a better customer experience. The Ridgefield distribution center will deploy a warehouse automation solution that supports our slow-moving SKU portfolio. The operational start-up of the Centralia, WA distribution center began in the fourth quarter of fiscal 2019 and was completed in the fourth quarter of fiscal 2020. We ceased operations in our Tacoma, WA, Auburn, WA, Auburn, CA and Milwaukie, OR (Portland) distribution centers and have transitioned to supplying customers served by these locations to our Centralia, WA, Ridgefield, WA and Gilroy, CA distribution centers. In order to maintain service levels of these higher volume pacific northwest distribution centers, we incurred incremental operating costs in the first quarter of fiscal 2021 that we believe temporarily reduced the realization of synergy benefits from this network consolidation. To support our continued growth on the East coast, we entered into a new lease agreement that has not yet commenced for an approximately 1.3 million square foot facility that is currently under construction. We expect to recognize a lease liability for this distribution center when we begin making our tenant improvements in fiscal 2021. We expect to begin distribution out of this facility in the second half of calendar 2021. To support our continued growth within southern California, we began operating a newly leased facility with approximately 1.2 million square feet upon completion of its construction in the fourth quarter of fiscal 2020. This facility provides significant capacity to service our customers in this market. On February 24, 2020, we executed a purchase option to acquire the real property of this distribution center, agreeing to pay approximately $151.9 million for the facility, subject to finalization. We expect to engage a real estate partner to monetize the real property of this location, including through a sale-leaseback transaction that would ultimately reduce rents paid for this property compared to current levels, which we expect would occur on or before June 2022. We continue to evaluate our distribution center network to optimize its performance and expect to incur incremental expenses related to any future network realignment and are working to both minimize these costs and obtain new business to further improve the efficiency of our transforming distribution network. Distribution Center Sales Subsequent to the end of the first quarter of fiscal 2021, we received $35.1 million from the collection of a short-term note receivable, representing the remaining proceeds related to the fiscal 2020 sale of a distribution center. As we consolidate our distribution network, we may sell additional owned facilities or exit leased facilities. Operating Efficiency As part of our “one company” approach, we are in the process of converting to a single national warehouse management and procurement system to integrate our existing facilities, including acquired Supervalu facilities, onto one nationalized platform across the organization. We continue to focus on the automation of our new or expanded distribution centers that are at different stages of construction and implementation. These steps and others are intended to promote operational efficiencies and improve operating expenses as a percentage of net sales. 33 Table of C ontents Divestiture of Retail Operations We have announced our intention to thoughtfully and economically divest our retail businesses acquired as part of the Supervalu acquisition in an efficient and economic manner in order to focus on our core wholesale distribution business. During the fourth quarter of fiscal 2020, we determined we no longer met the held for sale criterion for a probable sale to be completed within 12 months for the Cub Foods business and the majority of the remaining Shoppers locations, collectively referred to as the Retail segment. The Retail segment excludes retail banners and stores previously sold or closed. We reviewed our reportable segments and determined we were required to report Retail as a separate segment. As a result, we revised our Condensed Consolidated Financial Statements to reclassify Retail from discontinued operations to continuing operations. This change in financial statement presentation resulted in the inclusion of Retail’s results of operations, financial position, cash flows and related disclosures within continuing operations. Prior periods presented in the Condensed Consolidated Financial Statements have been conformed to the current period presentation, resulting in Retail being presented in continuing operations for all periods. The revision of our Condensed Consolidated Statements of Operations to present Retail within continuing operations resulted in an increase in our consolidated net sales, gross profit and operating expenses, and an increase in consolidated gross profit as a percentage of net sales, which was partially offset by an increase in operating expenses as a percent of net sales. In order to present Retail’s results of operations within continuing operations, Wholesale sales to Retail have been eliminated upon consolidation. The Wholesale segment’s net sales to discontinued operations retail stores are eliminated within the Wholesale segment. Our strategy remains unchanged and we expect to divest all of our Retail operation in the future. As part of that process we plan to maximize value as part of the divestiture process, including limiting liabilities and stranded costs associated with these divestitures. We expect to obtain ongoing supply relationships with the purchasers of some of these retail operations, but some reductions in supply volume may result from the divestiture of certain of these retail operations. Actions associated with retail divestitures and adjustments to our core cost structure for our wholesale food distribution business are expected to result in headcount reductions and other costs and charges. These costs and charges, which may be material, include multiemployer plan charges, severance costs, store closure charges, and related costs. A withdrawal from a multiemployer pension plan may result in an obligation to make material payments over an extended period