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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 October 31, 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 December 7, 1999, there were 18,259,678 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 OCTOBER 31, 1999
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1999 and
July 31, 1999 3
Consolidated Statements of Operations for the quarter ended
October 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the quarter ended
October 31, 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 7-16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16-17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<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) OCTOBER 31, 1999 JULY 31, 1999
---------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,798 $ 2,845
Accounts receivable, net of allowance of $2,706 and $2,297,
respectively 72,130 60,612
Notes receivable, trade 999 1,096
Inventories 101,909 90,725
Prepaid expenses 6,491 5,660
Deferred income taxes 1,966 1,765
Refundable income taxes 4,985 3,939
--------- ---------
Total current assets 193,278 166,642
--------- ---------
Property & equipment, net 43,672 43,784
--------- ---------
Other assets:
Notes receivable, trade, net 340 333
Goodwill, net 26,047 26,250
Covenants not to compete, net 287 328
Other, net 1,010 564
--------- ---------
Total assets $ 264,634 $ 237,901
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 50,583 $ 41,154
Current installments of long-term debt 3,671 3,682
Current installment of obligations under capital leases 717 833
Accounts payable 45,723 33,442
Accrued expenses 19,677 13,706
--------- ---------
Total current liabilities 120,371 92,817
Long-term debt, excluding current installments 23,840 24,370
Deferred income taxes 1,311 712
Obligations under capital leases, excluding current installments 1,408 1,421
--------- ---------
Total liabilities 146,930 119,320
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000 shares,
none issued and outstanding -- --
Common stock, $.01 par value, authorized 50,000 shares,
issued and outstanding 18,260 at October 31, 1999;
issued and outstanding 18,249 at July 31, 1999 183 182
Additional paid-in capital 67,839 67,740
Unallocated shares of ESOP (2,543) (2,584)
Retained earnings 52,225 53,243
--------- ---------
Total stockholders' equity 117,704 118,581
--------- ---------
Total liabilities and stockholders' equity $ 264,634 $ 237,901
========= =========
</TABLE>
See notes to consolidated financial statements.
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UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
OCTOBER 31,
-----------
(In thousands, except per share data) 1999 1998
---- ----
<S> <C> <C>
Net sales $ 218,455 $ 199,889
Cost of sales 178,003 157,275
--------- ---------
Gross profit 40,452 42,614
--------- ---------
Operating expenses 40,610 32,825
Amortization of intangibles 347 286
--------- ---------
Total operating expenses 40,957 33,111
--------- ---------
Operating (loss) income (505) 9,503
--------- ---------
Other expense (income):
Interest expense 1,267 1,516
Other, net (75) (176)
--------- ---------
Total other expense (income) 1,192 1,340
--------- ---------
(Loss) income before income (benefit) taxes (1,697) 8,163
Income (benefit) taxes (679) 3,384
--------- ---------
Net (loss) income $ (1,018) $ 4,779
========= =========
Per share data (basic):
Net (loss) income $ (0.06) $ 0.26
========= =========
Weighted average basic shares of common stock 18,260 18,175
========= =========
Per share data (diluted):
Net (loss) income $ (0.06) $ 0.26
========= =========
Weighted average diluted shares of common stock 18,260 18,537
========= =========
</TABLE>
See notes to consolidated financial statements.
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UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
ENDED OCTOBER 31,
-----------------
(In thousands) 1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (1,018) $ 4,779
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 1,873 1,696
Loss (gain) on disposals of property & equipment 46 (5)
Deferred income tax benefit 398 78
Provision for doubtful accounts 438 477
Changes in assets and liabilities, net of acquired companies:
Accounts receivable (11,955) (6,986)
Inventory (11,184) (8,884)
Prepaid expenses (831) (735)
Refundable income taxes (1,046) (387)
Other assets (406) 569
Notes receivable, trade 90 266
Accounts payable 12,280 4,318
Accrued expenses 5,971 1,085
-------- --------
Net cash used in operating activities (5,344) (3,729)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of subsidiaries, net of cash acquired -- (8,888)
Proceeds from disposals of property and equipment 1 31
Capital expenditures (1,436) (1,599)
-------- --------
Net cash used in investing activities (1,435) (10,456)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under note payable 9,430 15,285
Repayments on long-term debt (545) (900)
Principal payments of capital lease obligations (256) (156)
Proceeds from exercise of stock options 99 --
Other 4 18
-------- --------
Net cash provided by financing activities 8,732 14,247
-------- --------
NET INCREASE IN CASH 1,953 62
Cash at beginning of period 2,845 1,393
-------- --------
Cash at end of period $ 4,798 $ 1,455
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,177 $ 1,263
======== ========
Income taxes $ 141 $ 3,826
======== ========
</TABLE>
In the quarter ended October 31, 1999, the Company incurred $127 of capital
lease obligations.
