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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, 1998
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 15, 1998, there were 18,175,218 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 QUARTER ENDED APRIL 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 1998 and
July 31, 1997
Consolidated Statements of Income for the three months and
nine months ended April 30, 1998 and 1997
Consolidated Statements of Cash Flows for the nine months ended
April 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts) (Unaudited)
April 30, 1998 July 31, 1997
-------------- -------------
ASSETS
------
Current assets:
Cash $ 2,308 $ 952
Accounts receivable, net of allowance 48,548 42,952
Notes receivable, trade 835 866
Inventories 90,345 71,509
Prepaid expenses 4,379 4,110
Deferred income taxes 1,032 1,032
-------- --------
Total current assets 147,447 121,421
Property & equipment, net 42,487 32,412
Other assets:
Notes receivable, trade 1,099 995
Goodwill, net 19,807 7,579
Covenants not to compete, net 729 592
Other, net 711 1,562
-------- --------
Total assets $212,280 $164,561
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 56,588 $ 27,222
Current installments of long-term debt 2,472 3,016
Current installment of obligations under
capital leases 479 681
Accounts payable 30,874 30,536
Accrued expenses 9,190 6,488
Income taxes payable 857 377
-------- --------
Total current liabilities 100,460 68,320
Long-term debt, excluding current installments 27,535 20,411
Deferred income taxes 678 678
Obligations under capital leases, excluding
current installments 918 1,236
-------- --------
Total liabilities 129,591 90,645
-------- --------
Stockholders' equity:
Common stock, $.01 par value, authorized
25,000 shares;
Issued 17,404 and outstanding 17,375 at
April 30, 1998
Issued 17,377 and outstanding 17,357 at
July 31, 1997 174 174
Additional paid-in capital 50,272 51,842
Unallocated shares of ESOP (2,788) (2,910)
Retained earnings 35,340 24,854
Treasury stock, 29 and 20 shares, respectively,
at cost (309) (44)
-------- --------
Total stockholders' equity 82,689 73,916
-------- --------
Total liabilities and stockholders' equity $212,280 $164,561
======== ========
See notes to consolidated financial statements.
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------- ---------
(in thousands, except per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $187,581 $158,890 $538,940 $465,958
Cost of sales 148,200 127,243 429,062 372,266
-------- -------- -------- --------
Gross profit 39,381 31,647 109,878 93,692
-------- -------- -------- --------
Operating expenses 29,113 24,868 84,690 77,017
Merger expenses - - 4,064 -
Amortization of intangibles 333 265 838 795
-------- -------- -------- --------
Total operating expenses 29,446 25,133 89,592 77,812
-------- -------- -------- --------
Operating income 9,935 6,514 20,286 15,880
-------- -------- -------- --------
Other expenses (income):
Interest expense 1,395 1,237 3,668 4,745
Other, net (197) (169) (546) (471)
-------- -------- -------- --------
Total other expenses 1,198 1,068 3,122 4,274
-------- -------- -------- --------
Income before taxes and
extraordinary item 8,737 5,446 17,164 11,606
Income taxes 3,658 2,069 8,513 4,640
-------- -------- -------- --------
Income before extraordinary item 5,079 3,377 8,651 6,966
Extraordinary item - loss on early
extinguishment of debt, net of income tax
benefit of $662 - - - 933
-------- -------- -------- --------
Net income $ 5,079 $ 3,377 $ 8,651 $ 6,033
======== ======== ======== ========
Pro forma additional income tax expense - 173 320 179
-------- -------- -------- --------
Pro forma net income before extraordinary item $ 5,079 $ 3,204 $ 8,331 $ 6,787
======== ======== ======== ========
Per share data (basic):
Income before extraordinary item $ 0.29 $ 0.19 $ 0.50 $ 0.44
Extraordinary item - loss on early
extinguished of debt, net of income
tax benefit of $662 - - - 0.06
-------- -------- -------- --------
Net income $ 0.29 $ 0.19 $ 0.50 $ 0.38
======== ======== ======== ========
Pro forma net income before extraordinary item $ 0.29 $ 0.18 $ 0.48 $ 0.42
======== ======== ======== ========
Weighted average basic shares of common stock 17,369 17,357 17,361 16,034
======== ======== ======== ========
Per share data (diluted):
Income before extraordinary item $ 0.29 $ 0.19 $ 0.49 $ 0.42
Extraordinary item - loss on early