of time. The extent of these costs and charges will be determined based on outcomes achieved under the divestiture process. At this time, however, we are unable to make an estimate with reasonable certainty of the amount or type of costs and charges expected to be incurred in connection with the foregoing actions. Our discontinued operations as of the end of the first quarter of fiscal 2021 include five Shoppers stores, and for historical periods, results of discontinued operations include the Hornbacher’s and Shop ‘n Save and Shop ‘n Save East retail banners, which were divested in fiscal 2019, and Shoppers stores that were sold or closed in fiscal 2020. In addition, cash flows from discontinued operations include real estate sales related to those historical retail operations. These retail assets have been classified as held for sale as of the Supervalu acquisition date, and the results of operations, financial position and cash flows directly attributable to these operations are reported within discontinued operations in our Condensed Consolidated Financial Statements for all periods presented. As of the Supervalu acquisition date, retail assets and liabilities were recorded at their estimated fair value less costs to sell, and subsequent to that date, we reviewed the fair value, less cost to sell, of these disposal groups. We may incur additional costs and charges in the future related to the divestiture of Retail if these locations are subsequently sold, indicators exist that the business may be impaired, or if we incur employee-related charges or wind-down costs. Professional Services Agreements In connection with the sale of Save-A-Lot on December 5, 2016, Supervalu entered into a services agreement (the “Services Agreement”) with Moran Foods, LLC, the entity that operates the Save-A-Lot business. Pursuant to the Services Agreement, we provide certain technical, human resources, finance and other operational services to Save-A-Lot for a term of five years, on the terms and subject to the conditions set forth therein. The initial annual base charge under the Services Agreement is $30 million, subject to adjustments. During fiscal 2021, we expect to earn less than $20 million under this agreement. We expect that services provided under the Services Agreement will wind down at or near the end of the initial term. At that time, we would lose the revenue associated with this agreement, and if we are not able to eliminate fixed or variable costs associated with servicing this agreement concurrent with the decline in revenue, we would incur a decrease in operating profit. 34 Table of C ontents Impact of Inflation or Deflation We monitor product cost inflation and deflation and evaluate whether to absorb cost increases or decreases, or pass on pricing changes to our customers. We experienced a mix of inflation and deflation across product categories during the first quarter of fiscal 2021. In the aggregate across all of our legacy businesses and taking into account the mix of products, management estimates our businesses experienced cost inflation of less than one percent in the first quarter of fiscal 2021. Cost inflation and deflation estimates are based on individual like items sold during the periods being compared. Changes in merchandising, customer buying habits and competitive pressures create inherent difficulties in measuring the impact of inflation and deflation on Net sales and Gross profit. Absent any changes in units sold or the mix of units sold, deflation has the effect of decreasing sales. Under the LIFO method of inventory accounting, product cost increases are recognized within Cost of sales based on expected year end inventory quantities and costs, which has the effect of decreasing Gross profit and the carrying value of inventory. Business Performance Assessment and Composition of Condensed Consolidated Statements of Operations Net sales Our net sales consist primarily of sales of natural, organic, specialty, produce and conventional grocery and non-food products, and support services to retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue. Net sales also include amounts charged by us to customers for shipping and handling and fuel surcharges. Cost of sales and Gross profit The principal components of our cost of sales include the amounts paid to suppliers for product sold, plus the cost of transportation necessary to bring the product to, or move product between, our various distribution centers, partially 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. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses. Operating expenses Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation, and amortization expense. These expenses relate to warehousing and delivery expenses including purchasing, receiving, selecting and outbound transportation expenses. Restructuring, acquisition and integration expenses Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, change-in-control related charges, facility closure asset impairment charges and costs, stock-based compensation acceleration charges, and acquisition and integration expenses. Integration expenses include incremental expenses related to combining facilities required to optimize our distribution network as a result of acquisitions. Interest expense, net Interest expense, net includes primarily interest expense on long-term debt, net of capitalized interest, interest expense on finance and direct finance lease obligations, and amortization of financing costs and discounts. Net periodic benefit income, excluding service cost Net periodic benefit income, excluding service cost reflects the recognition of expected returns on benefit plan assets in excess of interest costs. 