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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-21531
UNITED NATURAL FOODS, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware 05-0376157
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
260 Lake Road
Dayville, CT 06241
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code: (860) 779-2800
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
As of June 12, 2000, there were 18,273,374 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
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UNITED NATURAL FOODS, INC.
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2000
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 2000 and July 31, 1999 3
Consolidated Statements of Operations for the three and nine months ended
April 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine months ended April 30,
2000 and 1999 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7-16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
-----------
(In thousands, except per share amounts) APRIL 30, 2000 JULY 31, 1999
-------------- -------------
ASSETS
Current assets:
Cash $ 3,334 $ 2,845
Accounts receivable, net of allowance of $3,578 and $2,297,
respectively 76,635 60,612
Notes receivable, trade 707 1,096
Inventories 101,919 90,725
Prepaid expenses 4,487 5,660
Deferred income taxes 2,406 1,765
Refundable income taxes 7,045 3,939
--------- ---------
Total current assets 196,533 166,642
Property & equipment, net 47,952 43,784
Other assets:
Notes receivable, trade, net 257 333
Goodwill, net 26,835 26,250
Covenants not to compete, net 212 328
Other, net 539 564
--------- ---------
Total assets $ 272,328 $ 237,901
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 66,504 $ 41,154
Current installments of long-term debt 2,240 3,682
Current installment of obligations under capital leases 300 833
Accounts payable 48,102 33,442
Accrued expenses 13,052 13,706
--------- ---------
Total current liabilities 130,198 92,817
Long-term debt, excluding current installments 23,906 24,370
Deferred income taxes 1,398 712
Obligations under capital leases, excluding current installments 1,804 1,421
--------- ---------
Total liabilities 157,306 119,320
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000 shares,
none issued and outstanding -- --
Common stock, $.01 par value, authorized 50,000 shares,
issued and outstanding 18,264 at April 30, 2000;
issued and outstanding 18,249 at July 31, 1999 183 182
Additional paid-in capital 67,839 67,740
Unallocated shares of ESOP (2,462) (2,584)
Retained earnings 49,462 53,243
--------- ---------
Total stockholders' equity 115,022 118,581
--------- ---------
Total liabilities and stockholders' equity $ 272,328 $ 237,901
========= =========
See notes to consolidated financial statements.
3
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------- ---------
(In thousands, except per share data) 2000 1999 2000 1999
---- ---- ---- ----
Net sales $ 229,205 $ 226,892 $ 679,035 $ 642,529
Cost of sales 183,900 178,953 551,107 505,768
--------- --------- --------- ---------
Gross profit 45,305 47,939 127,928 136,761
--------- --------- --------- ---------
Operating expenses 40,561 36,893 126,736 105,133
Restructuring and asset impairment charges -- 1,538 2,420 2,243
Amortization of intangibles 278 245 828 844
--------- --------- --------- ---------
Total operating expenses 40,839 38,676 129,984 108,220
--------- --------- --------- ---------
Operating income (loss) 4,466 9,263 (2,056) 28,541
--------- --------- --------- ---------
Other expense (income):
Interest expense 1,666 1,401 4,573 4,470
Other, net (140) (1,488) (345) (1,847)
--------- --------- --------- ---------
Total other expense (income) 1,526 (87) 4,228 2,623
--------- --------- --------- ---------
Income (loss) before income taxes (benefit) 2,940 9,350 (6,284) 25,918
Income taxes (benefit) 1,175 4,231 (2,503) 11,104
--------- --------- --------- ---------
Net income (loss) $ 1,765 $ 5,119 $ (3,781) $ 14,814
========= ========= ========= =========
Per share data (basic):
Net income (loss) $ 0.10 $ 0.28 $ (0.21) $ 0.81
========= ========= ========= =========
Weighted average shares of common stock 18,261 18,183 18,260 18,178
========= ========= ========= =========
Per share data (diluted):
Net income (loss) $ 0.10 $ 0.28 $ (0.21) $ 0.80
========= ========= ========= =========
Weighted average shares of common stock 18,562 18,512 18,260 18,529
========= ========= ========= =========
See notes to consolidated financial statements.
