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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 January 31, 2001
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 March 1, 2001 there were 18,581,055 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 SIX MONTHS ENDED JANUARY 31, 2001
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of January 31, 2001 and July 3
31, 2000
Consolidated Statements of Operations for the three and six 4
months ended January 31, 2001 and 2000
Consolidated Statements of Cash Flows for the six months 5
ended January 31, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 13
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JANUARY 31,
(In thousands, except per share amounts) 2001 JULY 31, 2000
---- -------------
ASSETS
Current assets:
Cash $ 2,791 $ 1,943
Accounts receivable, net 82,217 69,474
Notes receivable, trade 406 456
Inventories 107,407 104,486
Prepaid expenses 6,074 6,085
Deferred income taxes 2,635 2,350
Refundable income taxes 2,483 4,401
--------- ---------
Total current assets 204,013 189,195
Property & equipment, net 61,769 52,625
Other assets:
Notes receivable, trade, net 1,241 765
Goodwill, net 26,202 26,624
Covenants not to compete, net 118 181
Other, net 726 844
--------- ---------
Total assets $ 294,069 $ 270,234
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 69,502 $ 68,007
Current installments of long-term debt 2,776 2,770
Current installment of obligations under capital
leases 675 1,036
Accounts payable 53,965 39,393
Accrued expenses 12,179 12,178
--------- ---------
Total current liabilities 139,097 123,384
Long-term debt, excluding current installments 25,464 26,722
Deferred income taxes 854 367
Obligations under capital leases, excluding current
installments 2,167 1,807
--------- ---------
Total liabilities 167,582 152,280
--------- ---------
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 18,564 at
January 31, 2001; issued and outstanding
18,283 at July 31, 2000 186 183
Additional paid-in capital 70,756 68,180
Unallocated shares of ESOP (2,339) (2,421)
Retained earnings 57,884 52,012
--------- ---------
Total stockholders' equity 126,487 117,954
--------- ---------
Total liabilities and stockholders' equity $ 294,069 $ 270,234
========= =========
See notes to consolidated financial statements.
3
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
JANUARY 31, JANUARY 31,
(In thousands, except per share data) 2001 2000 2001 2000
---- ---- ---- ----
Net sales $ 244,422 $ 231,375 $ 488,564 $ 449,830
Cost of sales 196,632 189,204 392,723 367,207
--------- --------- --------- ---------
Gross profit 47,790 42,171 95,841 82,623
--------- --------- --------- ---------
Operating expenses 41,373 45,565 82,155 86,175
Restructuring and asset impairment charges -- 2,420 -- 2,420
Amortization of intangibles 261 203 524 550
--------- --------- --------- ---------
Total operating expenses 41,634 48,188 82,679 89,145
--------- --------- --------- ---------
Operating income (loss) 6,156 (6,017) 13,162 (6,522)
--------- --------- --------- ---------
Other expense (income):
Interest expense 1,822 1,640 3,600 2,907
Other, net (11) (130) (225) (205)
--------- --------- --------- ---------
Total other expense 1,811 1,510 3,375 2,702
--------- --------- --------- ---------
Income (loss) before income taxes
(benefit) 4,345 (7,527) 9,787 (9,224)
Income taxes (benefit) 1,738 (2,999) 3,915 (3,678)
--------- --------- --------- ---------
Net income (loss) $ 2,607 $ (4,528) $ 5,872 $ (5,546)
========= ========= ========= =========
Per share data (basic):
Net income (loss) $ 0.14 $ (0.25) $ 0.32 $ (0.30)
========= ========= ========= =========
Weighted average shares of common stock 18,414 18,260 18,367 18,260
========= ========= ========= =========
Per share data (diluted):
Net income (loss) $ 0.14 $ ( 0.25) $ .31 $ ( 0.30)
========= ========= ========= =========
Weighted average shares of common stock 18,784 18,260 18,710 18,260
========= ========= ========= =========
See notes to consolidated financial statements.