35 Table of C ontents Adjusted EBITDA Our Condensed Consolidated Financial Statements are prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). In addition to the GAAP results, we consider certain non-GAAP financial measures to assess the performance of our business and understand underlying operating performance and core business trends, which we use to facilitate operating performance comparisons of our business on a consistent basis over time. Adjusted EBITDA is provided as a supplement to our results of operations and related analysis, and should not be considered superior to, a substitute for or an alternative to any financial measure of performance prepared and presented in accordance with GAAP. Adjusted EBITDA excludes certain items because they are non-cash items or are items that do not reflect management’s assessment of on-going business performance. We believe Adjusted EBITDA is useful to investors and financial institutions because it provides additional understanding of factors and trends affecting our business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and as the primary compensation performance measure under certain compensation programs and plans. We believe Adjusted EBITDA is reflective of factors that affect our underlying operating performance and facilitate operating performance comparisons of our business on a consistent basis over time. Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Certain adjustments to our GAAP financial measures reflected below exclude items that may be considered recurring in nature and may be reflected in our financial results for the foreseeable future. These measurements and items may be different from non-GAAP financial measures used by other companies. Adjusted EBITDA should be reviewed in conjunction with our results reported in accordance with GAAP in this Quarterly Report. There are significant limitations to using Adjusted EBITDA as a financial measure including, but not limited to, it not reflecting the cost of cash expenditures for capital assets or certain other contractual commitments, finance lease obligation and debt service expenses, income taxes, and any impacts from changes in working capital. We define Adjusted EBITDA as a consolidated measure inclusive of continuing and discontinued operations results, which we reconcile by adding Net (loss) income from continuing operations, plus Total other expense, net and (Benefit) provision for income taxes, plus Depreciation and amortization calculated in accordance with GAAP, plus non-GAAP adjustments for Share-based compensation, Restructuring, acquisition and integration related expenses, Goodwill and asset impairment charges, Loss (gain) on sale of assets, certain legal charges and gains, certain other non-cash charges or items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in manner consistent with the results of continuing operations, outlined above. 36 Table of C ontents Assessment of Our Business Results The following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods indicated. We have revised the following table for the presentation of Retail within continuing operations discussed in Note 1—Significant Accounting Policies in Part II, Item 8 of the Annual Report on Form 10-K. 13-Week Period Ended (in thousands) October 31, 2020 November 2, 2019 Change Net sales $ 6,672,607 $ 6,296,612 $ 375,995 Cost of sales 5,706,108 5,389,401 316,707 Gross profit 966,499 907,211 59,288 Operating expenses 900,962 883,688 17,274 Goodwill and asset impairment charges — 425,405 (425,405) Restructuring, acquisition and integration related expenses 16,428 14,672 1,756 Gain on sale of assets (230) (90) (140) Operating income (loss) 49,339 (416,464) 465,803 Other expense (income): Net periodic benefit income, excluding service cost (17,033) (11,384) (5,649) Interest expense, net 69,133 49,709 19,424 Other, net (798) (400) (398) Total other expense, net 51,302 37,925 13,377 Loss from continuing operations before income taxes (1,963) (454,389) 452,426 Benefit for income taxes (991) (66,955) 65,964 Net loss from continuing operations (972) (387,434) 386,462 Income from discontinued operations, net of tax 1,296 4,026 (2,730) Net income (loss) including noncontrolling interests 324 (383,408) 383,732 Less net income attributable to noncontrolling interests (1,367) (519) (848) Net loss attributable to United Natural Foods, Inc. $ (1,043) $ (383,927) $ 382,884 Adjusted EBITDA $ 158,957 $ 121,694 $ 37,263 37 Table of C ontents The following table reconciles Adjusted EBITDA to Net loss from continuing operations and to Income from discontinued operations, net of tax. 13-Week Period Ended (in thousands) October 31, 2020 November 2, 2019 Net loss from continuing operations $ (972) $ (387,434) Adjustments to continuing operations net loss: Less net income attributable to noncontrolling interests (1,367) (519) Total other expense, net 51,302 37,925 Benefit for income taxes (991) (66,955) Depreciation and amortization 77,189 75,141 Share-based compensation 14,149 3,925 Goodwill and asset impairment charges (1) — 425,405 Restructuring, acquisition and integration related expenses (2) 16,428 14,672 Gain on sale of assets (230) (90) Note receivable charges (3) — 12,516 Legal reserve charge (4) — 1,850 Other retail expense (5) 1,609 — Adjusted EBITDA of continuing operations 157,117 116,436 Adjusted EBITDA of discontinued operations (6) 1,840 5,258 Adjusted EBITDA $ 158,957 $ 121,694 Income from discontinued operations, net of tax $ 1,296 $ 4,026 Adjustments to discontinued operations net income: Total other expense, net — (61) Provision for income taxes 526 1,293 Restructuring, store closure and other charges, net 18 — Adjusted EBITDA of discontinued operations $ 1,840 $ 5,258 (1) Fiscal 2020 reflects a goodwill impairment charge attributable to a reorganization of our reporting units and a sustained decrease in market capitalization and enterprise value of the Company, resulting in a decline in the estimated fair value of the U.S. Wholesale reporting unit. In addition, this charge includes a goodwill finalization charge attributable to the Supervalu acquisition and an asset impairment charge. (2) Fiscal 2021 primarily reflects costs associated with advisory and transformational activities as we position our business for further value-creation post-acquisition. Fiscal 2020 primarily reflects closed property reserve charges and administrative and operational restructuring costs. Refer to Note 4—Restructuring, Acquisition and Integration Related Expenses in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. (3) Reflects reserves and charges for notes receivable issued by the Supervalu business prior to its acquisition to finance the purchase of stores by its customers. (4) Reflects a charge to settle a legal proceeding. (5) Reflects expenses associated with event-specific damages to certain retail stores. (6) We believe the inclusion of discontinued operations results within Adjusted EBITDA provides investors a meaningful measure of total performance. 