UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Securities registered pursuant to Section 12 (b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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As of May 2, 2022, the registrant had
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 2022
TABLE OF CONTENTS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve substantial risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the “Exchange Act”), including, but not limited to, statements regarding our expectations, beliefs, intentions, strategies, future operations, future financial position, future revenue, projected expenses, and plans and objectives of management. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “will,” “would,” “should,” “could,” “can,” “predict,” “potential,” “continue,” “objective,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. These forward-looking statements reflect our current views about future events and involve known risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievement to be materially different from those expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended January 2, 2022, and our other filings with the Securities and Exchange Commission. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to the “Company,” “Sprouts,” “Sprouts Farmers Market,” “we,” “us” and “our” refer to Sprouts Farmers Market, Inc. and, where appropriate, its subsidiaries.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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April 3, 2022 |
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January 2, 2022 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, net |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation |
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Operating lease assets, net |
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Intangible assets, net of accumulated amortization |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Accrued salaries and benefits |
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Accrued income tax |
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Current portion of operating lease liabilities |
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Current portion of finance lease liabilities |
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Total current liabilities |
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Long-term operating lease liabilities |
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Long-term debt and finance lease liabilities |
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Other long-term liabilities |
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Deferred income tax liability |
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Total liabilities |
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Stockholders’ equity: |
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Undesignated preferred stock; $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Retained earnings |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
4
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Thirteen weeks ended |
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April 3, 2022 |
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April 4, 2021 |
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Net sales |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Depreciation and amortization (exclusive |
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Store closure and other costs, net |
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Income from operations |
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Interest expense, net |
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Income before income taxes |
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Income tax provision |
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Net income |
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$ |
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$ |
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Net income per share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these consolidated financial statements.
5
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
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Thirteen weeks ended |
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April 3, 2022 |
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April 4, 2021 |
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Net income |
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$ |
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$ |
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Other comprehensive income (loss), net of tax |
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Unrealized gains (losses) on cash flow |
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Reclassification of net gains (losses) on |
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( |
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( |
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Total other comprehensive income (loss) |
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Comprehensive income |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
6
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
For the thirteen weeks ended April 3, 2022 |
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Shares |
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Common |
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Additional |
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Retained |
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Accumulated |
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Total |
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Balances at January 2, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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Issuance of shares under stock plans |
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— |
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— |
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— |
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Repurchase and retirement of common stock |
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( |
) |
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( |
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— |
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( |
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— |
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( |
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Share-based compensation |
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— |
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— |
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— |
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— |
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Balances at April 3, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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For the thirteen weeks ended April 4, 2021 |
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Shares |
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Common |
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Additional |
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Retained |
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Accumulated |
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Total |
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Balances at January 3, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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Issuance of shares under stock plans |
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— |
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— |
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— |
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Repurchase and retirement of common stock |
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( |
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— |
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— |
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( |
) |
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— |
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( |
) |
Share-based compensation |
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— |
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— |
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— |
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— |
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Balances at April 4, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
7
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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Thirteen weeks ended |
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April 3, 2022 |
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April 4, 2021 |
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Operating activities |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization expense |
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Operating lease asset amortization |
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Store closure and other costs, net |
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Share-based compensation |
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Deferred income taxes |
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Other non-cash items |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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( |
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( |
) |
Prepaid expenses and other current assets |
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( |
) |
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Other assets |
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( |
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Accounts payable |
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Accrued liabilities |
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( |
) |
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( |
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Accrued salaries and benefits |
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( |
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( |
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Accrued income tax |
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Operating lease liabilities |
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( |
) |
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( |
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Other long-term liabilities |
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( |
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Cash flows from operating activities |
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Investing activities |
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Purchases of property and equipment |
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( |
) |
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( |
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Cash flows used in investing activities |
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( |
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( |
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Financing activities |
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Payments on finance lease liabilities |
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( |
) |
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( |
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Payments of deferred financing costs |
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( |
) |
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Repurchase of common stock |
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( |
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( |
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Proceeds from exercise of stock options |
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Cash flows used in financing activities |
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( |
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( |
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Increase in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at beginning of the period |
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Cash, cash equivalents, and restricted cash at the end of the period |
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$ |
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$ |
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Supplemental disclosure of cash flow information |
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Cash paid for interest |
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$ |
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$ |
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Cash refunded for income taxes |
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( |
) |
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( |
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Leased assets obtained in exchange for new operating lease liabilities |
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Supplemental disclosure of non-cash investing and financing activities |
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Property and equipment in accounts payable and accrued liabilities |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
8
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Sprouts Farmers Market, Inc., a Delaware corporation, through its subsidiaries, operates as a healthy grocery store that offers a unique grocery experience featuring an open layout with fresh produce at the heart of the store. The Company continues to bring the latest in wholesome, innovative products made with lifestyle-friendly ingredients such as organic, plant-based and gluten-free. As of April 3, 2022, the Company operated
The accompanying unaudited consolidated financial statements include the accounts of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement of the Company's financial position, results of operations and cash flows for the periods indicated. All material intercompany accounts and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The information included in these consolidated financial statements and notes thereto should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto for the fiscal year ended January 2, 2022 (“fiscal year 2021”) included in the Company’s Annual Report on Form 10-K, filed on February 24, 2022.