4
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JANUARY 31,
(In thousands) 2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,872 $ (5,546)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,759 3,807
Gain on disposals of property & equipment 85 1,550
Deferred income tax expense 202 941
Provision for doubtful accounts 1,043 969
Changes in assets and liabilities;
Accounts receivable (13,786) (16,452)
Inventory (2,921) (21,210)
Prepaid expenses 11 249
Refundable income taxes 1,918 (4,609)
Other assets 201 (298)
Notes receivable, trade (426) 291
Accounts payable 14,572 14,073
Accrued expenses 1 2,039
--------------------
Net cash provided by (used in) operating activities 10,531 (24,196)
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposals of property and equipment 38 25
Capital expenditures (11,902) (3,323)
--------------------
Net cash used in investing activities (11,864) (3,298)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 1,495 29,852
Repayments on long-term debt (1,381) (1,101)
Proceeds from long-term debt 39 4
Principal payments of capital lease obligations (551) (441)
Proceeds from exercise of stock options 2,579 99
--------------------
Net cash provided by financing activities 2,181 28,413
--------------------
NET INCREASE IN CASH 848 919
Cash at beginning of period 1,943 2,845
--------------------
Cash at end of period $ 2,791 $ 3,764
====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,339 $ 2,433
====================
Income taxes $ 1,746 $ 201
====================
In the six months ended January 31, 2001 and 2000, the Company incurred $639 and
$514, respectively, of capital lease obligations.
See notes to consolidated financial statements.
5
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2001 (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 accounting principles
generally accepted in the United States of America 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. 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 counter
party.
3. EARNINGS PER SHARE
Following is a reconciliation of the basic and diluted number of shares used in
computing earnings per share:
Quarter Ended Six Months Ended
January 31, January 31,
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Basic weighted average shares outstanding 18,414 18,260 18,367 18,260
Net effect of dilutive stock options
based upon the treasury stock method 370 -- 343 --
------ ------ ------ ------
Diluted weighted average shares
outstanding 18,784 18,260 18,710 18,260
====== ====== ====== ======
There were no dilutive stock options for the quarter and six months ended
January 31, 2000 because the Company reported a net loss.
4. 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 engaged in
importing, 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
------------ ----- ------------ ------------
Six Months Ended January 31, 2001
Revenue $ 468,791 $ 29,271 $ (9,498) $ 488,564
Operating Income (Loss) $ 13,769 $ (600) $ (7) $ 13,162
Amortization and Depreciation $ 3,137 $ 622 $ -- $ 3,759
Capital Expenditures $ 11,313 $ 589 $ -- $ 11,902
Assets $ 428,832 $ 3,800 $(138,563) $ 294,069
Six Months Ended January 31, 2000
Revenue $ 429,831 $ 29,149 $ (9,150) $ 449,830
Operating Income (Loss) $ (2,143) $ (4,473) $ 94 $ (6,522)
Amortization and Depreciation $ 3,206 $ 600 $ -- $ 3,806
Capital Expenditures $ 2,821 $ 502 $ -- $ 3,323
Assets $ 402,349 $ 9,540 $(133,315) $ 278,574
6
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 three principal
units: United Natural Foods in the Eastern Region (previously Cornucopia Natural
Foods, Inc. and Stow Mills, Inc.), Mountain People's Warehouse, Inc. and Rainbow
Natural Foods in the Western Region (previously Rainbow Natural Foods solely
comprised the Central Region), and Albert's Organics in various markets in the
United States. Through our subsidiary, the Natural Retail Group, we also own and
operate 11 retail natural products stores located in the eastern United States.
We believe our retail business serves as a natural complement to our
distribution business as it enables us to develop new marketing programs and
improve customer service. Hershey Import Co., our division located in Rahway,
New Jersey, is a business that specializes in the importing, roasting and
packaging of nuts, seeds, dried fruits and snack items.
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 between
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. We have
made considerable capital expenditures and incurred considerable expenses in
connection with the expansion of our facilities, including the expansion of our
Los Angeles and Auburn, California, and New Oxford, Pennsylvania locations.
