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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, 1999
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 14, 1999, there were 18,249,305 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
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<PAGE>
UNITED NATURAL FOODS, INC.
FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 1999 and July 31, 1998 3
Consolidated Statements of Income for the quarter and nine months ended
April 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the nine months ended April 30,
1999 and 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 7-17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
-----------
(In thousands, except per share amounts) APRIL 30, 1999 JULY 31, 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 12,012 $ 1,393
Accounts receivable, net of allowance of $2,500 and $1,780,
respectively 60,051 48,078
Notes receivable, trade 941 705
Inventories 98,973 91,119
Prepaid expenses 5,370 3,209
Deferred income taxes 2,647 1,540
Refundable income taxes -- 165
--------- ---------
Total current assets 179,994 146,209
--------- ---------
Property & equipment, net 44,551 44,434
--------- ---------
Other assets:
Notes receivable, trade, net 885 1,170
Goodwill, net 26,450 19,136
Covenants not to compete, net 369 613
Other, net 1,681 680
--------- ---------
Total assets $ 253,930 $ 212,242
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 50,499 $ 36,608
Current installments of long-term debt 3,964 3,309
Current installment of obligations under capital leases 729 488
Accounts payable 34,442 32,017
Accrued expenses 13,585 8,219
Income taxes payable 2,463 --
--------- ---------
Total current liabilities 105,682 80,641
Long-term debt, excluding current installments 24,900 25,081
Deferred income taxes 2,455 1,370
Obligations under capital leases, excluding current installments 1,114 764
--------- ---------
Total liabilities 134,151 107,856
--------- ---------
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 18,249 at April 30, 1999; authorized
25,000, issued 18,184 and outstanding 18,175 at July 31, 1998 182 182
Additional paid-in capital 69,709 67,440
Unallocated shares of ESOP (2,625) (2,747)
Retained earnings 52,513 39,776
Treasury stock, 9 shares at July 31, 1998, at cost -- (265)
--------- ---------
Total stockholders' equity 119,779 104,386
--------- ---------
Total liabilities and stockholders' equity $ 253,930 $ 212,242
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
--------- ---------
(In thousands, except per share data) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 226,892 $ 187,581 $ 642,529 $ 538,940
Cost of sales 178,953 148,200 505,768 429,062
--------- --------- --------- ---------
Gross profit 47,939 39,381 136,761 109,878
--------- --------- --------- ---------
Operating expenses 36,893 29,113 105,133 84,690
Merger and restructuring expenses 1,538 -- 2,243 4,064
Amortization of intangibles 245 333 844 838
--------- --------- --------- ---------
Total operating expenses 38,676 29,446 108,220 89,592
--------- --------- --------- ---------
Operating income 9,263 9,935 28,541 20,286
--------- --------- --------- ---------
Other expense (income):
Interest expense 1,401 1,395 4,470 3,668
Other, net (1,488) (197) (1,847) (546)
--------- --------- --------- ---------
Total other expense (income) (87) 1,198 2,623 3,122
--------- --------- --------- ---------
Income before income taxes 9,350 8,737 25,918 17,164
Income taxes 4,231 3,658 11,104 8,513
--------- --------- --------- ---------
Net income $ 5,119 $ 5,079 $ 14,814 $ 8,651
========= ========= ========= =========
Per share data (basic):
Net income $ 0.28 $ 0.29 $ 0.81 $ 0.50
========= ========= ========= =========
Weighted average basic shares of common stock 18,183 17,369 18,178 17,361
========= ========= ========= =========
Per share data (diluted):
Net income $ 0.28 $ 0.29 $ 0.80 $ 0.49
========= ========= ========= =========
Weighted average diluted shares of common stock 18,512 17,750 18,529 17,672
========= ========= ========= =========
</TABLE>
For the nine months ended April 30, 1998, pro forma additional income tax
expense was $320 and pro forma net income was $8,331, or $0.48 per share on both
a basic and diluted basis. The pro forma additional income tax expense relates
to Stow Mills' status as an S-Corporation prior to the merger (Note 4).
See notes to consolidated financial statements.