See notes to consolidated financial statements.
5
<PAGE>
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 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.
The financial statements have been prepared pursuant to rules and regulations of
the Securities and Exchange Commission for interim financial information,
including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally required in
complete financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In our opinion, these
financial statements include all adjustments necessary for a fair presentation
of the results of operations for the interim periods presented. The results of
operations for interim periods, however, may not be indicative of the results
that may be expected for a full year.
2. INTEREST RATE SWAP AGREEMENT
In October 1998, we entered into an interest rate swap agreement. The agreement
provides for us to pay interest for a five year period at a fixed rate of 5% on
a notional principal amount of $60 million while receiving interest for the same
period at the LIBOR rate on the same notional principal amount. The swap has
been entered into as a hedge against LIBOR interest rate movements on current
and anticipated variable rate indebtedness totaling $60 million at LIBOR plus
1%, thereby fixing our effective rate at 6%. The five year term of the swap
agreement may be extended to seven years at the option of the counterparty.
3. RESTRUCTURING COSTS
In connection with the consolidation of operations in the Eastern Region, we
recorded employee severance expenses and employee retention expenses of $0.8
million and $0.7 million, respectively, and recorded incremental depreciation of
$2.4 million for the year ended July 31, 1999. Approximately $0.6 million of the
retention and severance expenses had been paid as of October 31, 1999 with most
of the remaining amounts expected to be paid during the remainder of fiscal
2000. The incremental depreciation was to reduce the book value of the
Chesterfield, New Hampshire facility, which was being held for sale, to its
estimated net realizable value. Due to continuing difficulties in the
consolidation, our management decided in December 1999 to keep our Chesterfield
facility open for the foreseeable future. We will resume depreciating the
remaining net book value of the Chesterfield facility in December 1999 for
approximately $50,000 per quarter.
4. EARNINGS PER SHARE
Following is a reconciliation of the basic and diluted number of shares used in
computing earnings per share:
Quarter Ended
October 31,
(In thousands) 1999 1998
------ ------
Basic weighted average shares outstanding 18,260 18,175
Net effect of dilutive stock options based upon the
treasury stock method -- 362
------ ------
Diluted weighted average shares outstanding 18,260 18,537
====== ======
There were no dilutive stock options for the quarter ended October 31, 1999
because the Company reported a net loss.
5. BUSINESS SEGMENTS
The Company has several operating segments aggregated under the distribution
segment, which is the Company's only reportable segment. These operating
segments have similar products and services, customer types, distribution
methods and historical margins. The distribution segment is engaged in
national distribution of natural
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foods and related products in the United States. Other operating segments
include the retail segment, which engages in the sale of natural foods and
related products to the general public through retail storefronts on the east
coast of the United States, and a segment engaging in trading, roasting and
packaging of nuts, seeds, dried fruit and snack items. These other operating
segments do not meet the quantitative thresholds for reportable segments and are
therefore included in an "other" caption in the segment information. The "other"
caption also includes corporate expenses that are not allocated to operating
segments.
