-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vl6bE17bK9x2zU0Rm5/WMmEh0aOQ+UuM9ROX1Pi0J3CdC9apxKQ2mjsPGyevJxE1 6VCne25NoEHiYHEGu1Aiig== 0001005477-01-003717.txt : 20010615 0001005477-01-003717.hdr.sgml : 20010615 ACCESSION NUMBER: 0001005477-01-003717 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010430 FILED AS OF DATE: 20010614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED NATURAL FOODS INC CENTRAL INDEX KEY: 0001020859 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 050376157 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-15723 FILM NUMBER: 1660895 BUSINESS ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 BUSINESS PHONE: 8607792800 MAIL ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 10-Q 1 0001.txt FORM 10-Q ================================================================================ 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, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-21531 UNITED NATURAL FOODS, INC. (Exact name of Registrant as Specified in Its Charter) Delaware 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices) 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 4, 2001 there were 18,586,305 shares of the Registrant's Common Stock, $0.01 par value per share, outstanding. ================================================================================ UNITED NATURAL FOODS, INC. FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED APRIL 30, 2001 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of April 30, 2001 and July 31, 2000 3 Consolidated Statements of Operations for the three and nine months ended April 30, 2001 and 2000 4 Consolidated Statements of Cash Flows for the nine months ended April 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosure About Market Risk 13 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 PART I. FINANCIAL INFORMATION Item 1. Financial Statements UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) (In thousands, except per share amounts) April 30, 2001 JULY 31, 2000 -------------- ------------- ASSETS Current assets: Cash $ 7,829 $ 1,943 Accounts receivable, net 87,604 69,474 Notes receivable, trade 416 456 Inventories 113,200 104,486 Prepaid expenses 5,279 6,085 Deferred income taxes 2,917 2,350 Refundable income taxes 1,092 4,401 --------- --------- Total current assets 218,337 189,195 Property & equipment, net 62,094 52,625 Other assets: Notes receivable, trade, net 1,029 765 Goodwill, net 27,736 26,624 Covenants not to compete, net 206 181 Other, net 730 844 --------- --------- Total assets $ 310,132 $ 270,234 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - line of credit $ 67,054 $ 68,007 Current installments of long-term debt 2,949 2,770 Current installment of obligations under capital leases 465 1,036 Accounts payable 66,791 39,393 Accrued expenses 14,906 12,178 --------- --------- Total current liabilities 152,165 123,384 Long-term debt, excluding current installments 25,140 26,722 Deferred income taxes 618 367 Obligations under capital leases, excluding current installments 2,209 1,807 --------- --------- Total liabilities 180,132 152,280 --------- --------- Stockholders' equity: Preferred stock, $.01 par value, authorized 5,000 shares, none issued and outstanding -- -- Common stock, $.01 par value, authorized 50,000 shares, issued and outstanding 18,585 at April 30, 2001; issued and outstanding 18,283 at July 31, 2000 186 183 Additional paid-in capital 70,946 68,180 Unallocated shares of ESOP (2,298) (2,421) Retained earnings 61,166 52,012 --------- --------- Total stockholders' equity 130,000 117,954 --------- --------- Total liabilities and stockholders' equity $ 310,132 $ 270,234 ========= =========
See notes to consolidated financial statements. 3 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, (In thousands, except per share data) 2001 2000 2001 2000 -------- --------- -------- --------- Net sales $258,536 $ 229,205 $747,100 $ 679,035 Cost of sales 208,853 183,900 601,576 551,107 -------- --------- -------- --------- Gross profit 49,683 45,305 145,524 127,928 -------- --------- -------- --------- Operating expenses 41,182 40,561 123,337 126,736 Restructuring and asset impairment charges 802 -- 802 2,420 Amortization of intangibles 269 278 793 828 -------- --------- -------- --------- Total operating expenses 42,253 40,839 124,932 129,984 -------- --------- -------- --------- Operating income (loss) 7,430 4,466 20,592 (2,056) -------- --------- -------- --------- Other expense (income): Interest expense 1,692 1,666 5,292 4,573 Other, net 268 (140) 43 (345) -------- --------- -------- --------- Total other expense 1,960 1,526 5,335 4,228 -------- --------- -------- --------- Income (loss) before income taxes (benefit) 5,470 2,940 15,257 (6,284) Income taxes (benefit) 2,188 1,175 6,103 (2,503) -------- --------- -------- --------- Net income (loss) $ 3,282 $ 1,765 $ 9,154 $ (3,781) ======== ========= ======== ========= Per share data (basic): Net income (loss) $ 0.18 $ 0.10 $ 0.50 $ (0.21) ======== ========= ======== ========= Weighted average shares of common stock 18,580 18,261 18,436 18,260 ======== ========= ======== ========= Per share data (diluted): Net income (loss) $ 0.17 $ 0.10 $ 0.49 $ (0.21) ======== ========= ======== ========= Weighted average shares of common stock 18,839 18,562 18,752 18,260 ======== ========= ======== =========
