-----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, Sv3/55igCWngNEsDeJaUX7gBRjKAVzpywIPvN2lhM5R2rpqBhpsk6q0We3s3h/g5 ks4TZ/XabdrlnUaqAg5Hsw== 0001005477-99-002814.txt : 19990615 0001005477-99-002814.hdr.sgml : 19990615 ACCESSION NUMBER: 0001005477-99-002814 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990614 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: 000-21531 FILM NUMBER: 99645616 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 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, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-21531 UNITED NATURAL FOODS, INC. (Exact name of Registrant as Specified in Its Charter) Delaware 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices, Including Zip Code) Registrant's Telephone Number, Including Area Code: (860) 779-2800 ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes |X| No |_| As of June 14, 1999, there were 18,249,305 shares of the Registrant's Common Stock, $0.01 par value per share, outstanding. ================================================================================ UNITED NATURAL FOODS, INC. FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 1999 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of April 30, 1999 and July 31, 1998 3 Consolidated Statements of Income for the quarter and nine months ended April 30, 1999 and 1998 4 Consolidated Statements of Cash Flows for the nine months ended April 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-17 Item 3. Quantitative and Qualitative Disclosure About Market Risk 17 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19
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, 1999 JULY 31, 1998 -------------- ------------- ASSETS Current assets: Cash $ 12,012 $ 1,393 Accounts receivable, net of allowance of $2,500 and $1,780, respectively 60,051 48,078 Notes receivable, trade 941 705 Inventories 98,973 91,119 Prepaid expenses 5,370 3,209 Deferred income taxes 2,647 1,540 Refundable income taxes -- 165 --------- --------- Total current assets 179,994 146,209 --------- --------- Property & equipment, net 44,551 44,434 --------- --------- Other assets: Notes receivable, trade, net 885 1,170 Goodwill, net 26,450 19,136 Covenants not to compete, net 369 613 Other, net 1,681 680 --------- --------- Total assets $ 253,930 $ 212,242 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable - line of credit $ 50,499 $ 36,608 Current installments of long-term debt 3,964 3,309 Current installment of obligations under capital leases 729 488 Accounts payable 34,442 32,017 Accrued expenses 13,585 8,219 Income taxes payable 2,463 -- --------- --------- Total current liabilities 105,682 80,641 Long-term debt, excluding current installments 24,900 25,081 Deferred income taxes 2,455 1,370 Obligations under capital leases, excluding current installments 1,114 764 --------- --------- Total liabilities 134,151 107,856 --------- --------- Stockholders' equity: Preferred stock, $.01 par value, authorized 5,000 shares, none issued and outstanding -- -- Common stock, $.01 par value, authorized 50,000 shares, issued and outstanding 18,249 at April 30, 1999; authorized 25,000, issued 18,184 and outstanding 18,175 at July 31, 1998 182 182 Additional paid-in capital 69,709 67,440 Unallocated shares of ESOP (2,625) (2,747) Retained earnings 52,513 39,776 Treasury stock, 9 shares at July 31, 1998, at cost -- (265) --------- --------- Total stockholders' equity 119,779 104,386 --------- --------- Total liabilities and stockholders' equity $ 253,930 $ 212,242 ========= =========
See notes to consolidated financial statements. 3 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, --------- --------- (In thousands, except per share data) 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $ 226,892 $ 187,581 $ 642,529 $ 538,940 Cost of sales 178,953 148,200 505,768 429,062 --------- --------- --------- --------- Gross profit 47,939 39,381 136,761 109,878 --------- --------- --------- --------- Operating expenses 36,893 29,113 105,133 84,690 Merger and restructuring expenses 1,538 -- 2,243 4,064 Amortization of intangibles 245 333 844 838 --------- --------- --------- --------- Total operating expenses 38,676 29,446 108,220 89,592 --------- --------- --------- --------- Operating income 9,263 9,935 28,541 20,286 --------- --------- --------- --------- Other expense (income): Interest expense 1,401 1,395 4,470 3,668 Other, net (1,488) (197) (1,847) (546) --------- --------- --------- --------- Total other expense (income) (87) 1,198 2,623 3,122 --------- --------- --------- --------- Income before income taxes 9,350 8,737 25,918 17,164 Income taxes 4,231 3,658 11,104 8,513 --------- --------- --------- --------- Net income $ 5,119 $ 5,079 $ 14,814 $ 8,651 ========= ========= ========= ========= Per share data (basic): Net income $ 0.28 $ 0.29 $ 0.81 $ 0.50 ========= ========= ========= ========= Weighted average basic shares of common stock 18,183 17,369 18,178 17,361 ========= ========= ========= ========= Per share data (diluted): Net income $ 0.28 $ 0.29 $ 0.80 $ 0.49 ========= ========= ========= ========= Weighted average diluted shares of common stock 18,512 17,750 18,529 17,672 ========= ========= ========= =========
For the nine months ended April 30, 1998, pro forma additional income tax expense was $320 and pro forma net income was $8,331, or $0.48 per share on both a basic and diluted basis. The pro forma additional income tax expense relates to Stow Mills' status as an S-Corporation prior to the merger (Note 4). See notes to consolidated financial statements. 4 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED APRIL 30, --------------- (In thousands) 1999 1998 ---- ----- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,814 $ 8,651 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 6,337 4,405 Gain on sale of business (1,397) -- (Gain) loss on disposals of property & equipment (303) 155 Deferred income tax benefit (80) -- Provision for doubtful accounts 1,178 1,388 Changes in assets and liabilities, net of acquired companies: Accounts receivable (10,146) (5,012) Inventory (8,708) (13,845) Prepaid expenses (2,029) (110) Refundable income taxes 50 -- Other assets (386) (378) Notes receivable, trade 49 (73) Accounts payable 1,333 1,380 Accrued expenses 2,684 2,760 Income taxes payable 2,463 (902) -------- -------- Net cash provided by (used in) operating activities 5,859 (1,581) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchases of subsidiaries, net of cash acquired (8,888) (20,029) Proceeds from sale of business 7,086 -- Proceeds from disposals of property and equipment 1,367 400 Capital expenditures (5,155) (11,800) -------- -------- Net cash used in investing activities (5,590) (31,429) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under note payable 13,892 26,022 Repayments on long-term debt (3,526) (8,620) Proceeds from long-term debt -- 17,799 Principal payments of capital lease obligations (473) (835) Proceeds from exercise of stock options 456 -- -------- -------- Net cash provided by financing activities 10,349 34,366 -------- -------- NET INCREASE IN CASH 10,619 1,356 Cash at beginning of period 1,393 952 -------- -------- Cash at end of period $ 12,012 $ 2,308 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 4,306 $ 3,735 ======== ======== Income taxes $ 12,147 $ 7,669 ======== ========