Following is business segment information for the periods indicated:
<TABLE>
<CAPTION>
Distribution Other Eliminations Consolidated
<S> <C> <C> <C> <C>
Quarter Ended October 31, 1999
Revenue $ 208,813 $ 14,240 $ (4,598) $ 218,455
Operating Income (loss) $ 176 $ (661) $ (20) $ (505)
Amortization and Depreciation $ 1,575 $ 298 $ -- $ 1,873
Capital Expenditures $ 1,252 $ 184 $ -- $ 1,436
Assets $ 388,340 $ 13,475 $(137,181) $ 264,634
Quarter Ended October 31, 1998
Revenue $ 186,135 $ 19,267 $ (5,513) $ 199,889
Operating Income $ 9,493 $ 36 $ (26) $ 9,503
Amortization and Depreciation $ 1,321 $ 375 $ -- $ 1,696
Capital Expenditures $ 1,403 $ 196 $ -- $ 1,599
Assets $ 357,553 $ 31,960 $(145,207) $ 244,306
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We are a leading national distributor of natural foods and related products in
the United States. In recent years, our sales to existing and new customers have
increased through the acquisition of or merger with natural products
distributors, the expansion of existing distribution centers and the continued
growth of the natural products industry in general. Through these efforts, we
believe that we have been able to broaden our geographic penetration, expand our
customer base, enhance and diversify our product selections and increase our
market share. Our distribution operations are divided into four principal units:
United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods,
Inc. and Stow Mills, Inc.), Rainbow Natural Foods, Inc. in the Central Region,
Mountain People's Warehouse, Inc. in the Western Region and Albert's Organics in
various markets in the United States. Through our subsidiary, the Natural Retail
Group, we also own and operate a number of retail natural products stores
located in the eastern United States. Our retail strategy is to selectively
acquire existing natural products stores that meet our strict criteria in areas
such as sales growth, profitability, growth potential and store management. We
believe our retail business serves as a natural complement to our distribution
business enabling us to develop new marketing programs and improve customer
service.
We are continually integrating certain operating functions in order to improve
operating efficiencies, including: (i) integrating administrative and accounting
functions; (ii) expanding marketing and customer service programs across the
three regions; (iii) expanding national purchasing opportunities; (iv)
consolidating systems applications between physical locations and regions; and
(v) reducing geographic overlap between regions. In addition, our continued
growth has created the need for expansion of existing facilities to achieve
maximum operating efficiencies and to assure adequate space for future needs.
While operating margins may be affected in periods in which these expenses are
incurred, over the long term, we expect to benefit from the increased absorption
of our expenses over a larger sales base. We have made considerable capital
expenditures and incurred considerable expenses in connection with the expansion
of our facilities, including the relocation of our Denver, Colorado distribution
center and the expansion of refrigerated and frozen space at our Auburn,
California and Atlanta, Georgia facilities. Additionally, our Seattle,
Washington facility was relocated to a larger facility in Auburn, Washington
during the third quarter of fiscal 1999.
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We have incurred considerable expenses in connection with the planned
consolidation of operations in the Eastern Region, which was to have resulted in
the closure of our Chesterfield, New Hampshire facility. These expenses consist
of the cost of moving inventory, as well as additional temporary expenses for
information technology, inventory management and redundant staffing and
transportation. Our operating results for the fourth quarter of fiscal 1999 and
first quarter of fiscal 2000 were negatively impacted by computer and related
issues arising from the consolidation of Eastern Region operations. The
consolidation resulted in increased operating expenses, a lower gross margin and
lower sales than prior quarters in the Eastern Region. Due to the continuing
difficulties in the consolidation, our management decided in December 1999 to
keep our Chesterfield facility open for the foreseeable future. We expect that
the increased operating expenses, lower gross margin and lower sales than prior
quarters in the Eastern Region will continue throughout much of fiscal 2000.
Our net sales consist primarily of sales of natural products to retailers
adjusted for customer volume discounts, returns and allowances. The principal
components of our cost of sales include the amount paid to manufacturers and
growers for product sold, plus the cost of transportation necessary to bring the
product to our distribution facilities. Operating expenses include salaries and
wages, employee benefits (including payments under our Employee Stock Ownership
Plan), warehousing and delivery, selling, occupancy, administrative,
depreciation, and amortization expense. Other expenses include interest on
outstanding indebtedness, interest income and miscellaneous income and expenses.
Recent Acquisitions
On September 30, 1998, we acquired substantially all of the outstanding stock of
Albert's Organics, a business specializing in the purchase, sale and
distribution of produce and other perishable items, for $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.