38 Table of C ontents RESULTS OF OPERATIONS Net Sales Our net sales by customer channel was as follows (in millions): Net Sales for the 13-Week Period Ended Increase (Decrease) Customer Channel (1) October 31, 2020 % of Net Sales November 2, 2019 % of Net Sales $ % Chains $ 3,020 45 % $ 2,875 46 % $ 145 5 % Independent retailers 1,672 25 % 1,557 25 % 115 7 % Supernatural 1,214 18 % 1,111 18 % 103 9 % Retail 595 9 % 515 8 % 80 16 % Other 581 9 % 590 9 % (9) (2) % Eliminations (409) (6) % (351) (6) % (58) 17 % Total net sales $ 6,673 100 % $ 6,297 100 % $ 376 6 % (1) Refer to Note 3—Revenue Recognition in Part 1, Item 1 of this Quarterly Report on Form 10-Q for our channel definitions and for information regarding the recast of sales by customer channel to align with the current period presentation. Our net sales for the first quarter of fiscal 2021 increased approximately 6.0% from the first quarter of fiscal 2020. The increase in net sales was primarily driven by strong customer demand in response to the COVID-19 pandemic a s well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic. Chains net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers’ response to the COVID-19 pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic. Independent retailers net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers response to the COVID-19 pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic. Supernatural net sales increased primarily due to increased sales related to the COVID-19 pandemic, growth in existing and new product categories, and increased sales to existing and new stores, partially offset by the impact of categories that have been adversely impacted by COVID, such as bulk and ingredients used for prepared foods . Net sales within our supernatural channel do not include net sales to Amazon.com, Inc. in either the current period or the prior period, as these net sales are reported in our other ch annel. Retail’s net sales increased primarily due to a 15.7% increase in identical store sales from higher average basket sizes related to the COVID-19 pandemic. Retail identical store sales are defined as net product sales from stores operating since the beginning of the prior-year period, including store expansions and excluding fuel costs and announced planned store dispositions. Identical store sales is a common metric used to understand the sales performance of retail stores as it removes the impact of new and closed stores. The increase in Retail sales included the benefit of an approximately 200 percent increase in eCommerce sales at Cub Foods. Other net sales decreased primarily due to a 41% (or $48 million) decline in sales to food service customers resulting from the lower purchases due to the COVID-19 pandemic, which were partially offset by higher e-commerce sales. We also expect sales to our food service customers in the second quarter of fiscal 2021 to decrease as compared to fiscal 2020 as a result of the COVID-19 pandemic. 39 Table of C ontents Cost of Sales and Gross Profit Our gross profit increased $59.3 million, or 6.5%, to $966.5 million for the first quarter of fiscal 2021, from $907.2 million for the first quarter of fiscal 2020. Our gross profit as a percentage of net sales increased to 14.48% for the first quarter of fiscal 2021 compared to 14.41% for the first quarter of fiscal 2020. The increase in gross profit dollar growth was primarily driven by higher Wholesale and Retail sales volume. The 7 basis point increase in gross profit rate was driven by an increase from Retail, which contributed approximately 17 basis points to the growth in the consolidated gross margin rate as a result of lower promotional spending and the Retail segment representing a greater percentage of total net sales. Wholesale and the remaining business reduced the growth in the consolidated gross margin rate by approximately 10 basis points driven by lower levels of supplier-related income. Operating Expenses Operating expenses increased $17.3 million, or 2.0%, to $901.0 million, or 13.50% of net sales, for the first quarter of fiscal 2021 compared to $883.7 million, or 14.03% of net sales, for the first quarter of fiscal 2020. Operating expenses in the first quarter of fiscal 2020 included $18.0 million of charges and expenses, primarily related to customer notes receivable and surplus property depreciation. The remaining decrease in operating expenses as a percent of net sales was driven by lower administrative costs and leveraging fixed operating expenses over higher net sales, which was partially offset by higher operating costs related to starting up three distribution centers. Total operating expenses also included share-based compensation expense of $14.1 million and $3.9 million for the first quarter of fiscal 2021 and 2020, respectively. Goodwill and Asset Impairment Charges A goodwill impairment adjustment of $425.4 million was recorded in the first quarter of fiscal 2020, which was attributable to changes in the preliminary fair value of net assets, which affected the initial goodwill resulting from the Supervalu acquisition. As discussed further in Note 5—Goodwill and Intangible Assets in Part I, Item 1 of this Quarterly Report, we recorded a goodwill impairment charge of $421.5 million in the first quarter of fiscal 2020. The goodwill impairment charge is reflected in Goodwill and asset impairment charges in the Condensed Consolidated Statements of Operations. The goodwill impairment charge reflects the impairment of all of the U.S. Wholesale’s reporting unit goodwill. Restructuring, Acquisition and Integration Related Expenses Restructuring, acquisition and integration related expenses were $16.4 million for the first quarter of fiscal 2021, which included $14.8 million of restructuring and integration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value-creation