VILLAGE SUPER MARKET INC 10-Q

Item 1. Financial Statements VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) October 30, 2021 July 31, 2021 ASSETS Current assets Cash and cash equivalents $ 105,087 $ 116,314 Merchandise inventories 46,021 42,633 Patronage dividend receivable 16,501 11,860 Notes receivable from Wakefern 27,635 — Income taxes receivable 5,286 5,111 Other current assets 21,885 20,398 Total current assets 222,415 196,316 Property, equipment and fixtures, net 261,309 256,154 Operating lease assets 282,483 289,461 Notes receivable from Wakefern 28,252 55,295 Investment in Wakefern 33,004 33,004 Goodwill 24,190 24,190 Other assets 36,373 34,584 Total assets $ 888,026 $ 889,004 LIABILITIES and SHAREHOLDERS' EQUITY Current liabilities Operating lease obligations $ 21,667 $ 21,627 Finance lease obligations 547 531 Notes payable to Wakefern 629 632 Current portion of debt 6,976 6,976 Accounts payable to Wakefern 76,959 70,792 Accounts payable and accrued expenses 23,441 25,098 Accrued wages and benefits 23,272 25,036 Income taxes payable 566 1,601 Total current liabilities 154,057 152,293 Long-term debt Operating lease obligations 271,500 278,135 Finance lease obligations 22,127 22,325 Notes payable to Wakefern 2,721 2,791 Long-term debt 65,041 66,827 Total long-term debt 361,389 370,078 Pension liabilities 10,240 10,182 Other liabilities 15,369 14,978 Commitments and contingencies Shareholders' equity Preferred stock, no par value: Authorized 10,000 shares, none issued — — Class A common stock, no par value: Authorized 20,000 shares; issued 10,987 shares at October 30, 2021 and 10,978 shares at July 31, 2021 71,238 70,594 Class B common stock, no par value: Authorized 20,000 shares; issued and outstanding 4,294 shares at October 30, 2021 and July 31, 2021 697 697 Retained earnings 297,249 293,185 Accumulated other comprehensive loss ( 8,185 ) ( 9,064 ) Less treasury stock, Class A, at cost: 730 shares at October 30, 2021 and 726 shares at July 31, 2021 ( 14,028 ) ( 13,939 ) Total shareholders’ equity 346,971 341,473 Total liabilities and shareholders’ equity $ 888,026 $ 889,004 See notes to consolidated financial statements. 3 VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) 13 Weeks Ended October 30, 2021 October 24, 2020 Sales $ 494,211 $ 490,136 Cost of sales 354,031 352,173 Gross profit 140,180 137,963 Operating and administrative expense 121,283 124,363 Depreciation and amortization 8,335 8,714 Operating income 10,562 4,886 Interest expense ( 970 ) ( 987 ) Interest income 976 891 Income before income taxes 10,568 4,790 Income taxes 3,240 1,430 Net income $ 7,328 $ 3,360 Net income per share: Class A common stock: Basic $ 0.56 $ 0.26 Diluted $ 0.50 $ 0.23 Class B common stock: Basic $ 0.37 $ 0.17 Diluted $ 0.37 $ 0.17 See notes to consolidated financial statements. 4 VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) 13 Weeks Ended October 30, 2021 October 24, 2020 Net income $ 7,328 $ 3,360 Other comprehensive income: Unrealized gains on interest rate swaps, net of tax (1) 791 594 Amortization of pension actuarial loss, net of tax (2) 88 101 Comprehensive income $ 8,207 $ 4,055 (1) Amount is net of tax of $ 339 and $ 261 for the 13 weeks ended October 30, 2021 and October 24, 2020, respectively. (2) Amounts are net of tax of $ 38 and $ 46 for the 13 weeks October 30, 2021 and October 24, 2020, respectively. All amounts are reclassified from accumulated other comprehensive loss to operating and administrative expense. See notes to consolidated financial statements. 