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
October 31,
1999 1998
-------------------
Net sales 100.0% 100.0%
Cost of sales 81.5% 78.7%
----- -----
Gross profit 18.5% 21.3%
----- -----
Operating expenses 18.6% 16.4%
Amortization of intangibles 0.2% 0.1%
----- -----
Total operating expenses 18.7% 16.6%
----- -----
Operating (loss) income -0.2% 4.8%
----- -----
Other expense (income):
Interest expense 0.6% 0.8%
Other, net -- -0.1%
----- -----
Total other expense (income) 0.5% 0.7%
----- -----
(Loss) income before income (benefit) taxes -0.8% 4.1%
Income (benefit) taxes -0.3% 1.7%
----- -----
Net (loss) income -0.5% 2.4%
===== =====
8
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Quarter Ended October 31, 1999 Compared To Quarter Ended October 31, 1998
Net Sales.
Our net sales increased approximately 9.3%, or $18.6 million, to $218.5 million
for the quarter ended October 31, 1999 from $199.9 million for the quarter ended
October 31, 1998. The overall increase in net sales was attributable to
increased sales to existing customers, the sale of new product offerings and the
inclusion of a full quarter of Albert's Organics sales. Net sales for the first
quarter of fiscal 1998 included only one month of Albert's sales. These
increases were partially offset by a decrease in net sales from the Natural
Retail Group due to the sale of four stores in April 1999. Excluding Albert's
August 1999 and September 1999 sales and the Natural Retail Group's first
quarter of fiscal 1998 sales by the sold stores, sales increased approximately
7.6% for the quarter ended October 31, 1999 over the comparable prior year
period.
These growth rates are lower than in past quarters. The major factors
contributing to our lower growth rates were increased out of stocks in the
Eastern Region and loss of customers in the Eastern Region to other suppliers.
Gross Profit.
Our gross profit decreased approximately 5.1%, or $2.2 million, to $40.5 million
for the quarter ended October 31, 1999 from $42.6 million for the quarter ended
October 31, 1998. Our gross profit as a percentage of net sales decreased to
18.5% for the quarter ended October 31, 1999 from 21.3% for the quarter ended
October 31, 1998. The decrease in gross profit as a percentage of net sales
resulted primarily from ongoing difficulties with the Eastern Region
consolidation, as well as an increased percentage of sales to existing customers
under our volume discount program and the divestiture of four retail stores,
which have higher gross margins than our distribution business. Difficulties in
the Eastern Region which impacted our margin include higher than normal levels
of customer returns and allowances, pricing errors, inventory shrink and higher
inbound transportation costs for expedited shipments.
Operating Expenses.
Our total operating expenses increased approximately 23.7%, or $7.8 million, to
$41.0 million for the quarter ended October 31, 1999 from $33.1 million for the
quarter ended October 31, 1998. As a percentage of net sales, operating expenses
increased to 18.7% for the quarter ended October 31, 1999 from 16.6% for the
quarter ended October 31, 1998. The increase in operating expenses as a
percentage of net sales was primarily due to the continuing difficulties in the
Eastern Region and increased costs in all regions for insurance and fuel. We
incurred approximately $3 million in the Eastern Region in redundant labor
expenses and approximately $0.6 million for temporary storage and rental
equipment. Our company-wide insurance and fuel expenses have increased
approximately $1 million compared to the comparable prior year period.
Operating (Loss) Income.
Operating income decreased $10.0 million, to a loss of $(0.5) million for the
quarter ended October 31, 1999 from income of $9.5 million for the quarter ended
October 31, 1998.
Other (Income)/Expense.
The $0.1 million decrease in other expense in the quarter ended October 31, 1999
compared to the quarter ended October 31, 1998 was primarily attributable to
slightly lower interest expense, reflecting a lower level of debt in the first
quarter of fiscal 2000.
Income (Benefit) Taxes.
Our effective income (benefit) tax rates were (40.0)% and 41.5% for the quarters
ended October 31, 1999 and 1998, respectively. The effective rates were higher
than the federal statutory rate primarily due to state and local income taxes.
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Net (Loss) Income.