post-acquisition and $1.7 million of closed property charges and costs. Expenses incurred were $14.7 million for the first quarter of fiscal 2020, which included $9.3 million of integration related costs, including a charge for an off-site storage contract, $3.5 million of closed property reserve charges and costs, and $1.8 million of restructuring costs. We expect to incur additional costs associated with advisory and integration activities, and distribution center integration costs throughout fiscal 2021 related to our operational restructuring to achieve cost synergies and supply chain efficiencies within continuing operations. Operating Income (Loss) Reflecting the factors described above, operating income increased $465.8 million to $49.3 million for the first quarter of fiscal 2021, from an operating loss of $416.5 million for the first quarter of fiscal 2020. The operating income increase was primarily driven by the fiscal 2020 goodwill impairment charge and an increase in gross profit in excess of operating expenses discussed above. 40 Table of C ontents Total Other Expense, Net 13-Week Period Ended (in thousands) October 31, 2020 November 2, 2019 Increase (Decrease) Net periodic benefit income, excluding service cost $ (17,033) $ (11,384) $ (5,649) Interest expense on long-term debt, net of capitalized interest 37,196 43,539 (6,343) Interest expense on finance lease obligations 4,868 2,243 2,625 Amortization of financing costs and discounts 3,999 3,943 56 Loss on debt extinguishment 23,750 73 23,677 Interest income (680) (89) (591) Interest expense, net 69,133 49,709 19,424 Other, net (798) (400) (398) Total other expense, net $ 51,302 $ 37,925 $ 13,377 The increase in net periodic benefit income, excluding service costs reflects the recognition of lower interest costs due to a lower discount rate utilized in the measurement of pension liabilities. The decrease in interest expense on long-term debt, net of capitalized interest was driven by lower amounts of outstanding debt and lower average interest rates. The increase in loss on debt extinguishment costs primarily reflects the acceleration of unamortized debt issuance costs and original issue discounts related to mandatory and voluntary prepayments on the Term Loan Facility made in the first quarter of fiscal 2021. Refer to Note 8—Long-Term Debt for further information. The increase in interest expense on finance leases primarily reflects interest related to a distribution center for which we executed a purchase option with a delayed purchase provision. Benefit for Income Taxes The effective income tax rate for continuing operations was a benefit of 50.5% compared to a benefit of 14.7% on pre-tax income for the first quarters of fiscal 2021 and 2020, respectively. The change in the effective income tax rate for the first quarter of fiscal 2021 was primarily driven by a discrete tax benefit in the first quarter of fiscal 2021 related to employee stock awards compared to a discrete tax expense for this item in the first quarter of fiscal 2020. In addition, the first quarter of fiscal 2020 was impacted by a goodwill impairment charge. Income from Discontinued Operations, Net of Tax The results of operations for the first quarter of fiscal 2021 reflect net sales of $24.8 million for which we recognized $8.0 million of gross profit and Income from discontinued operations, net of tax of $1.3 million. Net sales and gross profit of discontinued operations decreased $70.8 million and $22.5 million, respectively, for the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020 primarily due to a lower operating store base due to closures and sales that occurred in fiscal 2020, which was partially offset by an increase in identical store sales results driven by the impacts of the COVID-19 pandemic. Refer to the section above Executive Overview—Divestiture of Retail Operations and to Note 16—Discontinued Operations in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional financial information regarding these discontinued operations. Net Loss Attributable to United Natural Foods, Inc. Reflecting the factors described in more detail above, we incurred a net loss attributable to United Natural Foods, Inc. of $1.0 million, or $0.02 per diluted common share, for the first quarter of fiscal 2021, compared to $383.9 million, or $7.21 per diluted common share, for the first quarter of fiscal 2020. 41 Table of C ontents As described in more detail in Note 10—Share-Based Awards in Part I, Item I of this Quarterly Report on Form 10-Q, in the first quarter of fiscal 2021, we granted restricted stock units and performance share units representing a right to receive an aggregate of 2.6 million shares of common stock under our 2020 Equity Incentive Plan. As described in more detail within Note 13—Share-Based Awards in Part II, Item 8 of the Annual Report on Form 10-K, in fiscal 2020 we issued approximately 1.3 million shares of common stock to fund the settlement of time-vesting replacement award obligations from the Supervalu acquisition, which has had a dilutive effect on our weighted average earnings per share as compared to last year. Segment Results of Operations In evaluating financial performance in each business segment, management primarily uses Net sales and Adjusted EBITDA of its business segments as discussed and reconciled within Note 14—Business Segments within Part I, Item 1 of this Quarterly Report on Form 10-Q and the above table within the Executive Overview section. The following tables set forth Net sales and Adjusted EBITDA by segment for the periods indicated. 