4
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS
ENDED APRIL 30,
---------------
(In thousands) 2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,781) $ 14,814
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,735 6,337
Gain on sale of business -- (1,397)
Loss (gain) on disposals of property & equipment 1,970 (303)
Deferred income tax expense (benefit) 45 (80)
Provision for doubtful accounts 1,992 1,178
Changes in assets and liabilities, net of acquired companies:
Accounts receivable (18,015) (10,146)
Inventory (11,194) (8,708)
Prepaid expenses 1,173 (2,029)
Refundable income taxes (3,106) 50
Other assets 147 (386)
Notes receivable, trade 465 49
Accounts payable 14,659 1,333
Accrued expenses (653) 2,684
Income taxes payable -- 2,463
-------- --------
Net cash (used in) provided by operating activities (10,563) 5,859
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of subsidiaries, net of cash acquired (1,200) (8,888)
Proceeds from sale of business -- 7,086
Proceeds from disposals of property and equipment 40 1,367
Capital expenditures (10,644) (5,155)
-------- --------
Net cash used in investing activities (11,804) (5,590)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 25,350 13,892
Repayments on long-term debt (3,172) (3,525)
Proceeds from long-term debt 1,266 --
Principal payments of capital lease obligations (688) (473)
Other 100 456
-------- --------
Net cash provided by financing activities 22,856 10,350
-------- --------
NET INCREASE IN CASH 489 10,619
Cash at beginning of period 2,845 1,393
-------- --------
Cash at end of period $ 3,334 $ 12,012
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,080 $ 4,306
======== ========
Income taxes $ 740 $ 12,147
======== ========
In the nine months ended April 30, 2000 and 1999, the Company incurred $537 and
$1,064, respectively of capital lease obligations.
See notes to consolidated financial statements.
5
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2000 (UNAUDITED)
1. BASIS OF PRESENTATION
Our accompanying consolidated financial statements include the accounts of
United Natural Foods, Inc. and our wholly owned subsidiaries. We are a
distributor and retailer of natural foods and related products.
The financial statements have been prepared pursuant to rules and regulations of
the Securities and Exchange Commission for interim financial information,
including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally required in
complete financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In our opinion, these
financial statements include all adjustments necessary for a fair presentation
of the results of operations for the interim periods presented. The results of
operations for interim periods, however, may not be indicative of the results
that may be expected for a full year.
2. LINE OF CREDIT AGREEMENT
We are a party to a line of credit agreement with Fleet Capital Corporation. An
amendment to this agreement was entered into effective March 31, 2000 which
revises a financial covenant through October 31, 2000 in exchange for a 1/4%
increase in the interest rate we pay Fleet. We do not expect this increase to
have a material impact on our results of operations or financial condition.
3. INTEREST RATE SWAP AGREEMENT
In October 1998, we entered into an interest rate swap agreement. The agreement
provides for us to pay interest for a five year period at a fixed rate of 5% on
a notional principal amount of $60 million while receiving interest for the same
period at the LIBOR rate on the same notional principal amount. The swap has
been entered into as a hedge against LIBOR interest rate movements on current
and anticipated variable rate indebtedness totaling $60 million at LIBOR plus
1.25%, thereby fixing our effective rate at 6.25%. The five year term of the
swap agreement may be extended to seven years at the option of the counterparty.
4. RESTRUCTURING COSTS
In connection with the consolidation of operations in the Eastern Region, we
recorded employee severance expenses and employee retention expenses of $0.8
million and $0.7 million, respectively, and recorded incremental depreciation of
$2.4 million for the year ended July 31, 1999. We recorded asset impairment
charges of $1.5 million and additional employee severance and retention expenses
of $0.3 million in the quarter ended January 31, 2000. Approximately $1.6
million of the retention and severance expenses had been paid as of April 30,
2000 with most of the remaining amounts expected to be paid during the remainder
of fiscal 2000. The incremental depreciation was to reduce the book value of the
Chesterfield, New Hampshire facility, which was being held for sale, to its
estimated net realizable value. Due to continuing difficulties in the
consolidation, our management decided in December 1999 to keep our Chesterfield
facility open for the foreseeable future. We resumed depreciating the remaining
net book value of the Chesterfield facility in December 1999.
In connection with the consolidation of operations in the Central Region and the
closing of our Chicago facility, we recorded restructuring and asset impairment
charges of $0.3 million each in the quarter ended January 31, 2000.
Substantially all of these restructuring expenses had been paid as of April 30,
2000.
6
5. EARNINGS PER SHARE
Following is a reconciliation of the basic and diluted number of shares used in
computing earnings per share:
Quarter Ended Nine Months Ended
April 30, April 30,
(In thousands) 2000 1999 2000 1999
---- ---- ---- ----
Basic weighted average shares outstanding 18,261 18,183 18,260 18,178
Net effect of dilutive stock options based upon the treasury
stock method 301 329 -- 351
------ ------ ------ ------
Diluted weighted average shares outstanding 18,562 18,512 18,260 18,529
====== ====== ====== ======
There were no dilutive stock options for the nine months ended April 30, 2000
because the Company reported a net loss.
6. BUSINESS SEGMENTS
The Company has several operating segments aggregated under the distribution
segment, which is the Company's only reportable segment. These operating
segments have similar products and services, customer types, distribution
methods and historical margins. The distribution segment is engaged in national
distribution of natural foods and related products in the United States. Other
operating segments include the retail segment, which engages in the sale of
natural foods and related products to the general public through retail
storefronts on the east coast of the United States, and a segment engaging in
trading, roasting and packaging of nuts, seeds, dried fruit and snack items.
These other operating segments do not meet the quantitative thresholds for
reportable segments and are therefore included in an "other" caption in the
segment information. The "other" caption also includes corporate expenses that
are not allocated to operating segments.