Approximately 45% of our distribution facility capacity has been added over the
past 4 years. 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 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 consisted 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
all of fiscal 2000 were negatively impacted by computer and related issues
arising from the consolidation of our Eastern Region operations. The
consolidation resulted in increased operating expenses, a lower gross margin and
lower sales than prior quarters in the Eastern Region. As a result of the
difficulties in the consolidation, our management decided in December 1999 to
keep our Chesterfield facility open for the foreseeable future. Additionally, we
closed our Chicago facility during the third quarter of fiscal 2000. Our Chicago
volume is now serviced from our Aurora, Colorado and New Oxford, Pennsylvania
facilities. The closure of our Chicago facility has not had a material impact on
our results of operations or financial condition. We have consolidated our
Denver facility (formerly our Central Region) into our Western Region. The
structure of our distribution business now consists of two main regions, Eastern
and Western, both of approximately the same size and scope.
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
products 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.
Computer and related issues arising from the consolidation of operations in our
Eastern Region resulted in increased operating expenses and lower sales and
gross margin in fiscal 2000 than prior quarters in the Eastern Region. As a
result of these problems, fiscal 2000 was a rebuilding year for us. Our
operating margins suffered in the first quarter (0.23%) and the second quarter
(0.26%) (excluding non-recurring charges of approximately $5.4 million) of
fiscal 2000. As a result of our efforts to reduce expenses, improve our
operating margin and increase sales our operating margin improved to 2.12%
(excluding non-recurring charges of approximately $0.4 million) in the third
quarter and to 2.57% in the fourth quarter of fiscal 2000. Our operating margin
continued to improve, and for the six months ended January 31, 2001, excluding
moving costs of approximately $0.2 million related to the expansion of the our
New Oxford, PA distribution facility, was 2.7% of sales.
7
Results of Operations
The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:
Quarter Ended Six Months Ended
January 31, January 31,
---------------- ----------------
2001 2000 2001 2000
---------------- ----------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 80.4% 81.8% 80.4% 81.6%
------- ------- ------- -------
Gross profit 19.6% 18.2% 19.6% 18.4%
------- ------- ------- -------
Operating expenses 16.9% 19.7% 16.8% 19.2%
Restructuring and asset impairment charges 0.0% 1.0% 0.0% 0.5%
Amortization of intangibles 0.1% 0.1% 0.1% 0.1%
------- ------- ------- -------
Total operating expenses 17.0% 20.8% 16.9% 19.8%
------- ------- ------- -------
Operating income (loss) 2.5% -2.6% 2.7% -1.4%
------- ------- ------- -------
Other expense (income):
Interest expense 0.7% 0.7% 0.7% 0.6%
Other, net 0.0% -0.1% 0.0% 0.0%
------- ------- ------- -------
Total other expense 0.7% 0.7% 0.7% 0.6%
------- ------- ------- -------
Income (loss) before income taxes (benefit) 1.8% -3.3% 2.0% -2.1%
Income taxes (benefit) 0.7% -1.3% 0.8% -0.8%
------- ------- ------- -------
Net income (loss) 1.1% -2.0% 1.2% -1.2%
======= ======= ======= =======
Quarter Ended January 31, 2001 Compared To Quarter Ended January 31, 2000
Net Sales.
Our net sales increased approximately 5.6%, or $13.0 million, to $244.4 million
for the quarter ended January 31, 2001 from $231.4 million for the quarter ended
January 31, 2000. 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. Net sales growth was adversely affected by a failure to
replace increased sales volume in the quarter ended January 31, 2000
attributable to Year 2000 concerns, and the closure of several internet-based
companies and several Wild Oats Markets, Inc. stores that generated sales in the
quarter ended January 31, 2000. Sales to our two largest customers, Whole Foods
Market, Inc. and Wild Oats Markets, Inc. represented in total approximately 32%
of net sales for the quarter ended January 31, 2001 compared to approximately
28% for the same period last year.
Gross Profit.
Our gross profit increased approximately 13.3%, or $5.6 million, to $47.8
million for the quarter ended January 31, 2001 from $42.2 million for the
quarter ended January 31, 2000. Our gross profit as a percentage of net sales
increased to 19.6% for the quarter ended January 31, 2001 from 18.2% for the
quarter ended January 31, 2000. The increase in gross profit resulted primarily
from our recovery in our Eastern Region as customer returns and allowances,
inventory shrink, and inbound transportation costs decreased significantly. A
portion of the gain in our gross profit was offset by a change in our channel
mix as the percentage of our sales to supernaturals increased. We expect the
increase in percentage of sales to supernaturals to continue in future periods.