extinguishment of debt, net of income tax
benefit of $662 - - - 0.06
-------- -------- -------- --------
Net income $ 0.29 $ 0.19 $ 0.49 $ 0.36
======== ======== ======== ========
Pro forma net income before extraordinary item $ 0.29 $ 0.18 $ 0.48 $ 0.41
======== ======== ======== ========
Weighted average diluted shares of
common stock 17,750 17,539 17,672 16,586
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
APRIL 30,
-----------------
(in thousands) 1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,651 $ 6,033
Adjustments to reconcile net income to net cash
used in operating activities:
Extraordinary loss on early extinguishment of
debt, net of tax benefit - 933
Depreciation and amortization 4,405 4,144
Loss (gain) on disposals of property & equipment 155 (14)
Accretion of original issue discount - 153
Deferred income tax benefit - (455)
Provision for doubtful accounts 1,388 1,688
Changes in assets and liabilities, net of
acquired cocmpanies:
Accounts receivable (5,012) (5,840)
Inventory (13,845) (12,761)
Prepaid expenses (110) (274)
Other assets (378) (1,097)
Notes receivable, trade (73) (121)
Accounts payable 1,380 5,260
Accrued expenses 2,760 (1,029)
Income taxes payable (902) 840
-------- --------
Net cash used in operating activities (1,581) (2,540)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of new businesses (20,029) -
Proceeds from disposals of property and
equipment 400 91
Capital expenditures (11,800) (3,238)
-------- --------
Net cash used in investing activities (31,429) (3,147)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under note payable 26,022 (14,788)
Repayments on long-term debt (8,620) (15,739)
Proceeds from long-term debt 17,799 833
Principal payments of capital lease obligations (835) (361)
Proceeds from issuance of common stock, net - 35,510
Net borrowings on Stow Mills stockholder loans - 561
Dividends paid to Stow Mills stockholders - (25)
Cash distributions to Hendrickson partners - (490)
-------- --------
Net cash provided by financing activities 34,366 5,501
-------- --------
NET INCREASE (DECERASE) IN CASH 1,356 (186)
Cash at beginning of period 952 749
-------- --------
Cash at end of period $ 2,308 $ 563
======== ========
Supplemental disclosures of cash flow information:
- -------------------------------------------------
Cash paid during the period for:
Interest $ 3,735 $ 4,551
======== ========
Income taxes $ 7,669 $ 3,398
======== ========
See notes to consolidated financial statements.
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements ("financial statements")
include the accounts of United Natural Foods, Inc. and its wholly owned
subsidiaries (the "Company"). The Company is a distributor and retailer of
natural foods and related products.
On October 31, 1997, a subsidiary of the Company completed its merger with Stow
Mills, Inc. ("Stow Mills") wherein Stow Mills became a wholly owned subsidiary
of the Company. The merger with Stow was accounted for as a pooling of interests
and, accordingly, all financial information included is reported as though the
companies had been combined for all periods reported. Net sales for the
quarters ended April 30 and October 31, 1997 and for the nine months ended April
30, 1997 for the Company excluding Stow were approximately $108.1 million,
$116.5 million, and $311.0 million, respectively. Net income for the quarters
ended April 30 and October 31, 1997 and for the nine months ended April 30, 1997
for the Company excluding Stow was $2.9 million, $1.2 million and $5.5 million,
respectively. Net sales for the quarters ended April 30 and October 31, 1997 and
for the nine months ended April 30, 1997 for Stow were $50.8 million, $56.9
million and $155.0 million, respectively. Net income (loss) for the quarters
ended April 30 and October 31, 1997 and for the nine months ended April 30, 1997
for Stow was $0.5 million, $(1.8) million and $0.5 million, respectively.
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 the opinion of
management, 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.
Certain fiscal 1997 balances have been reclassified to conform to the fiscal
1998 presentation.
2. TRADE ACCOUNTS RECEIVABLE
An allowance for doubtful accounts is deducted from trade accounts receivable in
the accompanying financial statements. The allowance for doubtful accounts was
$2.1 million at April 30, 1998 and $2.3 million at July 31, 1997.