In the nine months ended April 30, 1999 and 1998, the Company incurred $1,064 and $315, respectively, of capital lease obligations. See notes to consolidated financial statements. 5 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION Our accompanying consolidated financial statements include the accounts of United Natural Foods, Inc. and our wholly owned subsidiaries. We are a distributor and retailer of natural foods and related products. On October 31, 1997, we completed a merger with Stow Mills, Inc. wherein Stow Mills became one of our wholly owned subsidiaries. The merger with Stow Mills was accounted for as a pooling of interests and, accordingly, all financial information included is reported as though we had been combined for all periods reported. Our net sales for the quarter ended October 31, 1997 excluding Stow Mills were $116.5 million. Our net income for the quarter ended October 31, 1997 excluding Stow Mills was $1.2 million. Net sales for the quarter ended October 31, 1997 for Stow Mills were $56.9 million. Net loss for the quarter ended October 31, 1997 for Stow Mills was $1.8 million. The financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally required in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In our opinion, these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for interim periods, however, may not be indicative of the results that may be expected for a full year. Certain fiscal 1998 balances have been reclassified to conform to the fiscal 1999 presentation. 2. INTEREST RATE SWAP AGREEMENT In October 1998, we entered into an interest rate swap agreement. The agreement provides for us to pay interest for a five year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million. The five year term of the swap agreement may be extended to seven years at the option of the counterparty. 3. RESTRUCTURING COSTS We accrued employee severance expenses of $0.7 million during the quarter ended January 31, 1999, in connection with the consolidation of operations in the Eastern Region. During the quarter ended April 30, 1999, we recorded incremental depreciation of $1.2 million and accrued employee retention expenses of $0.4 million. Less than $0.1 million of the retention and severance expenses had been paid as of April 30, 1999. 4. PRO FORMA NET INCOME Stow Mills was subject to taxation as an S corporation until the merger on October 31, 1997. For pro forma disclosure purposes, income tax adjustments were assumed in order to reflect results as if Stow Mills had been subject to taxation as a C corporation for the period prior to the merger. 5. EARNINGS PER SHARE Following is a reconciliation of the basic and diluted number of shares used in computing earnings per share:
Quarter Ended Nine Months Ended April 30, April 30, (In thousands) 1999 1998 1999 1998 ---- ---- ---- ---- Basic weighted average shares outstanding 18,183 17,369 18,178 17,361 Net effect of dilutive stock options based upon the treasury stock method 329 381 351 311 --------- -------- ----------- ---------- Diluted weighted average shares outstanding 18,512 17,750 18,529 17,672 ========= ======== =========== ==========
6 6. ACQUISITION On September 30, 1998, we acquired substantially all of the outstanding stock of Albert's Organics, Inc., a business specializing in the purchase, sale and distribution of produce and other perishable items, for $10.8 million to $12 million, predicated upon the future performance of Albert's, including $9.1 million of goodwill which we are amortizing over 40 years. Albert's had sales of $47.8 million for the fiscal year ended December 31, 1997 and provides us with additional expertise in the purchasing of produce and other perishable items. Albert's also enables us to avail ourselves of a number of cross-selling opportunities, which will be mutually beneficial to both businesses. This acquisition has been accounted for as a purchase and, accordingly, all financial information has been included since the date of acquisition. 7. COMPREHENSIVE INCOME Effective August 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Our comprehensive income is equal to net income for all periods presented. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We are the leading independent national distributor of natural foods and related products in the United States. In recent years, our sales to existing and new customers have increased through the acquisition of or merger with natural products distributors, the opening of distribution centers in new geographic areas, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. Our distribution operations are divided into three principal regions: United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods, Inc. and Stow Mills, Inc.), Rainbow Natural Foods, Inc. in the Central Region and Mountain People's Warehouse, Inc. in the Western Region. Through our subsidiary, the Natural Retail Group, we also own and operate a number of retail natural products stores located in the eastern United States. Our retail strategy is to selectively acquire existing natural products stores that meet our strict criteria in areas such as sales growth, profitability, growth potential and store management. We believe our retail business serves as a natural complement to our distribution business enabling us to develop new marketing programs and improve customer service. We are continually integrating certain operating functions in order to improve operating efficiencies, including: (i) integrating administrative and accounting functions; (ii) expanding marketing and customer service programs across the three regions; (iii) expanding national purchasing