Operating Expenses.
Our total operating expenses, excluding special charges, decreased approximately
4.0%, or $1.7 million, to $41.4 million for the quarter ended January 31, 2001
from $43.1 million for the quarter January 31, 2000. As a percentage of net
sales, operating expenses excluding special charges decreased to 16.9% for the
quarter ended January 31, 2001 from 18.6% for the quarter ended January 31,
2000. Special charges are discussed in the following paragraph. The lower
operating expenses as a percentage of net sales was attributable to increased
labor productivity in our distribution centers, a reduction in Information
Technology personnel as the Eastern region conversion issues were resolved,
reductions in expenditures associated with the consolidation of our Central
region into our Western region, and our Eastern Region recovery. These were
partially offset by higher fuel prices, which increased approximately $0.3
million during the period, and labor expenses.
Operating expenses for the quarter ended January 31, 2001 included special
charges of $0.2 million that represented moving costs related to the expansion
of our New Oxford, PA distribution facility. Our operating expenses for the
quarter ended January 31, 2000 were impacted by several special charges. These
charges included approximately $2.6 million of executive 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 planned closing of our
Chicago facility. Operating expenses including special charges decreased
approximately 13.6%, or $6.6 million, to $41.6 million for the quarter ended
January 31, 2001 from $48.2 million for the quarter ended January 31, 2000. As a
percentage of sales operating expenses including special charges decreased to
17.0% for the quarter ended January 31, 2001 from 20.8% for the quarter ended
January 31, 2000.
8
Operating Income.
Operating income increased $12.2 million to $6.2 million for the quarter ended
January 31, 2001 from a loss of $ (6.0) million for the quarter ended January
31, 2000.
Other (Income)/Expense.
The $0.3 million increase in other expense in the quarter ended January 31, 2001
compared to the quarter ended January 31, 2000 was primarily attributable to
slightly higher debt levels that were mostly offset by lower interest rates.
Income Taxes.
Our effective income tax (benefit) rates were 40.0% and (40.0)% for the quarters
ended January 31, 2001 and 2000, respectively. The effective rates were higher
than the federal statutory rate primarily due to state and local income taxes.
Net Income.
As a result of the foregoing, net income increased $7.1 million to $2.6 million
for the quarter ended January 31, 2001, compared to a loss of $(4.5) million in
the quarter ended January 31, 2000.
Six Months Ended January 31, 2001 compared to Six Months Ended January 31, 2000
Net Sales.
Our net sales increased approximately 8.6%, or $38.7 million, to $488.6 million
for the six months ended January 31, 2001 from $449.8 million for the six months
ended January 31, 2000. The overall increase in net sales was attributable to
increased sales to existing customers, the sale of new product offerings, sales
to new customers and increased market penetration in our Eastern Region as we
continued to recover from the difficulties associated with Eastern Region
consolidation. These increases were partially offset by a decrease in net sales
due to the closure of several internet-based companies and several Wild Oats
stores that generated sales in the prior year, as well as increased sales volume
in the prior year resulting from Year 2000 concerns. Sales to our two largest
customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc. represented in
total approximately 32% of net sales for the six months ended January 31, 2001
compared to approximately 29% for the same period last year.
Gross Profit.
Our gross profit increased approximately 16.0%, or $13.2 million, to $95.8
million for the six months ended January 31, 2001 from $82.6 million for the six
months ended January 31, 2000. Our gross profit as a percentage of net sales
increased to 19.6% for the six months ended January 31, 2001 from 18.4% for the
same period last year. The increase in gross profit resulted primarily from our
recovery in our Eastern Region as customer returns and allowances, inventory
shrink, and inbound transportation costs decreased significantly. A portion of
the gain in our gross profit was offset by a change in our channel mix as the
percentage of our sales to supernaturals increased. We expect the increase in
percentage of sales to supernaturals to continue in future periods.
Operating Expenses.