3. NOTE PAYABLE
In October 1997, the Company amended its credit agreement with its bank to
increase the amount of the facility from $50 million to $100 million, to
increase the limit on inventory advances to $50 million and the advance rate to
60%, to establish a term loan of $6.6 million and to increase the aggregate
amount of real estate acquisition loans and real estate term loans to $20
million. The agreement also provides for the bank to syndicate the credit
facility to other banks and lending institutions. The credit facility was used
to repay existing indebtedness of Stow owing to the Company's bank at the date
of the merger and is used for general operating capital needs. Interest under
the facility, except the portion related to the mortgage commitments, accrues at
the Company's option at the New York Prime Rate or 1.00% above the bank's London
Interbank Offered Rate (LIBOR), and the Company has the option to fix the rate
for all or a portion of the debt for a period up to 180 days. Interest on the
mortgage facility will accrue at 1.25% above the bank's LIBOR rate, although the
Company has the option to fix the rate for a period of five years at a rate of
1.25% above the five-year U.S Treasury Note rate. The Company has pledged all
of its assets as collateral for its obligations under the credit agreement. As
of April 30, 1998, the Company's outstanding borrowings under the credit
agreement totaled $56.6 million. The credit agreement expires on July 31, 2002.
In connection with the amendment to the Company's credit agreement with its bank
as above, an Agency and Interlender Agreement was entered into by the Company,
its bank and two additional participating banks effective December 1, 1997.
This agreement states, among other things, that the Company's primary bank will
participate in this credit facility with the other banks.
6
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. PRO FORMA NET INCOME
Stow was subject to taxation as an S corporation until the merger on October 31,
1997. For pro forma disclosure purposes, income tax adjustments were assumed in
order to reflect results as if Stow had been subject to taxation as a C
corporation for periods prior to the merger.
5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This
statement establishes standards for computing and presenting earnings per share
(EPS) and applies to entities with publicly held common stock or potential
common stock. The statement replaces the presentation of primary EPS with a
presentation of basic EPS. The statement also requires a dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. This statement is effective for periods ending
after December 15, 1997. The Company has calculated earnings per share under
the standard for all periods presented.
6. SUBSEQUENT EVENT
On June 10, 1998, the Company announced the commencement of a public offering of
3.250 million shares of Common Stock to be sold by the Company (0.800 million
shares) and certain selling stockholders (2.450 million shares) at a price of
$23.00 per share. In addition, one selling stockholder has granted the
underwriters an option to purchase up to an additional 4.875 million shares of
Common Stock to cover over-allotments, if any.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
United Natural Foods, Inc. is the leading independent national distributor of
natural foods and related products in the United States. In recent years, the
Company has increased sales to existing and new customers through the
acquisition of or merger with natural products distributors, the opening of
distribution centers in new geographic areas, the expansion of existing
distribution centers and the continued growth of the natural products industry
in general. Through these efforts, management believes that the Company has been
able to broaden its geographic penetration, expand its customer base, enhance
and diversify its product selections and increase its market share. The
Company's distribution operations are divided into three principal regions:
Cornucopia Natural Foods, Inc. ("Cornucopia") and Stow Mills in the Eastern
Region, Rainbow Natural Foods, Inc. ("Rainbow") in the Central Region and
Mountain People's Warehouse Incorporated ("Mountain People's") in the Western
Region. Through its Natural Retail Group ("NRG"), the Company also owns and
operates 16 retail natural products stores located in the eastern United States.
The Company's retail strategy for NRG is to selectively acquire existing natural
products stores that meet the Company's strict criteria in areas such as sales
growth, profitability, growth potential and store management. Management
believes the Company's retail business serves as a natural complement to its
distribution business.
The Company is 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, the Company's
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 expenses are
incurred, over the long term, the Company expects to benefit from the increased
absorption of its expenses over a larger sales base. In recent years, the
Company has made considerable expenditures in connection with the expansion of
its facilities, including the expansion of its distribution center and
headquarters in Dayville, Connecticut, the relocation of its Denver, Colorado
distribution center and the expansion of refrigerated and frozen space at its
Auburn, California and Atlanta, Georgia facilities.
The Company's net sales consist primarily of sales of natural products to
retailers adjusted for customer volume discounts, returns and allowances and, to
a lesser extent, sales from its natural products stores. The principal
components of the Company's 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 the Company's distribution facilities.
Operating expenses include salaries and wages, employee benefits (including
payments under the Company's Employee Stock Ownership Plan), warehousing and
delivery, selling, occupancy, administrative, depreciation, merger expenses and
amortization expense. Other expenses include interest payments on outstanding
indebtedness, miscellaneous expenses, interest income and miscellaneous income.
RECENT ACQUISITIONS
The mergers of the Company with Mountain People's and Stow Mills have each been
accounted for as a pooling of interests and, accordingly, all information
included herein is reported as though United Natural, Mountain People's and Stow
Mills had been combined for all periods reported.