opportunities; (iv) consolidating systems applications between physical locations and regions; and (v) reducing geographic overlap between regions. In addition, our continued growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. While operating margins may be affected in periods in which these expenses are incurred, over the long term, we expect to benefit from the increased absorption of our expenses over a larger sales base. We have incurred considerable expenses in connection with the consolidation of operations in the Eastern Region, and expect these expenses to continue for the remainder of fiscal 1999. These expenses consist of restructuring costs, including additional depreciation, severance and retention expenses, and the cost of moving inventory, as well as additional temporary expenses for information technology, inventory management and redundant staffing and transportation. We have also made considerable expenditures in connection with the expansion of our facilities, including the relocation of our Denver, Colorado distribution center and the expansion of refrigerated and frozen space at our Auburn, California and Atlanta, Georgia facilities. Additionally, our Seattle, Washington facility was relocated to a larger facility in Auburn, Washington during the third quarter of fiscal 1999. Our net sales consist primarily of sales of natural products to retailers adjusted for customer volume discounts, returns and allowances. The principal components of our cost of sales include the amount paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to our distribution facilities. Operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, administrative, depreciation, merger expenses and amortization expense. Other expenses include gain on the sale of retail stores, interest on outstanding indebtedness, interest income and miscellaneous income and expenses. 7 Recent Acquisitions On September 30, 1998, we acquired substantially all of the outstanding stock of Albert's Organics, Inc., a business specializing in the purchase, sale and distribution of produce and other perishable items, for $10.8 million to $12 million, predicated upon the future performance of the acquired business, including $9.1 million of goodwill which we are amortizing over 40 years. Albert's had sales of $47.8 million for the fiscal year ended December 31, 1997 and provides us with additional expertise in the purchasing of produce and other perishable items. Albert's also enables us to avail ourselves of a number of cross-selling opportunities, which will be mutually beneficial to both businesses. The acquisition of Albert's has been accounted for as a purchase and, accordingly, all financial information has been included since the date of acquisition. Our merger with Stow Mills in October 1997 has been accounted for as a pooling of interests and, accordingly, all information included herein is reported as though United Natural and Stow Mills had been combined for all periods reported. Results of Operations The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:
Quarter Ended Nine Months April 30, Ended April 30, (In thousands, except per share data) 1999 1998 1999 1998 ------------------- ------------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 78.9% 79.0% 78.7% 79.6% -------- -------- -------- -------- Gross profit 21.1% 21.0% 21.3% 20.4% -------- -------- -------- -------- Operating expenses 16.3% 15.5% 16.4% 15.7% Merger and restructuring expenses 0.7% 0.0% 0.3% 0.8% Amortization of intangibles 0.1% 0.2% 0.1% 0.2% -------- -------- -------- -------- Total operating expenses 17.0% 15.7% 16.8% 16.6% -------- -------- -------- -------- Operating income 4.1% 5.3% 4.4% 3.8% -------- -------- -------- -------- Other expense (income): Interest expense 0.6% 0.7% 0.7% 0.7% Other, net -0.7% -0.1% -0.3% -0.1% -------- -------- -------- -------- Total other expense (income) 0.0% 0.6% 0.4% 0.6% -------- -------- -------- -------- Income before income taxes 4.1% 4.7% 4.0% 3.2% Income taxes 1.9% 2.0% 1.7% 1.6% -------- -------- -------- -------- Net income 2.3% 2.7% 2.3% 1.6% ======== ======== ======== ========
8 Quarter Ended April 30, 1999 Compared To Quarter Ended April 30, 1998 Net Sales. Our net sales increased approximately 21.0%, or $39.3 million, to $226.9 million for the quarter ended April 30, 1999 from $187.6 million for the quarter ended April 30, 1998. The overall increase in net sales was attributable to increased sales to existing customers, the sale of new product offerings and the newly acquired Albert's Organics business. Excluding Albert's Organics, our most recent acquisition, our net sales growth would have been 13.6% over the prior year comparable period. Gross Profit. Our gross profit increased approximately 21.7%, or $8.6 million, to $47.9 million for the quarter ended April 30, 1999 from $39.4 million for the quarter ended April 30, 1998. Our gross profit as a percentage of net sales increased to 21.1% for the quarter ended April 30, 1999 from 21.0% for the quarter ended April 31, 1998. The increase in gross profit as a percentage of net sales resulted partially from greater purchasing efficiencies resulting from the integration of Stow Mills and inbound freight efficiencies, and a greater mix of higher margin business, partially offset by increased sales to existing customers under our volume discount program. Operating Expenses. Our total operating expenses increased approximately 31.3%, or $9.2 million, to $38.7 million for the quarter ended April 30, 1999 from $29.4 million for the quarter ended April 30, 1998. As a percentage of net sales, operating expenses increased to 17.0% for the quarter ended April 30, 1999 from 15.7% for the quarter ended April 30, 1998. Excluding restructuring costs of $1.5 million, total operating expenses for the quarter ended April 30, 1999 would have been $37.1 million, or 16.4% of net sales, resulting in an increase for the quarter ended April 30, 1999 of $7.7 million, or 26.1%, over the comparable prior period. The increase in operating expenses as a percentage of net sales, excluding restructuring costs, is primarily due to increased information technology expenditures, the growth of the retail business, which generally has higher operating expenses as a percentage of net sales than the distribution business and additional business integration costs for redundant staffing and training in preparation for the migration of the business from the Chesterfield, New Hampshire facility to the Dayville, Connecticut facility. Operating