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UNITED NATURAL FOODS INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Annual Report on Form 10-K. Forward-Looking Statements This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 27A of the Securities Act, 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 25 -------------------------------------------------------------------------------- Table of Contents such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plans," "seek," "should," "will," and "would," or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other "forward-looking" information. Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to: • our dependence on principal customers; • our sensitivity to general economic conditions, including the current economic environment; • changes in disposable income levels and consumer spending trends; • our ability to reduce our expenses in amounts sufficient to offset our increased focus on sales to conventional supermarkets and the resulting lower gross margins on these sales; • our reliance on the continued growth in sales of natural and organic foods and non-food products in comparison to conventional products; • our ability to timely and successfully deploy our new warehouse management system throughout our distribution centers and our transportation management system across our Company; • increased fuel costs; • our sensitivity to inflationary and deflationary pressures; • the relatively low margins and economic sensitivity of our business; • the potential for disruptions in our supply chain by circumstances beyond our control; • union-organizing activities that could cause labor relations difficulties; • the ability to identify and successfully complete acquisitions of other natural, organic and specialty food and non-food products distributors; • management's allocation of capital and the timing of capital expenditures; and • our ability to successfully deploy our operational initiatives to achieve synergies from the acquisition of Tony's This list of risks and uncertainties, however, is only a summary of some of the most important factors and is not intended to be exhaustive. You should carefully review the risks described under "Part I. Item 1A. Risk Factors," as well as any other cautionary language in this Annual Report on Form 10-K, as the occurrence of any of these events could have an adverse effect on our business, results of operation and financial condition. Overview We believe we are a leading national distributor based on sales of natural, organic and specialty foods and non-food products in the United States and Canada and that our thirty-two distribution centers, representing approximately 7.2 million square feet of warehouse space, provide us with the largest capacity of any North American-based distributor in the natural, organic and specialty products industry. We offer more than 80,000 high-quality natural, organic and specialty foods and non-food products, consisting of national brands, regional brands, private label and master distribution products, in six product categories: grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements and sports nutrition, bulk and food service products and personal care items. We serve more than 40,000 customer locations primarily located across the United States and Canada, the majority of which can be classified into one of the following categories: independently owned natural products retailers, which include buying clubs; supernatural chains, which consist solely of Whole Foods Market; conventional supermarkets, which include mass market chains; and other which includes foodservice and international customers outside of Canada. Our operations are comprised of three principal operating divisions. These operating divisions are: • our wholesale division, which includes our broadline natural, organic and specialty distribution business in the United States, UNFI Canada, which is our natural, organic and specialty distribution business in Canada, Albert's, which is a leading distributor of organically grown produce and non-produce perishable items within the United States, and Select Nutrition, which distributes vitamins, minerals and supplements; • our retail division, consisting of Earth Origins, which operates our twelve natural products retail stores within the United States; and • our manufacturing division, consisting of Woodstock Farms Manufacturing, which specializes in the international importation, roasting, packaging and distribution of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items, and confections, and our Blue Marble Brands product lines. In recent years, our sales to existing and new customers have increased through the continued growth of the natural and organic products industry in general, increased market share as a result of our high quality service and a broader product selection, 26 -------------------------------------------------------------------------------- Table of Contents including specialty products, and the acquisition of, or merger with, natural and specialty products distributors, the expansion of our existing distribution centers; the construction of new distribution centers; the introduction of new products and the development of our own line of natural and organic branded products. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. We have been the primary distributor to Whole Foods Market for more than sixteen years. We now 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 25, 2020. Whole Foods Market accounted for approximately 36% of our net sales for the years ended August 2, 2014 and August 3, 2013. In June 2010, we acquired the SDG assets of SunOpta through our wholly-owned subsidiary, UNFI Canada for cash consideration of $65.8 million. With the acquisition, we became the largest distributor of natural, organic and specialty foods, including kosher foods, in Canada. This was a strategic acquisition as UNFI Canada provides us with an immediate platform for growth in the Canadian market. During fiscal 2012, we utilized our UNFI Canada platform to further expand in the Canadian market, including through our purchase of substantially all of the assets of a specialty food distribution business in the Ontario market in November 2011. During the first quarter of fiscal 2013, we also utilized this platform for our August 2012 acquisition of substantially all of the assets of a dairy distribution business in the central Canada market. In July 2014, we completed the acquisition of all of the outstanding capital stock of Tony's, through our wholly-owned subsidiary, UNFI West for consideration of approximately $206.2 million. With the completion of the transaction, Tony's is now a wholly-owned subsidiary and continues to operate as Tony's Fine Foods. Founded in 1934 by the Ingoglia family, Tony's is headquartered in West Sacramento, California and is a leading distributor of perishable food products, including a wide array of specialty protein, cheese, deli, food service and bakery goods to retail and specialty grocers, food service customers and other distribution companies principally located throughout the Western United States, as well as Alaska and Hawaii. We believe that the acquisition of Tony's accomplished certain of our strategic objectives as Tony's provides us with an immediate platform for expanding both our high-growth perishable product offerings and our distribution footprint in the Western Region of the United States. The ability to distribute specialty food items (including ethnic, kosher and gourmet) has accelerated our expansion into a number of high-growth business markets and allowed us to establish immediate market share in the fast-growing specialty foods market. We have now integrated specialty food products and natural and organic specialty non-food products into most of our