See notes to consolidated financial statements. 4 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED ----------------- APRIL 30, --------- (In thousands) 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 9,154 $ (3,781) Adjustments to reconcile net income (loss) to net cash Provided by (used in) operating activities: Depreciation and amortization 5,830 5,735 Loss on impairment of intangible assets 255 -- Loss on disposals of property and equipment 582 1,970 Deferred income tax (benefit) expense (316) 45 Provision for doubtful accounts 2,198 1,992 Changes in assets and liabilities, net of acquisitions; Accounts receivable (20,227) (18,015) Inventory (8,265) (11,194) Prepaid expenses 828 1,173 Refundable income taxes 3,308 (3,106) Other assets 237 147 Notes receivable, trade (224) 465 Accounts payable 27,348 14,659 Accrued expenses 2,721 (653) -------- -------- Net cash provided by (used in) operating activities 23,429 (10,563) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of acquired businesses, net of cash acquired; (2,393) (1,200) Proceeds from sale of property and equipment 43 40 Capital expenditures (14,166) (10,644) -------- -------- Net cash used in investing activities (16,516) (11,804) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings under note payable (954) 25,350 Repayments of long-term debt (2,032) (3,172) Proceeds from long-term debt 39 1,266 Principal payments of capital lease obligations (849) (688) Proceeds from exercise of stock options 2,769 100 -------- -------- Net cash (used in) provided by financing activities (1,027) 22,856 -------- -------- NET INCREASE IN CASH 5,886 489 Cash at beginning of period 1,943 2,845 -------- -------- Cash at end of period $ 7,829 $ 3,334 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5,171 $ 4,080 ======== ======== Income taxes $ 3,100 $ 740 ======== ========
In the nine months ended April 30, 2001 and 2000, the Company incurred $679 and $537, respectively, of capital lease obligations. See notes to consolidated financial statements. 5 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION Our accompanying consolidated financial statements include the accounts of United Natural Foods, Inc. and our wholly owned subsidiaries. We are a distributor and retailer of natural foods and related products. The financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally required in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In our opinion, these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for interim periods, however, may not be indicative of the results that may be expected for a full year. 2. INTEREST RATE SWAP AGREEMENT In October 1998, we entered into an interest rate swap agreement. The agreement provides for us to pay interest for a five-year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million at LIBOR plus 1.25%, thereby fixing our effective rate at 6.25%. The five-year term of the swap agreement may be extended to seven years at the option of the counter party, which prohibits accounting for the swap as an effective hedge under Statement of Financial Accounting Standards #133. 3. EARNINGS PER SHARE Following is a reconciliation of the basic and diluted number of shares used in computing earnings per share:
Quarter Ended Nine Months Ended ------------- ----------------- April 30, April 30, --------- --------- (In thousands) 2001 2000 2001 2000 ---- ---- ---- ---- Basic weighted average shares outstanding 18,580 18,261 18,436 18,260 Net effect of dilutive stock options based upon the treasury stock method 259 301 316 -- ====== ====== ====== ====== Diluted weighted average shares outstanding 18,839 18,562 18,752 18,260 ====== ====== ====== ======
There were no dilutive stock options for the nine months ended April 30, 2000 because the Company reported a net loss. 4. BUSINESS SEGMENTS The Company has several operating segments aggregated under the distribution segment, which is the Company's only reportable segment. These operating segments have similar products and services, customer types, distribution methods and historical margins. The distribution segment is engaged in national distribution of natural foods and related products in the United States. Other operating segments include the retail segment, which engages in the sale of natural foods and related products to the general public through retail storefronts on the east coast of the United States, and a segment engaged in importing, roasting and packaging of nuts, seeds, dried fruit and snack items. These other operating segments do not meet the quantitative thresholds for reportable segments and are therefore included in an "Other" caption in the segment information. The "Other" caption also includes corporate expenses that are not allocated to operating segments. Following is business segment information for the periods indicated:
Distribution Other Eliminations Consolidated ------------ ----- ------------ ------------ Nine Months Ended April 30, 2001 Revenue $717,633 $ 43,916 $ (14,449) $ 747,100 Operating Income (Loss) $ 21,476 $ (874) $ (10) $ 20,592 Amortization and Depreciation $ 4,874 $ 956 $ -- $ 5,830 Capital Expenditures $ 13,233 $ 933 $ -- $ 14,166 Assets $447,544 $ 4,436 $(141,848) $ 310,132
6
Distribution Other Eliminations Consolidated ------------ ----- ------------ ------------ Nine Months Ended April 30, 2000 Revenue $649,626 $ 42,754 $ (13,345) $ 679,035 Operating Income (Loss) $ 2,125 $ (4,261) $ 80 $ (2,056) Amortization and Depreciation $ 4,834 $ 901 $ -- $ 5,735 Capital Expenditures $ 10,052 $ 592 $ -- $ 10,644 Assets $400,558 $ 6,987 $(135,217) $ 272,328
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We are a leading national distributor of natural foods and related products in the United States. In recent years, our sales to existing and new customers have increased through the acquisition of or merger with natural products distributors, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. Our distribution operations are divided into three principal units: United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods, Inc. and Stow Mills, Inc.), Mountain People's Warehouse, Inc. and Rainbow Natural Foods in the Western Region (previously Rainbow Natural Foods solely comprised the Central Region), and Albert's Organics in various markets in the United States. Through our subsidiary, the Natural Retail Group, we also own and operate 11 retail natural products stores located in the eastern United States. We believe our retail business serves as a natural complement to our distribution business as it enables us to develop new marketing programs and improve customer service. Hershey Import Co., our division located in Rahway, New Jersey, is a business that specializes in the importing, roasting and packaging of nuts, seeds, dried fruits and snack items. We are continually integrating certain operating functions in order to improve operating efficiencies, including: (i) integrating administrative and accounting functions; (ii) expanding marketing and customer service programs between regions; (iii) expanding national purchasing opportunities; (iv) consolidating systems applications between physical locations and regions; and (v) reducing geographic overlap between regions. In addition, our continued growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. We have made considerable capital expenditures and incurred considerable expenses in connection with the expansion of our facilities, including the expansion of our Los Angeles and Auburn, California, and New Oxford, Pennsylvania locations. Approximately 45% of our distribution facility capacity has been added over the past 4 years. While operating margins may be affected in periods in which these expenses are incurred, over the long term, we expect to benefit from the increased allocation of our expenses over a larger sales base. As our sales continue to grow, we expect to continue expanding our existing facilities, moving to larger facilities or opening new facilities as needed. We incurred considerable expenses in connection with the planned consolidation of our operations in the Eastern Region, which was to have resulted in the closure of our Chesterfield, New Hampshire facility. These expenses consisted of the cost of moving inventory, as well as additional temporary expenses for information technology, inventory management and redundant staffing and transportation. Our operating results for the fourth quarter of fiscal 1999 and all of fiscal 2000 were negatively impacted by computer and related issues arising from the consolidation of our Eastern Region operations. This consolidation resulted in increased operating expenses, a lower gross margin and lower sales than prior quarters in the Eastern Region. As a result of the difficulties in this consolidation, our management decided in December 1999 to keep our Chesterfield facility open for the foreseeable future. Additionally, we closed our Chicago facility during the third quarter of fiscal 2000. Our Chicago sales are now serviced from our New Oxford, Pennsylvania facility. The closure of our Chicago facility has not had a material impact on our results of operations or financial condition. We have consolidated our Denver facility (formerly our Central Region) into our Western Region. The consolidation of our Denver facility into our Western region has not had a material impact on our results of operations or financial condition. Our net sales consist primarily of sales of natural products to retailers adjusted for customer volume discounts, returns and allowances. The principal components of our cost of sales include the amount paid to manufacturers and growers for products sold, plus the cost of transportation necessary to bring the products to our distribution facilities. Operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, administrative, depreciation and amortization expense. Other expenses (income) include interest on outstanding indebtedness, interest income and miscellaneous income and expenses. Computer and related issues arising from the consolidation of operations in our Eastern Region resulted