Income. Operating income decreased $0.7 million, to $9.3 million for the quarter ended April 30, 1999 from $9.9 million for the quarter ended April 30, 1998. As a percentage of net sales, operating income decreased to 4.1% in the quarter ended April 30, 1999 from 5.3% in the comparable 1998 period. Excluding the restructuring costs noted above, operating income for the quarter ended April 30, 1999 would have been $10.8 million, or 4.8% of net sales, resulting in an increase for the quarter ended April 30, 1999 of $0.9 million, or 8.7%, over the comparable prior period. Other (Income)/Expense. The $1.3 million increase in other income in the quarter ended April 30, 1999 compared to the quarter ended April 30, 1998 was primarily attributable to the gain on the sale of four retail stores in April, 1999. Interest expense was relatively unchanged, reflecting a higher level of debt in the third quarter of fiscal 1999 used to fund working capital investments and acquisitions offset by a decrease in our average interest rate on debt. Income Taxes. Our effective income tax rates were 45.3% and 41.9% for the quarters ended April 30, 1999 and 1998, respectively. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. The effective rate for 1999 also increased due to the settlement of an audit with the Internal Revenue Service for $0.3 million. Net Income. As a result of the foregoing, net income was relatively unchanged at $5.1 million, or 2.3% of net sales, for the quarter ended April 30, 1999, compared to 2.7% of net sales in the quarter ended April 30, 1998. Excluding the $1.5 million in restructuring costs ($0.9 million, net of tax), the $1.4 million gain on the sale of four retail stores ($0.8 million, net of tax) and the $0.3 million IRS settlement in the third quarter of fiscal 1999, net income would have 9 been $5.5 million, or 2.4% of net sales, resulting in an increase for the quarter ended April 30, 1999 of $0.4 million, or 8.3%, over the comparable prior period. Nine Months Ended April 30, 1999 Compared To Nine Months Ended April 30, 1998 Net Sales. Our net sales increased approximately 19.2%, or $103.6 million, to $642.5 million for the nine months ended April 30, 1999 from $538.9 million for the nine months ended April 30, 1998. The overall increase in net sales was attributable to increased sales to existing customers, the sale of new product offerings and the newly acquired Albert's Organics business. Excluding Albert's Organics, our most recent acquisition, our net sales growth would have been 13.7% over the prior year comparable period. Gross Profit. Gross profit increased approximately 24.5%, or $26.9 million, to $136.8 million for the nine months ended April 30, 1999 from $109.9 million for the nine months ended April 30, 1998. Gross profit as a percentage of net sales increased to 21.3% for the nine months ended April 30, 1999 from 20.4% for the nine months ended April 30, 1998. The increase in gross profit as a percentage of net sales resulted from greater purchasing efficiencies resulting from the integration of Stow Mills and inbound freight efficiencies, and a greater mix of higher margin business, partially offset by increased sales to existing customers under our volume discount program. Operating Expenses. Total operating expenses increased approximately 20.8%, or $18.6 million, to $108.2 million for the nine months ended April 30, 1999 from $89.6 million for the nine months ended April 30, 1998. As a percentage of net sales, operating expenses increased to 16.8% for the nine months ended April 30, 1999 from 16.6% for the nine months ended April 30, 1998. Excluding fiscal 1999 restructuring costs of $2.2 million and fiscal 1998 merger costs of $4.1 million, total operating expenses for the nine months ended April 30, 1999 and 1998 would have been $106.0 million, or 16.5% of net sales, and $85.5 million, or 15.9% of net sales, respectively, resulting in an increase for the nine months ended April 30, 1999 of $20.4 million, or 23.9%, over the comparable prior period. The increase in operating expenses as a percentage of net sales, excluding restructuring and merger costs, is primarily due to increased information technology expenditures, the growth of the retail business, which generally has higher operating expenses as a percentage of net sales than the distribution business and additional business integration costs for redundant staffing and training in preparation for the migration of the business from the Chesterfield, New Hampshire facility to the Dayville, Connecticut facility. Operating Income. Operating income increased $8.3 million to $28.5 million for the nine months ended April 30, 1999 from $20.3 million for the nine months ended April 30, 1998. As a percentage of net sales, operating income increased to 4.4% in the nine months ended April 30, 1999 from 3.8% in the comparable 1998 period. Excluding the restructuring and merger costs noted above, operating income for the nine months ended April 30, 1999 and 1998 would have been $30.8 million, or 4.8% of net sales, and $24.4 million, or 4.5% of net sales, respectively, resulting in an increase for the nine months ended April 30, 1999 of $6.4 million, or 26.4%, over the comparable prior period. Other (Income)/Expense. The $0.5 million decrease in other expense in the nine months ended April 30, 1999 compared to the nine months ended April 30, 1998 was primarily attributable to the gain on the sale of four retail stores in April 1999, partially offset by an increase in interest expense relating to the higher level of debt in the first nine months of fiscal 1999 used to fund working capital investments and acquisitions. This increase in interest expense was partially offset by a decrease in our average interest rate on debt. 10 Income Taxes. Our effective income tax rates were 42.8% and 49.6% for the nine months ended April 30, 1999 and 1998, respectively. The effective rate for 1999 was higher than the federal statutory rate primarily due to state and local income taxes and the settlement of an IRS audit for $0.3 million. The effective rate for 1998 was higher than the federal statutory rate primarily due to state and local income taxes and and non-deductible merger expenses incurred in the first quarter of fiscal 1998, partially offset by the fact that Stow Mills was an S Corporation prior to the merger and, as such, had no federal tax expense for the first fiscal quarter of 1998. Net Income. As a result of the foregoing, net income increased by $6.2 million