13-Week Period Ended (in thousands) October 31, 2020 November 2, 2019 Increase (Decrease) Net sales: Wholesale $ 6,431,283 $ 6,067,307 $ 363,976 Retail 594,911 515,226 79,685 Other 55,612 65,079 (9,467) Eliminations (409,199) (351,000) (58,199) Total Net sales $ 6,672,607 $ 6,296,612 $ 375,995 Continuing operations Adjusted EBITDA: Wholesale $ 122,961 $ 106,312 $ 16,649 Retail 24,282 10,562 13,720 Other 4,150 (1,597) 5,747 Eliminations 5,724 1,159 4,565 Total continuing operations Adjusted EBITDA $ 157,117 $ 116,436 $ 40,681 Net Sales Wholesale net sales increased primarily due to growth in sales to existing customers in the Chains, Independent retailers and Supernatural channels. Sales growth was primarily driven by strong customer demand in response to the COVID-19 pandemic as well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic. Retail net sales increased primarily due to a 15.7% increase in identical store sales from higher average basket sizes related to the COVID-19 pandemic. The increase in eliminations net sales was driven by higher Wholesale sales to Retail to support Retail’s continued sales growth. Adjusted EBITDA Wholesale’s Adjusted EBITDA increased 16% for the first quarter of fiscal 2021 from the first quarter of fiscal 2020. The increase was driven by leveraged sales growth, which was partially offset by higher operating costs related to starting up three distribution centers. Gross profit dollar growth for the first quarter of fiscal 2021 was $28.3 million with a gross profit rate decrease of 26 basis points driven by lower supplier income, which outpaced operating expense increases, excluding depreciation and amortization and stock-based compensation, of $11.6 million. Operating expense rate decreased 42 basis points primarily driven by leveraging fixed and variable costs, which was partially offset by higher operating costs related to starting up three distribution centers. Wholesale depreciation expense was approximately flat to last year. 42 Table of C ontents Retail’s Adjusted EBITDA increased 130% for the first quarter of fiscal 2021 from the first quarter of fiscal 2020. The increase was driven by leveraged sales growth from increases in food-at-home purchases that drove sales at our stores. Gross profit dollar growth for the first quarter of fiscal 2021 was $27.1 million with gross profit rate increasing 99 basis points from lower promotional activity, which outpaced operating expense growth of $12.5 million with an operating expense rate decrease of 117 basis points driven by fixed and variable cost leveraging. Retail depreciation and amortization expense increased $5.9 million primarily related to assets previously classified as held for sale that were moved to continuing operations in the fourth quarter of fiscal 2020 for which we are required to begin recording depreciation and amortization expense. LIQUIDITY AND CAPITAL RESOURCES Highlights • Total liquidity as of October 31, 2020 was $1.06 billion and consisted of the following: ◦ Unused credit under our ABL Credit Facility was $1,008.3 million, which decreased $226.5 million from $1,234.8 million as of August 1, 2020, primarily due to increased cash utilized to fund seasonal working capital increases and prepayments on the Term Loan Facility. ◦ Cash and cash equivalents was $49.0 million, which increased $2.1 million from $47.0 million as of August 1, 2020. • Our total debt increased $135.8 million to $2,633.4 million as of October 31, 2020 from $2,497.6 million as of August 1, 2020, primarily related to additional borrowings under the ABL Credit Facility to fund seasonal inventory build in excess of accounts payable and increases in accounts receivable. • In the first quarter of fiscal 2021, we issued $500.0 million of unsecured 6.750% Senior Notes due October 15, 2028 (the “Senior Notes”) and utilized the net proceeds and borrowings under the ABL Credit Facility to make a $500.0 million prepayment on our Term Loan Facility. In addition, during the quarter, the Company made $108.0 million of additional repayments under the Term Loan Facility, including $72.0 million related to cash flow generated in fiscal 2020, as required under the Term Loan Agreement and a voluntary prepayment of $36.0 million with incremental borrowings under the ABL Credit Facility. Other debt maturities are expected to be $9.6 million in fiscal 2021. We are also obligated to make payments to reduce finance lease obligations. Proceeds from the sale of any properties mortgaged and encumbered under our Term Loan Facility are required to make additional Term Loan Facility payments or be reinvested in the business. • Subsequent to the end of the first quarter of fiscal 2021, we made a voluntary prepayment of $150.0 million on the Term Loan Facility funded with incremental borrowings under the ABL Credit Facility that will reduce our interest costs. This prepayment will count towards satisfying any requirement to make a mandatory prepayment with Excess Cash Flow (as defined in the Term Loan Agreement) generated during fiscal 2021, if any, which would be due in fiscal 2022. In the second quarter of fiscal 2021, we expect to record an accelerated charge related to deferred financing fees and original issue discounts based on the proportionate amount of this prepayment to the Term Loan Facility balance. • We expect to be able to fund near-term debt maturities through fiscal 2023 with internally generated funds, proceeds from asset sales or borrowings under the ABL Credit Facility. • Working capital increased $231.4 million to $1,566.3 million as of October 31, 2020 from $1,334.8 million as of August 1, 2020, primarily due to seasonal inventory build in excess of accounts payable increases, an increase in accounts payable, a reduction of the current portion of long-term debt resulting from the Term Loan Facility Excess Cash Flow prepayment described above, and an increase in accounts receivable driven by credit extended to higher sales growth customers. Sources and Uses of Cash We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds and sale of surplus and/or non-core assets. A significant reduction in operating earnings or the incurrence of operating losses could have a negative impact on our operating cash flow, which may limit our ability to pay down our outstanding indebtedness as planned. Our credit facilities are secured by a substantial portion of our total assets. Our primary sources of liquidity are from internally generated funds and from borrowing capacity under our credit facilities. Our short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to satisfy debt obligations and fund capital expenditures as opportunities arise. Our continued access to short-term and long-term financing through credit markets depends on numerous factors, including the condition of the credit markets and our results of operations, cash flows, financial position and credit ratings. 