On May 22, 1995, prior to its merger with United Natural, Mountain People's
acquired Nutrasource, Inc. ("Nutrasource"), and on July 29, 1995 the Company
acquired Rainbow. The acquisitions of Nutrasource and Rainbow were each
accounted for under the purchase method of accounting and, accordingly, all
financial information for Nutrasource and Rainbow has been included since the
respective dates of acquisition. The excess of
8
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the purchase price over the net assets acquired in each of these acquisitions
has been recorded as goodwill and is being amortized by the Company over various
useful lives, not exceeding 40 years.
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 APRIL 30, 1998 COMPARED TO QUARTER ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 79.0% 80.1% 79.6% 79.9%
----- ----- ----- -----
Gross profit 21.0% 19.9% 20.4% 20.1%
----- ----- ----- -----
Operating expenses 15.5% 15.7% 15.7% 16.5%
Merger expenses 0.0% 0.0% 0.8% 0.0%
Amortization of intangibles 0.2% 0.2% 0.2% 0.2%
----- ----- ----- -----
Total operating expenses 15.7% 15.8% 16.6% 16.7%
----- ----- ----- -----
Operating income 5.3% 4.1% 3.8% 3.4%
----- ----- ----- -----
Other expense (income):
Interest expense 0.7% 0.8% 0.7% 1.0%
Other, net -0.1% -0.1% -0.1% -0.1%
----- ----- ----- -----
Total other expense 0.6% 0.7% 0.6% 0.9%
----- ----- ----- -----
Income before extraordinary
item and income taxes 4.7% 3.4% 3.2% 2.5%
Extraordinary item - Loss on early
extinguishment debt (less
applicable income taxes) 0.0% 0.0% 0.0% 0.2%
----- ----- ----- -----
Income before income
taxes 4.7% 3.4% 3.2% 2.3%
Income taxes 2.0% 1.3% 1.6% 1.0%
----- ----- ----- -----
Net income 2.7% 2.1% 1.6% 1.3%
===== ===== ===== =====
</TABLE>
Net Sales.
The Company's net sales increased approximately 18.1%, or $28.7 million, to
$187.6 million for the quarter ended April 30, 1998 from $158.9 million for the
quarter ended April 30, 1997. The overall increase in net sales was primarily
attributable to increased sales to existing customers, sales to new accounts in
existing geographic areas and the introduction of new products not previously
offered by the Company. Historical information for Stow Mills for the three
months ended April 30, 1997 includes four fewer selling days than in the
comparable period in fiscal 1998. Additional net sales of approximately $2.8
million would have been reported by the Company in the 1997 three month period
had Stow Mills been on the Company's reporting calendar at that time. As a
result, the increases in the Company's net sales for the three month period,
adjusted for such additional sales, would have been approximately 16.0%. The
increase in net income for the quarter ended April 30, 1998, as adjusted for the
above-mentioned item, would have been $1.5 million.
Gross Profit.
The Company's gross profit increased approximately 24.4%, or $7.7 million, to
$39.4 million for the quarter ended April 30, 1998 from $31.6 million for the
quarter ended April 30, 1997. The Company's gross profit as a percentage of net
sales increased to 21.0% for the quarter ended April 30, 1998 from 19.9% for the
quarter ended April 30, 1997. The increase in gross profit as a percentage of
net sales resulted partially from greater purchasing efficiencies resulting from
the integration of Stow Mills, partially offset by increased sales to existing
customers under the Company's volume discount program.
Operating Expenses.
The Company's total operating expenses increased approximately 17.2%, or $4.3
million, to $29.4 million for the quarter ended April 30, 1998 from $25.1
million for the quarter ended April 30, 1997. As a percentage of net sales,
operating expenses decreased to 15.7% for the quarter ended April 30, 1998 from
15.8% for the quarter ended April 30, 1997. The decrease in total operating
expenses as a percentage of net sales was primarily attributable to the
Company's ability to leverage its overhead and realize synergies from recent
acquisitions. Included in operating expenses for the quarter ended April 30,
1997 were Stow Mills officer salaries totaling $0.5 million in excess of the
contractual agreements entered into in connection with the merger with Stow
Mills. Excluding these excess amounts, operating expenses for the quarter ended
April 30, 1997 would have been $24.6 million, or 15.5% of net sales.
Operating Income.
Operating income increased $3.4 million, or approximately 52.5%, to $9.9 million
for the quarter ended April 30, 1998 from $6.5 million for the quarter ended
April 30, 1997. As a percentage of net sales, operating income increased to 5.3%
in the quarter ended April 30, 1998 from 4.1% in the quarter ended April 30,
1997.
9
<PAGE>
Other (Income)/Expense.