broadline distribution centers across the United States and Canada. Due to our expansion into specialty foods, we were awarded new business with a number of conventional supermarkets over the past three fiscal years that we previously had not done business with because we did not distribute specialty products. We believe that distribution of these products enhances our conventional supermarket business channel and that our complementary product lines continue to present opportunities for cross-selling. In June 2011, we entered into an asset purchase agreement with L&R Distributors pursuant to which we agreed to sell our conventional non-foods and general merchandise lines of business, including certain inventory related to these product lines. This divestiture was completed in the first quarter of fiscal 2012, and has allowed us to concentrate on our core business of the distribution of natural, organic, and specialty foods and non-food products. To maintain our market leadership and improve our operating efficiencies, we seek to continually: • expand our marketing and customer service programs across regions; • expand our national purchasing opportunities; • offer a broader product selection than our competitors; • offer operational excellence with high service levels and a higher percentage of on-time deliveries than our competitors; • centralize general and administrative functions to reduce expenses; • consolidate systems applications among physical locations and regions; • increase our investment in people, facilities, equipment and technology; • integrate administrative and accounting functions; and • reduce the geographic overlap between regions. Our continued growth has allowed us to expand our existing facilities and open new facilities in an effort to achieve increasing operating efficiencies. We have made significant capital expenditures and incurred considerable expenses in connection with the opening and expansion of our facilities. At August 2, 2014, our distribution capacity totaled approximately 7.2 million square feet. In September 2010, we began shipping products from our distribution center in Lancaster, Texas, which serves customers throughout 27 -------------------------------------------------------------------------------- Table of Contents the Southwestern United States, including Texas, Oklahoma, New Mexico, Arkansas and Louisiana. In October 2010, in connection with the acquisition of the Rocky Mountain distribution business of Whole Foods Distribution, we took over the operations, including the assumption of an operating lease at a distribution center in Aurora, Colorado, augmenting our existing Aurora, Colorado distribution center, which was at capacity, in serving customers in Colorado, Utah, Arizona and New Mexico. In May 2013, we began operations at our new 540,000 square foot distribution center in Aurora, Colorado, replacing our existing two broadline distribution centers, an Albert's distribution center and an off-site storage location and also began operations at our new Albert's distribution center in Logan, New Jersey. We have progressed in our multi-year expansion plan, which included new distribution centers in Sturtevant, Wisconsin and Montgomery, New York from which we began operations in June 2014 and September 2014, respectively, construction of a new distribution center in Prescott, Wisconsin, from which we expect to begin operations in the fourth quarter of fiscal 2015, and an additional facility in Gilroy, California. Our net sales consist primarily of sales of natural, organic and specialty products to retailers, adjusted for customer volume discounts, returns and allowances. Net sales also consist of amounts charged by us to customers for shipping and handling and fuel surcharges. The principal components of our cost of sales include the amounts paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to our distribution centers, offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers' products. Cost of sales also includes amounts incurred by us at our manufacturing subsidiary, Woodstock Farms Manufacturing, for inbound transportation costs and for depreciation for manufacturing equipment. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses. We include purchasing, receiving, selecting and outbound transportation expenses within our operating expenses rather than in our cost of sales. Total operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation and amortization expense. Other expenses (income) include interest on our outstanding indebtedness, including the financing obligation related to our Aurora, Colorado distribution center, interest income and miscellaneous income and expenses. Fiscal 2014 other income includes a gain of $4.8 million associated with a non-cash transfer pursuant to which we acquired the land on which we constructed our Sturtevant, Wisconsin facility. Fiscal year 2013 other expense also includes a pre-tax charge of $4.9 million in the first quarter related to an agreement to settle a multi-state unclaimed property audit. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and require our most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies are: (i) determining our allowance for doubtful accounts, (ii) determining our reserves for the self-insured portions of our workers' compensation and automobile liabilities, (iii) valuing assets and liabilities acquired in business combinations; and (iv) valuing goodwill and intangible assets. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies. Allowance for doubtful accounts We analyze customer creditworthiness, accounts receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of our allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are conducted using either cash-on-delivery terms, or the account is closely monitored so that as agreed upon payments are received, orders are released; a failure to pay results in held or cancelled orders. Our accounts receivable balance was $449.9 million and $339.6 million, net of the allowance for doubtful accounts of $7.6 million and $9.3 million, as of August 2, 2014 and August 3, 2013, respectively. Our notes receivable balances were $5.9 million and $3.3 million, net of the allowance for doubtful accounts of $0.7 million and $0.8 million, as of August 2, 2014 and August 3, 2013, respectively. Insurance reserves We are primarily self-insured for workers' compensation, and general and automobile liability insurance. It is our policy to record the self-insured portions of our workers' compensation and automobile liabilities based upon actuarial methods of estimating the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported. Any projection of losses concerning workers' compensation and automobile liability is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting litigation trends, benefit level changes and claim settlement patterns. If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our consolidated financial statements. Accruals for workers' compensation and automobile liabilities totaled $18.9 million and $18.5 million as of August 2, 2014 and August 3, 2013, respectively. 28 -------------------------------------------------------------------------------- Table of Contents Business Combinations We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as the estimated life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. In determining the estimated fair value for intangible assets, we typically utilize the income approach, which discounts the projected future net cash flow using an appropriate discount rate that reflects the risks associated with such projected future cash flow. Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Intangible assets determined to have an indefinite useful life are reassessed periodically based on the expected use of the asset by us, legal or contractual provisions that may affect the useful life or renewal or extension of the asset's contractual life without substantial cost, and the effects of demand, competition and other economic factors. Valuation of goodwill and intangible assets We are required to test goodwill for impairment at least annually, and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have elected to perform our annual tests for indications of goodwill impairment during the fourth quarter of each fiscal year. We test for goodwill impairment at the reporting unit level, which are at or one level below the operating segment level. Beginning in fiscal 2012, the first step in our annual assessment of each of our reporting units is a qualitative assessment as allowed under Accounting Standards Update ("ASU") No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011-08"), unless we believe it is more likely than not that a reporting unit's fair value is less than the carrying value. In order to qualify for an exclusion from the quantitative two-step goodwill test, the thresholds used by the Company for this determination are that a reporting unit must (1) have passed its previous two-step test with a margin of calculated fair value versus carrying value of at least 20%, (2) have had no significant changes to its working capital structure, and (3) have current year income which is at least 85% of prior year amounts. For reporting units which do not meet this exclusion, the quantitative goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. Each reporting unit regularly prepares discrete operating forecasts and uses these forecasts as the basis for the assumptions used in the discounted cash flow analysis. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated potential impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. As of August 2, 2014, our annual assessment of each of our reporting units indicated that no impairment of goodwill existed. Approximately 93.5% of our goodwill is within our wholesale reporting unit. Total goodwill as of August 2, 2014 and August 3, 2013 was $274.5 million and $201.9 million, respectively. Intangible assets with indefinite lives are tested for impairment at least annually and between annual tests if events occur or circumstances change that would indicate that the value of the asset may be impaired. In accordance with ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU No. 2012-02"), we analyzed several qualitative factors to determine whether it was more likely than not that an indefinite-lived intangible asset was impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. Impairment would be measured as the difference between the fair value of the asset and its carrying value. During fiscal 2012, our long-term plans related to the trade name of a portion of our Canadian wholesale distribution business evolved, and we decided to phase out this trade name. As a result, we began amortizing this trade name over a period of ten years. As a result, our branded product line asset group and the tradename acquired in the Tony's acquisition are the only remaining indefinite lived intangible assets. As of our most recent annual impairment review, the branded product line asset group was determined not to be impaired. The qualitative factors used in the impairment assessment for the branded product line asset group included a review of the most recent quantitative impairment review through which we confirmed that fair value exceeded carrying value by at least 20% and that pre-tax operating income was at least 85% of the prior year. We believe these projections are reasonable based on our historical trends and expectation 29 -------------------------------------------------------------------------------- Table of Contents of future results. Total indefinite lived intangible assets as of August 2, 2014 and August 3, 2013 were $53.6 million and $28.3 million, respectively. Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Cash flows expected to be generated by the related assets are estimated over the asset's useful life based on updated projections. If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow model. During the fiscal year ended August 3, 2013, an impairment charge of $1.6 million was recognized in connection with the termination of a long-term licensing agreement and the write-off of the associated intangible asset. Total finite-lived intangible assets as of August 2, 2014 and August 3, 2013 were $81.4 million and $21.3 million, respectively. The assessment of the recoverability of goodwill and intangible assets will be impacted if estimated future cash flows are not achieved. Results of Operations The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales: Fiscal year ended August 2, August 3, July 28, 2014 2013 2012 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 83.4 % 83.1 % 82.5 % Gross profit 16.6 % 16.9 % 17.5 % Operating expenses 13.5 % 13.8 % 14.4 % Restructuring and asset impairment expenses - % - % 0.1 % Total operating expenses 13.5 % 13.8 % 14.5 % Operating income 3.1 % 3.1 % 3.0 % Other expense (income): Interest expense 0.1 % 0.1 % 0.1 % Interest income - % - % - % Other, net (0.1 )% 0.1 % - % Total other expense, net - % 0.2 % 0.1 % Income before income taxes 3.1 % 2.9 % 2.9 % Provision for income taxes 1.2 % 1.1 % 1.1 % Net income 1.8 % * 1.8 % 1.7 % * * Total reflects rounding Fiscal year ended August 2, 2014 compared to fiscal year ended August 3, 2013 Net Sales Our net sales for the fiscal year ended August 2, 2014 increased approximately 12.0%, or $730 million, to a record $6.79 billion from $6.06 billion for the fiscal year ended August 3, 2013. This increase was primarily due to growth in our wholesale segment of $711.9 million. We experienced organic growth (sales growth excluding the impact of acquisitions) of 10.2% over the prior fiscal year due to the continued growth of the natural and organic products industry in general, increased market share as a result of our focus on service and value added services, and a broader selection of products, including specialty foods. Net sales for the fiscal year ended August 3, 2013 were benefited by approximately $118.7 million, due to an additional week during the fiscal year compared to fiscal 2014. Net sales for the fiscal year ended August 2, 2014 was favorably impacted by the acquisition of Trudeau Foods and Tony's which contributed approximately $62.9 million and $45.3 million of net sales, respectively. Our net sales for the fiscal year ended August 2, 2014 were also favorably impacted by moderate price inflation of approximately 2% during the year. 30 -------------------------------------------------------------------------------- Table of Contents Our net sales by customer type for the fiscal years ended August 2, 2014 and August 3, 2013 were as follows (in millions): 2014 % of Total 2013 % of Total Customer Type Net Sales Net Sales Net Sales Net Sales Independently owned natural products retailers $ 2,223 33 % $ 2,040 34 % Supernatural chains 2,422 36 % 2,207 36 % Conventional supermarkets 1,755 26 % 1,501 25 % Other 394 5 % * 316 5 % Total $ 6,794 100 % $ 6,064 100 % * Total reflects rounding Net sales to our independent retailer channel increased by approximately $183 million, or 9.0% during the fiscal year ended August 2, 2014 compared to the fiscal year ended August 3, 2013. While net sales in this channel have increased, they have grown at a slower rate than net sales in our supernatural and conventional supermarket channels, and therefore represent a lower percentage of our total net sales compared to the prior year. Whole Foods Market is our only supernatural chain customer, and net sales to Whole Foods Market for the fiscal year ended August 2, 2014 increased by approximately $215 million or 9.7% over the prior year and accounted for approximately 36% of our total net sales for