4
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED APRIL 30,
---------------
(In thousands) 1999 1998
---- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,814 $ 8,651
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 6,337 4,405
Gain on sale of business (1,397) --
(Gain) loss on disposals of property & equipment (303) 155
Deferred income tax benefit (80) --
Provision for doubtful accounts 1,178 1,388
Changes in assets and liabilities, net of acquired companies:
Accounts receivable (10,146) (5,012)
Inventory (8,708) (13,845)
Prepaid expenses (2,029) (110)
Refundable income taxes 50 --
Other assets (386) (378)
Notes receivable, trade 49 (73)
Accounts payable 1,333 1,380
Accrued expenses 2,684 2,760
Income taxes payable 2,463 (902)
-------- --------
Net cash provided by (used in) operating activities 5,859 (1,581)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of subsidiaries, net of cash acquired (8,888) (20,029)
Proceeds from sale of business 7,086 --
Proceeds from disposals of property and equipment 1,367 400
Capital expenditures (5,155) (11,800)
-------- --------
Net cash used in investing activities (5,590) (31,429)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 13,892 26,022
Repayments on long-term debt (3,526) (8,620)
Proceeds from long-term debt -- 17,799
Principal payments of capital lease obligations (473) (835)
Proceeds from exercise of stock options 456 --
-------- --------
Net cash provided by financing activities 10,349 34,366
-------- --------
NET INCREASE IN CASH 10,619 1,356
Cash at beginning of period 1,393 952
-------- --------
Cash at end of period $ 12,012 $ 2,308
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,306 $ 3,735
======== ========
Income taxes $ 12,147 $ 7,669
======== ========
</TABLE>
In the nine months ended April 30, 1999 and 1998, the Company incurred $1,064
and $315, respectively, of capital lease obligations.
See notes to consolidated financial statements.
5
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1999 (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.
On October 31, 1997, we completed a merger with Stow Mills, Inc. wherein Stow
Mills became one of our wholly owned subsidiaries. The merger with Stow Mills
was accounted for as a pooling of interests and, accordingly, all financial
information included is reported as though we had been combined for all periods
reported. Our net sales for the quarter ended October 31, 1997 excluding Stow
Mills were $116.5 million. Our net income for the quarter ended October 31, 1997
excluding Stow Mills was $1.2 million. Net sales for the quarter ended October
31, 1997 for Stow Mills were $56.9 million. Net loss for the quarter ended
October 31, 1997 for Stow Mills was $1.8 million.
The financial statements have been prepared pursuant to rules and regulations of
the Securities and Exchange Commission for interim financial information,
including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally required in
complete financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In our opinion, these
financial statements include all adjustments necessary for a fair presentation
of the results of operations for the interim periods presented. The results of
operations for interim periods, however, may not be indicative of the results
that may be expected for a full year.
Certain fiscal 1998 balances have been reclassified to conform to the fiscal
1999 presentation.
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. The five year
term of the swap agreement may be extended to seven years at the option of the
counterparty.
3. RESTRUCTURING COSTS
We accrued employee severance expenses of $0.7 million during the quarter ended
January 31, 1999, in connection with the consolidation of operations in the
Eastern Region. During the quarter ended April 30, 1999, we recorded incremental
depreciation of $1.2 million and accrued employee retention expenses of $0.4
million. Less than $0.1 million of the retention and severance expenses had been
paid as of April 30, 1999.
4. PRO FORMA NET INCOME
Stow Mills 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 Mills had been subject to
taxation as a C corporation for the period prior to the merger.
5. EARNINGS PER SHARE
Following is a reconciliation of the basic and diluted number of shares used in
computing earnings per share:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
April 30, April 30,
(In thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding 18,183 17,369 18,178 17,361
Net effect of dilutive stock options based upon the
treasury stock method 329 381 351 311
--------- -------- ----------- ----------
Diluted weighted average shares outstanding 18,512 17,750 18,529 17,672
========= ======== =========== ==========
</TABLE>
6
<PAGE>
6. ACQUISITION
On September 30, 1998, we acquired substantially all of the outstanding stock of
Albert's Organics, Inc., a business specializing in the purchase, sale and
distribution of produce and other perishable items, for $10.8 million to $12
million, predicated upon the future performance of Albert's, including $9.1
million of goodwill which we are amortizing over 40 years. Albert's had sales of
$47.8 million for the fiscal year ended December 31, 1997 and provides us with
additional expertise in the purchasing of produce and other perishable items.
Albert's also enables us to avail ourselves of a number of cross-selling
opportunities, which will be mutually beneficial to both businesses. This
acquisition has been accounted for as a purchase and, accordingly, all financial
information has been included since the date of acquisition.
7. COMPREHENSIVE INCOME
Effective August 1, 1998, we adopted 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. Our comprehensive income is equal to net income for all
periods presented.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are the leading independent 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 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, 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
regions: United Natural Foods in the Eastern Region (previously Cornucopia
Natural Foods, Inc. and Stow Mills, Inc.), Rainbow Natural Foods, Inc. in the
Central Region and Mountain People's Warehouse, Inc. in the Western Region.
Through our subsidiary, the Natural Retail Group, we also own and operate a
number of retail natural products stores located in the eastern United States.
Our retail strategy is to selectively acquire existing natural products stores
that meet our strict criteria in areas such as sales growth, profitability,
growth potential and store management. We believe our retail business serves as
a natural complement to our distribution business enabling us to develop new
marketing programs and improve customer service.