The $0.1 million increase in other expense in the quarter ended April 30, 1998
compared to the quarter ended April 30, 1997 was primarily attributable to an
increase in interest expense as a result of a higher level of debt in 1998 than
in 1997.
Income Taxes.
The Company's effective income tax rates were 41.9% and 38.0% for the quarters
ended April 30, 1998 and 1997, respectively. The effective rates were higher
than the federal statutory rate primarily due to state and local income taxes,
partially offset in 1997 by the fact that Stow Mills was an S Corporation prior
to the merger and, as such, had no federal tax expense. The increase in the
effective rate was primarily attributable to increased earnings in higher state
tax jurisdictions, as well as Stow Mills being subject to federal tax in 1998.
Net Income.
As a result of the foregoing, the Company's net income increased by $1.7 million
to $5.1 million, or 2.7% of net sales, for the quarter ended April 30, 1998 from
$3.4 million, or 2.1% of net sales, in the quarter ended April 30, 1997.
NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30, 1997
Net Sales.
The Company's net sales increased approximately 15.7%, or $73.0 million, to
$538.9 million for the nine months ended April 30, 1998 from $466.0 million for
the nine months ended April 30, 1997. The overall increase in net sales was
primarily attributable to increased sales to existing customers, sales to new
accounts in existing geographic areas and the introduction of new products not
previously offered by the Company. Historical information for Stow Mills for
the nine months ended April 30, 1997 includes four fewer selling days than in
the comparable periods in fiscal 1998. Additional net sales of approximately
$2.8 million would have been reported by the Company in the fiscal 1997 period
had Stow Mills been on the Company's reporting calendar at that time. As a
result, the increases in the Company's net sales for the nine month period,
adjusted for such additional sales, would have been approximately 15.0%. The
increase in income before extraordinary item for the nine months ended April 30,
1998, as adjusted for the above-mentioned item, would have been $1.5 million.
Gross Profit.
The Company's gross profit increased approximately 17.3%, or $16.2 million, to
$109.9 million for the nine months ended April 30, 1998 from $93.7 million for
the nine months ended April 30, 1997. The Company's gross profit as a percentage
of net sales increased to 20.4% for the nine months ended April 30, 1998 from
20.1% for the nine months ended April 30, 1997. The increase in gross profit as
a percentage of net sales resulted partially from greater purchasing
efficiencies resulting from the integration of Stow Mills, partially offset by
increased sales to existing customers under the Company's volume discount
program.
Operating Expenses.
The Company's total operating expenses increased approximately 15.1%, or $11.8
million, to $89.6 million for the nine months ended April 30, 1998 from $77.8
million for the nine months ended April 30, 1997. As a percentage of net sales,
operating expenses decreased to 16.6% for the nine months ended April 30, 1998
from 16.7% for the nine months ended April 30, 1997. Excluding merger costs of
$4.1 million, the Company's total operating expenses for the nine months ended
April 30, 1998 would have been $85.5 million, or 15.9% of net sales,
representing an increase of $7.7 million, or 9.9%, over the comparable prior
period. The decrease in total operating expenses as a percentage of net sales
was primarily attributable to the Company's ability to leverage its overhead and
realize synergies from recent acquisitions.
10
<PAGE>
Operating Income.
Operating income increased $4.4 million, or approximately 27.7%, to $20.3
million for the nine months ended April 30, 1998 from $15.9 million for the nine
months ended April 30, 1997. As a percentage of net sales, operating income
increased to 3.8% in the nine months ended April 30, 1998 from 3.4% in the
comparable 1997 period. Excluding the merger costs noted above, operating income
for the nine months ended April 30, 1998 would have been $24.4 million
(representing an increase of 53.3% over the prior period), or 4.5% of net
sales.
Other (Income)/Expense.
The $1.2 million decrease in other expense in the nine months ended April 30,
1998 compared to the nine months ended April 30, 1997 was primarily attributable
to the reduction in interest expense in the first six months of fiscal 1998
relating to the repayment of Stow Mills' debt with proceeds from the Company's
credit facility, which bears interest at a lower rate. In addition, the proceeds
from the Company's initial public offering were used to repay debt.
Income Taxes.
The Company's effective income tax rates were 49.6% and 40.2% for the nine
months ended April 30, 1998 and 1997, respectively. The effective rates were
higher than the federal statutory rate primarily due to nondeductible merger
costs incurred during the first quarter of fiscal 1998 and state and local
income taxes, partially offset by the fact that Stow Mills was an S Corporation
prior to the merger and, as such, had no federal tax expense.