each of the fiscal years ended August 2, 2014 and August 3, 2013. The increase in sales to Whole Foods Market is primarily due to the increases in same-store sales as well as sales by our Tony's subsidiary to Whole Foods Market, Tony's largest customer in fiscal 2014. Net sales to conventional supermarkets for the fiscal year ended August 2, 2014 increased by approximately $254 million, or 16.9% from fiscal 2013 and represented approximately 26% of total net sales in fiscal 2014 compared to 25% in fiscal 2013. The increase in net sales to conventional supermarkets is due to increased demand for our products, conventional supermarkets expanding the breadth of products carried in their stores, and additional sales as a result of our acquisition of Trudeau Foods and Tony's during fiscal 2014. Other net sales, which include sales to foodservice and sales from the United States to countries other than Canada, as well as sales through our retail division, manufacturing division, and our branded product lines, increased by approximately $78 million or 24.7% during the fiscal year ended August 2, 2014 over the prior fiscal year and accounted for approximately 5% of total net sales in fiscal 2014 and fiscal 2013. The increase in other net sales was primarily driven by an increase in broadline distribution sales to foodservice customers. As we continue to aggressively pursue new customers and as economic conditions continue to stabilize, we expect net sales for fiscal 2015 to grow over fiscal 2014. We believe that the integration of our specialty business into our national platform has allowed us to attract customers that we would not have been able to attract without that business and will continue to allow us to pursue a broader array of customers as many customers seek a single source for their natural, organic and specialty products. We believe that our projected sales growth will come from both sales to new customers (including as a result of acquisitions) and an increase in the number of products that we sell to existing customers. Our acquisition of Tony's should allow us to sell more specialty protein, cheese and deli items to our customers. We expect that most of our sales growth will occur in our lower gross margin supernatural and conventional supermarket channels. Although sales to these customers typically generate lower gross margins than sales to customers within our independent retailer channel, they also typically carry a lower average cost to serve than sales to our independent customers. We also believe that food price inflation similar to the levels experienced in fiscal 2014 will contribute to our projected net sales growth in fiscal 2015. Cost of Sales and Gross Profit Our gross profit increased approximately 10.0%, or $102.6 million, to $1.13 billion for the fiscal year ended August 2, 2014, from $1.03 billion for the fiscal year ended August 3, 2013. Our gross profit as a percentage of net sales was 16.6% for the fiscal year ended August 2, 2014 and 16.9% for the fiscal year ended August 3, 2013. The decrease in gross profit was attributed to a combination of severe weather in the second quarter, the foreign exchange impact of weakness in the Canadian dollar on our Canadian business and the continued shift in sales growth towards supernatural, national supermarket and multi-unit independent customers. These challenges were partially offset by improved execution by the supply chain group, specifically with respect to procurement and inbound logistics. Our gross profits are generally higher on net sales to independently owned retailers and lower on net sales in the conventional supermarket and the supernatural channels. For the year fiscal ended August 2, 2014 approximately $469 million of our total net sales growth of $730 million was from increased net sales in the conventional supermarket and supernatural channels. Approximately 61% of our total net sales for each of the fiscal years 2014 and 2013 were to the conventional supermarket and 31 -------------------------------------------------------------------------------- Table of Contents supernatural channels. We anticipate net sales growth in the conventional supermarket and supernatural channels will continue to outpace growth in the independent and other channels. We expect that our growth with Whole Foods Market and our opportunities in the conventional supermarket channel will continue to generate lower gross profit percentages than our historical rates, particularly during the time period when we are on-boarding new business and incurring costs of hiring and training additional associates and increasing inventory levels before a new customer has reached expected purchasing levels. We will seek to fully offset these reductions in gross profit percentages by reducing our operating expenses as a percentage of net sales primarily through improved efficiencies in our supply chain and improvements to our information technology infrastructure. Operating Expenses Our total operating expenses increased approximately 9.2%, or $77.3 million, to $916.9 million for the fiscal year ended August 2, 2014, from $839.6 million for the fiscal year ended August 3, 2013. The increase in total operating expenses for the fiscal year ended August 2, 2014 was primarily due to an increase in net sales year over year as well as the inclusion of operating expenses attributable to current year acquisitions. Total operating expenses for the fiscal year ended August 2, 2014 included approximately $1.4 million and $0.8 million related to the start up of the Company's Sturtevant, Wisconsin and Montgomery, New York facilities, respectively, in addition to approximately $1.5 million of Tony's acquisition costs. Operating expenses for the fiscal year ended August 3, 2013 included $6.3 million in labor action related costs at our Auburn, Washington facility and approximately $1.6 million related to the termination of a licensing agreement and write-off of the associated intangible asset. Total operating expenses for fiscal 2014 include share-based compensation expense of $14.6 million, compared to $15.1 million in fiscal 2013. Share-based compensation expense for the fiscal years ended August 2, 2014 and August 3, 2013 includes approximately $1.1 million and $1.5 million, respectively, in expense related to performance share-based awards granted to our Chief Executive Officer related to certain financial goals for those years ended August 2, 2014 and August 3, 2013. Share-based compensation expense also includes an overall benefit of $0.1 million for the year ended August 2, 2014 and expense of $1.7 million for the years ended August 3, 2013, related to performance-based equity compensation arrangements with a 2-year performance-based vesting component that was established for members of our executive leadership team. The $0.1 million net benefit recorded for fiscal 2014 is a result of established metrics not being met for the 2-year performance period ended August 2, 2014, offset by expense recorded for the 2-year performance year ended August 1, 2015. See Note 3 "Equity Plans" to our Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. As a percentage of net sales, total operating expenses decreased to approximately 13.5% for the fiscal year ended August 2, 2014, from approximately 13.8% for the fiscal year ended August 3, 2013. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the growth in the supernatural and conventional supermarket channels which in general have lower operating expenses and higher fixed cost coverage due to higher sales, as well as expense control programs across all of our divisions. Our operating expenses as a percentage of net sales for fiscal 2013 were negatively impacted by $6.3 million in labor action related costs at our Auburn, Washington facility and approximately $1.6 million related to the termination of a licensing agreement and write-off of the associated intangible asset. We were able to manage our fuel costs despite rising prices by locking in the price of a portion of our expected fuel usage, updating and revising existing routes to reduce miles traveled and optimize use of trailer space, reducing idle times and other similar measures. We expect that we will be able to continue to reduce our operating expenses as we continue the roll-out of our supply chain initiatives including a national warehouse management and procurement system, first launched in our Lancaster, Texas facility in September 2010, our Ridgefield, Washington facility in July 2012 and our new Sturtevant, Wisconsin facility in July 2014, and is expected to be rolled out in all of our existing, broadline distribution centers by the end of fiscal 2017. Operating Income Operating income increased approximately 13.6%, or $25.3 million, to $210.8 million for the fiscal year ended August 2, 2014, from $185.5 million for the fiscal year ended August 3, 2013. As a percentage of net sales, operating income was 3.1% for each of the fiscal years ended August 2, 2014 and August 3, 2013. Other Expense (Income) Other expense (income) decreased $8.0 million to $3.4 million for the fiscal year ended August 2, 2014, from $11.4 million for the fiscal year ended August 3, 2013. Interest expense for the fiscal year ended August 2, 2014 increased to $7.8 million from $5.9 million in the fiscal year ended August 3, 2013. This increase is primarily related to a full year for our Aurora, Colorado facility, which we are accounting for under the financing method due to our meeting the criteria for continuing involvement in this sale-leaseback transaction, which increased $1.8 million to $2.5 million for fiscal 2014 from $0.7 million in fiscal 2013. Interest income for the fiscal year ended August 2, 2014 decreased to $0.5 million from $0.6 million in the fiscal year ended 32 -------------------------------------------------------------------------------- Table of Contents August 3, 2013. Other income for the fiscal year ended August 2, 2014 includes a pre-tax gain of $4.8 million associated with a non-cash transfer pursuant to which we acquired the land on which we constructed our Sturtevant, Wisconsin facility. Other expense for the fiscal year ended August 3, 2013 includes a pre-tax charge of $4.9 million related to an agreement to settle a multi-state unclaimed property audit. Provision for Income Taxes Our effective income tax rate was 39.5% and 38.1% for the fiscal years ended August 2, 2014 and August 3, 2013, respectively. The increase in the effective income tax rate is the result of a net benefit for the reversal of uncertain tax positions in the fiscal year ended August 3, 2013, and tax credits associated with a renewable energy project in Moreno Valley, California. This increase was partially offset by tax benefits associated with anticipated amended state tax return filings to claim prior year state net operating losses. Our effective income tax rate in both fiscal years was also affected by increased state taxes resulting from the states in which we operate. Net Income Reflecting the factors described in more detail above, net income increased $17.6 million to $125.5 million, or $2.52 per diluted share, for the fiscal year ended August 2, 2014, compared to $107.9 million, or $2.18 per diluted share for the fiscal year ended August 3, 2013. Fiscal year ended August 3, 2013 compared to fiscal year ended July 28, 2012 Net Sales Our net sales for the fiscal year ended August 3, 2013 increased approximately 15.8%, or $828 million, to a then record $6.06 billion from $5.24 billion for the fiscal year ended July 28, 2012. This increase was primarily due to growth in our wholesale segment of $821.8 million. Our organic growth (sales growth excluding the impact of acquisitions) of 14.8% was due to the continued growth of the natural and organic products industry in general, increased market share as a result of our focus on service and value added services, and a broader selection of products, including specialty foods. In addition to net sales growth attributable to our organic growth, we also benefited from the inclusion of $53.8 million in incremental net sales related to our acquisitions of certain assets of three distributors completed during the first quarter of fiscal 2013. Our net sales for the fiscal year ended August 3, 2013 were also favorably impacted by approximately 2.2%, or $118.7 million, due to the addition of an extra week in the fiscal year compared to fiscal 2012, and by moderate food price inflation of approximately 2% during the year. Our net sales by customer type for the fiscal years ended August 3, 2013 and July 28, 2012 were as follows (in millions): 2013 % of Total 2012 % of Total Customer Type Net Sales Net Sales Net Sales Net Sales Independently owned natural products retailers $ 2,040 34 % $ 1,847 35 % Supernatural chains 2,207 36 % 1,883 36 % Conventional supermarkets 1,501 25 % 1,246 24 % Other 316 5 % 260 5 % Total $ 6,064 100 % $ 5,236 100 % Net sales to our independent retailer channel increased by approximately $193 million, or 10.4% during the fiscal year ended August 3, 2013 compared to the year ended July 28, 2012. While net sales in this channel increased, they have grown at a slower rate than net sales in our supernatural and conventional supermarket channels, and therefore represented a lower percentage of our total net sales compared to the prior year. Whole Foods Market is our only supernatural chain customer, and net sales to Whole Foods Market for the fiscal year ended August 3, 2013 increased by approximately $324 million or 17.2% over the prior year and accounted for approximately 36% of our total net sales for each of the fiscal years ended August 3, 2013 and July 28, 2012. The increase in sales to Whole Foods Market is primarily due to the increases in same-store sales, and to a lesser extent, new store additions compared to the prior year. Net sales to conventional supermarkets for the fiscal year ended August 3, 2013 increased by approximately $255 million, or 20.5% from fiscal 2012 and represented approximately 25% of total net sales in fiscal 2013 compared to 24% in fiscal 2012. The increase in net sales to conventional supermarkets was due to increased demand for our products, conventional supermarkets 33 -------------------------------------------------------------------------------- Table of Contents expanding the breadth of products carried in their stores, and the additional two months of sales in fiscal 2013 versus the ten months of sales in fiscal 2012 to a large national customer which we began servicing during the first quarter of fiscal 2012. Other net sales, which include sales to foodservice and sales from the United States to countries other than Canada, as well as sales through our retail division, manufacturing division, and our branded product lines, increased by approximately $56 million or 21.5% during the fiscal year ended August 3, 2013 over the prior fiscal year and accounted for approximately 5% of total net sales in fiscal 2013 and fiscal 2012. The increase in other net sales was primarily driven by an increase in broadline distribution sales to foodservice customers. Cost of Sales and Gross Profit Our gross profit increased approximately 11.9%, or $109.1 million, to $1.03 billion for the fiscal year ended August 3, 2013, from $916.0 million for the fiscal year ended July 28, 2012. Our gross profit as a percentage of net sales was 16.9% for the fiscal year ended August 3, 2013 and 17.5% for the fiscal year ended July 28, 2012. The decrease in gross profit as a percentage of net sales is primarily due to the continued change in the mix of net sales by channel, as well as a reduced number of promotional opportunities driven by higher supplier out of stocks and