Following is business segment information for the periods indicated:
Distribution Other Eliminations Consolidated
------------ ----- ------------ ------------
Nine Months Ended April 30, 2000
Revenue $649,626 $42,754 $ (13,345) $679,035
Operating Income (loss) $ 2,125 $(4,261) $ 80 $ (2,056)
Amortization and Depreciation $ 4,834 $ 901 $ -- $ 5,735
Capital Expenditures $ 10,052 $ 592 $ -- $ 10,644
Assets $400,558 $ 6,987 $(135,217) $272,328
Nine Months Ended April 30, 1999
Revenue $599,955 $60,201 $ (17,627) $642,529
Operating Income $ 29,787 $ 839 $ (2,085) $ 28,541
Amortization and Depreciation $ 5,215 $ 1,122 $ -- $ 6,337
Capital Expenditures $ 4,462 $ 693 $ -- $ 5,155
Assets $373,933 $21,005 $(141,008) $253,930
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
We are a leading national distributor of natural foods and related products in
the United States. In recent years, our sales to existing and new customers have
increased through the acquisition of or merger with natural products
distributors, the expansion of existing distribution centers and the continued
growth of the natural products industry in general. Through these efforts, we
believe that we have been able to broaden our geographic penetration, expand our
customer base, enhance and diversify our product selections and increase our
market share. Our distribution operations are divided into four principal units:
United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods,
Inc. and Stow Mills, Inc.), Rainbow Natural Foods, Inc. in the Central Region,
Mountain People's Warehouse, Inc. in the Western Region and Albert's Organics in
various markets in the United States. Through our subsidiary, the Natural Retail
Group, we also own and operate a number of retail natural products stores
located in the eastern United States. Our retail strategy is to selectively
acquire existing natural products stores that meet our
7
strict criteria in areas such as sales growth, profitability, growth potential
and store management. We believe our retail business serves as a natural
complement to our distribution business enabling us to develop new marketing
programs and improve customer service.
We are continually integrating certain operating functions in order to improve
operating efficiencies, including: (i) integrating administrative and accounting
functions; (ii) expanding marketing and customer service programs across the
three regions; (iii) expanding national purchasing opportunities; (iv)
consolidating systems applications between physical locations and regions; and
(v) reducing geographic overlap between regions. In addition, our continued
growth has created the need for expansion of existing facilities to achieve
maximum operating efficiencies and to assure adequate space for future needs.
While operating margins may be affected in periods in which these expenses are
incurred, over the long term, we expect to benefit from the increased absorption
of our expenses over a larger sales base. We have made considerable capital
expenditures and incurred considerable expenses in connection with the expansion
of our facilities, including the relocation of our Denver, Colorado distribution
center and the expansion of refrigerated and frozen space at our Auburn,
California and Atlanta, Georgia facilities. Additionally, our Seattle,
Washington facility was relocated to a larger facility in Auburn, Washington
during the third quarter of fiscal 1999, and we are currently expanding our New
Oxford, Pennsylvania facility.
We have incurred considerable expenses in connection with the planned
consolidation of operations in the Eastern Region, which was to have resulted in
the closure of our Chesterfield, New Hampshire facility. These expenses consist
of the cost of moving inventory, as well as additional temporary expenses for
information technology, inventory management and redundant staffing and
transportation. Our operating results for the fourth quarter of fiscal 1999 and
first three quarters of fiscal 2000 were negatively impacted by computer and
related issues arising from the consolidation of Eastern Region operations. The
consolidation resulted in increased operating expenses, a lower gross margin and
lower sales than prior quarters in the Eastern Region. Due to the continuing
difficulties in the consolidation, our management decided in December 1999 to
keep our Chesterfield facility open for the foreseeable future. We expect that
the lower gross margin and lower sales than prior quarters in the Eastern Region
will continue throughout fiscal 2000. Additionally, we closed our Chicago
facility during the third quarter of fiscal 2000. Most of our existing Chicago
volume is now serviced from our Aurora, Colorado facility. We do not expect the
closure of our Chicago facility to have material impact on our results of
operations or financial condition.
Our net sales consist primarily of sales of natural products to retailers
adjusted for customer volume discounts, returns and allowances. The principal
components of our cost of sales include the amount paid to manufacturers and
growers for product sold, plus the cost of transportation necessary to bring the
product to our distribution facilities. Operating expenses include salaries and
wages, employee benefits (including payments under our Employee Stock Ownership
Plan), warehousing and delivery, selling, occupancy, administrative,
depreciation and amortization expense. Other expenses (income) include interest
on outstanding indebtedness, interest income and miscellaneous income and
expenses.