Net Income.
As a result of the foregoing, the Company's net income increased by $2.6 million
to $8.7 million for the nine months ended April 30, 1998 from $6.0 million in
the nine months ended April 30, 1997. Excluding the $4.1 million (net of taxes)
in merger costs in fiscal 1998 and $0.9 million extraordinary item (net of
taxes) related to the early extinguishment of debt in fiscal 1997, net income
would have been $12.7 million (representing an increase of 82.5% over the prior
period), or 2.4% of net sales, and $7.0 million, or 1.5% of net sales, for the
nine months ended April 30, 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and growth primarily from
cash flows from operations, borrowings under its credit facility, seller
financing of acquisitions, operating and capital leases, trade payables, bank
indebtedness and the sale of debt and equity 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 $1.6 million and $2.5 million for the nine
months ended April 30, 1998 and 1997, respectively. Excluding merger expenses of
$4.1 million, net cash provided by operations in fiscal 1998 would have been
$2.5 million. The Company's cash provided by operations in fiscal 1998,
excluding merger expenses, is due primarily to net income plus depreciation and
amortization, offset by investments in accounts receivable and inventory in the
ordinary course of business. The Company's cash used in operations in fiscal
1997 related primarily to investments in accounts receivable and inventory in
the ordinary course of business. The increases in inventory levels relate to
supporting increased sales with wider product assortment combined with the
Company's ability to capture purchasing efficiency opportunities in excess of
total carrying costs. The Company's working capital at April 30, 1998 was $47.0
million.
Net cash used in investing activities was $31.4 million and $3.1 million for the
nine months ended April 30, 1998 and 1997, respectively. Investing activities in
1998 were primarily for the acquisition of new businesses and the purchase of a
warehouse, as well as the continued upgrade of existing management information
systems. Investing activities in 1997 included primarily capital expenditures
related to the purchase of material handling equipment and
11
<PAGE>
the continued upgrade of existing management information systems. The Company's
capital expenditures were primarily funded from senior bank indebtedness,
including term loans.
Cash provided by financing activities was $34.3 million and $5.5 million for the
nine months ended April 30, 1998 and 1997, respectively. During 1998, the
Company had net borrowing on its line of credit of $26.0 million and proceeds
from long-term debt of $17.8 million. During fiscal 1997, the Company issued
2.9 million shares of its common stock in its initial public offering, which
resulted in net proceeds to the Company of $35.5 million. The proceeds were used
to repay indebtedness of the Company.
In October 1997, the Company amended its credit agreement with its bank to
increase the amount of the facility from $50 million to $100 million, to
increase the limit on inventory advances to $50 million and the advance rate to
60%, to establish a term loan of $6.6 million and to increase the aggregate
amount of real estate acquisition loans and real estate term loans to
$20 million. The agreement also provides for the bank to syndicate the credit
facility to other banks and lending institutions. The credit facility was used
to repay existing indebtedness of Stow Mills owing to the Company's bank and
is used for general operating capital needs. Interest under the facility,
except the portion related to the mortgage commitments, accrues at the Company's
option at the New York Prime Rate or 1.00% above the bank's London Interbank
Offered Rate (LIBOR), and the Company has the option to fix the rate for all or
a portion of the debt for a period up to 180 days. Interest on the mortgage
facility will accrue at 1.25% above the bank's LIBOR rate, although the Company
has the option to fix the rate for a period of five years at a rate of 1.25%
above the five-year rate for U.S. Treasury Notes. The Company has pledged all of
its assets as collateral for its obligations under the credit agreement. As of
April 30, 1998, the Company's outstanding borrowings under the credit agreement
totaled $56.6 million. The credit agreement expires on July 31, 2002.
The Company expects to spend approximately $25 million over the next five years
in capital expenditures to fund the expansion of existing facilities, upgrade
information systems and technology and update its material handling equipment.
Included in this amount are $3 to $5 million in capital expenditures in the 1998
and 1999 calendar years for the Company's Year 2000 upgrade and new warehouse
management system, including new hardware and installation.
IMPACT OF INFLATION
Historically, the Company has been able to pass along inflation-related
increases. Consequently, inflation has not had a material impact upon the
results of the Company's operations or profitability.
SEASONALITY
Generally, the Company does not experience any material seasonality. However,
the Company's 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 the Company's operating and growth strategies,
personnel changes, demand for natural products, supply shortages and general
economic conditions.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("SFAS") No. 129, "Disclosure of Information about Capital
Structure." This statement establishes standards for disclosing information
about an entity's capital structure. This statement is effective for periods
ending after December 15, 1997. The Company is in compliance with this standard.