We are continually integrating certain operating functions in order to improve
operating efficiencies, including: (i) integrating administrative and accounting
functions; (ii) expanding marketing and customer service programs across the
three regions; (iii) expanding national purchasing opportunities; (iv)
consolidating systems applications between physical locations and regions; and
(v) reducing geographic overlap between regions. In addition, our continued
growth has created the need for expansion of existing facilities to achieve
maximum operating efficiencies and to assure adequate space for future needs.
While operating margins may be affected in periods in which these expenses are
incurred, over the long term, we expect to benefit from the increased absorption
of our expenses over a larger sales base. We have incurred considerable expenses
in connection with the consolidation of operations in the Eastern Region, and
expect these expenses to continue for the remainder of fiscal 1999. These
expenses consist of restructuring costs, including additional depreciation,
severance and retention expenses, and the cost of moving inventory, as well as
additional temporary expenses for information technology, inventory management
and redundant staffing and transportation. We have also made considerable
expenditures in connection with the expansion of our facilities, including the
relocation of our Denver, Colorado distribution center and the expansion of
refrigerated and frozen space at our Auburn, California and Atlanta, Georgia
facilities. Additionally, our Seattle, Washington facility was relocated to a
larger facility in Auburn, Washington during the third quarter of fiscal 1999.
Our net sales consist primarily of sales of natural products to retailers
adjusted for customer volume discounts, returns and allowances. The principal
components of our cost of sales include the amount paid to manufacturers and
growers for product sold, plus the cost of transportation necessary to bring the
product to our distribution facilities. Operating expenses include salaries and
wages, employee benefits (including payments under our Employee Stock Ownership
Plan), warehousing and delivery, selling, occupancy, administrative,
depreciation, merger expenses and amortization expense. Other expenses include
gain on the sale of retail stores, interest on outstanding indebtedness,
interest income and miscellaneous income and expenses.
7
<PAGE>
Recent Acquisitions
On September 30, 1998, we acquired substantially all of the outstanding stock of
Albert's Organics, Inc., a business specializing in the purchase, sale and
distribution of produce and other perishable items, for $10.8 million to $12
million, predicated upon the future performance of the acquired business,
including $9.1 million of goodwill which we are amortizing over 40 years.
Albert's had sales of $47.8 million for the fiscal year ended December 31, 1997
and provides us with additional expertise in the purchasing of produce and other
perishable items. Albert's also enables us to avail ourselves of a number of
cross-selling opportunities, which will be mutually beneficial to both
businesses. The acquisition of Albert's has been accounted for as a purchase
and, accordingly, all financial information has been included since the date of
acquisition.
Our merger with Stow Mills in October 1997 has been accounted for as a pooling
of interests and, accordingly, all information included herein is reported as
though United Natural and Stow Mills had been combined for all periods reported.
Results of Operations
The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Quarter Ended Nine Months
April 30, Ended April 30,
(In thousands, except per share data) 1999 1998 1999 1998
------------------- -------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 78.9% 79.0% 78.7% 79.6%
-------- -------- -------- --------
Gross profit 21.1% 21.0% 21.3% 20.4%
-------- -------- -------- --------
Operating expenses 16.3% 15.5% 16.4% 15.7%
Merger and restructuring expenses 0.7% 0.0% 0.3% 0.8%
Amortization of intangibles 0.1% 0.2% 0.1% 0.2%
-------- -------- -------- --------
Total operating expenses 17.0% 15.7% 16.8% 16.6%
-------- -------- -------- --------
Operating income 4.1% 5.3% 4.4% 3.8%
-------- -------- -------- --------
Other expense (income):
Interest expense 0.6% 0.7% 0.7% 0.7%
Other, net -0.7% -0.1% -0.3% -0.1%
-------- -------- -------- --------
Total other expense (income) 0.0% 0.6% 0.4% 0.6%
-------- -------- -------- --------
Income before income taxes 4.1% 4.7% 4.0% 3.2%
Income taxes 1.9% 2.0% 1.7% 1.6%
-------- -------- -------- --------
Net income 2.3% 2.7% 2.3% 1.6%
======== ======== ======== ========
</TABLE>
8
<PAGE>
Quarter Ended April 30, 1999 Compared To Quarter Ended April 30, 1998
Net Sales.
Our net sales increased approximately 21.0%, or $39.3 million, to $226.9 million
for the quarter ended April 30, 1999 from $187.6 million for the quarter ended
April 30, 1998. The overall increase in net sales was attributable to increased
sales to existing customers, the sale of new product offerings and the newly
acquired Albert's Organics business. Excluding Albert's Organics, our most
recent acquisition, our net sales growth would have been 13.6% over the prior
year comparable period.
Gross Profit.