5 VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) (Unaudited) 13 Weeks Ended October 30, 2021 and October 24, 2020 Class A Common Stock Class B Common Stock Accumulated Other Comprehensive Income (Loss) Treasury Stock Class A Total Shareholders' Equity Shares Issued Amount Shares Issued Amount Retained Earnings Shares Amount Balance, July 31, 2021 10,978 $ 70,594 4,294 $ 697 $ 293,185 $ ( 9,064 ) 726 $ ( 13,939 ) $ 341,473 Net income — — — — 7,328 — — — 7,328 Other comprehensive income, net of tax of $ 377 — — — — — 879 — — 879 Dividends — — — — ( 3,264 ) — — — ( 3,264 ) Treasury stock purchases — — — — — — 4 ( 89 ) ( 89 ) Share-based compensation expense 9 644 — — — — — — 644 Balance, October 30, 2021 10,987 $ 71,238 4,294 $ 697 $ 297,249 $ ( 8,185 ) 730 $ ( 14,028 ) $ 346,971 Balance, July 25, 2020 10,985 $ 68,072 4,294 $ 697 $ 286,241 $ ( 8,751 ) 726 $ ( 13,939 ) $ 332,320 Net income — — — — 3,360 — — — 3,360 Other comprehensive income, net of tax of $ 307 — — — — — 695 — — 695 Dividends — — — — ( 3,257 ) — — — ( 3,257 ) Restricted shares forfeited ( 5 ) ( 12 ) — — — — — — ( 12 ) Share-based compensation expense 8 635 — — — — — — 635 Balance, October 24, 2020 10,988 $ 68,695 4,294 $ 697 $ 286,344 $ ( 8,056 ) 726 $ ( 13,939 ) $ 333,741 See notes to consolidated financial statements. 6 VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) 13 Weeks Ended October 30, 2021 October 24, 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,328 $ 3,360 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,712 9,072 Non-cash share-based compensation 644 623 Deferred taxes ( 600 ) ( 836 ) Provision to value inventories at LIFO 250 — Gain on sale of property, equipment and fixtures ( 166 ) ( 42 ) Changes in assets and liabilities: Merchandise inventories ( 3,638 ) ( 4,761 ) Patronage dividend receivable ( 4,641 ) ( 4,609 ) Accounts payable to Wakefern 5,634 ( 6,127 ) Accounts payable and accrued expenses ( 1,655 ) ( 1,608 ) Accrued wages and benefits ( 1,764 ) ( 309 ) Income taxes receivable / payable ( 1,210 ) 2,260 Other assets and liabilities ( 1,007 ) ( 376 ) Net cash provided by (used in) operating activities 7,887 ( 3,353 ) CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ( 13,343 ) ( 3,301 ) Proceeds from the sale of assets 173 65 Investment in notes receivable from Wakefern ( 592 ) ( 567 ) Net cash used in investing activities ( 13,762 ) ( 3,803 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt — 50,000 Principal payments of long-term debt ( 1,999 ) ( 1,444 ) Payments on revolving line of credit — ( 50,000 ) Debt issuance costs — ( 222 ) Dividends ( 3,264 ) ( 3,257 ) Treasury stock purchases, including shares surrendered for withholding taxes ( 89 ) — Net cash used in financing activities ( 5,352 ) ( 4,923 ) NET DECREASE IN CASH AND CASH EQUIVALENTS ( 11,227 ) ( 12,079 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 116,314 111,681 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 105,087 $ 99,602 SUPPLEMENTAL DISCLOSURES OF CASH PAYMENTS MADE FOR: Interest $ 970 $ 987 Income taxes $ 5,050 $ — NONCASH SUPPLEMENTAL DISCLOSURES: Investment in Wakefern and increase in notes payable to Wakefern $ — $ 670 Capital expenditures included in accounts payable and accrued expenses $ 3,693 $ 4,951 See notes to consolidated financial statements. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (Unaudited) 1. BASIS OF PRESENTATION and ACCOUNTING POLICIES In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring accruals) necessary to present fairly the consolidated financial position as of October 30, 2021 and the consolidated statements of operations, comprehensive income and cash flows for the 13 weeks ended October 30, 2021 and October 24, 2020 of Village Super Market, Inc. (“Village” or the “Company”). The significant accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements in the July 31, 2021 Village Super Market, Inc. Annual Report on Form 10-K, which should be read in conjunction with these financial statements. The results of operations for the periods ended October 30, 2021 are not necessarily indicative of the results to be expected for the full year. Disaggregated Revenues The following table presents the Company's sales by product categories during each of the periods indicated: 13 Weeks Ended October 30, 2021 October 24, 2020 Amount % Amount % Center Store (1) $ 295,974 59.9 % $ 295,940 60.4 % Fresh (2) 179,823 36.4 175,644 35.8 Pharmacy 16,848 3.4 16,432 3.4 Other (3) 1,566 0.3 2,120 0.4 Total Sales $ 494,211 100.0 % $ 490,136 100.0 % (1) Consists primarily of grocery, dairy, frozen, health and beauty care, general merchandise and liquor. (2) Consists primarily of produce, meat, deli, seafood, bakery, prepared foods and floral. (3) Consists primarily of sales related to other income streams, including service fees related to digital sales, gift card and lottery commissions and wholesale sales. 