43 Table of C ontents Primary uses of cash include debt service, capital expenditures, working capital maintenance and income tax payments. We typically finance working capital needs with cash provided from operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories. We currently do not pay a dividend on our common stock, and have no current plans to do so. In addition, we are limited in the aggregate amount of dividends that we may pay under the terms of our Term Loan Facility, ABL Credit Facility, and Senior Notes. Subject to certain limitations contained in our debt agreements and as market conditions warrant, we may from time to time refinance indebtedness that we have incurred, including through the incurrence or repayment of loans under existing or new credit facilities or the issuance or repayment of debt securities. Long-Term Debt During the first quarter of fiscal 2021, we borrowed a net $230.0 million under the ABL Credit Facility, repaid $608.0 million on the Term Loan Facility related to mandatory prepayments and voluntary prepayments, and issued $500.0 million of Senior Notes. Refer to Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for a detailed discussion of the provisions of our credit facilities and certain long-term debt agreements and additional information. Our Term Loan Agreement does not include any financial maintenance covenants. Our ABL Loan Agreement subjects us to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) of at least 1.0 to 1.0 calculated at the end of each of our fiscal quarters on a rolling four quarter basis, if the adjusted aggregate availability (as defined in the ABL Loan Agreement) is ever less than the greater of (i) $235.0 million and (ii) 10% of the aggregate borrowing base. We have not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement, including through the filing date of this Quarterly Report. The ABL Loan Agreement and the Term Loan Agreement contain certain customary operational and informational covenants. If we fail to comply with any of these covenants, we may be in default under the applicable loan agreement, and all amounts due thereunder may become immediately due and payable. The Senior Notes contain covenants customary for debt securities of this type that limit the ability of the Company and its restricted subsidiaries to, among other things, incur debt, declare or pay dividends or make other distributions to stockholders of the Company, transfer or sell assets, create liens on our assets, engage in transactions with affiliates, and merge, consolidate or sell all or substantially all of the assets of the Company and its subsidiaries on a consolidated basis. We were in compliance with all such covenants for all periods presented. Derivatives and Hedging Activity We enter into interest rate swap contracts from time to time to mitigate our exposure to changes in market interest rates as part of our overall strategy to manage our debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates. Interest rate swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. As of October 31, 2020, we had an aggregate of $1.49 billion of notional debt hedged through pay fixed and receive floating interest rate swap contracts to effectively fix the LIBOR component of our floating LIBOR based debt at fixed rates ranging from 1.795% to 2.959%, with maturities between April 2022 and October 2025. The fair value of these interest rate derivatives represents a total net liability of $111 million and are subject to volatility based on changes in market interest rates. See Note 7—Derivatives in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. In the first quarter of fiscal 2021, we paid $11.3 million to terminate $954 million of notional value interest rate swaps, $504 million of which were effective interest swaps and $450 million of which were forward starting. The termination payment reflects the amount of accumulated other comprehensive loss that will continue to be amortized into interest expense over the original interest rate swap contract terms as long as the hedged interest rate transactions are still probable of occurring. From time to time, we enter into fixed price fuel supply agreements and foreign currency hedges. As of October 31, 2020, we had fixed price fuel contracts outstanding and foreign currency forward agreements outstanding. Gains and losses and the outstanding net asset from these arrangements are insignificant. 44 Table of C ontents Capital Expenditures Our capital expenditures for the first quarter of fiscal 2021 were $41.4 million, compared to $45.0 million for the first of fiscal 2020, a decrease of $3.6 million. In the first quarter of fiscal 2021, our capital expenditures principally included information technology and equipment expenditures. Fiscal 2021 capital spending is expected to be in the range of $250 million to $300 million and include projects that optimize and expand our distribution network and our technology platform. Longer term, capital spending is expected to be at or below 1.0% of net sales. We expect to finance requirements with cash generated from operations and borrowings under our ABL Credit Facility. Future investments may be financed through long-term debt or borrowings under our ABL Credit Facility. Cash Flow Information The following summarizes our Condensed Consolidated Statements of Cash Flows: 13-Week Period Ended (in thousands) October 31, 2020 November 2, 2019 Change Net cash used in operating activities of continuing operations $ (55,182) $ (134,381) $ 79,199 Net cash used in investing activities of continuing operations (36,992) (44,745) 7,753 Net cash provided by financing activities of continuing operations 95,265 156,096 (60,831) Net cash (used in) provided by discontinued operations (998) 20,376 (21,374) Effect of exchange rate on cash 56 (10) 66 Net increase (decrease) in cash and cash equivalents 2,149 (2,664) 4,813 Cash and cash equivalents, at beginning of period 47,070 45,267 1,803 Cash and cash equivalents at end of period $ 49,219 $ 42,603 $ 6,616 The decrease in net cash used