Our gross profit increased approximately 21.7%, or $8.6 million, to $47.9
million for the quarter ended April 30, 1999 from $39.4 million for the quarter
ended April 30, 1998. Our gross profit as a percentage of net sales increased to
21.1% for the quarter ended April 30, 1999 from 21.0% for the quarter ended
April 31, 1998. The increase in gross profit as a percentage of net sales
resulted partially from greater purchasing efficiencies resulting from the
integration of Stow Mills and inbound freight efficiencies, and a greater mix of
higher margin business, partially offset by increased sales to existing
customers under our volume discount program.
Operating Expenses.
Our total operating expenses increased approximately 31.3%, or $9.2 million, to
$38.7 million for the quarter ended April 30, 1999 from $29.4 million for the
quarter ended April 30, 1998. As a percentage of net sales, operating expenses
increased to 17.0% for the quarter ended April 30, 1999 from 15.7% for the
quarter ended April 30, 1998. Excluding restructuring costs of $1.5 million,
total operating expenses for the quarter ended April 30, 1999 would have been
$37.1 million, or 16.4% of net sales, resulting in an increase for the quarter
ended April 30, 1999 of $7.7 million, or 26.1%, over the comparable prior
period. The increase in operating expenses as a percentage of net sales,
excluding restructuring costs, is primarily due to increased information
technology expenditures, the growth of the retail business, which generally has
higher operating expenses as a percentage of net sales than the distribution
business and additional business integration costs for redundant staffing and
training in preparation for the migration of the business from the Chesterfield,
New Hampshire facility to the Dayville, Connecticut facility.
Operating Income.
Operating income decreased $0.7 million, to $9.3 million for the quarter ended
April 30, 1999 from $9.9 million for the quarter ended April 30, 1998. As a
percentage of net sales, operating income decreased to 4.1% in the quarter ended
April 30, 1999 from 5.3% in the comparable 1998 period. Excluding the
restructuring costs noted above, operating income for the quarter ended April
30, 1999 would have been $10.8 million, or 4.8% of net sales, resulting in an
increase for the quarter ended April 30, 1999 of $0.9 million, or 8.7%, over the
comparable prior period.
Other (Income)/Expense.
The $1.3 million increase in other income in the quarter ended April 30, 1999
compared to the quarter ended April 30, 1998 was primarily attributable to the
gain on the sale of four retail stores in April, 1999. Interest expense was
relatively unchanged, reflecting a higher level of debt in the third quarter of
fiscal 1999 used to fund working capital investments and acquisitions offset by
a decrease in our average interest rate on debt.
Income Taxes.
Our effective income tax rates were 45.3% and 41.9% for the quarters ended April
30, 1999 and 1998, respectively. The effective rates were higher than the
federal statutory rate primarily due to state and local income taxes. The
effective rate for 1999 also increased due to the settlement of an audit with
the Internal Revenue Service for $0.3 million.
Net Income.
As a result of the foregoing, net income was relatively unchanged at $5.1
million, or 2.3% of net sales, for the quarter ended April 30, 1999, compared to
2.7% of net sales in the quarter ended April 30, 1998. Excluding the $1.5
million in restructuring costs ($0.9 million, net of tax), the $1.4 million gain
on the sale of four retail stores ($0.8 million, net of tax) and the $0.3
million IRS settlement in the third quarter of fiscal 1999, net income would
have
9
<PAGE>
been $5.5 million, or 2.4% of net sales, resulting in an increase for the
quarter ended April 30, 1999 of $0.4 million, or 8.3%, over the comparable prior
period.
Nine Months Ended April 30, 1999 Compared To Nine Months Ended April 30, 1998
Net Sales.
Our net sales increased approximately 19.2%, or $103.6 million, to $642.5
million for the nine months ended April 30, 1999 from $538.9 million for the
nine months ended April 30, 1998. The overall increase in net sales was
attributable to increased sales to existing customers, the sale of new product
offerings and the newly acquired Albert's Organics business. Excluding Albert's
Organics, our most recent acquisition, our net sales growth would have been
13.7% over the prior year comparable period.
Gross Profit.
Gross profit increased approximately 24.5%, or $26.9 million, to $136.8 million
for the nine months ended April 30, 1999 from $109.9 million for the nine months
ended April 30, 1998. Gross profit as a percentage of net sales increased to
21.3% for the nine months ended April 30, 1999 from 20.4% for the nine months
ended April 30, 1998. The increase in gross profit as a percentage of net sales
resulted from greater purchasing efficiencies resulting from the integration of
Stow Mills and inbound freight efficiencies, and a greater mix of higher margin
business, partially offset by increased sales to existing customers under our
volume discount program.
Operating Expenses.