in increased operating expenses and lower sales and gross margin in fiscal 2000 than prior quarters in the Eastern Region. As a result of these problems, fiscal 2000 was a rebuilding year for us. Our operating margins suffered in the first quarter (0.23%) and the second quarter (0.26%), excluding special charges, of approximately $5.4 million, of fiscal 2000. As a result of our efforts to reduce expenses, improve our operating margin and increase sales our operating margin improved to 2.1% (excluding special charges of approximately $0.4 million) in the third quarter and to 2.6% in the fourth quarter of fiscal 2000. Our operating margin has continued to improve, and for the quarter ended April 30, 2001, was 3.2% of sales, excluding special charges, of approximately $1.0 million. 7 Results of Operations The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:
Quarter Ended Nine Months Ended April 30, April 30, ---------------- ------------------- 2001 2000 2001 2000 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 80.8% 80.2% 80.5% 81.2% ----- ----- ----- ----- Gross profit 19.2% 19.8% 19.5% 18.8% ----- ----- ----- ----- Operating expenses 15.9% 17.7% 16.5% 18.7% Restructuring and asset impairment charges 0.3% -- 0.1% 0.4% Amortization of intangibles 0.1% 0.1% 0.1% 0.1% ----- ----- ----- ----- Total operating expenses 16.3% 17.8% 16.7% 19.1% ----- ----- ----- ----- Operating income (loss) 2.9% 1.9% 2.8% -0.3% ----- ----- ----- ----- Other expense (income): Interest expense 0.7% 0.7% 0.7% 0.7% Other, net 0.1% -0.1% 0.0% -0.1% ----- ----- ----- ----- Total other expense 0.8% 0.7% 0.7% 0.6% ----- ----- ----- ----- Income (loss) before income taxes (benefit) 2.1% 1.3% 2.0% -0.9% Income taxes (benefit) 0.8% 0.5% 0.8% -0.4% ----- ----- ----- ----- Net income (loss) 1.3% 0.8% 1.2% -0.6% ===== ===== ===== =====
Quarter Ended April 30, 2001 Compared To Quarter Ended April 30, 2000 Net Sales. Our net sales increased approximately 12.8%, or $29.3 million, to $258.5 million for the quarter ended April 30, 2001 from $229.2 million for the quarter ended April 30, 2000. This increase was due primarily to increased sales throughout all divisions and distribution channels including super naturals, independents and mass market. Sales to our two largest customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc. represented approximately 16.6% and 14.8%, respectively, of net sales for the quarter ended April 30, 2001. Whole Foods Market, Inc. represented approximately 16.6% and Wild Oats Markets, Inc. represented approximately 14.6%, of net sales for the quarter ended April 30, 2000. We expect sales during the fourth quarter of fiscal 2001 and for all of fiscal 2002 to increase 8% - 12% over the comparable prior year periods. Gross Profit. Our gross profit increased approximately 9.7%, or $4.4 million, to $49.7million for the quarter ended April 30, 2001 from $45.3 million for the quarter ended April 30, 2000. Our gross profit as a percentage of net sales was 19.2% for the quarter ended April 30, 2001 compared to 19.8% for the quarter ended April 30, 2000. This decrease in gross profit as a percent of sales was due primarily to our revision of a balance sheet estimate from a prior quarter, inventory loss at an outside storage location, as well as reduced margins in our Albert's Organics division. We have purchased the assets of Source Organic, Inc. as part of our strategy to strengthen the gross margin performance at our Albert's Organics division. We believe this initiative will result in increased access to better products and prices and will also improve our relationship with our produce vendors. We expect our gross margin as a percentage of sales to be 19.4% - 19.8% in the fourth quarter of fiscal 2001 and for all of fiscal 2002. Operating Expenses. Our total operating expenses, excluding special charges, increased approximately 2.2%, or $0.9 million, to $41.3 million for the quarter ended April 30, 2001 from $40.4 million for the quarter ended April 30, 2000. As a percentage of net sales, operating expenses, excluding special charges, decreased to 16.0% for the quarter ended April 30, 2001 from 17.6% for the quarter ended April 30, 2000. Special charges are discussed in the following paragraph. The lower operating expenses as a percentage of net sales were due primarily to increased labor productivity in our distribution centers, increased efficiencies in our transportation departments as a result of better routing and successfully leveraging our fixed expenses against a higher sales base. The improved labor productivity was due primarily to a more favorable labor market nationwide and higher retention rate of experienced warehouse employees. The improved transportation routing resulted in less miles traveled by our fleet, and corresponding reductions in expenses. We expect to reduce our operating expenses, excluding special charges, as a percentage of sales to less than 16% as we continue to realize operating efficiencies and expand our sales base. We also expect to incur additional special charges as we increase our warehouse capacity. Operating expenses for the quarter ended April 30, 2001 included special