2. MERCHANDISE INVENTORIES At both October 30, 2021 and July 31, 2021, approximately 62 % of merchandise inventories are valued by the LIFO method while the balance is valued by FIFO. If the FIFO method had been used for the entire inventory, inventories would have been $ 15,571 and $ 15,321 higher than reported at October 30, 2021 and July 31, 2021, respectively. 3. NET INCOME PER SHARE The Company has two classes of common stock. Class A common stock is entitled to cash dividends as declared 54 % greater than those paid on Class B common stock. Shares of Class B common stock are convertible on a share-for-share basis for Class A common stock at any time. The Company utilizes the two-class method of computing and presenting net income per share. The two-class method is an earnings allocation formula that calculates basic and diluted net income per share for each class of common stock separately based on dividends declared and participation rights in undistributed earnings. Under the two-class method, Class A common stock is assumed to receive a 54 % greater participation in undistributed earnings than Class B common stock, in accordance with the classes' respective dividend rights. Unvested share-based payment awards that contain nonforfeitable rights to dividends are treated as participating securities and therefore included in computing net income per share using the two-class method. 8 Diluted net income per share for Class A common stock is calculated utilizing the if-converted method, which assumes the conversion of all shares of Class B common stock to Class A common stock on a share-for-share basis, as this method is more dilutive than the two-class method. Diluted net income per share for Class B common stock does not assume conversion of Class B common stock to shares of Class A common stock. The tables below reconcile the numerators and denominators of basic and diluted net income per share for all periods presented. 13 Weeks Ended October 30, 2021 Class A Class B Numerator: Net income allocated, basic $ 5,538 $ 1,566 Conversion of Class B to Class A shares 1,566 — Net income allocated, diluted $ 7,104 $ 1,566 Denominator: Weighted average shares outstanding, basic 9,864 4,294 Conversion of Class B to Class A shares 4,294 — Weighted average shares outstanding, diluted 14,158 4,294 13 Weeks Ended October 24, 2020 Class A Class B Numerator: Net income allocated, basic $ 2,526 $ 716 Conversion of Class B to Class A shares 716 — Net income allocated, diluted $ 3,242 $ 716 Denominator: Weighted average shares outstanding, basic 9,850 4,294 Conversion of Class B to Class A shares 4,294 — Weighted average shares outstanding, diluted 14,144 4,294 Outstanding stock options to purchase Class A shares of 102 and 154 were excluded from the calculation of diluted net income per share at October 30, 2021 and October 24, 2020, respectively, as a result of their anti-dilutive effect. In addition, 388 and 416 non-vested restricted Class A shares, which are considered participating securities, and their allocated net income were excluded from the diluted net income per share calculation at October 30, 2021 and October 24, 2020, respectively, due to their anti-dilutive effect. 9 4. PENSION PLANS Net periodic pension cost for the three defined benefit pension plans sponsored in fiscal 2022 and 2021 includes the following components: 13 Weeks Ended October 30, 2021 October 24, 2020 Service cost $ 47 $ 54 Interest cost on projected benefit obligations 420 422 Expected return on plan assets ( 409 ) ( 483 ) Amortization of net losses 126 147 Net periodic pension cost $ 184 $ 140 As of October 30, 2021, the Company has no t made any contributions to its pension plans in fiscal 2022. The Company expects to terminate one of the plans during fiscal 2022. The Company will fully fund this plan and liquidate all plan assets to purchase annuity contracts from an insurance company for all participants who do not elect a lump sum distribution. As of July 31, 2021, the funded status of this plan was a net liability of $ 3,844 . Contributions to the remaining plans are expected to be immaterial in fiscal 2022. 