to $14.8 million, or 2.3% of net sales, for the nine months ended April 30, 1999 from $8.7 million in the nine months ended April 30, 1998. Excluding the $2.2 million in restructuring costs ($1.3 million, net of tax), the $1.4 million gain on the sale of four retail stores ($0.8 million, net of tax) and the $0.3 million IRS settlement in the third quarter of fiscal 1999, and the $4.1 million in merger costs in fiscal 1998, net income would have been $15.6 million, or 2.4% of net sales, and $12.7 million, or 2.4% of net sales, respectively, resulting in an increase for the nine months ended April 30, 1999 of $2.9 million, or 22.8%, over the comparable prior period. Liquidity And Capital Resources We have historically financed operations and growth primarily from cash flows from operations, borrowings under our credit facility, seller financing of acquisitions, operating and capital leases, trade payables, bank indebtedness and the sale of equity and debt securities. Primary uses of capital have been acquisitions, expansion of plant and equipment and investment in accounts receivable and inventory. Net cash provided by (used in) operations was $5.9 million and $(1.6) million for the nine months ended April 30, 1999 and 1998, respectively. Excluding merger expenses of $4.1 million, net cash provided by operations in the first nine months of fiscal 1998 would have been $2.5 million. Cash provided by operations in the first nine months of fiscal 1999 related primarily to cash collected from customers net of cash paid to vendors, partially offset by investments in accounts receivable and inventory in the ordinary course of business. The increases in inventory levels relate to supporting increased sales with wider product assortment combined with our ability to capture purchasing efficiency opportunities in excess of total carrying costs. Cash provided by operations in the first nine months of fiscal 1998, excluding merger expenses, is also due primarily to cash collected from customers net of cash paid to vendors, partially offset by investments in accounts receivable and inventory in the ordinary course of business. Working capital at April 30, 1999 was $74.3 million. Net cash used in investing activities was $5.6 million and $31.4 million for the nine months ended April 30, 1999 and 1998, respectively. Investing activities in both years were primarily for the acquisition of new businesses and the continued upgrade of existing management information systems. Net cash used in investing activities in fiscal 1999 was partially offset by proceeds from the sale of four retail stores in April 1999. Cash provided by financing activities was $10.4 million and $34.4 million for the nine months ended April 30, 1999 and 1998, respectively. We increased borrowings on our line of credit by $13.9 million and $26.0 million during the first nine months of fiscal 1999 and fiscal 1998, respectively, and repaid long-term obligations in the amount of $4.0 million and $9.5 million, respectively. During fiscal 1998 we also incurred $17.8 million of long-term debt. We expect to spend approximately $45 million over the next five years in capital expenditures to fund the expansion of existing facilities, upgrade information systems and technology and update our material handling equipment. In October 1998, we entered into an interest rate swap agreement. The agreement provides for us to pay interest for a five year period at a fixed rate of 5% on a notional principal amount of $60 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The swap has been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million. The five year term of the swap agreement may be extended to seven years at the option of the counterparty. 11 Impact Of Inflation Historically, we have been able to pass along inflation-related increases to our customers. Consequently, inflation has not had a material impact upon our results operations or profitability. Seasonality Generally, we do not experience any material seasonality. However, sales and operating results may vary significantly from quarter to quarter due to factors such as changes in operating expenses, our ability to execute operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. Recently Issued Financial Accounting Standards The Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting operating segments of publicly traded business enterprises in annual and interim financial statements and requires that those enterprises report selected information about operating segments. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business," but retains the requirement to report information about major customers. This statement also amends SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997 and requires that comparative information for earlier years be restated. We are currently evaluating what impact, if any, this standard will have on our financial statement disclosures. The Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes disclosure requirements for pensions and other postretirement benefits, and is effective for fiscal years beginning after December 15, 1997. This statement does not apply as we do not currently sponsor any defined benefit plans. The Financial Accounting Standards Board recently issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, and is effective for fiscal quarters of fiscal years beginning after June 15, 2000. We have not yet determined what impact, if any, this standard will have on our financial statement presentation. Year 2000 Issues We have assessed most of our internal exposure to the year 2000 issue, and have established a comprehensive response to that exposure. We continue to assess our customer and vendor exposure. Generally, United Natural has "Year 2000" exposure in three areas: o United Natural's information technology infrastructure, including computer operating systems and applications, o microprocessors and other electronic devices -- "embedded chips" -- included as components of non-computer equipment, and o computer systems used by third parties, including our customers and suppliers. The information technology infrastructure and embedded chips are being addressed on a regional level. The third parties are being evaluated centrally. We have completed our assessment of our information technology infrastructure, and are in the process of completing our evaluation of all microprocessors and other electronic devices, third-party vendors and customers. Our Western Region We believe that our