the increased sales of customers' private label brands, which carry a lower gross margin, combined with higher inbound freight costs. Our decision to maintain higher service levels despite greater supplier out of stocks also negatively impacted our gross margin in fiscal 2013 due to increased costs to move freight on an expedited basis and between our facilities. Our gross profits are generally higher on net sales to independently owned retailers and lower on net sales in the conventional supermarket and the supernatural channels. For the year ended August 3, 2013 approximately $579 million of our total net sales growth of $828 million was from increased net sales in the conventional supermarket and supernatural channels. As a result, approximately 61% of our total net sales in fiscal 2013 were to the conventional supermarket and supernatural channels compared to approximately 60% in fiscal 2012. This change in sales mix from 2012 to 2013 resulted in lower gross profits as a percentage of net sales during fiscal 2013 than we experienced in fiscal 2012. Operating Expenses Our total operating expenses increased approximately 10.3%, or $78.7 million, to $839.6 million for the fiscal year ended August 3, 2013, from $760.8 million for the fiscal year ended July 28, 2012. The increase in total operating expenses for the year ended August 3, 2013 was primarily due to higher sales volume, approximately $6.3 million in labor action related costs at our Auburn, Washington facility and approximately $1.6 million related to the termination of a licensing agreement and write-off of the associated intangible asset. Operating expenses for the fiscal year ended July 28, 2012 included $5.1 million of severance and other restructuring expenses associated with the divestiture of our conventional non-food and general merchandise lines of business and $1.6 million in start-up expenses incurred in connection with onboarding a large national conventional supermarket customer. Total operating expenses for fiscal 2013 include share-based compensation expense of $15.1 million, compared to $11.4 million in fiscal 2012. Share-based compensation expense for the fiscal years ended August 3, 2013 and July 28, 2012 includes approximately $1.5 million and $1.7 million, respectively, in expense related to performance share-based awards granted to our Chief Executive Officer related to certain financial goals for those years ended August 3, 2013 and July 28, 2012. The Company recorded $1.7 million and $0.4 million for the fiscal years ended August 3, 2013 and July 28, 2012, respectively, related to performance-based equity compensation arrangements with a 2-year performance-based vesting component that was established for members of our executive leadership team. See Note 3 "Equity Plans" to our Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. As a percentage of net sales, total operating expenses decreased to approximately 13.8% for the fiscal year ended August 3, 2013, from approximately 14.5% for the fiscal year ended July 28, 2012. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the growth in the supernatural and conventional supermarket channels which in general have lower operating expenses and higher fixed cost coverage due to higher sales, as well as expense control programs across all of our divisions. Our operating expenses as a percentage of net sales for fiscal 2013 were negatively impacted by $6.3 million in labor action related costs at our Auburn, Washington facility and approximately $1.6 million related to the termination of a licensing agreement and write-off of the associated intangible asset. We were able to manage our fuel costs despite rising prices by locking in the price of a portion of our expected fuel usage, updating and revising existing routes to reduce miles traveled and optimize use of trailer space, reducing idle times and other similar measures. Operating Income Operating income increased approximately 19.6%, or $30.3 million, to $185.5 million for the fiscal year ended August 3, 2013, from $155.2 million for the fiscal year ended July 28, 2012. As a percentage of net sales, operating income was 3.1% for the fiscal year ended August 3, 2013 compared to 3.0% for the fiscal year ended July 28, 2012. The increase in operating income 34 -------------------------------------------------------------------------------- Table of Contents is primarily attributable to sales growth and lower operating expenses as a percentage of net sales during fiscal 2013 compared to fiscal 2012. Other Expense (Income) Other expense (income) increased $7.0 million to $11.4 million for the fiscal year ended August 3, 2013, from $4.4 million for the fiscal year ended July 28, 2012. Other expense for the fiscal year ended August 3, 2013 included a pre-tax charge of $4.9 million related to an agreement to settle a multi-state unclaimed property audit. Interest expense for the fiscal year ended August 3, 2013 increased to $5.9 million from $4.7 million in the fiscal year ended July 28, 2012 primarily due to $0.7 million of non-cash interest expense related to the Aurora, Colorado facility as we are accounting for this facility under the financing method due to our meeting the criteria for continuing involvement in this sale-leaseback transaction. Interest income for the fiscal year ended August 3, 2013 decreased to $0.6 million from $0.7 million in the fiscal year ended July 28, 2012. Provision for Income Taxes Our effective income tax rate was 38.1% and 39.4% for the fiscal years ended August 3, 2013 and July 28, 2012, respectively. The decrease in the effective income tax rate was impacted by a net benefit for the reversal of uncertain tax positions for the fiscal year ended August 3, 2013, and one time tax credits associated with a renewable energy project in Moreno Valley, California. Our effective income tax rate in both fiscal years was also affected by increased state taxes resulting from the states in which we operate. Net Income Reflecting the factors described in more detail above, net income increased $16.5 million to $107.9 million, or $2.18 per diluted share, for the fiscal year ended August 3, 2013, compared to $91.3 million, or $1.86 per diluted share for the fiscal year ended July 28, 2012. Liquidity and Capital Resources We finance our day to day operations and growth primarily with cash flows from operations, borrowings under our amended and restated revolving credit facility, operating leases, a finance lease, trade payables and bank indebtedness. In addition, from time to time, we may issue equity and debt securities to finance our operations and acquisitions. We believe that our cash on hand and available credit through our amended and restated revolving credit facility as discussed below is sufficient for our operations and planned capital expenditures over the next twelve months. We expect to generate an average of $75.0 million to $125 million in cash flow from operations per year for the 2015 and 2016 fiscal years. We intend to continue to utilize this cash generated from operations to fund acquisitions, fund investment in working capital and capital expenditure needs, including expansion of our distribution facilities, and reduce our debt levels. We intend to manage capital expenditures to approximately 2% to 2.2% of net sales for fiscal 2015 excluding the impact of any potential sale-leaseback transactions, reflecting an increase over levels experienced in fiscal 2013 and fiscal 2014 as we construct new distribution centers in Wisconsin and California in fiscal 2015. We expect to finance these requirements with cash generated from operations and borrowings under our amended and restated revolving credit facility. Our planned capital projects will provide both new and expanded facilities as well as technology that we believe will provide us with increased efficiency and the