Total operating expenses increased approximately 20.8%, or $18.6 million, to
$108.2 million for the nine months ended April 30, 1999 from $89.6 million for
the nine months ended April 30, 1998. As a percentage of net sales, operating
expenses increased to 16.8% for the nine months ended April 30, 1999 from 16.6%
for the nine months ended April 30, 1998. Excluding fiscal 1999 restructuring
costs of $2.2 million and fiscal 1998 merger costs of $4.1 million, total
operating expenses for the nine months ended April 30, 1999 and 1998 would have
been $106.0 million, or 16.5% of net sales, and $85.5 million, or 15.9% of net
sales, respectively, resulting in an increase for the nine months ended April
30, 1999 of $20.4 million, or 23.9%, over the comparable prior period. The
increase in operating expenses as a percentage of net sales, excluding
restructuring and merger costs, is primarily due to increased information
technology expenditures, the growth of the retail business, which generally has
higher operating expenses as a percentage of net sales than the distribution
business and additional business integration costs for redundant staffing and
training in preparation for the migration of the business from the Chesterfield,
New Hampshire facility to the Dayville, Connecticut facility.
Operating Income.
Operating income increased $8.3 million to $28.5 million for the nine months
ended April 30, 1999 from $20.3 million for the nine months ended April 30,
1998. As a percentage of net sales, operating income increased to 4.4% in the
nine months ended April 30, 1999 from 3.8% in the comparable 1998 period.
Excluding the restructuring and merger costs noted above, operating income for
the nine months ended April 30, 1999 and 1998 would have been $30.8 million, or
4.8% of net sales, and $24.4 million, or 4.5% of net sales, respectively,
resulting in an increase for the nine months ended April 30, 1999 of $6.4
million, or 26.4%, over the comparable prior period.
Other (Income)/Expense.
The $0.5 million decrease in other expense in the nine months ended April 30,
1999 compared to the nine months ended April 30, 1998 was primarily attributable
to the gain on the sale of four retail stores in April 1999, partially offset by
an increase in interest expense relating to the higher level of debt in the
first nine months of fiscal 1999 used to fund working capital investments and
acquisitions. This increase in interest expense was partially offset by a
decrease in our average interest rate on debt.
10
<PAGE>
Income Taxes.
Our effective income tax rates were 42.8% and 49.6% for the nine months ended
April 30, 1999 and 1998, respectively. The effective rate for 1999 was higher
than the federal statutory rate primarily due to state and local income taxes
and the settlement of an IRS audit for $0.3 million. The effective rate for 1998
was higher than the federal statutory rate primarily due to state and local
income taxes and and non-deductible merger expenses incurred in the first
quarter of fiscal 1998, partially offset by the fact that Stow Mills was an S
Corporation prior to the merger and, as such, had no federal tax expense for the
first fiscal quarter of 1998.
Net Income.
As a result of the foregoing, net income increased by $6.2 million to $14.8
million, or 2.3% of net sales, for the nine months ended April 30, 1999 from
$8.7 million in the nine months ended April 30, 1998. Excluding the $2.2 million
in restructuring costs ($1.3 million, net of tax), the $1.4 million gain on the
sale of four retail stores ($0.8 million, net of tax) and the $0.3 million IRS
settlement in the third quarter of fiscal 1999, and the $4.1 million in merger
costs in fiscal 1998, net income would have been $15.6 million, or 2.4% of net
sales, and $12.7 million, or 2.4% of net sales, respectively, resulting in an
increase for the nine months ended April 30, 1999 of $2.9 million, or 22.8%,
over the comparable prior period.
Liquidity And Capital Resources
We have historically financed operations and growth primarily from cash flows
from operations, borrowings under our credit facility, seller financing of
acquisitions, operating and capital leases, trade payables, bank indebtedness
and the sale of equity and debt securities. Primary uses of capital have been
acquisitions, expansion of plant and equipment and investment in accounts
receivable and inventory.
Net cash provided by (used in) operations was $5.9 million and $(1.6) million
for the nine months ended April 30, 1999 and 1998, respectively. Excluding
merger expenses of $4.1 million, net cash provided by operations in the first
nine months of fiscal 1998 would have been $2.5 million. Cash provided by
operations in the first nine months of fiscal 1999 related primarily to cash
collected from customers net of cash paid to vendors, partially offset by
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 our ability to capture purchasing
efficiency opportunities in excess of total carrying costs. Cash provided by
operations in the first nine months of fiscal 1998, excluding merger expenses,
is also due primarily to cash collected from customers net of cash paid to
vendors, partially offset by investments in accounts receivable and inventory in
the ordinary course of business. Working capital at April 30, 1999 was $74.3
million.