Recent Acquisitions
On September 30, 1998, we acquired substantially all of the outstanding stock of
Albert's Organics, a business specializing in the purchase, sale and
distribution of produce and other perishable items for $12 million, including
$10.3 million of goodwill which we are amortizing over 40 years. Albert's had
sales of $47.8 million for the fiscal year ended December 31, 1997 and provides
us with additional expertise in the purchasing of produce and other perishable
items. Albert's also enables us to avail ourselves of a number of cross-selling
opportunities, which will be mutually beneficial to both businesses. The
acquisition of Albert's has been accounted for as a purchase and, accordingly,
all financial information has been included since the date of acquisition.
8
Results of Operations
The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:
Nine Months
Quarter Ended Ended
April 30, April 30,
2000 1999 2000 1999
--------------- ---------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 80.2% 78.9% 81.2% 78.7%
----- ----- ----- -----
Gross profit 19.8% 21.1% 18.8% 21.3%
----- ----- ----- -----
Operating expenses 17.7% 16.3% 18.7% 16.4%
Restructuring and asset impairment charges -- 0.7% 0.4% 0.3%
Amortization of intangibles 0.1% 0.1% 0.1% 0.1%
----- ----- ----- -----
Total operating expenses 17.8% 17.0% 19.1% 16.8%
----- ----- ----- -----
Operating income (loss) 1.9% 4.1% -0.3% 4.4%
----- ----- ----- -----
Other expense (income):
Interest expense 0.7% 0.6% 0.7% 0.7%
Other, net -0.1% -0.7% -0.1% -0.3%
----- ----- ----- -----
Total other expense 0.7% -- 0.6% 0.4%
----- ----- ----- -----
Income (loss) before income taxes (benefit) 1.3% 4.1% -0.9% 4.0%
Income (benefit) taxes 0.5% 1.9% -0.4% 1.7%
----- ----- ----- -----
Net income (loss) 0.8% 2.3% -0.6% 2.3%
===== ===== ===== =====
Quarter Ended April 30, 2000 Compared To Quarter Ended April 30, 1999
Net Sales.
Our net sales increased approximately 1.0%, or $2.3 million, to $229.2 million
for the quarter ended April 30, 2000 from $226.9 million for the quarter ended
April 30, 1999. The overall increase in net sales was attributable to increased
sales to existing customers, the sale of new product offerings and sales to new
customers. These increases were partially offset by a decrease in net sales from
the Natural Retail Group due to the sale of four stores and the closing of one
store in April 1999. Excluding the Natural Retail Group's third quarter of
fiscal 1999 sales by the sold and closed stores, sales increased approximately
3.0% for the quarter ended April 30, 2000 over the comparable prior year period.
These growth rates are lower than in past quarters. The major factor
contributing to our lower growth rates was loss of volume in the Eastern Region
to other suppliers due to difficulties encountered in the consolidation effort.
Another contributing factor was the closure of our Chicago facility and the
resulting inability to fully service this region from our Denver, CO and New
Oxford, PA facilities, which resulted in approximately $1 million of lost sales.
Gross Profit.
Our gross profit decreased approximately 5.5%, or $2.6 million, to $45.3 million
for the quarter ended April 30, 2000 from $47.9 million for the quarter ended
April 30, 1999. Our gross profit as a percentage of net sales decreased to 19.8%
for the quarter ended April 30, 2000 from 21.1% for the quarter ended April 30,
1999. The decrease in gross profit as a percentage of net sales resulted
primarily from ongoing difficulties with the Eastern Region consolidation, as
well as an increased percentage of sales to existing customers under our volume
discount program and the divestiture of four retail stores, which have higher
gross margins than our distribution business. Difficulties in the Eastern Region
which impacted our margin include higher than normal levels of customer returns
and allowances, pricing errors, inventory shrink and higher inbound
transportation costs for expedited shipments.
9
Operating Expenses.
Our total operating expenses increased approximately 5.6%, or $2.2 million, to
$40.8 million for the quarter ended April 30, 2000 from $38.7 million for the
quarter ended April 30, 1999. As a percentage of net sales, operating expenses
increased to 17.8% for the quarter ended April 30, 2000 from 17.0% for the
quarter ended April 30, 1999. The increase in operating expenses as a percentage
of net sales was primarily due to increased costs in all regions for insurance
and fuel and the continuing difficulties in the Eastern Region. Our company-wide
insurance and fuel expenses have increased approximately $1.2 million compared
to the comparable prior year period and temporary storage and rental equipment
expense increased approximately $0.5 million over the prior year.
Our operating expenses for the quarter ended April 30, 2000 were also impacted
by approximately $0.4 million of non-recurring charges related to the closure of
our Chicago facility. Our operating expenses for the quarter ended April 30,
1999 were impacted by approximately $1.5 million of non-recurring charges for
depreciation on our Chesterfield facility. Excluding these non-recurring
charges, operating expenses would have been $40.4 million, or 17.6% of net
sales, for the quarter ended April 30, 2000 and $37.1 million, or 16.4% of net
sales, for the quarter ended April 30, 1999. Excluding non-recurring charges,
operating expenses would have increased $3.3 million, or 8.8%, in the quarter
ended April 30, 2000 compared to the quarter ended April 30, 1999.