western region's critical information technology infrastructure components and embedded chips are year 2000 compliant. We have made the minimal changes necessary for our information technology infrastructure to operate in a year 2000 environment. We do not utilize two digit date coding logic, and we have successfully tested hardware, operating system and applications software simulating post year 2000 systems clock dates. We have tested our microprocessors and other electronic devices and have completed the necessary changes 12 rendering them year 2000 compliant. The Seattle facility's phone system was replaced for other business reasons during the third quarter of fiscal 1999 and is year 2000 compliant. We have tested all western region critical information technology infrastructure components and embedded chips and we believe they will work properly in the year 2000 and beyond. Our Central Region We believe our central region's critical information technology infrastructure components and embedded chips are also year 2000 compliant. Our central region does not employ two digit date coding logic and has simulated year 2000 system clock dates in tests of its hardware and operating systems as well as selected applications software. We recently completed all year 2000 simulation testing. We have also recently completed an independent third-party review of our central region's operating system and critical information technology applications software code which has indicated that they are year 2000 compliant. All other information technology infrastructure components and embedded chips either have been modified or, if not year 2000 compliant, will be retired before July 1, 1999. Our Eastern Region Our eastern region is currently reviewing the results of a third-party audit of its year 2000 systems code for both the Cornucopia (Dayville, Connecticut and Atlanta, Georgia) and Stow Mills systems. Our eastern region is in the process of moving to a single system for operational efficiency reasons. The Stow Mills system will become a hybrid of the best functionality components of each system. The Stow Mills system requires a number of code changes to achieve full year 2000 compliance. We expect the existing operating system to be upgraded to a year 2000 compliant version by the end of July 1999. In addition, all code is expected to be year 2000 compliant for the new Eastern Region business systems by the end of June 1999, except for one warehouse facility which is expected to be year 2000 compliant by October 1999. Also, to test year 2000 compliance, the surviving eastern region systems clock will be moved forward simulating the year 2000 prior to the end of August 1999. The existing Cornucopia systems are not year 2000 compliant. We expect to move off these existing systems and on to the new Eastern Region system during June 1999. All other information technology infrastructure components and embedded chips have been modified, or, if not year 2000 compliant, will be retired before July 1, 1999. Our Eastern Region's telephone systems are not yet year 2000 compliant and will be replaced or upgraded by July 1999. Retail Stores The current point of sale or cash registers are not all year 2000 compliant. We plan to have the year 2000 compliant point of sale systems or compliant cash registers in place on by July 1999. Albert's Organics, Inc. and Hershey Import Co., Inc. We will place our Hershey business onto the United Natural Foods system and expect to have this completed by the end of October 1999. We have simulated year 2000 system clock dates for the Albert's systems, and we expect to make the code changes required to make these systems year 2000 compliant by August 1999. Our Suppliers and Customers We have sent written requests for year 2000 information to substantially all suppliers. We are currently reviewing the responses received and have sent second requests to the top suppliers making up at least 80% of our purchases. We have also compiled a database of all customers regarding their year 2000 status and plans for remediation and have sent both initial and follow-up information requests. Expenditures We are in the process of updating our systems for business functionality reasons and have adopted a going forward systems strategy of staying current with state of the art systems technology. We are also in the process of integrating acquisitions to achieve customer service and operating efficiency improvements, which require common state of the art systems technology. Accordingly, all business systems changes would be performed regardless of the year 2000 issue both from a timing and cost perspective. We have significantly increased our information technology expenditures to execute our systems strategy that includes any immaterial incremental amounts to achieve year 2000 compliance. We therefore believe that we will have spent an incremental amount of less than $0.4 million on year 2000 remediation over what we would have spent to execute our going forward systems strategy. We expect to 13 spend on information technology systems and support approximately $7.2 million in fiscal 1999 and we have already spent approximately $4 million and $3 million in fiscal 1998 and 1997, respectively. Potential Risks The dates on which we believe we will be year 2000 compliant are based on our plans for work to be performed and best estimates which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results may differ materially from those anticipated. If we are unsuccessful in completing remediation of non-compliant systems, correcting embedded chips or if customers or suppliers cannot rectify their year 2000 issues, it could have a material adverse effect on our business, financial condition and results of operations. We have not yet established a contingency plan in the event of non-compliance by any parties. We are beginning to prepare contingency plans for any critical business applications and expect to have such plans completed prior to the end of August 1999. Certain Factors That May Affect Future Results If any of the events described below actually occur, our business, financial condition, or results of operations could be materially adversely affected. This Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, including those set forth in the following risk factors and elsewhere in, or incorporated by reference into, this Form 10-Q. Our business could be adversely affected if we are unable to integrate our acquisitions and mergers A significant portion