Net cash used in investing activities was $5.6 million and $31.4 million for the
nine months ended April 30, 1999 and 1998, respectively. Investing activities in
both years were primarily for the acquisition of new businesses and the
continued upgrade of existing management information systems. Net cash used in
investing activities in fiscal 1999 was partially offset by proceeds from the
sale of four retail stores in April 1999.
Cash provided by financing activities was $10.4 million and $34.4 million for
the nine months ended April 30, 1999 and 1998, respectively. We increased
borrowings on our line of credit by $13.9 million and $26.0 million during the
first nine months of fiscal 1999 and fiscal 1998, respectively, and repaid
long-term obligations in the amount of $4.0 million and $9.5 million,
respectively. During fiscal 1998 we also incurred $17.8 million of long-term
debt.
We expect to spend approximately $45 million over the next five years in capital
expenditures to fund the expansion of existing facilities, upgrade information
systems and technology and update our material handling equipment.
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.
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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 our
results operations or profitability.
Seasonality
Generally, we do not experience any material seasonality. However, sales and
operating results may vary significantly from quarter to quarter due to factors
such as changes in operating expenses, our ability to execute 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 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. We are currently evaluating what
impact, if any, this standard will have on our financial statement disclosures.
The Financial Accounting Standards Board 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 as we do not currently sponsor any defined benefit
plans.
The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments, and
is effective for fiscal quarters of fiscal years beginning after June 15, 2000.
We have not yet determined what impact, if any, this standard will have on our
financial statement presentation.
Year 2000 Issues
We have assessed most of our internal exposure to the year 2000 issue, and have
established a comprehensive response to that exposure. We continue to assess our
customer and vendor exposure. Generally, United Natural has "Year 2000" exposure
in three areas:
o United Natural's information technology infrastructure, including
computer operating systems and applications,
o microprocessors and other electronic devices -- "embedded chips" --
included as components of non-computer equipment, and
o computer systems used by third parties, including our customers and
suppliers.
The information technology infrastructure and embedded chips are being addressed
on a regional level. The third parties are being evaluated centrally. We have
completed our assessment of our information technology infrastructure, and are
in the process of completing our evaluation of all microprocessors and other
electronic devices, third-party vendors and customers.
Our Western Region
We believe that our western region's critical information technology
infrastructure components and embedded chips are year 2000 compliant. We have
made the minimal changes necessary for our information technology infrastructure
to operate in a year 2000 environment. We do not utilize two digit date coding
logic, and we have successfully tested hardware, operating system and
applications software simulating post year 2000 systems clock dates. We have
tested our microprocessors and other electronic devices and have completed the
necessary changes
12
<PAGE>
rendering them year 2000 compliant. The Seattle facility's phone system was
replaced for other business reasons during the third quarter of fiscal 1999 and
is year 2000 compliant. We have tested all western region critical information
technology infrastructure components and embedded chips and we believe they will
work properly in the year 2000 and beyond.
Our Central Region
We believe our central region's critical information technology infrastructure
components and embedded chips are also year 2000 compliant. Our central region
does not employ two digit date coding logic and has simulated year 2000 system
clock dates in tests of its hardware and operating systems as well as selected
applications software. We recently completed all year 2000 simulation testing.
We have also recently completed an independent third-party review of our central
region's operating system and critical information technology applications
software code which has indicated that they are year 2000 compliant. All other
information technology infrastructure components and embedded chips either have
been modified or, if not year 2000 compliant, will be retired before July 1,
1999.
Our Eastern Region
Our eastern region is currently reviewing the results of a third-party audit of
its year 2000 systems code for both the Cornucopia (Dayville, Connecticut and
Atlanta, Georgia) and Stow Mills systems. Our eastern region is in the process
of moving to a single system for operational efficiency reasons. The Stow Mills
system will become a hybrid of the best functionality components of each system.
The Stow Mills system requires a number of code changes to achieve full year
2000 compliance. We expect the existing operating system to be upgraded to a
year 2000 compliant version by the end of July 1999. In addition, all code is
expected to be year 2000 compliant for the new Eastern Region business systems
by the end of June 1999, except for one warehouse facility which is expected to
be year 2000 compliant by October 1999. Also, to test year 2000 compliance, the
surviving eastern region systems clock will be moved forward simulating the year
2000 prior to the end of August 1999. The existing Cornucopia systems are not
year 2000 compliant. We expect to move off these existing systems and on to the
new Eastern Region system during June 1999. All other information technology
infrastructure components and embedded chips have been modified, or, if not year
2000 compliant, will be retired before July 1, 1999. Our Eastern Region's
telephone systems are not yet year 2000 compliant and will be replaced or
upgraded by July 1999.
Retail Stores
The current point of sale or cash registers are not all year 2000 compliant. We
plan to have the year 2000 compliant point of sale systems or compliant cash
registers in place on by July 1999.
Albert's Organics, Inc. and Hershey Import Co., Inc.