capacity to continue to support the growth of our customer base. Future investments and acquisitions may be financed through equity, long-term debt or borrowings under our amended and restated revolving credit facility. In May 2014, we entered into the Amendment to our amended and restated revolving credit facility, which increased the maximum borrowings under the amended and restated revolving credit facility to $600 million and extended the maturity date to May 21, 2019. Up to $550.0 million is available to our U.S. subsidiaries and up to $50.0 million is available to UNFI Canada. After giving effect to the Amendment, the amended and restated revolving credit facility provides a one-time option to increase the borrowing base by up to an additional $150 million (but in not less than $10.0 million increments) subject to certain customary conditions and the lenders committing to provide the increase in funding, and also permits us to enter into a real-estate backed term loan facility which shall not exceed $200.0 million. The borrowings of the US portion of the amended and restated credit facility, prior to and after giving effect to the Amendment, accrue interest, at the our option, at either (i) a base rate (generally defined as the highest of (x) the Bank of America Business Capital prime rate, (y) the average overnight federal funds effective rate plus one-half percent (0.50%) per annum and (z) one-month LIBOR plus one percent (1%) per annum) plus an initial margin of 0.50%, or (ii) the LIBOR for one, two, three or six months or, if approved by all affected lenders, nine months plus an initial margin of 1.50%. The borrowings on the Canadian portion of the credit facility for Canadian swing-line loans, Canadian overadvance loans or Canadian protective advances accrue interest, at the our option, at either (i) a prime rate (generally defined as the highest of (x) 0.50% over 30-day Reuters Canadian Deposit Offering Rate for bankers' acceptances, (y) the prime rate of Bank of America, N.A.'s Canada branch, and (z) a bankers' acceptance equivalent rate for a one month interest period plus 1.00%) plus an initial margin of 0.50%, or (ii) a bankers' acceptance equivalent rate of the rate of interest per annum equal to the annual 35 -------------------------------------------------------------------------------- Table of Contents rates applicable to Canadian Dollar bankers' acceptances on the "CDOR Page" of Reuter Monitor Money Rates Service, plus the CDOR rate, and an initial margin of 1.50%. All other borrowings on the Canadian portion of the amended and restated credit facility, prior to and after giving effect to the Amendment, must exclusively accrue interest under the CDOR rate plus the applicable margin. An annual commitment fee in the amount of 0.30% if the average daily balance of amounts actually used (other than swing-line loans) is less than 40% of the aggregate commitments, or 0.25% if such average daily balance is 40% or more of the aggregate commitments. As of August 2, 2014, our borrowing base, based on eligible accounts receivable and inventory levels, was $587.4 million. As of August 2, 2014, we had $415.7 million outstanding under our credit facility, $33.6 million in letter of credit commitments and $2.8 million in reserves which generally reduces our available borrowing capacity under its revolving credit facility on a dollar for dollar basis. Our resulting remaining availability was $135.3 million as of August 2, 2014. The revolving credit facility, as amended and restated, subjects us to a springing minimum fixed charge coverage ratio (as defined in the underlying credit agreement) of 1.0 to 1.0 calculated at the end of each of our fiscal quarters on a rolling four quarter basis when aggregate availability (as defined in the underlying credit agreement) is less than the greater of (i) $35.0 million and (ii) 10% of the aggregate borrowing base. We were not subject to fixed charge coverage ratio covenants as of the fiscal year ended August 2, 2014. On August 14, 2014, we entered into a real-estate backed Term Loan Agreement by and among us, our wholly-owned subsidiary Albert's, the financial institutions that are parties thereto as lenders (collectively, the "Lenders"), Bank of America, N.A. as administrative agent for the Lenders and the other parties thereto. The total initial borrowings under the Term Loan Agreement were $150.0 million. We are required to make $2.5 million principal payments quarterly beginning on November 1, 2014. The Term Loan Agreement will terminate on the earlier of (a) August 14, 2022 and (b) the date that is ninety days prior to the termination date of our amended and restated revolving credit facility. Under the Term Loan Agreement, we at our option may request the establishment of one or more new term loan commitments in increments of at least $10.0 million, but not to exceed $50.0 million in total, subject to the approval of the Lenders electing to participate in such incremental loans and the satisfaction of the conditions required by the Term Loan Agreement. We will be required to make quarterly principal payments on these incremental borrowings in accordance with the terms of the Term Loan Agreement. Proceeds from this Term Loan Agreement were used to pay down borrowings on our amended and restated revolving credit facility. Our capital expenditures for the 2014 fiscal year were $147.3 million, compared to $66.6 million for fiscal 2013, primarily driven by the construction of our new Sturtevant, Wisconsin and Montgomery, New York distribution centers. We believe that our capital requirements for fiscal 2015 will be between $165 million and $180 million. This does not include any potential proceeds related to a planned sale leaseback transaction at our Prescott, Wisconsin facility. We expect to finance these requirements with cash generated from operations, proceeds from a planned sale leaseback and borrowings under our amended and restated revolving credit facility. Our planned capital projects will provide both additional warehouse space and technology that we believe will provide us with increased efficiency and the capacity to continue to support the growth of our customer base. We believe that our future capital requirements after fiscal 2015 will be marginally lower than our anticipated fiscal 2015 requirements, as a percentage of net sales, although we plan to continue to invest in technology and expand our facilities. Future investments and acquisitions will be financed through our revolving credit facility, or with the issuance of equity or long-term debt, negotiated at the time of the potential acquisition. Net cash provided by operations was $62.4 million for the year ended August 2, 2014, an increase of $18.1 million from the $44.3 million provided by operations for the year ended August 3, 2013. Net cash provided by operating activities of $62.4 million for fiscal 2014 was primarily due to net income for the year of $125.5 million, coupled with depreciation and amortization of $48.8 million and an increase in accounts payable of $28.2 million. These cash in-flows were partially offset by increases in inventories of $97.8 million in part as a result stocking inventory in our Sturtevant, Wisconsin facility as we prepared to commence operations and an increase in accounts receivable of $70.7 million due to our sales growth during the year. Net cash provided by operations of $44.3 million for the year ended August 3, 2013 was impacted by an increase in inventories of $123.9 million in part as a response to higher supplier out of stocks, and an increase in accounts receivable of $37.3 million due to our sales growth during the year, more than offset by net income of $107.9 million. Days in inventory was 51 days at August 2, 2014, compared to 52 days at August 3, 2013. Days sales outstanding increased from 21 at August 3, 2013 to 23 days at August 2, 2014. Working capital increased by $137.5 million, or 19.2%, to $854.5 million at August 2, 2014, compared to working capital of $717.0 million at August 3, 2013, primarily as a result of the increase in our inventory and accounts receivable balances. Net cash used in investing activities increased $280.5 million to $352.8 million for the fiscal year ended August 2, 2014, compared to $72.3 million for the fiscal year ended August 3, 2013. The increase from the fiscal year ended August 3, 2013 was primarily due to an increase in capital spending associated with our Sturtevant, Wisconsin and Montgomery, New York distribution centers coupled with the acquisitions of Trudeau Foods during the first quarter of fiscal 2014 and Tony's in the fourth quarter of fiscal 2014. Net cash used in investing activities of $72.3 million for the fiscal year ended August 3, 2013 was primarily due to capital spending associated with our Logan, New Jersey distribution center coupled with the acquisition of three distribution companies in the first quarter of fiscal 2013. 