of our historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. United Natural merged with Stow Mills in October 1997. The successful and timely integration of this merger is critical to our future operating and financial performance. We believe that the integration of Stow Mills will be substantially completed by the end of 1999. The integration will require, among other things: o the optimization of delivery routes; o coordination of administrative, distribution and finance functions; o the integration of personnel; and o the integration of computer systems onto a single systems platform. The integration process could divert the attention of management, and any difficulties or problems encountered in the transition process could have a material adverse effect on our business, financial condition or results of operations. In addition, the process of combining the companies could cause the interruption of, or a loss of momentum in, the activities of the respective businesses, which could have an adverse effect on their combined operations. There can be no assurance that United Natural will retain key employees of Stow Mills or that we will realize any of the other anticipated benefits of the Stow Mills merger. We recently announced plans to close our Chesterfield, New Hampshire distribution center and to consolidate its operations with our Dayville, Connecticut and New Oxford, Pennsylvania facilities. We expect to begin transferring sales operations from the Chesterfield facility to our Dayville and New Oxford facilities by June of 1999. There are numerous risks involved with this consolidation of operations including, among other things: o we may have difficulty retaining drivers currently employed at our Chesterfield facility or hiring a sufficient number of new drivers at our Dayville and New Oxford facilities to handle the increased sales volume at those facilities; o we may have difficulty retaining warehouse employees from our Chesterfield facility or hiring a sufficient number of new warehouse employees to handle the increased sales volume at those facilities; o we may lose customers; 14 o our operating costs may increase because of the expenses involved in closing the Chesterfield facility and consolidating its operations into the operations in place at the Dayville and New Oxford facilities; o our Dayville and New Oxford facilities may have difficulty accommodating the increased sales volume; and o construction delays in the expansion of the New Oxford facility could delay the realization of savings. The occurrence of any of these events could have a material adverse effect on our business, financial condition or results of operations. We may have difficulty in managing our growth The growth in the size of our business and operations has placed and is expected to continue to place a significant strain on our management. Our future growth is limited in part by the size and location of our distribution centers. There can be no assurance that we will be able to successfully expand our existing distribution facilities or open new distribution facilities in new or existing markets to facilitate growth. In addition, our growth strategy to expand our market presence includes possible additional acquisitions. To the extent our future growth includes acquisitions, there can be no assurance that we will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. Our ability to compete effectively and to manage future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage our work force. There can be no assurance that our personnel, systems, procedures and controls will be adequate to support our operations. Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition or results of operations. We have significant competition from a variety of sources We operate in highly competitive markets, and our future success will be largely dependent on our ability to provide quality products and services at competitive prices. Our competition comes from a variety of sources, including other distributors of natural products as well as specialty grocery and mass market grocery distributors. There can be no assurance that mass market grocery distributors will not increase their emphasis on natural products and more directly compete with us or that new competitors will not enter the market. These distributors may have been in business longer than us, may have substantially greater financial and other resources than us and may be better established in their markets. There can be no assurance that our current or potential competitors will not provide services comparable or superior to those provided by us or adapt more quickly than United Natural to evolving industry trends or changing market requirements. It is also possible that alliances among competitors may develop and rapidly acquire significant market share or that certain of our customers will increase distribution to their own retail facilities. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect our business, financial condition or results of operations. There can be no assurance that we will be able to compete effectively against current and future competitors. We depend heavily on our principal customers Our ability to maintain close, mutually beneficial relationships with our top two customers, Whole Foods Market, Inc. and Wild Oats Markets, Inc., is important to the ongoing growth and profitability of our business. Whole Foods Market, Inc., our largest customer, accounted for approximately 16% of our net sales during the fiscal year ended July 31, 1998. As a result of this concentration of our customer base, the loss or cancellation of business from either of these customers, including from increased distribution to their own facilities, could materially and adversely affect our business, financial condition or results of operations. We sell products under purchase orders, and we generally have no agreements with or commitments from our customers for the purchase of products. No assurance can be given that our customers will maintain or increase their sales volumes or orders for the products supplied by us or that we will be able to maintain or add to our existing customer base. 15 Our profit margins may decrease due to consolidation in the grocery industry The grocery distribution industry generally is characterized by relatively high volume with relatively low profit margins. The continuing consolidation of retailers in the natural products industry and the emergence of super natural chains