in operating activities of continuing operations in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 was primarily due lower cash utilized to build inventories, and higher earnings before taxes, depreciation and amortization, and impairments. The decrease in net cash used in investing activities of continuing operations in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 was primarily due to lower cash payments for capital expenditures and higher cash proceeds for the sale of property and equipment. The decrease in net cash provided by financing activities of continuing operations in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 was primarily due to higher payments of long-term debt attributable to the mandatory and voluntary prepayments on the Term Loan Facility, partially offset by new borrowings from the Senior Notes. The decrease in cash flows from discontinued operations in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 was primarily due to lower investing activities cash flow from the sale of property. Other On October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200.0 million of our outstanding common stock. The repurchase program is scheduled to expire upon our repurchase of shares of our common stock having an aggregate purchase price of $200.0 million. We did not purchase any shares of our common stock in the first quarters of fiscal 2020 and 2021 pursuant to the share repurchase program. As of October 31, 2020, we have $175.8 million remaining authorized under the share repurchase program. We do not expect to purchase shares under the share repurchase program during fiscal 2021. Additionally, our ABL Credit Facility, Term Loan Facility, and Senior Notes contain terms that limit our ability to repurchase of common stock above certain levels unless certain conditions and financial tests are met. 45 Table of C ontents Pension and Other Postretirement Benefit Obligations In fiscal 2021, no pension contributions are required to be made under either the SUPERVALU Inc. Retirement Plan or the Unified Grocers, Inc. Cash Balance Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”). We anticipate fiscal 2021 non-qualified pension contributions and other postretirement benefit plan contributions to be approximately $5.3 million. We fund our defined benefit pension plans based on the minimum contribution amount required under ERISA, the Pension Protection Act of 2006 and other applicable laws, as determined by us, including our external actuarial consultant, and additional contributions made at our discretion. We may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable. We assess the relative attractiveness of the use of cash to accelerate contributions considering such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required Pension Benefit Guaranty Corporation variable rate premiums, or in order to achieve exemption from participant notices of underfunding. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS Off-Balance Sheet Arrangements Guarantees and Contingent Liabilities We have outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of October 31, 2020. We are contingently liable for leases that have been assigned to various parties in connection with facility closings and dispositions. We are also a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise. Refer to Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements under the caption Guarantees and Contingent Liabilities in Part I, Item I of this Quarterly Report on Form 10-Q for further information regarding our outstanding guarantees and contingent liabilities. Multiemployer Benefit Plans We contribute to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Trustees are appointed in equal number by employers and unions that are parties to the collective bargaining agreement. Based on the assessment of the most recent information available from the multiemployer plans, we believe that most of the plans to which we contribute are underfunded. We are only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability to us. Our contributions can fluctuate from year to year due to store closures, employer participation within the respective plans and reductions in headcount. Our contributions to these plans could increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of our collective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, we could trigger a partial or complete withdrawal that would require us to record a withdrawal liability. Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized continuing and discontinued operations expense, of $52 million in fiscal 2020. In fiscal 2021, we expect to contribute approximately $45 million related to continuing and discontinued operations contributions to the multiemployer pension plans, subject to the outcome of collective bargaining and capital market conditions. Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP. Any triggered withdrawal obligation could result in a material charge and payment obligations that would be required to be made over an extended period of time. We also make contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating expenses could increase in the future. 46 Table of C ontents Refer to Note 14—Benefit Plans in Part II, Item 8 of the Annual Report on Form 10-K for the fiscal year ended August 1, 2020 for additional information regarding the plans in which we participate. Contractual Obligations Except as otherwise disclosed in Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes in the Company’s contractual obligations since the end of fiscal 2020. Refer to Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended August 1, 2020 for additional information regarding the Company’s contractual obligations. Critical Accounting Policies and Estimates There were no material changes to our critical accounting policies during the period covered by this Quarterly Report on Form 10-Q. Refer to the description of critical accounting policies included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended August 1, 2020. 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, demand for our products, supply shortages and general economic conditions.