36 -------------------------------------------------------------------------------- Table of Contents Net cash provided by financing activities was $295.4 million for the fiscal year ended August 2, 2014. We present proceeds and borrowings related to the Company's amended and restated revolving credit facility on a gross basis. The net cash provided by financing activities was primarily due to gross borrowings under our amended and restated revolving credit facility of $853.9 million, partially offset by repayments of $568.3 million. This increase is primarily attributable to the borrowings used to fund capital expenditures and the acquisition of Tony's in the fourth quarter of fiscal 2014. Net cash provided by financing activities was $22.3 million for the fiscal year ended August 3, 2013, primarily due to borrowings, net of repayments, under our amended and restated revolving credit facility of $15.9 million and increases in bank overdrafts of $6.3 million. We may from time to time enter into commodity swap agreements to reduce price risk associated with our anticipated purchases of diesel fuel. These commodity swap agreements hedge a portion of our expected fuel usage for the periods set forth in the agreements. We monitor the commodity (NYMEX #2 Heating oil) used in our swap agreements to determine that the correlation between the commodity and diesel fuel is deemed to be "highly effective." During the fiscal years ended August 2, 2014 and August 3, 2013, we had no outstanding commodity swap agreements. In addition to the previously discussed interest rate and commodity swap agreements, from time-to-time we enter into fixed price fuel supply agreements. As of August 2, 2014, we had entered into agreements which require us to purchase a total of approximately 8.9 million gallons of diesel fuel at prices ranging from $3.17 to $4.00 per gallon through December 2014. As of August 3, 2013, we were not a party to any agreements which required us to purchase diesel fuel. These fixed price fuel agreements qualify for the "normal purchase" exception under ASC 815, Derivatives and Hedging as physical deliveries will occur rather than net settlements, therefore the fuel purchases under these contracts will be expensed as incurred and included within operating expenses. Commitments and Contingencies The following schedule summarizes our contractual obligations and commercial commitments as of August 2, 2014: Payments Due by Period Less than 1-3 3-5 Total One Year Years Years Thereafter (in thousands) Inventory purchase commitments $ 29,379 $ 29,379 Diesel fuel purchase commitments 32,551 32,551 - - - Notes payable (1) 415,660 - - 415,660 - Long-term debt (2) 33,500 990 2,141 2,556 27,813 Deferred compensation 11,752 1,368 2,608 2,130 5,646 Long-term non-capitalized leases 289,273 50,399 87,581 64,115 87,178 Total $ 812,115 $ 114,687 $ 92,330 $ 484,461 $ 120,637 (1) The notes payable obligations shown reflect the expiration of the credit facility, not necessarily the underlying individual borrowings. Notes payable does not included outstanding letters of credit of approximately $33.6 million at August 2, 2014 nor approximately $29.7 million in interest payments (including unused lines fees) projected to be due in future years (less than 1 year - $7.8 million; 1-3 years - $15.6 million; and 3-5 years $6.3 million) based on the variable rates in effect at August 2, 2014. Variable rates, as well as outstanding principal balances, could change in future periods. See "Liquidity and Capital Resources" above and Note 6 "Notes Payable" to our Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of our credit facility. (2) Long-term debt does not include approximately $24.3 million in interest payments projected to be due in future years (less than 1 year - $2.4 million; 1-3 years - $4.6 million; 3-5 years - $4.3 million; thereafter - $13.0 million). See Note 7 "Long-Term Debt" to our Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of our long-term debt. Included in other liabilities in the consolidated balance sheet at August 2, 2014, the Company has a liability, including potential interest and penalties, of $0.6 million for uncertain tax positions that have been taken or are expected to be taken in various income tax returns. The Company does not know the ultimate resolution of these uncertain tax positions and as such, does not know the ultimate timing of payments related to this liability. Accordingly, these amounts are not included in the table above. 37 -------------------------------------------------------------------------------- Table of Contents Seasonality Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. Recently Issued Financial Accounting Standards In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, (Topic 606) ("ASU 2014-09"). The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new pronouncement is effective for public companies with annual periods, and interim periods within those periods, beginning after December 15, 2016, which will be the first quarter of the fiscal year ended July 28, 2018. We are in the process of evaluating the impact that this new guidance will have on the Company's consolidated financial statements. In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 2015) and Property Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an entity. The new guidance raises the threshold for disposals that would qualify as discontinued operations and also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations. The amendments are effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2014, which would be the Company's first quarter of the fiscal year ended July 30, 2016, and should be applied on prospective basis. We do not expect the adoption of these provisions to have a significant impact on the Company's consolidated financial statements. In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). This update supersedes the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU No. 2011-05, Presentation of Comprehensive Income, and ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2013-02 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income by component and to present, either on the face of the financial statements or in a single note, any significant amount reclassified out of accumulated other comprehensive income in its entirety in the period, and the income statement line item affected by the reclassification. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. ASU 2013-02 is effective for annual reporting periods that begin after December 15, 2012 and was adopted by the Company in the first quarter of the fiscal year ending August 2, 2014. The adoption of ASU 2013-02 did not have an impact on the presentation of the Company's consolidated financial statements. |