As a result of the foregoing, net income decreased $5.8 million, to a loss of
$(1.0) million for the quarter ended October 31, 1999, compared to net income of
$4.8 million in the quarter ended October 31, 1998.
Liquidity and Capital Resources
We have historically financed operations and growth primarily from cash flows
from operations, borrowings under our credit facility, seller financing of
acquisitions, operating and capital leases, trade payables, bank indebtedness
and the sale of equity and debt securities. Primary uses of capital have been
acquisitions, expansion of plant and equipment and investment in accounts
receivable and inventory.
Net cash used in operations was $5.3 million and $3.7 million for the quarter
ended October 31, 1999 and 1998, respectively. Cash used in operations in the
first quarter of fiscal 2000 related primarily to investments in inventory in
the ordinary course of business and an increase in accounts receivable. Days
sales outstanding for the quarter ended October 31, 1999 has increased to
approximately 30 days from approximately 26 days at July 31,1999. We are
allocating additional resources to collection efforts to decrease our days sales
outstanding. The increases in inventory levels relate to supporting increased
sales with wider product assortment combined with our ability to capture
purchasing efficiency opportunities in excess of total carrying costs. These
items were partially offset by increases in accounts payable and accrued
expenses. Cash used in operations in the first quarter of fiscal 1999 was due
primarily to cash investments in accounts receivable and inventory in the
ordinary course of business, partially offset by cash collected from customers
net of cash paid to vendors and an increase in accounts payable. Working capital
at October 31, 1999 was $72.9 million.
Net cash used in investing activities was $1.4 million and $10.5 million for the
quarters ended October 31, 1999 and 1998, respectively. Investing activities in
the quarter ended October 31, 1999 were for capital expenditures. Investing
activities in the quarter ended October 31, 1998 were primarily for the
acquisition of new businesses and the continued upgrade of existing management
information systems.
Cash provided by financing activities was $8.7 million and $14.2 million for the
quarters ended October 31, 1999 and 1998, respectively. We increased borrowings
on our line of credit by $9.4 million and $15.3 million during the first
quarters of fiscal 2000 and fiscal 1999, respectively, and repaid long-term
obligations in the amount of $0.8 million and $1.1 million, respectively.
In October 1998, we entered into an interest rate swap agreement. The agreement
provides for us to pay interest for a five year period at a fixed rate of 5% on
a notional principal amount of $60 million while receiving interest for the same
period at the LIBOR rate on the same notional principal amount. The swap has
been entered into as a hedge against LIBOR interest rate movements on current
and anticipated variable rate indebtedness totaling $60 million. The five year
term of the swap agreement may be extended to seven years at the option of the
counterparty.
IMPACT OF INFLATION
Historically, 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 SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments, and
is effective for fiscal quarters of fiscal years beginning after June 15, 2000.
We believe this standard will not have a material impact on our financial
statement presentation.
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Year 2000 Issues
The following information constitutes "Year 2000 Readiness Disclosure" under the
Year 2000 Information and Readiness Disclosure Act of 1998.
We have completed an assessment of most of our internal exposure to the Year
2000 issue. We continue to assess our customer and vendor exposure. Generally,
we believe we have "Year 2000" exposure in three areas:
o our 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 on a
company-wide basis. 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. Our
Western Region does not utilize two digit date coding logic, and we have
successfully tested hardware, operating system and applications software
simulating post Year 2000 dates. We have tested our microprocessors and other
electronic devices and have completed implementing changes designed to achieve
Year 2000 compliance. The Seattle facility's phone system was replaced for other
business reasons during the third quarter of fiscal 1999 and is Year 2000
compliant.
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 dates in
tests of its hardware and operating systems as well as selected applications
software. We have completed all planned Year 2000 simulation testing. We have
also 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. The Denver facility's
telephone system was replaced in October 1999 and is now Year 2000 compliant.
All other significant information technology infrastructure components and
embedded chips either have been modified or, if not Year 2000 compliant, have
been retired.