charges of $0.6million related to the expansion of our New Oxford, PA distribution facility, and $0.4 million of asset impairment charges, primarily goodwill, associated with the closing of an unprofitable retail store. Our operating expenses for the quarter ended April 30, 2000 included $0.4 million from the planned closing of 8 our Chicago facility. Operating expenses, including special charges, increased approximately 3.4%, or $1.4 million, to $42.3 million for the quarter ended April 30, 2001 from $40.8 million for the quarter ended April 30, 2000. As a percentage of sales operating expenses, including special charges, decreased to 16.3% for the quarter ended April 30, 2001 from 17.8% for the quarter ended April 30, 2000. Operating Income. Operating income, excluding the special charges discussed above, increased $3.5 million to $8.4 million for the quarter ended April 30, 2001 compared to $4.9 million for the quarter ended April 30, 2000. As a percentage of sales, operating income, excluding special charges, increased to 3.2% for the quarter ended April 30, 2001 compared to 2.1% for the quarter ended April 30, 2000. Operating income, including special charges, increased $2.9 million to $7.4 million for the quarter ended April 30, 2001 compared to $4.5 million for the quarter ended April 30, 2000. Other (Income) Expense. The $0.4 million increase in other expense in the quarter ended April 30, 2001 compared to the quarter ended April 30, 2000 was attributable to Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities" expense. FAS 133 requires recognition in the financial statements of the change in fair value during the quarter of certain interest rate protection contracts and other derivatives. We recorded FAS 133 expense of $0.4 million on our interest rate swap agreement resulting from the significant decline in interest rates during the quarter. We will continue to recognize this income or expense quarterly for the duration of the swap contract until either October 2003 or 2005, depending on whether the contract is extended. Whether we recognize income or expense in any given quarter, and the magnitude of that item, is dependent on interest rates and the remaining term of the contract. Upon expiration of the swap contract, the cumulative earnings impact will be zero. Income Taxes. Our effective income tax rate was 40.0% for the quarters ended April 30, 2001 and 2000. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. Net Income. As a result of the foregoing, net income, excluding special charges, increased $2.1 million to $4.1 million, or $.22 per diluted share, for the quarter ended April 30, 2001, compared to $2.0 million, or $0.11 per diluted share, in the quarter ended April 30, 2000. Net income, including special charges, increased $1.5 million to $3.3 million for the quarter ended April 30, 2001, compared to $1.8 million in the quarter ended April 30, 2000. We expect earnings per diluted share, excluding any special charges, to be $0.22 - $0.25 for the fourth quarter of fiscal 2001, and $1.02 - $1.06 for fiscal 2002. Nine Months Ended April 30, 2001 compared to Nine Months Ended April 30, 2000 Net Sales. Our net sales increased approximately 10.0%, or $68.1 million, to $747.1million for the nine months ended April 30, 2001 from $679.0 million for the nine months ended April 30, 2000. This increase was due primarily to increased sales throughout all divisions and distribution channels including super naturals, independents and mass market. Net sales growth was adversely affected by a failure to replace increased sales volume in fiscal 2000 attributable to Year 2000 concerns, and the closure of several internet-based companies and several Wild Oats Markets, Inc. stores that generated sales in the period ended April 30, 2000. Sales to our two largest customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc. represented approximately 16.7% and 14.7%, respectively, of net sales for the nine months ended April 30, 2001 compared to approximately 16.7% and 13.0%, respectively, for the same period last year. Gross Profit. Our gross profit increased approximately 13.8%, or $17.6 million, to $145.5 million for the nine months ended April 30, 2001 from $127.9 million for the nine months ended April 30, 2000. Our gross profit as a percentage of net sales increased to 19.5% for the nine months ended April 30, 2001 from 18.8% for the same period last year. The increase in gross profit was due primarily from our recovery in our Eastern Region as customer returns and allowances, inventory shrink, and inbound transportation costs decreased significantly. This increase was partially offset by our revision of a balance sheet estimate from a prior quarter, inventory loss at an outside storage location, as well as reduced margins in our Albert's Organics division. Additionally the gain in our gross profit was further offset by a change in our channel mix as the percentage of our sales to super naturals, which are at lower margins, increased. We expect the increase in percentage of sales to super naturals to continue in future periods. Operating Expenses. Our total operating expenses, excluding special