The year-end balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.
The Company reports its results of operations on a 52- or 53-week fiscal calendar ending on the Sunday closest to December 31. The fiscal year ending January 1, 2023 (“fiscal year 2022”) and fiscal year 2021 are 52-week years. The Company reports its results of operations on a 13-week quarter, except for 53-week fiscal years (in which the fourth quarter has 14 weeks).
All dollar amounts are in thousands, unless otherwise noted.
9
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company’s performance obligations are satisfied upon the transfer of goods to the customer, which occurs at the point of sale, and payment from customers is also due at the time of sale. Proceeds from the sale of gift cards are recorded as a liability at the time of sale and recognized as sales when they are redeemed by the customer and the performance obligation is satisfied by the Company. The Company’s gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage."
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Balance at |
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Gift Cards Issued During |
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Revenue Recognized from |
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Balance at |
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Gift card liability, net |
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$ |
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$ |
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$ |
( |
) |
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$ |
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(1)
Restricted Cash
Restricted cash relates to defined benefit plan forfeitures as well as healthcare, general liability and workers’ compensation restricted funds of approximately $
Recently Adopted Accounting Pronouncements
Reference Rate Reform
In March 2020 and January 2021, the FASB issued ASU no. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU 2021-01, “Reference Rate Reform (Topic 848): Scope,” respectively. The amendments in these updates provide optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships, and other transactions affected by reference rate reform. In the thirteen weeks ended April 3, 2022, the Company adopted certain optional expedients provided under Topic 848 that permit its hedging relationships to continue without de-designation upon changes due to reference rate reform. The adoption of this guidance resulted in no material impact to the Company’s consolidated financial statements. See Note 9, “Derivative Financial Instruments” for more information on our hedging activities. The optional expedients and accounting relief in Topic 848 remain effective through December 31, 2022.
Recently Issued Accounting Pronouncements Not Yet Adopted
No other new accounting pronouncements issued or effective during the thirteen weeks ended April 3, 2022 had, or are expected to have, a material impact on the Company’s consolidated financial statements.
10
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Fair Value Measurements
The Company records its financial assets and liabilities in accordance with the framework for measuring fair value in accordance with GAAP. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Fair value measurements of nonfinancial assets and nonfinancial liabilities are primarily used in the valuation of derivative instruments, impairment analysis of goodwill, intangible assets and long-lived assets.
The following tables present the fair value hierarchy for the Company’s financial liabilities measured at fair value on a recurring basis as of April 3, 2022 and January 2, 2022:
April 3, 2022 |
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Level 1 |
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Level 2 |
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Level 3 |
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Total |
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Long-term debt |
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$ |
— |
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$ |
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$ |
— |
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$ |
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Interest rate swap liability |
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— |
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— |
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Total financial liabilities |
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$ |
— |
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$ |
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$ |
— |
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$ |
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|
|
|
|
|
||||
January 2, 2022 |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Long-term debt |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Interest rate swap liability |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total financial liabilities |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
The Company’s interest rate swaps are considered Level 2 in the hierarchy and are valued using an income approach. Expected future cash flows are converted to a present value amount based on market expectations of the yield curve on floating interest rates, which is readily available on public markets.