Our Eastern Region
Our Eastern Region information technology department has been focused on a
business recovery strategy to normalize operations, which were disrupted as a
result of the conversion to the Stow Mills system in our Atlanta and Dayville
facilities. A new management team has been appointed to continue the recovery
process and address Year 2000 compliance. The primary business operation systems
in the Eastern Region are:
BIP - Utilized by all four Eastern Region warehouses to accept customer
orders, place purchase orders with our vendors and maintain inventory
controls.
BAKO - Warehouse management system used in Chesterfield and New Oxford.
CWMS - Warehouse management system used in Dayville and Atlanta.
Down to Earth - Accounting software.
BIP, BAKO and CWMS are currently being re-evaluated for Year 2000 compliance.
Many critical components, including all hardware and network equipment, have
been successfully tested. The remaining components are
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undergoing testing for compliance. We may not achieve comprehensive testing and
remediation for the systems prior to January 2000. However, substantially all
the systems are currently handling dates beyond January 1, 2000.
We have assembled a team of IT professionals both from within and outside the
Company who are familiar with our systems in an effort to successfully resolve
any Year 2000 issues in a timely manner if testing and remediation are not
completed by year-end. If we are unable to resolve these issues by January 1,
2000, we expect to manually perform certain functions performed by the affected
systems until the issues are resolved. This could adversely affect our ability
to fill and process customer orders which could result in a reduction in our
revenues and net income. In addition, any additional costs incurred to address
these problems could adversely impact our operating income and net income.
The Down to Earth accounting software is developed and supported by an outside
vendor. The vendor has represented to us that the software has been tested and
is Year 2000 compliant. The system has successfully accepted dates beyond
January 1, 2000.
Our EDI software, which enables us to communicate electronically with some of
our customers, including receiving orders, is not compliant and must be upgraded
to become Year 2000 compliant. We are working with our EDI vendor, and expect to
complete the upgrade before year-end. If this system is not upgraded, we expect
to process these orders manually.
Microprocessors and other electronic devices used in the Eastern Region have
been tested and are Year 2000 compliant.
The telephone systems in all Eastern Region locations are Year 2000 compliant.
Retail Stores
All of our cash registers are Year 2000 compliant. We believe all other critical
information technology infrastructure and embedded chips are Year 2000
compliant.
Albert's Organics, Inc. and Hershey Import Co., Inc.
Our Hershey business has turned back its system clock to simulate 1990 to avoid
Year 2000 issues. We have simulated Year 2000 system clock dates for the
Albert's systems and made the code changes required to make these systems Year
2000 compliant.
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. Substantially all responses received from both suppliers and customers
indicate they are Year 2000 compliant or will be by January 1, 2000.
Expenditures
We are in the process of updating our systems for business functionality reasons
and have adopted a 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 have been 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 immaterial incremental amount on Year 2000
remediation over what we would have spent to execute our going forward systems
strategy. We spent on information technology systems and support approximately
$1.9 million, $7 million, $4 million and $3 million in the quarter ended October
31, 1999 and fiscal 1999, 1998 and 1997, respectively.
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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 developing regional contingency plans for any critical business
applications.
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. The integration will require, among other things:
o the optimization of delivery routes;
o coordination of administrative, distribution and finance functions;
and
o the integration of personnel.
The integration process has and could continue to divert the attention of
management, and any further difficulties or problems encountered in the
transition process could continue to have a material adverse effect on our
business, financial condition or results of operations. In addition, the process
of combining the companies has and could continue to cause the interruption of,
or a loss of momentum in, the activities of the respective businesses, which
could have an adverse effect on their combined operations. There can be no
assurance that 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 announced plans during fiscal 1999 to close our Chesterfield, New Hampshire
distribution center and to consolidate its operations with our Dayville,
Connecticut and New Oxford, Pennsylvania facilities. We began transferring sales
operations from the Chesterfield facility to our Dayville facility during June
of 1999. Due to the continuing difficulties of the consolidation, our new
management decided in December 1999 to keep our Chesterfield facility open for
the foreseeable future. There are numerous risks involved with keeping the
Chesterfield facility open and the transfer of sales to the Dayville facility
which has already occurred, including, among other things:
o we have had and may continue to have difficulty retaining drivers
currently employed at our Chesterfield facility or hiring a
sufficient number of new drivers at our Dayville, New Oxford and
Chesterfield facilities to handle the increased sales volume at
those facilities;
o we have had and may continue to have difficulty retaining warehouse
employees at our Chesterfield facility or hiring a sufficient number
of new warehouse employees at our Dayville, New Oxford and
Chesterfield facilities to handle the increased sales volume at
those facilities;
o we have lost and may continue to lose business;
o our operating costs have increased and may continue to increase
because of the expenses involved
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in continuing to operate the Chesterfield facility and consolidating
certain of its operations into the operations in place at the
Dayville facility;
o our Dayville facility has had and may continue to have, along with
our Chesterfield facility, 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. and Wild Oats Markets, Inc. accounted for approximately 17% and
11%, respectively, of our net sales during the fiscal year ended July 31, 1999.