Our total operating expenses excluding special charges decreased approximately
2.0%, or $1.7 million, to $82.4 million for the six months ended January 31,
2001 from $84.1 million for the six months ended January 31, 2001. As a
percentage of net sales, operating expenses excluding special charges decreased
to 16.9% for the six months ended January 31, 2001 from 18.7% for the six months
ended January 31, 2000. Special charges are discussed in the following
paragraph. The decrease in operating expenses as a percentage of net sales
occurred despite fuel price increases and higher expenses related to a tight
labor market and was attributable to increased labor productivity in our
distribution centers, a reduction in Information Technology personnel as the
Eastern region conversion problems were resolved, reductions in expenditures
associated with the consolidation of our Central region into our Western region,
and our Eastern Region recovery. These were partially offset by higher fuel
prices, which increased approximately $0.9 million during the period, and labor
expenses.
Operating expenses for the six months ended January 31, 2001 included special
charges of $0.2 million that represented moving costs related to the expansion
of our New Oxford, PA distribution facility. Our operating expenses for the six
months ended January 31, 2000 were impacted by several special charges. These
charges included approximately $2.6 million of executive 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 planned closing of our
Chicago facility. Operating expenses including special charges decreased
approximately 7.3% or $6.5 million to $82.7 million for the six months ended
January 31, 2001 from $89.1 million for the six months ended January 31, 2000.
As a percentage of sales operating expenses including special charges decreased
to 16.9% for the six months ended January 31, 2001 from 19.8% for the six months
ended January 31, 2000.
Operating Income.
Operating income increased $19.7 million, to $13.2 million for the six months
ended January 31, 2001 from a loss of $(6.5) million for the six months ended
January 31, 2000.
Other (Income)/Expense.
The $0.7 million increase in other expense for the six months ended January 31,
2001 compared to the six months ended January 31, 2000 was primarily
attributable to slightly higher debt levels that were mostly offset by lower
interest rates.
Income Taxes.
Our effective income tax (benefit) rates were 40.0% and (40.0)% for the six
months ended January 31, 2001 and 2000, respectively. The effective rates were
higher than the federal statutory rate primarily due to state and local income
taxes.
9
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. As of January 31, 2001 we had less
than $11 million available under our $100 million credit facility. We are
currently evaluating various plans to access additional cash to meet our
anticipated higher capital requirements. Primary uses of capital have been
acquisitions, expansion of plant and equipment and investment in accounts
receivable and inventory.
Net cash provided by operations was $10.5 million for the six months ended
January 31, 2001 and was attributable to the increase of $11.4 million in net
income and cash collected from customers net of cash paid to vendors. Days in
inventory for the six months ended January 31, 2001 decreased to approximately
50 days from approximately 56 days for the same period last year due to the
recovery in the Eastern region and the subsequent decrease of inventory levels.
Net cash used in operations for the six months ended January 31, 2000 was $24.2
million and related primarily to investments in inventory in the ordinary course
of business and an increase in accounts receivable.
Net cash used in investing activities was $11.9 million for the six months ended
January 31, 2001 and was attributable primarily to the purchase of our secondary
facility in Auburn, CA and the expansion of our New Oxford, Pennsylvania
distribution facility.
Net cash provided by financing activities was $2.2 million for the six months
ended January 31, 2001 attributable to proceeds from the exercise of stock
options, and increased borrowings on our line of credit offset by repayment of
long-term debt. Net cash provided by financing activities was $28.4 million for
the six months ended January 31, 2000. We increased borrowings on our line of
credit by $29.9 million and repaid long-term obligations in the amount of $1.5
million.
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 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 June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative financial
instruments, and hedging activities related to those instruments, as well as
other hedging activities, and was amended by SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities." We believe that
we do not hold any derivative instruments or engage in hedging activities.
Accordingly, the adoption of SFAS No. 133 did not have a material impact on our
financial position, results of operations or cash flows.
Certain Factors That May Affect Future Results
This Form 10-Q and the documents incorporated by reference in this Form 10-Q
contain forward-looking statements that involve substantial risks and
uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would," or similar words. You
should read statements that contain these words carefully because they discuss
future expectations, contain projections of futures results of operations or of
financial position or state other "forward-looking" information. The important
factors listed below as well as any cautionary language in this Form 10-Q,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations described in these
forward-looking statements. You should be aware that the occurrence of the
events described in the risk factors below and elsewhere in this Form 10-Q could
have an adverse effect on our business, results of operations and financial
position.