We will place our Hershey business onto the United Natural Foods system and
expect to have this completed by the end of October 1999. We have simulated year
2000 system clock dates for the Albert's systems, and we expect to make the code
changes required to make these systems year 2000 compliant by August 1999.
Our Suppliers and Customers
We have sent written requests for year 2000 information to substantially all
suppliers. We are currently reviewing the responses received and have sent
second requests to the top suppliers making up at least 80% of our purchases. We
have also compiled a database of all customers regarding their year 2000 status
and plans for remediation and have sent both initial and follow-up information
requests.
Expenditures
We are in the process of updating our systems for business functionality reasons
and have adopted a going forward systems strategy of staying current with state
of the art systems technology. We are also in the process of integrating
acquisitions to achieve customer service and operating efficiency improvements,
which require common state of the art systems technology. Accordingly, all
business systems changes would be performed regardless of the year 2000 issue
both from a timing and cost perspective. We have significantly increased our
information technology expenditures to execute our systems strategy that
includes any immaterial incremental amounts to achieve year 2000 compliance. We
therefore believe that we will have spent an incremental amount of less than
$0.4 million on year 2000 remediation over what we would have spent to execute
our going forward systems strategy. We expect to
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spend on information technology systems and support approximately $7.2 million
in fiscal 1999 and we have already spent approximately $4 million and $3 million
in fiscal 1998 and 1997, respectively.
Potential Risks
The dates on which we believe we will be year 2000 compliant are based on our
plans for work to be performed and best estimates which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results may differ materially from
those anticipated. If we are unsuccessful in completing remediation of
non-compliant systems, correcting embedded chips or if customers or suppliers
cannot rectify their year 2000 issues, it could have a material adverse effect
on our business, financial condition and results of operations. We have not yet
established a contingency plan in the event of non-compliance by any parties. We
are beginning to prepare contingency plans for any critical business
applications and expect to have such plans completed prior to the end of August
1999.
Certain Factors That May Affect Future Results
If any of the events described below actually occur, our business, financial
condition, or results of operations could be materially adversely affected. This
Form 10-Q contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in such forward-looking statements as a result of a variety of factors,
including those set forth in the following risk factors and elsewhere in, or
incorporated by reference into, this Form 10-Q.
Our business could be adversely affected if we are unable to integrate our
acquisitions and mergers
A significant portion of our historical growth has been achieved through
acquisitions of or mergers with other distributors of natural products. United
Natural merged with Stow Mills in October 1997. The successful and timely
integration of this merger is critical to our future operating and financial
performance. We believe that the integration of Stow Mills will be substantially
completed by the end of 1999. The integration will require, among other things:
o the optimization of delivery routes;
o coordination of administrative, distribution and finance functions;
o the integration of personnel; and
o the integration of computer systems onto a single systems platform.
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 our business, financial condition or results of
operations. In addition, the process of combining the companies could cause the
interruption of, or a loss of momentum in, the activities of the respective
businesses, which could have an adverse effect on their combined operations.
There can be no assurance that United Natural will retain key employees of Stow
Mills or that we will realize any of the other anticipated benefits of the Stow
Mills merger.
We recently announced plans to close our Chesterfield, New Hampshire
distribution center and to consolidate its operations with our Dayville,
Connecticut and New Oxford, Pennsylvania facilities. We expect to begin
transferring sales operations from the Chesterfield facility to our Dayville and
New Oxford facilities by June of 1999. There are numerous risks involved with
this consolidation of operations including, among other things:
o we may have difficulty retaining drivers currently employed at our
Chesterfield facility or hiring a sufficient number of new drivers
at our Dayville and New Oxford facilities to handle the increased
sales volume at those facilities;
o we may have difficulty retaining warehouse employees from our
Chesterfield facility or hiring a sufficient number of new warehouse
employees to handle the increased sales volume at those facilities;
o we may lose customers;
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<PAGE>
o our operating costs may increase because of the expenses involved in
closing the Chesterfield facility and consolidating its operations
into the operations in place at the Dayville and New Oxford
facilities;
o our Dayville and New Oxford facilities may have difficulty
accommodating the increased sales volume; and
o construction delays in the expansion of the New Oxford facility
could delay the realization of savings.
The occurrence of any of these events could have a material adverse effect on
our business, financial condition or results of operations.
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
Market, Inc., our largest customer, accounted for approximately 16% of our net
sales during the fiscal year ended July 31, 1998. 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.
15
<PAGE>
Our profit margins may decrease due to consolidation in the grocery industry
The grocery distribution industry generally is characterized by relatively high
volume with relatively low profit margins. The continuing consolidation of
retailers in the natural products industry and the emergence of super natural
chains may reduce our profit margins in the future as more customers qualify for
greater volume discounts.