The determination of fair values of certain tangible and intangible assets for purposes of the Company’s goodwill impairment evaluation as described above is based upon Level 3 inputs. The weighted average cost of capital is estimated using information from comparable companies and management’s judgment related to the risk associated with the operations of the stores.
Cash, cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities, and accrued salaries and benefits approximate fair value because of the short maturity of those instruments. Based on comparable open market transactions, the fair value of the long-term debt approximated carrying value as of April 3, 2022 and January 2, 2022.
4. Long-Term Debt and Finance Lease Liabilities
A summary of long-term debt and finance lease liabilities is as follows:
|
|
|
|
|
|
As of |
|
|||||
Facility |
|
Maturity |
|
Interest Rate |
|
April 3, 2022 |
|
|
January 2, 2022 |
|
||
Senior secured debt |
|
|
|
|
|
|
|
|
|
|
||
$ |
|
|
|
$ |
|
|
$ |
— |
|
|||
Former Credit Facility |
|
|
|
|
— |
|
|
|
|
|||
Finance lease liabilities |
|
Various |
|
n/a |
|
|
|
|
|
|
||
Long-term debt and finance lease liabilities |
|
|
|
|
|
$ |
|
|
$ |
|
11
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
New Credit Agreement
The Company’s subsidiary, Sprouts Farmers Markets Holdings, LLC (“Intermediate Holdings”), is the borrower under a credit agreement entered into on March 25, 2022 (the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility (the "Revolving Credit Facility") with an initial aggregate commitment of $
The Company capitalized debt issuance costs of $
The Credit Agreement provides for a $
Guarantees
Obligations under the Credit Agreement are guaranteed by the Company and substantially all of its existing and future wholly-owned material domestic subsidiaries, and are secured by first-priority security interests in substantially all of the assets of the Company, Intermediate Holdings, and the subsidiary guarantors, including, without limitation, a pledge by the Company of its equity interest in Intermediate Holdings.
Interest and Fees
Loans under the Credit Agreement will initially bear interest,
Under the terms of the Credit Agreement, the Company is obligated to pay a commitment fee on the available unused amount of the commitments, which commitment fee ranges between
As of April 3, 2022, loans outstanding under the Credit Agreement bore interest at Term SOFR (as defined in the Credit Agreement) plus a
The effective interest rate on
As of April 3, 2022, outstanding letters of credit issued under the Credit Agreement were subject to a participation fee of
12
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Payments and Borrowings
The Credit Agreement is scheduled to mature, and the commitments thereunder will terminate on
The Company may prepay loans and permanently reduce commitments under the Credit Agreement at any time in agreed-upon minimum principal amounts, without premium or penalty (except SOFR breakage costs, if applicable).
In connection with the execution of the Credit Agreement, the obligations as borrower under the Former Credit Facility were prepaid and terminated.
During the thirteen weeks ended April 3, 2022, the Company made
Covenants
The Credit Agreement contains financial, affirmative and negative covenants. The negative covenants include, among other things, limitations on the Company’s ability to:
Each of these covenants is subject to customary and other agreed-upon exceptions.
In addition, the Credit Agreement requires that the Company and its subsidiaries maintain a maximum total net leverage ratio not to exceed
The Company was in compliance with all applicable covenants under the Credit Agreement as of April 3, 2022.
13
SPROUTS FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Income Taxes
The Company’s effective tax rate decreased to
The Company files income tax returns for federal purposes and in many states. The Company’s tax filings remain subject to examination by applicable tax authorities for a certain length of time, generally three years, following the tax year to which those filings relate. The Company’s U.S. federal income tax returns for the fiscal years ended December 31, 2017 and January 1, 2017, are currently under examination by the Internal Revenue Service.
6. Commitments and Contingencies
The Company is exposed to claims and litigation matters arising in the ordinary course of business and uses various methods to resolve these matters that are believed to best serve the interests of the Company’s stakeholders. The Company’s primary contingencies are associated with self-insurance obligations and litigation matters. Self-insurance liabilities require significant judgment and actual claim settlements and associated expenses may differ from the Company’s current provisions for loss.
Proposition 65 Coffee Action
On April 13, 2010, an organization named Council for Education and Research on Toxics (“CERT”) filed a lawsuit in the Superior Court of the State of California, County of Los Angeles, against nearly
The Company, as part of a joint defense group, asserted multiple defenses against the lawsuit. On May 7, 2