Operating Income.
Operating income decreased $4.8 million, or 51.8%, to $4.5 million for the
quarter ended April 30, 2000 from $9.3 million for the quarter ended April 30,
1999. Excluding the non-recurring charges discussed above, operating income
would have decreased $5.9 million, or 54.9%, to $4.9 million for the quarter
ended April 30, 2000 from $10.8 million for the quarter ended April 30, 1999.
Other (Income)/Expense.
The $1.6 million increase in other expense in the quarter ended April 30, 2000
compared to the quarter ended April 30, 1999 was primarily attributable to a
$1.4 million gain on the sale of retail stores in 1999 and slightly higher
interest expense in 2000, reflecting a higher level of debt in the third quarter
of fiscal 2000. Excluding the gain on sale of retail stores in 1999, other
expense increased $0.2 million.
Income Taxes.
Our effective income tax rates were 40.0% and 45.2% for the quarters ended April
30, 2000 and 1999, respectively. The effective rates were higher than the
federal statutory rate primarily due to state and local income taxes. The
effective rate for 1999 also increased due to the settlement of an audit with
the Internal Revenue Service for $0.3 million.
Net Income.
As a result of the foregoing, net income decreased $3.4 million, or 65.5%, to
$1.8 million for the quarter ended April 30, 2000, compared to $5.1 million in
the quarter ended April 30, 1999. Excluding the non-recurring charges and gain
discussed above, net income would have decreased $3.5 million, or 63.6%, to $2.0
million for the quarter ended April 30, 2000, from $5.5 million for the quarter
ended April 30, 1999.
Nine Months Ended April 30, 2000 Compared To Nine Months Ended April 30, 1999
Net Sales.
Our net sales increased approximately 5.7%, or $36.5 million, to $679.0 million
for the nine months ended April 30, 2000 from $642.5 million for the nine months
ended April 30, 1999. The overall increase in net sales was attributable to
increased sales to existing customers, the sale of new product offerings and
sales to new customers, as well as an additional two months of sales from
Albert's Organics in fiscal 2000. These increases were partially offset by a
decrease in net sales from the Natural Retail Group due to the sale of four
stores and the closing of one store in April 1999. Excluding the impact of the
additional Albert's sales and the Natural Retail Group's first nine months of
fiscal 1999 sales by the sold and closed stores, sales increased approximately
6.5% for the nine months ended April 30, 2000 over the comparable prior year
period.
These growth rates are lower than in the past. The major factors contributing to
our lower growth rates were increased out of stocks in the Eastern Region and
loss of volume in the Eastern Region to other suppliers due to difficulties
encountered in the consolidation effort. Another contributing factor was the
closure of our Chicago
10
facility and the resulting inability to fully service this region from our
Denver, CO and New Oxford, PA facilities, which resulted in approximately $1
million in lost sales.
Gross Profit.
Our gross profit decreased approximately 6.5%, or $8.8 million, to $127.9
million for the nine months ended April 30, 2000 from $136.8 million for the
nine months ended April 30, 1999. Our gross profit as a percentage of net sales
decreased to 18.8% for the nine months ended April 30, 2000 from 21.3% for the
nine months ended April 30, 1999. The decrease in gross profit as a percentage
of net sales resulted primarily from ongoing difficulties with the Eastern
Region consolidation, as well as an increased percentage of sales to existing
customers under our volume discount program and the divestiture of four retail
stores, which have higher gross margins than our distribution business.
Difficulties in the Eastern Region which impacted our margin include higher than
normal levels of customer returns and allowances, pricing errors, inventory
shrink and higher inbound transportation costs for expedited shipments.
Operating Expenses.
Our total operating expenses increased approximately 20.1%, or $21.8 million, to
$130.0 million for the nine months ended April 30, 2000 from $108.2 million for
the nine months ended April 30, 1999. As a percentage of net sales, operating
expenses increased to 19.1% for the nine months ended April 30, 2000 from 16.8%
for the nine months ended April 30, 1999. The increase in operating expenses as
a percentage of net sales was primarily due to the continuing difficulties in
the Eastern Region and increased costs in all regions for insurance and fuel. We
incurred approximately $6 million in the Eastern Region in redundant labor
expenses and approximately $1.5 million in temporary storage and rental
equipment expense. Our company-wide insurance and fuel expenses have increased
approximately $3 million compared to the comparable prior year period.
Our operating expenses for the nine months ended April 30, 2000 were also
impacted by several non-recurring charges. These charges included approximately
$3.4 million of severance costs and the write-off of current assets in the
Eastern Region and Chicago and approximately $2.4 million of restructuring and
asset impairment charges related to the write-off of certain Eastern Region
fixed assets and the closing of our Chicago facility. Our operating expenses for
the nine months ended April 30, 1999 included approximately $2.2 million of
restructuring expenses related to the Eastern Region consolidation. Excluding
these non-recurring charges, operating expenses would have been $124.1 million,
or 18.3% of net sales, for the nine months ended April 30, 2000 and $106.0
million, or 16.5% of net sales, for the nine months ended April 30, 1999.