may reduce our profit margins in the future as more customers qualify for greater volume discounts. Our industry is sensitive to economic downturns The grocery industry is also sensitive to national and regional economic conditions, and the demand for our products may be adversely affected from time to time by economic downturns. In addition, our operating results are particularly sensitive to, and may be materially adversely affected by: o difficulties with the collectibility of accounts receivable, o difficulties with inventory control, o competitive pricing pressures, and o unexpected increases in fuel or other transportation-related costs. There can be no assurance that one or more of such factors will not materially adversely affect our business, financial condition or results of operations. We are dependent on a number of key executives Management of our business is substantially dependent on the services of Norman A. Cloutier, Chairman of the Board and Chief Executive Officer, Robert T. Cirulnick, Chief Financial Officer, and other key management employees. Loss of the services of such officers or any other key management employee could have a material adverse effect on our business, financial condition or results of operations. Our operating results are subject to significant fluctuations Our net sales and operating results may vary significantly from period to period due to: o changes in our operating expenses, o management's ability to execute our business and growth strategies, o personnel changes, o demand for natural products, o supply shortages, o general economic conditions, o changes in customer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues, o fluctuation of natural product prices due to competitive pressures, o lack of an adequate supply of high-quality agricultural products due to poor growing conditions, natural disasters or otherwise, o volatility in prices of high-quality agricultural products resulting from poor growing conditions, natural disasters or otherwise, and 16 o future acquisitions, particularly in periods immediately following the consummation of such acquisition transactions while the operations of the acquired businesses are being integrated into our operations. Due to the foregoing factors, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful and that such comparisons cannot be relied upon as indicators of future performance. We are subject to significant governmental regulation Our business is highly regulated at the federal, state and local levels and our products and distribution operations require various licenses, permits and approvals. In particular: o our products are subject to inspection by the U.S. Food and Drug Administration, o our warehouse and distribution facilities are subject to inspection by the U.S. Department of Agriculture and state health authorities, and o our trucking operations are regulated by the U.S. Department of Transportation and the U.S. Federal Highway Administration. The loss or revocation of any existing licenses, permits or approvals or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where we intend to do business could have a material adverse effect on our business, financial condition or results of operations. Our officers and directors and the employee stock ownership trust have significant voting power. As of January 31, 1999, our executive officers and directors, and their affiliates, and the United Natural Foods Employee Stock Ownership Trust beneficially owned in the aggregate approximately 58% of United Natural's common stock. Accordingly, these stockholders, if acting together, would have the ability to elect our directors and may have the ability to determine the outcome of corporate actions requiring stockholder approval, irrespective of how other stockholders may vote. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of United Natural. Union-organizing activities could cause labor relations difficulties As of April 30, 1999, approximately 160 employees, representing approximately 6% of our approximately 2,600 employees, were union members. We have in the past been the focus of union-organizing efforts. As we increase our employee base and broaden our distribution operations to new geographic markets, our increased visibility could result in increased or expanded union-organizing efforts. Although we have not experienced a work stoppage to date, if additional employees were to unionize, we could be subject to work stoppages and increases in labor costs, either of which could materially adversely affect our business, financial condition or results of operations. Access to capital and the cost of that capital In order to maintain our profit margins, we rely on strategic investment buying initiatives, such as discounted bulk purchases, which require spending significant amounts of working capital. In the event that capital market turmoil significantly increased our cost of capital or the ability to borrow funds or raise equity capital, we could suffer reduced profit margins and be unable to grow our business organically or through acquisitions, which could have a material adverse effect on our business, financial condition or results of operations. Item 3. Quantitative and Qualitative Disclosure About Market Risk We are exposed to market risk from interest rate fluctuations because we use variable rate debt to finance working capital requirements. We have entered into an interest rate swap agreement which manages that risk by fixing $60 million of our variable debt at a rate of 6% through October 2003. We do not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require further disclosure under this item. 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Quarterly Report on Form 10-Q. b) Reports on Form 8-K. None. Exhibit Index Exhibit No. Description Page - ----------- ----------- ---- 27 Financial Data Schedule 20 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED NATURAL FOODS, INC. /s/ Robert T. Cirulnick --------------------------- Robert T. Cirulnick Chief Financial Officer (Principal Financial and Accounting Officer) Dated: June 14, 1999 19 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED APRIL 30, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 9-MOS JUL-31-1999 APR-30-1999 12,012 0 63,492 2,500 98,973 179,994 70,723 26,172 253,930 105,682 26,014 0 0 182 119,597 253,930 642,529 642,529 505,768 505,768 0 1,178 4,470 25,918 11,104 14,814 0 0 0 14,814 0.81 0.80
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