5. RELATED PARTY INFORMATION A description of the Company’s transactions with Wakefern, its principal supplier, and with other related parties is included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2021. Included in cash and cash equivalents at October 30, 2021 and July 31, 2021 are $ 75,850 and $ 86,670 , respectively, of demand deposits invested at Wakefern at overnight money market rates. There have been no other significant changes in the Company’s relationships or nature of transactions with related parties during the 13 weeks ended October 30, 2021. 6. COMMITMENTS and CONTINGENCIES The Company is involved in other litigation incidental to the normal course of business. Company management is of the opinion that the ultimate resolution of these legal proceedings should not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 10 7. DEBT Long-term debt consists of: October 30, 2021 July 31, 2021 Secured term loan $ 46,199 $ 47,025 Unsecured term loan 20,206 21,104 New Market Tax Credit Financing 5,612 5,674 Total debt, excluding obligations under leases 72,017 73,803 Less current portion 6,976 6,976 Total long-term debt, excluding obligations under leases $ 65,041 $ 66,827 Credit Facility On May 6, 2020, Village entered into a credit agreement (the “Credit Facility”) with Wells Fargo National Bank, National Association (“Wells Fargo”) that supersedes in its entirety the prior credit agreement with Wells Fargo dated November 9, 2017. The principal purpose of the Credit Facility is to finance general corporate and working capital requirements and Village’s acquisition of certain Fairway Markets assets, including five stores and a production distribution center. Among other things, the Credit Facility provides for a maximum loan amount of $ 150,500 as further set forth below: • An unsecured revolving line of credit providing a maximum amount available for borrowing of $ 125,000 . Indebtedness under this agreement bears interest at the applicable LIBOR rate plus 1.10 % and expires on May 6, 2025. • An unsecured term loan with a maximum loan amount of $ 25,500 . On May 12, 2020, Village executed a $ 25,500 term note, repayable in equal monthly installments based on a seven-year amortization schedule through May 4, 2027 and bearing interest at the applicable LIBOR rate plus 1.35 %. Additionally, Village executed an interest rate swap for a notional amount equal to the term loan amount that fixes the base LIBOR rate at .41 % per annum through May 4, 2027, resulting in a fixed effective interest rate of 1.76 % on the term note. • On September 1, 2020, Village converted $ 50,000 of its revolving line of credit to a secured converted term loan. The conversion reduced the maximum amount available for borrowing under the revolving line of credit from $ 125,000 to $ 75,000 . The term loan bears interest at the applicable LIBOR rate plus 1.50 % and is repayable in equal monthly installments based on a fifteen-year amortization schedule beginning on the conversion date. Additionally, Village previously executed a forward interest rate swap, effective on the conversion date, for a notional amount equal to the term loan amount that fixes the base LIBOR rate at .69 % per annum for 15 years, resulting in a fixed effective interest rate of 2.19 % on the converted term loan. The term loan is secured by real properties of Village Super Market, Inc. and its subsidiaries, including the sites of three Village stores. The Credit Facility also provides for up to $ 25,000 of letters of credit ($ 7,336 outstanding at October 30, 2021), which secure obligations for store leases and construction performance guarantees to municipalities. The Credit Facility contains covenants that, among other conditions, require a minimum tangible net worth, a minimum fixed charge coverage ratio and a maximum adjusted debt to EBITDAR ratio. The Company was in compliance with all covenants of the credit agreement at October 30, 2021. New Markets Tax Credit Financing On December 29, 2017, the Company entered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (“Wells Fargo”) under a qualified New Markets Tax Credit (“NMTC”) program related to the construction of a new store in the Bronx, New York. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their Federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments. 11 In connection with the financing, the Company loaned $ 4,835 to VSM Investment Fund, LLC (the "Investment Fund") at an interest rate of 1.403 % per year and with a maturity date of December 31, 2044. Repayments on the loan commence in March 2025. Wells Fargo contributed $ 2,375 to the Investment Fund and, by virtue of such contribution, is entitled to substantially all of the tax benefits derived from the NMTC. The Investment Fund is a wholly owned subsidiary of Wells Fargo. The loan to the Investment Fund is recorded in other assets in the consolidated balance sheets. The Investment Fund then contributed the proceeds to a CDE, which, in turn, loaned combined funds of $ 6,563 , net of debt issuance costs, to Village Super Market of NY, LLC, a wholly-owned subsidiary of the Company, at an interest rate of 1.000 % per year with a maturity date of December 31, 2051. These loans are secured by the leasehold improvements and equipment related to the construction of the Bronx store. Repayment of the loans commences in March 2025. The proceeds of the loans from the CDE were used to partially fund the construction of the Bronx store. The Notes payable related to New Markets Tax Credit, net of debt issuance costs, are recorded in long-term debt in the consolidated balance sheets. The NMTC is subject to 100% recapture for a period of seven years. The Company is required to be in compliance with various regulations and contractual provisions that apply to the New Markets Tax Credit arrangement. Noncompliance could result in Wells Fargo's projected tax benefits not being realized and, therefore, require the Company to indemnify Wells Fargo for any loss or recapture of NMTCs. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement. The transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase Wells Fargo's interest in the Investment Fund. The value attributed to the put/call is de minimis. We believe that Wells Fargo will exercise the put option in December 2024, at the end of the recapture period, that will result in a net benefit to the Company of $ 1,728 . The Company is recognizing the net benefit over the seven-year compliance period in operating and administrative expense. 8. DERIVATIVES AND HEDGING ACTIVITIES The Company is exposed to interest rate risk arising from fluctuations in LIBOR related to the Company’s Credit Facility. The Company manages exposure to this risk and the variability of related cash flows primarily by the use of derivative financial instruments, specifically, interest rate swaps. The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In 2020, the Company executed two interest rate swaps with an aggregate notional value of $ 75,500 to hedge the variable cash flows associated with variable-rate loans under the Company's Credit Facility. The interest rate swaps were executed for risk management and are not held for trading purposes. The objective of the interest rate swaps is to hedge the variability of cash flows resulting from fluctuations in LIBOR. The swaps replaced the applicable LIBOR with fixed interest rates and payments are settled monthly when payments are made on the variable-rate loans. The Company's derivatives qualify and have been designated as cash flow hedges of interest rate risk. The gain or loss on the derivative is recorded in Accumulated other comprehensive loss and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in Accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the variable-rate loans. The Company reclassified $ 88 and $ 66 during the 13 weeks ended October 30, 2021 and October 24, 2020, respectively, from Accumulated other comprehensive loss to Interest expense. The notional value of the interest rate swaps were $ 66,728 as of October 30, 2021. The fair value of interest rate swaps recorded in other assets is $ 2,241 as of October 30, 2021. 12