Excluding non-recurring charges, operating expenses would have increased $18.2
million, or 17.1%, in the nine months ended April 30, 2000 compared to the nine
months ended April 30, 1999.
Operating (Loss) Income.
Operating income decreased $30.6 million, to a loss of $(2.1) million for the
nine months ended April 30, 2000 from income of $28.5 million for the nine
months ended April 30, 1999. Excluding the non-recurring charges discussed
above, operating income would have decreased $27.0 million to $3.8 million for
the nine months ended April 30, 2000 from $30.8 million for the nine months
ended April 30, 1999.
Other (Income)/Expense.
Other expense increased $1.6 million in the nine months ended April 30, 2000
compared to the nine months ended April 30, 1999 due primarily to a $1.4 million
gain on the sale of retail stores in 1999 and a $0.1 million increase
attributable to increased interest expense.
Income (Benefit) Taxes.
Our effective income (benefit) tax rates were (39.8)% and 42.8% for the nine
months ended April 30, 2000 and 1999, respectively. The effective rates were
higher than the federal statutory rate primarily due to state and local income
taxes (benefit). Additionally, we recorded $0.3 million of incremental income
taxes in 1999 related to the sale of the retail stores.
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Net (Loss) Income.
As a result of the foregoing, net income decreased $18.6 million to a loss of
$(3.8) million for the nine months ended April 30, 2000, compared to net income
of $14.8 million in the nine months ended April 30, 1999. Excluding the
non-recurring charges discussed above, net income would have decreased $15.9
million to a loss of $(0.3) million for the nine months ended April 30, 2000
from income of $15.6 million for the nine months ended April 30, 1999.
Liquidity and Capital Resources
We have historically financed operations and growth primarily from cash flows
from operations, borrowings under our credit facility, seller financing of
acquisitions, operating and capital leases, trade payables, bank indebtedness
and the sale of equity and debt securities. Primary uses of capital have been
acquisitions, expansion of plant and equipment and investment in accounts
receivable and inventory.
Net cash used in operations was $10.6 million for the nine months ended April
30, 2000. Cash used in operations in the first nine months of fiscal 2000
related primarily to an increase in accounts receivable and investments in
inventory in the ordinary course of business. Days sales outstanding at April
30, 2000 has increased to approximately 31 days from approximately 26 days at
July 31, 1999. We are allocating additional resources to collection efforts to
decrease our days sales outstanding. The increases in inventory levels relate to
supporting increased sales with wider product assortment combined with our
ability to capture purchasing efficiency opportunities in excess of total
carrying costs. These items were partially offset by an increase in accounts
payable. Cash provided by operations in the first nine months of fiscal 1999 was
$5.9 million, due primarily to cash collected from customers net of cash paid to
vendors and partially offset by investments in accounts receivable and inventory
in the ordinary course of business. Working capital at April 30, 2000 was $66.3
million.
Net cash used in investing activities was $11.8 million and $5.6 million for the
nine months ended April 30, 2000 and 1999, respectively. Investing activities in
the nine months ended April 30, 2000 were primarily for capital expenditures.
Investing activities in the nine months ended April 30, 1999 were primarily for
the acquisition of new businesses and the continued upgrade of existing
management information systems, partially offset by proceeds from the sale of
certain retail stores.
Net cash provided by financing activities was $22.9 million and $10.4 million
for the nine months ended April 30, 2000 and 1999, respectively. We increased
borrowings on our line of credit by $25.4 million and $13.9 million during the
first nine months of fiscal 2000 and fiscal 1999, respectively, and repaid
long-term obligations in the amount of $3.9 million and $4.0 million,
respectively.
In October 1998, we entered into an interest rate swap agreement. The agreement
provides for us to pay interest for a five-year period at a fixed rate of 5% on
a notional principal amount of $60 million while receiving interest for the same
period at the LIBOR rate on the same notional principal amount. The swap has
been entered into as a hedge against LIBOR interest rate movements on current
and anticipated variable rate indebtedness totaling $60 million. The five-year
term of the swap agreement may be extended to seven years at the option of the
counterparty.
IMPACT OF INFLATION
Historically, we have been able to pass along inflation-related increases to our
customers. Consequently, inflation has not had a material impact upon the
results of our operations or profitability. We are currently assessing and
implementing strategies to mitigate the impact rising fuel costs have on our
results of operations. Continuing increases in the cost of fuel could have a
material adverse impact on our results of operations and profitability if we are
unable to pass along a significant portion of these increases.
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 the Company's operating expenses, management's ability to
execute our operating and growth strategies, personnel changes, demand for
natural products, supply shortages and general economic conditions.
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RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments, and
is effective for fiscal quarters of fiscal years beginning after June 15, 2000.