Any forward-looking statements in this Form 10-Q and the documents incorporated
by reference in this Form 10-Q are not guarantees of futures performance, and
actual results, developments and business decisions may differ from those
envisaged by such forward-looking statements, possibly materially. We disclaim
any duty to update any forward-looking statements, all of which are expressly
qualified by the statement in this section.
Access to capital and the cost of that capital
As of January 31, 2001 we had less than $11 million available under our $100
million credit facility. We are currently evaluating various plans to access
additional cash to meet our anticipated higher capital requirements but future
low cash availability levels could restrict our ability to expand our business.
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 limited our 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.
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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 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
and Wild Oats accounted for approximately 17% and 15%, respectively, of our net
sales during the six months ended January 31, 2001. 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 growth 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:
|_| difficulties with the collectibility of accounts receivable,
|_| difficulties with inventory control,
|_| competitive pricing pressures, and
|_| 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, Steven Townsend, President, Kevin
Michel, Chief Financial Officer, and other key management employees. 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.
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Our operating results are subject to significant fluctuations
Our net sales and operating results may vary significantly from period to period
as a result of:
|_| changes in our operating expenses,
|_| management's ability to execute our business and growth strategies,
|_| personnel changes,
|_| demand for natural products,
|_| supply shortages,
|_| general economic conditions,
|_| changes in customer preferences and demands for natural products,
including levels of enthusiasm for health, fitness and environmental
issues,
|_| fluctuation of natural product prices due to competitive pressures,
|_| lack of an adequate supply of high-quality agricultural products due
to poor growing conditions, natural disasters or otherwise,
|_| volatility in prices of high-quality agricultural products resulting
from poor growing conditions, natural disasters or otherwise, and
|_| 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.
As a result of 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:
|_| our products are subject to inspection by the U.S. Food and Drug
Administration,
|_| our warehouse and distribution facilities are subject to inspection
by the U.S. Department of Agriculture and state health authorities,
and
|_| 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 January 31, 2001, our executive officers and directors, and their
affiliates, and the United Natural Foods Employee Stock Ownership Trust
beneficially owned in the aggregate approximately 17% of United Natural's common
stock. Accordingly, these stockholders, if acting together, may have the ability
to impact the election of our directors and determine the outcome of corporate
actions requiring stockholder approval, depending on 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 January 31, 2001, approximately 220 employees, representing approximately
8% 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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We do not believe that there is any material market risk exposure with respect
to derivative or other financial instruments that would require disclosure under
this item.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company (the "Annual Meeting") held
on December 6, 2000, the stockholders of the Company considered and voted on
three proposals:
1) Election of Directors. The stockholders elected Joseph M. Cianciolo, Kevin
T. Michel and Richard S. Youngman as Class I directors for the ensuing
three years. The terms of office as directors of Gordon D. Barker, Michael
S. Funk, James P. Heffernan and Thomas B. Simone continued after the
meeting. Following the annual meeting, Richard S. Youngman retired from
the Board of Directors, which appointed Steven H. Townsend, President of
the Company, to replace Mr. Youngman for the remainder of his three-year
term. The stockholders voted in the following manner:
Name Votes "FOR" Votes "WITHHELD"
---- ----------- ----------------
Joseph M. Cianciolo 13,441,637 2,858,949
Kevin T. Michel 13,446,437 2,854,149
Richard S. Youngman 13,406,187 2,894,399
2) Stock Option Plan. The stockholders approved of an amendment to the
Company's Amended and Restated 1996 Stock Option Plan that increased the
number of shares of Common Stock reserved for issuance under the Plan from
2,000,000 to 2,500,000. The stockholders voted in the following manner:
(I) 8,650,038 votes were cast "FOR" the proposal; (ii) 7,502,750 votes
were cast "AGAINST" the proposal; and (iii) 147,768 votes abstained.
3) Independent Auditor. The stockholders ratified the appointment of KPMG LLP
as the Company's independent auditor for the year ended July 31, 2001. The
stockholders voted in the following manner: (I) 14,144,880 votes were cast
"FOR" the proposal; (ii) 2,149,075 votes were cast "AGAINST" the proposal;
and (iii) 6,631 votes abstained.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
NONE
Reports on Form 8-K
NONE
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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
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: March 19, 2001
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