charges, decreased approximately 0.3%, or $0.4 million, to $123.7 million for the nine months ended April 30, 2001 from $124.1 million for the nine months ended April 30, 2000. As a percentage of net sales, operating expenses, excluding special charges, decreased to 16.6% for the nine months ended April 30, 2001 from 18.3% for the nine months ended April 30, 2000. Special charges are discussed in the following paragraph. The lower operating expenses as a percentage of net sales were due primarily to increased labor productivity in our distribution centers and increased efficiencies in our transportation departments as a result of better routing, a reduction in Information Technology personnel as the Eastern region conversion problems were resolved, reductions in expenditures associated with the consolidation of our Central region into our Western region and our Eastern Region recovery. 9 Operating expenses for the nine months ended April 30, 2001 included special charges of $0.8 million related to the expansion of our New Oxford, PA distribution facility, and $0.4 million of asset impairment charges, primarily goodwill, associated with the closing of an unprofitable retail store. Our operating expenses for the nine months ended April 30, 2000 were impacted by several special charges. These charges included approximately $3.4 million of executive severance costs and the write-off of current assets in the Eastern Region and Chicago and approximately $2.4 million of restructuring and asset impairment charges related to the write-off of certain Eastern Region fixed assets and the planned closing of our Chicago facility. Operating expenses, including special charges, decreased approximately 3.9% or $5.1 million, to $124.9 million for the nine months ended April 30, 2001 from $129.9 million for the nine months ended April 30, 2000. As a percentage of sales operating expenses, including special charges, decreased to 16.7% for the nine months ended April 30, 2001 from 19.1% for the nine months ended April 30, 2000. Operating Income. Operating income, excluding the special charges discussed above, increased $18.0 million to $21.8 million for the nine months ended April 30, 2001 compared to $3.8 million for the nine months ended April 30, 2000. As a percentage of sales, operating income, excluding special charges, increased to 2.9% for the nine months ended April 30, 2001 compared to 0.6% for the nine months ended April 30, 2000. Operating income, including special charges, increased $22.7 million to $20.6 million for the nine months ended April 30, 2001 from a loss of $(2.1) million for the nine months ended April 30, 2000. Other (Income) Expense. The $1.1 million increase in other expense for the nine months ended April 30, 2001 compared to the nine months ended April 30, 2000 was attributable to slightly higher debt levels and expense related to FAS 133 that were offset by lower interest rates. We recorded $0.4 million of expense on our interest rate swap agreement resulting from the significant decline in interest rates during the nine-month period ended April 30, 2001. Income Taxes. Our effective income tax (benefit) rates were 40.0% and (40.0)% for the nine months ended April 30, 2001 and 2000, respectively. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. Net Income As a result of the foregoing, net income, excluding special charges, increased $10.4 million to $10.1 million for the nine months ended April 30, 2001, compared to a loss of $(0.3) million in the nine months ended April 30, 2000. Net income, including special charges, increased $12.9 million to $9.2 million for the nine months ended April 30, 2001, compared to a loss of $(3.7) million in the nine months ended April 30, 2000. Liquidity and Capital Resources We have historically financed operations and growth primarily with cash flows from operations, borrowings under our credit facility, seller financing of acquisitions, operating and capital leases, trade payables, bank indebtedness and the sale of equity and debt securities. As of April 30, 2001 we had less than $10 million available under our $100 million credit facility. We are currently in the process of expanding our credit facility to $130 - $150 million in order to meet our anticipated higher capital requirements. We expect this expanded facility to be in effect by our fiscal year-end of July 31, 2001. Primary uses of capital have been acquisitions, expansion of plant and equipment and investment in accounts receivable and inventory. Net cash provided by operations was $23.4 million for the nine months ended April 30, 2001 and was due to cash collected from customers net of cash paid to vendors exceeding our investments in accounts receivable and inventory. Net cash used in operations for the nine months ended April 30, 2000 was $10.6 million and related primarily to investments in inventory in the ordinary course of business and an increase in accounts receivable. Net cash used in investing activities was $16.5 million for the nine months ended April 30, 2001 and was due primarily to the purchase of our secondary facility in Auburn, CA, the expansion of our New Oxford, Pennsylvania