We believe this standard will not have a material impact on our financial
statement presentation.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation". The interpretation clarifies certain matters concerning the
application of APB Opinion No. 25 and is generally effective beginning July 1,
2000. We believe this standard will not have a material impact on our financial
statement presentation.
Certain Factors That May Affect Future Results
If any of the events described below actually occur, our business, financial
condition, or results of operations could be materially adversely affected. This
Form 10-Q contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in such forward-looking statements as a result of a variety of factors,
including those set forth in the following risk factors and elsewhere in, or
incorporated by reference into, this Form 10-Q.
Our business could be adversely affected if we are unable to integrate our
acquisitions and mergers
A significant portion of our historical growth has been achieved through
acquisitions of or mergers with other distributors of natural products. We
merged with Stow Mills in October 1997. The successful integration of this
merger is critical to our future operating and financial performance. The
integration will require, among other things:
o the optimization of delivery routes;
o coordination of administrative, distribution and finance functions;
and
o the integration of personnel.
The integration process has and could continue to divert the attention of
management, and any further difficulties or problems encountered in the
transition process could continue to have a material adverse effect on our
business, financial condition or results of operations. In addition, the process
of combining the companies has and could continue to cause the interruption of,
or a loss of momentum in, the activities of the respective businesses, which
could have an adverse effect on their combined operations. There can be no
assurance that we will realize any of the anticipated benefits of the Stow Mills
merger.
We may have difficulty in managing our growth
The growth in the size of our business and operations has placed and is expected
to continue to place a significant strain on our management. Our future growth
is limited in part by the size and location of our distribution centers. There
can be no assurance that we will be able to successfully expand our existing
distribution facilities or open new distribution facilities in new or existing
markets to facilitate growth. In addition, our growth strategy to expand our
market presence includes possible additional acquisitions. To the extent our
future growth includes acquisitions, there can be no assurance that we will
successfully identify suitable acquisition candidates, consummate and integrate
such potential acquisitions or expand into new markets. Our ability to compete
effectively and to manage future growth, if any, will depend on our ability to
continue to implement and improve operational, financial and management
information systems on a timely basis and to expand, train, motivate and manage
our work force. There can be no assurance that our personnel, systems,
procedures and controls will be adequate to support our operations. Our
inability to manage our growth effectively could have a material adverse effect
on our business, financial condition or results of operations.
We have significant competition from a variety of sources
We operate in highly competitive markets, and our future success will be largely
dependent on our ability to provide quality products and services at competitive
prices. Our competition comes from a variety of sources, including other
distributors of natural products as well as specialty grocery and mass market
grocery distributors. There can be no assurance that mass market grocery
distributors will not increase their emphasis on natural products and more
directly compete with us or that new competitors will not enter the market.
These distributors may have been in
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business longer than us, may have substantially greater financial and other
resources than us and may be better established in their markets. There can be
no assurance that our current or potential competitors will not provide services
comparable or superior to those provided by us or adapt more quickly than United
Natural to evolving industry trends or changing market requirements. It is also
possible that alliances among competitors may develop and rapidly acquire
significant market share or that certain of our customers will increase
distribution to their own retail facilities. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
could materially adversely affect our business, financial condition or results
of operations. There can be no assurance that we will be able to compete
effectively against current and future competitors.
We depend heavily on our principal customers
Our ability to maintain close, mutually beneficial relationships with our top
two customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc., is
important to the ongoing growth and profitability of our business. Whole Foods
Market, Inc. and Wild Oats Markets, Inc. accounted for approximately 17% and
15%, respectively, of our net sales during the nine months ended April 30, 2000.
As a result of this concentration of our customer base, the loss or cancellation
of business from either of these customers, including from increased
distribution to their own facilities, could materially and adversely affect our
business, financial condition or results of operations. We sell products under
purchase orders, and we generally have no agreements with or commitments from
our customers for the purchase of products. No assurance can be given that our
customers will maintain or increase their sales volumes or orders for the
products supplied by us or that we will be able to maintain or add to our
existing customer base.
Our profit margins may decrease due to consolidation in the grocery industry
The grocery distribution industry generally is characterized by relatively high
volume with relatively low profit margins. The continuing consolidation of
retailers in the natural products industry and the emergence of super natural
chains may reduce our profit margins in the future as more customers qualify for
greater volume discounts.
Our industry is sensitive to economic downturns
The grocery industry is also sensitive to national and regional economic
conditions, and the demand for our products may be adversely affected from time
to time by economic downturns. In addition, our operating results are
particularly sensitive to, and may be materially adversely affected by:
o difficulties with the collectibility of accounts receivable,
o difficulties with inventory control,
o competitive pricing pressures, and
o unexpected increases in fuel or other transportation-related costs.
There can be no assurance that one or more of such factors will not materially
adversely affect our business, financial condition or results of operations.