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.
14
<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 Michael
S. Funk, Chief Executive Officer, Richard S. Youngman, President, and other key
management employees. Norman A. Cloutier, our former Chairman of the Board and
Chief Executive Officer, resigned these positions on December 6, 1999. Loss of
the services of any additional officers or any other key management employee
could have a material adverse effect on our business, financial condition or
results of operations.
Our operating results are subject to significant fluctuations
Our net sales and operating results may vary significantly from period to period
due to:
o changes in our operating expenses,
o management's ability to execute our business and growth strategies,
o personnel changes,
o demand for natural products,
o supply shortages,
o general economic conditions,
o changes in customer preferences and demands for natural products,
including levels of enthusiasm for health, fitness and environmental
issues,
o fluctuation of natural product prices due to competitive pressures,
o lack of an adequate supply of high-quality agricultural products due
to poor growing conditions, natural disasters or otherwise,
o volatility in prices of high-quality agricultural products resulting
from poor growing conditions, natural disasters or otherwise, and
o future acquisitions, particularly in periods immediately following
the consummation of such
15
<PAGE>
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 September 30, 1999, our executive officers and directors, and their
affiliates, and the United Natural Foods Employee Stock Ownership Trust
beneficially owned in the aggregate approximately 36% 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 May 31, 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.
Our systems may not all be Year 2000 compliant by January 1, 2000
As discussed above, our systems may not all be Year 2000 compliant by January 1,
2000. This could result in being unable to accept, process and invoice orders
which could have a material adverse effect on our business, financial condition
and 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
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<PAGE>
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.
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 December 8, 1999, the Company filed a Current Report on Form 8-K dated
December 6, 1999 announcing under Item 5 (Other Events) a press release
regarding (1) the election of Michael S. Funk as Chief Executive Officer, (2)
the election of Richard S. Youngman as President, (3) the election of Kevin T.
Michel as Vice President and Chief Financial Officer, (4) the election of Thomas
B. Simone as Chairman of the Board of Directors and (5) the resignation of
Norman A. Cloutier as Chief Executive Officer and Chairman of the Board of
Directors, and presenting under Item 7 (Financial Statements, Pro-Forma
Financial Information and Exhibits) the following information:
EXHIBITS Press Release dated December 6, 1999
Exhibit Index
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule 19
17
<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/ Kevin T. Michel
-----------------------------
Kevin T. Michel
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: December 15, 1999
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 1999
AND THE CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-2000
<PERIOD-END> OCT-31-1999
<CASH> 4,798
<SECURITIES> 0
<RECEIVABLES> 75,835
<ALLOWANCES> 2,706
<INVENTORY> 101,909
<CURRENT-ASSETS> 193,278
<PP&E> 73,605
<DEPRECIATION> 29,933
<TOTAL-ASSETS> 264,634
<CURRENT-LIABILITIES> 120,371
<BONDS> 25,248
0
0
<COMMON> 183
<OTHER-SE> 117,521
<TOTAL-LIABILITY-AND-EQUITY> 264,634
<SALES> 218,455
<TOTAL-REVENUES> 218,455
<CGS> 178,003
<TOTAL-COSTS> 178,003
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<LOSS-PROVISION> 438
<INTEREST-EXPENSE> 1,267
<INCOME-PRETAX> (1,697)
<INCOME-TAX> (679)
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