distribution facility and payments for the purchase of Source Organic, Inc. and Palm Harbor Natural Foods. The acquisition of Source Organic, Inc. is part of our strategy to strengthen the gross margin performance at our Albert's Organics division. We believe this initiative will result in increased access to better products at the best prices available and will also improve our relationship with our produce vendors. We also acquired Palm Harbor Natural Foods, a retail store located in Florida. We believe our retail stores have a number of advantages over their competitors, including our financial strength and marketing expertise, the purchasing power resulting from group purchasing by stores within our Natural Retail Group (NRG) and the breadth of their product selection. Net cash used in financing activities was $1.0 million for the nine months ended April 30, 2001 due to proceeds from the exercise of stock options, mostly offset by repayment of long-term debt. Net cash provided by financing activities was $22.9 million for the nine months ended April 31, 2000 was a result of increased borrowings on our line of credit offset by repayments of long-term obligations. 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 counter party, which prohibits accounting for the swap as an effective hedge under Statement of Financial Accounting Standards #133. IMPACT OF INFLATION Historically, we have been able to pass along inflation-related increases to our customers. Consequently, inflation has not had a material impact upon the results of our operations or profitability. We are currently assessing and implementing strategies to mitigate the impact rising fuel costs have on our results of operations. Continuing increases in the cost of fuel could have a material adverse impact on our results of operations and profitability if we are unable to pass along a significant portion of these increases. 10 SEASONALITY Generally, we do not experience any material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management's ability to execute our operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS In June 1998, The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments, and hedging activities related to those instruments, as well as other hedging activities, and was amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." FAS 133 requires recognition in the financial statements of the change in fair value during the quarter of certain interest rate protection contracts and other derivatives. We adopted FAS 133 on August 1, 2000. We recorded $0.4 million in other expense resulting from the significant decline in interest rates related to our interest rate swap agreement during the quarter ended April 30, 2001. Certain Factors That May Affect Future Results This Form 10-Q and the documents incorporated by reference in this Form 10-Q contain forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would," or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or of financial position or state other "forward-looking" information. The important factors listed below as well as any cautionary language in this Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. You should be aware that the occurrence of the events described in the risk factors below and elsewhere in this Form 10-Q could have an adverse effect on our business, results of operations and financial position. Any forward-looking statements in this Form 10-Q and the documents incorporated by reference in this Form 10-Q are not guarantees of futures performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, possibly materially. We disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statement in this section. Access to capital and the cost of that capital As of April 30, 2001 we had less than $10 million available under our $100 million credit facility. We are currently evaluating various plans to access additional cash to meet our anticipated higher capital requirements but future low cash availability levels could restrict our ability to expand our business. In order to maintain our profit margins, we rely on strategic investment buying initiatives, such as discounted bulk purchases, which require spending significant amounts of working capital. In the event that capital market turmoil significantly increases our cost of capital or limits our ability to borrow funds or raise equity capital, we could suffer reduced profit margins and be unable to grow our business organically or through acquisitions, which could have a material adverse effect on our business, financial condition or results of operations. 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. 