We are dependent on a number of key executives
Management of our business is substantially dependent upon the services of
Michael S. Funk, Chief Executive Officer, Richard S. Youngman, President, and
other key management employees. Norman A. Cloutier, our former Chairman of the
Board and Chief Executive Officer, resigned these positions on December 6, 1999.
Loss of the services of any additional officers or any other key management
employee could have a material adverse effect on our business, financial
condition or results of operations.
Our operating results are subject to significant fluctuations
Our net sales and operating results may vary significantly from period to period
due to:
o changes in our operating expenses,
o management's ability to execute our business and growth strategies,
o personnel changes,
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o demand for natural products,
o supply shortages,
o general economic conditions,
o changes in customer preferences and demands for natural products,
including levels of enthusiasm for health, fitness and environmental
issues,
o fluctuation of natural product prices due to competitive pressures,
o lack of an adequate supply of high-quality agricultural products due
to poor growing conditions, natural disasters or otherwise,
o volatility in prices of high-quality agricultural products resulting
from poor growing conditions, natural disasters or otherwise, and
o future acquisitions, particularly in periods immediately following
the consummation of such acquisition transactions while the
operations of the acquired businesses are being integrated into our
operations.
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results may not necessarily be meaningful and that such
comparisons cannot be relied upon as indicators of future performance.
We are subject to significant governmental regulation
Our business is highly regulated at the federal, state and local levels and our
products and distribution operations require various licenses, permits and
approvals. In particular:
o our products are subject to inspection by the U.S. Food and Drug
Administration,
o our warehouse and distribution facilities are subject to inspection
by the U.S. Department of Agriculture and state health authorities,
and
o our trucking operations are regulated by the U.S. Department of
Transportation and the U.S. Federal Highway Administration.
The loss or revocation of any existing licenses, permits or approvals or the
failure to obtain any additional licenses, permits or approvals in new
jurisdictions where we intend to do business could have a material adverse
effect on our business, financial condition or results of operations.
Our officers and directors and the employee stock ownership trust have
significant voting power
As of April 30, 2000, our executive officers and directors, and their
affiliates, and the United Natural Foods Employee Stock Ownership Trust
beneficially owned in the aggregate approximately 30% of United Natural's common
stock. Accordingly, these stockholders, if acting together, would have the
ability to significantly influence the election of our directors and may have
the ability to significantly influence the outcome of corporate actions
requiring stockholder approval, irrespective of how other stockholders may vote.
This concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of United Natural.
Union-organizing activities could cause labor relations difficulties
As of March 10, 2000, approximately 180 employees, representing approximately 7%
of our approximately 2,700 employees, were union members. We have in the past
been the focus of union-organizing efforts. As we increase our employee base and
broaden our distribution operations to new geographic markets, our increased
visibility could result in increased or expanded union-organizing efforts.
Although we have not experienced a work stoppage to date, if additional
employees were to unionize, we could be subject to work stoppages and increases
in labor costs, either of which could materially adversely affect our business,
financial condition or results of operations.
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Access to capital and the cost of that capital
In order to maintain our profit margins, we rely on strategic investment buying
initiatives, such as discounted bulk purchases, which require spending
significant amounts of working capital. In the event that capital market turmoil
significantly increased our cost of capital or the ability to borrow funds or
raise equity capital, we could suffer reduced profit margins and be unable to
grow our business organically or through acquisitions, which could have a
material adverse effect on our business, financial condition or results of
operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risk from interest rate fluctuations because we use
variable rate debt to finance working capital requirements. We have entered into
an interest rate swap agreement which manages that risk by fixing $60 million of
our variable debt at a rate of 6.25% through October 2003. We do not believe
that there is any material market risk exposure with respect to derivative or
other financial instruments that would require further disclosure under this
item.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
The exhibits listed in the Exhibit Index immediately preceding such exhibits are
filed as part of this Quarterly Report on Form 10-Q.
b) Reports on Form 8-K
On March 2, 2000, we filed a Current Report on Form 8-K dated February 22, 2000
announcing under Item 5 (Other Events) a press release regarding the declaration
of a dividend distribution of one preferred share purchase right for each
outstanding share of our Common Stock, and presenting under Item 7 (Financial
Statements, Pro-Forma Financial Information and Exhibits) the following
information:
1. Rights Agreement, dated as of February 22, 2000, between United Natural
Foods, Inc., and Continental Stock Transfer and Trust Company, as Rights
Agent, including all exhibits thereto, incorporated therein by reference
to Exhibit 1 to the Corporation's Registration Statement on Form 8-A,
dated March 2, 2000.
2. Press Release of the Corporation, dated February 22, 2000, incorporated
therein by reference to Exhibit 2 to the Corporation's Registration
Statement on Form 8-A, dated March 2, 2000.
Exhibit Index
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule 18
99 Fifth Amendment to Amended and Restated Loan
Agreement with Fleet Capital Corporation 19-25
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED NATURAL FOODS, INC.
/s/ Kevin T. Michel
-----------------------------
Kevin T. Michel
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: June 14, 2000
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