Our industry is sensitive to economic downturns
The grocery industry is also sensitive to national and regional economic
conditions, and the demand for our products may be adversely affected from time
to time by economic downturns. In addition, our operating results are
particularly sensitive to, and may be materially adversely affected by:
o difficulties with the collectibility of accounts receivable,
o difficulties with inventory control,
o competitive pricing pressures, and
o unexpected increases in fuel or other transportation-related costs.
There can be no assurance that one or more of such factors will not materially
adversely affect our business, financial condition or results of operations.
We are dependent on a number of key executives
Management of our business is substantially dependent on the services of Norman
A. Cloutier, Chairman of the Board and Chief Executive Officer, Robert T.
Cirulnick, Chief Financial Officer, and other key management employees. Loss of
the services of such officers or any other key management employee could have a
material adverse effect on our business, financial condition or results of
operations.
Our operating results are subject to significant fluctuations
Our net sales and operating results may vary significantly from period to period
due to:
o changes in our operating expenses,
o management's ability to execute our business and growth strategies,
o personnel changes,
o demand for natural products,
o supply shortages,
o general economic conditions,
o changes in customer preferences and demands for natural products,
including levels of enthusiasm for health, fitness and environmental
issues,
o fluctuation of natural product prices due to competitive pressures,
o lack of an adequate supply of high-quality agricultural products due
to poor growing conditions, natural disasters or otherwise,
o volatility in prices of high-quality agricultural products resulting
from poor growing conditions, natural disasters or otherwise, and
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o future acquisitions, particularly in periods immediately following
the consummation of such acquisition transactions while the
operations of the acquired businesses are being integrated into our
operations.
Due to the foregoing factors, we believe that period-to-period comparisons of
our operating results may not necessarily be meaningful and that such
comparisons cannot be relied upon as indicators of future performance.
We are subject to significant governmental regulation
Our business is highly regulated at the federal, state and local levels and our
products and distribution operations require various licenses, permits and
approvals. In particular:
o our products are subject to inspection by the U.S. Food and Drug
Administration,
o our warehouse and distribution facilities are subject to inspection
by the U.S. Department of Agriculture and state health authorities,
and
o our trucking operations are regulated by the U.S. Department of
Transportation and the U.S. Federal Highway Administration.
The loss or revocation of any existing licenses, permits or approvals or the
failure to obtain any additional licenses, permits or approvals in new
jurisdictions where we intend to do business could have a material adverse
effect on our business, financial condition or results of operations.
Our officers and directors and the employee stock ownership trust have
significant voting power.
As of January 31, 1999, our executive officers and directors, and their
affiliates, and the United Natural Foods Employee Stock Ownership Trust
beneficially owned in the aggregate approximately 58% of United Natural's common
stock. Accordingly, these stockholders, if acting together, would have the
ability to elect our directors and may have the ability to determine the outcome
of corporate actions requiring stockholder approval, irrespective of how other
stockholders may vote. This concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of United Natural.
Union-organizing activities could cause labor relations difficulties
As of April 30, 1999, approximately 160 employees, representing approximately 6%
of our approximately 2,600 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.
Access to capital and the cost of that capital
In order to maintain our profit margins, we rely on strategic investment buying
initiatives, such as discounted bulk purchases, which require spending
significant amounts of working capital. In the event that capital market turmoil
significantly increased our cost of capital or the ability to borrow funds or
raise equity capital, we could suffer reduced profit margins and be unable to
grow our business organically or through acquisitions, which could have a
material adverse effect on our business, financial condition or results of
operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risk from interest rate fluctuations because we use
variable rate debt to finance working capital requirements. We have entered into
an interest rate swap agreement which manages that risk by fixing $60 million of
our variable debt at a rate of 6% through October 2003. We do not believe that
there is any material market risk exposure with respect to derivative or other
financial instruments that would require further disclosure under this item.
17
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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.
None.
Exhibit Index
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule 20
18
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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/ Robert T. Cirulnick
---------------------------
Robert T. Cirulnick
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: June 14, 1999
19
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED APRIL 30, 1999 AND
THE CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> APR-30-1999
<CASH> 12,012
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<RECEIVABLES> 63,492
<ALLOWANCES> 2,500
<INVENTORY> 98,973
<CURRENT-ASSETS> 179,994
<PP&E> 70,723
<DEPRECIATION> 26,172
<TOTAL-ASSETS> 253,930
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<BONDS> 26,014
0
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<COMMON> 182
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<TOTAL-LIABILITY-AND-EQUITY> 253,930
<SALES> 642,529
<TOTAL-REVENUES> 642,529
<CGS> 505,768
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<LOSS-PROVISION> 1,178
<INTEREST-EXPENSE> 4,470
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<INCOME-TAX> 11,104
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