11 We depend heavily on our principal customers Our ability to maintain close, mutually beneficial relationships with our top two customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc., is important to the ongoing growth and profitability of our business. Whole Foods and Wild Oats accounted for approximately 16.7% and 14.7%, respectively, of our net sales during the nine months ended April 30, 2001. As a result of this concentration of our customer base, the loss or cancellation of business from either of these customers, including from increased distribution to their own facilities, could materially and adversely affect our business, financial condition or results of operations. We sell products under purchase orders, and we generally have no agreements with or commitments from our customers for the purchase of products. No assurance can be given that our customers will maintain or increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. Our profit margins may decrease due to consolidation in the grocery industry The grocery distribution industry generally is characterized by relatively high volume with relatively low profit margins. The continuing consolidation of retailers in the natural products industry and the growth of super natural chains may reduce our profit margins in the future as more customers qualify for greater volume discounts. Our industry is sensitive to economic downturns The grocery industry is also sensitive to national and regional economic conditions, and the demand for our products may be adversely affected from time to time by economic downturns. In addition, our operating results are particularly sensitive to, and may be materially adversely affected by: o difficulties with the collectibility of accounts receivable, o difficulties with inventory control, o competitive pricing pressures, and o unexpected increases in fuel or other transportation-related costs. There can be no assurance that one or more of such factors will not materially adversely affect our business, financial condition or results of operations. We are dependent on a number of key executives Management of our business is substantially dependent upon the services of Michael S. Funk, Chief Executive Officer, Steven Townsend, President, Todd Weintraub, Chief Financial Officer, Kevin Michel, President of the Western Region and other key management employees. Loss of the services of any additional officers or any other key management employee could have a material adverse effect on our business, financial condition or results of operations. Our operating results are subject to significant fluctuations Our net sales and operating results may vary significantly from period to period as a result of: 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 acquisition transactions while the operations of the acquired businesses are being integrated into our operations. 12 As a result of the foregoing factors, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful and that such comparisons cannot be relied upon as indicators of future performance. We are subject to significant governmental regulation Our business is highly regulated at the federal, state and local levels and our products and distribution operations require various licenses, permits and approvals. In particular: o our products are subject to inspection by the U.S. Food and Drug Administration, o our warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities, and o our trucking operations are regulated by the U.S. Department of Transportation and the U.S. Federal Highway Administration. The loss or revocation of any existing licenses, permits or approvals or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where we intend to do business could have a material adverse effect on our business, financial condition or results of operations. Our officers and directors and the employee stock ownership trust have significant voting power As of April 30, 2001, our executive officers and directors, and their affiliates, and the United Natural Foods Employee Stock Ownership Trust beneficially owned in the aggregate approximately 16% of United Natural's common stock. Accordingly, these stockholders, if acting together, may have the ability to impact the election of our directors and determine the outcome of corporate actions requiring stockholder approval, depending on how other stockholders may vote. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of United Natural. Union-organizing activities could cause labor relations difficulties As of April 30, 2001, approximately 200 employees, representing approximately 7% of our approximately 2,700 employees, were union members. We have in the past been the focus of union-organizing efforts. As we increase our employee base and broaden our distribution operations to new geographic markets, our increased visibility could result in increased or expanded union-organizing efforts. Although we have not experienced a work stoppage to date, if additional employees were to unionize, we could be subject to work stoppages and increases in labor costs, either of which could materially adversely affect our business, financial condition or results of operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk We do not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Exhibits NONE Reports on Form 8-K April 6, 2001 - Announcement of realignment of management responsibilities. 13 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/ Todd Weintraub ----------------------------- Todd Weintraub Chief Financial Officer (Principal Financial and Accounting Officer) Dated: June 14, 2001 14 -----END PRIVACY-ENHANCED MESSAGE-----