The Financial Accounting Standards Board recently issued SFAS No. 130,"Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. This statement is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of financial
statements for earlier periods provided for comparative purposes. The Company
will comply with the required presentation in fiscal 1999.
12
<PAGE>
The Financial Accounting Standards Board recently issued SFAS No.
131,"Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for reporting operating segments of publicly
traded business enterprises in annual and interim financial statements and
requires that those enterprises report selected information about operating
segments. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business," but retains the requirement to report information about
major customers. This statement also amends SFAS No. 94, "Consolidation of All
Majority-Owned Subsidiaries." SFAS No. 131 is effective for financial statements
for fiscal years beginning after December 15, 1997 and requires that comparative
information for earlier years be restated. The Company has not yet determined
what impact, if any, this standard will have on its financial statement
presentation.
The Financial Accounting Standards Board recently issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement standardizes disclosure requirements for pensions and other
postretirement benefits, and is effective for fiscal years beginning after
December 15, 1997. This statement does not apply to the Company as the Company
does not currently sponsor any defined benefit plans.
YEAR 2000 ISSUES
The Company's financial accounting systems are Year 2000 compliant. The
Company's Eastern Region and its Chicago facility are not currently Year 2000
compliant. The Company is currently reviewing its operational business systems
to ensure Year 2000 compliance and to enhance its business systems functionality
to achieve operating efficiencies and customer service improvements. The Company
plans to purchase packaged software to address Year 2000 issues when available.
The Company expects to incur $3 to $5 million in expenditures in the 1998 and
1999 calendar years for its Year 2000 upgrade and new warehouse management
systems, including new hardware and installation .However, there can be no
assurance that the systems of other companies on which the Company's systems
rely also will be timely converted or that any such failure to convert by
another company would not have a material adverse effect on the Company's
business, financial condition or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time. Any statements contained herein (including without limitations
statements to the effect that the Company or its management "believes,"
"expects," "anticipates," "plans" and similar expressions) that are not
statements of historical fact should be considered forward-looking statements.
Results of operations in any past period should not be considered indicative of
the results to be expected for future periods. Fluctuations in operating
results may also result in fluctuations in the price of the Company's common
stock.
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, continued demand for current products
offered by the Company, the success of the Company's acquisition strategy,
competitive pressures, general economic conditions, the success of new product
introductions and government regulation.
A significant portion of the Company's historical growth has been achieved
through acquisitions of or mergers with other distributors of natural products.
The Company recently acquired or merged with four large regional distributors of
natural products. The successful and timely integration of these acquisitions
and mergers is critical to future operating and financial performance of the
Company. While the integration of these acquisitions and mergers with the
Company's existing operations has begun, the Company believes that the
integration will not be substantially completed until the end of calendar 1998.
The integration will require, among other things, coordination of
administrative, sales and marketing, distribution, and accounting and finance
functions and expansion of information and warehouse management systems among
the Company's regional operations. The integration process could divert the
attention of management, and any difficulties or problems encountered in the
transition process could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, the process
of combining the companies could cause the interruption of, or loss of
13
<PAGE>
momentum in, the activities of the respective businesses, which could have an
adverse effect on their combined operations.
The Company is currently experiencing a period of growth which could place a
significant strain on its management and other resources. The Company's business
has grown significantly in size and complexity over the past several years. The
growth in the size of the Company's business and operations has placed and is
expected to continue to place a significant strain on the Company's management.
The Company's future growth is limited in part by the size and location of its
distribution centers. There can be no assurance that the Company will be able to
successfully expand its existing distribution facilities or open new
distribution facilities in new or existing markets to facilitate growth. In
addition, the Company's growth strategy to expand its market presence includes
possible additional acquisitions. To the extent the Company's future growth
includes acquisitions, there can be no assurance that it will successfully
identify suitable acquisition candidates, consummate and integrate such
potential acquisitions or expand into new markets.
The Company operates in highly competitive markets, and its future success will
be largely dependent on its ability to provide quality products and services at
competitive prices. The Company's 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 the mass
market grocery distributors will not increase their emphasis on natural products
and more directly compete with the Company or that new competitors will not
enter the market.
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 natural products
supermarket chains may have an adverse effect on the Company's profit margins in
the future as more customers qualify for greater volume discounts offered by the
Company. The grocery industry is also sensitive to national and regional
economic conditions, and the demand for product supply may be adversely affected
from time to time by economic downturns.
14
<PAGE>
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 April 22, 1998, the Company filed a Current Report on Form 8-K dated April
22, 1998 restating under Item 5 (Other Events) financial statements and other
financial information, and presenting under Item 7 (Financial Statements, Pro
Forma Financial Information and Exhibits) the following information:
EXHIBITS.
11 - Computation of Net Earnings per Share for the year ended October 31,
1995, the nine months ended July 31, 1996, the year ended July 31, 1997
and the six months ended January 31, 1997 and 1998.
23 - Consent of KPMG Peat Marwick LLP, independent auditors.
27.1 - Restated Financial Data Schedules - six months ended January 31, 1998 and
three months ended October 31, 1997.
27.2 - Restated Financial Data Schedules - year ended July 31, 1997, nine months
ended April 30, 1997 and six months ended January 31, 1997.
27.3 - Restated Financial Data Schedules - three months ended October 31, 1996,
nine months ended July 31, 1996 and year ended October 31, 1995.
99.1 - Selected Consolidated Financial Data.
99.2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
99.3 - Consolidated Financial Statements of United Natural Foods, Inc. as of
October 31, 1995, July 31, 1996 and 1997 and January 31, 1998 (unaudited)
and for the year ended October 31, 1995, the nine months ended July 31,
1996, the year ended July 31, 1997 and the six months ended January 31,
1997 and 1998 (unaudited) and Reports of Independent Accountants thereon.
99.4 - Schedule II - Valuation and Qualifying Accounts and Report of Independent
Accountants thereon.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. DESCRIPTION
- ----------- -----------
<S> <C>
11 Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
<PAGE>
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/ Robert T. Cirulnick
_____________________________
Robert T. Cirulnick
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: June 12, 1998
<PAGE>
EXHIBIT 11
UNITED NATURAL FOODS INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
(in thousands, except per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding 17,369 17,357 17,361 16,034
Net affect of dilutive stock options
based upon the treasury stock
method using the average stock price 381 183 311 553
------ ------ ------ ------
Diluted weighted average shares outstanding 17,750 17,539 17,672 16,586
====== ====== ====== ======
Income before extraordinary item $5,079 $3,377 $8,651 $6,966
Extraordinary item - loss on early
extinguishment of debt, net of
income tax benefit of $662 - - - 933
------ ------ ------ ------
Net income $5,079 $3,377 $8,851 $6,787
====== ====== ====== ======
Pro forma net income before
extraordinary item $5,079 $3,204 $8,331 $6,787
====== ====== ====== ======
Basic Per Share Data:
Income before extraordinary item $ 0.29 $ 0.19 $ 0.50 $ 0.44
Extraordinary item - loss on early
extinguishment of debt, net of income
tax benefit of $662 $ - $ - $ - $ 0.06
------ ------ ------ ------
Net income $ 0.29 $ 0.19 $ 0.50 $ 0.38
====== ====== ====== ======
Pro forma net income before
extraordinary item $ 0.29 $ 0.18 $ 0.48 $ 0.42
====== ====== ====== ======
Diluted Per Share Data:
Income before extraordinary item $ 0.29 $ 0.19 $ 0.49 $ 0.42
Extraordinary item - loss on early
extinguishment of debt, net of income
tax benefit of $662 $ - $ - $ - $ 0.06
------ ------ ------ ------
Net income $ 0.29 $ 0.19 $ 0.49 $ 0.36
====== ====== ====== ======
Pro forma net income before extraordinary
item $ 0.29 $ 0.18 $ 0.48 $ 0.41
====== ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND
THE CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> APR-30-1998
<CASH> 2,308
<SECURITIES> 0
<RECEIVABLES> 51,475
<ALLOWANCES> 2,092
<INVENTORY> 90,345
<CURRENT-ASSETS> 147,447
<PP&E> 65,252
<DEPRECIATION> 22,765
<TOTAL-ASSETS> 212,280
<CURRENT-LIABILITIES> 100,460
<BONDS> 28,453
0
0
<COMMON> 174
<OTHER-SE> 82,515
<TOTAL-LIABILITY-AND-EQUITY> 212,280
<SALES> 538,940
<TOTAL-REVENUES> 538,940
<CGS> 429,062
<TOTAL-COSTS> 429,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,388
<INTEREST-EXPENSE> 3,668
<INCOME-PRETAX> 17,164
<INCOME-TAX> 8,513
<INCOME-CONTINUING> 8,651
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,651
<EPS-PRIMARY> 0.50
<EPS-DILUTED> 0.49
</TABLE>
