-----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, QDD1yDrFUwm+sNSy+bdH3Obs233B5Eh/l5KJHLcuGFH1rPk79O6lsu89hyKmHhED FX1LgeJs6PfN/23fMWyRYg== 0001171520-05-000245.txt : 20050611 0001171520-05-000245.hdr.sgml : 20050611 20050609165719 ACCESSION NUMBER: 0001171520-05-000245 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050430 FILED AS OF DATE: 20050609 DATE AS OF CHANGE: 20050609 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: 1934 Act SEC FILE NUMBER: 001-15723 FILM NUMBER: 05888028 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 eps1850.txt UNITED NATURAL FOODS, INC. UNITED STATES 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, 2005 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 Identification No.) Incorporation or Organization) 260 Lake Road Dayville, CT 06241 (Address of Principal Executive Offices) (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 |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| As of June 2, 2005, there were 41,048,010 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, 2005 TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) 3 Condensed Consolidated Statements of Income (unaudited) 4 Condensed Consolidated Statements of Cash Flows (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure About Market Risk 27 Item 4. Controls and Procedures 27 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements UNITED NATURAL FOODS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except per share amounts)
April 30, July 31, 2005 2004 ---------- --------- ASSETS - ------ Current assets: Cash and cash equivalents $ 8,197 $ 13,633 Accounts receivable, net 137,698 106,178 Notes receivable, trade 592 772 Inventories 228,746 196,171 Prepaid expenses 10,853 7,007 Deferred income taxes 8,117 7,610 --------- --------- Total current assets 394,203 331,371 Property & equipment, net 146,460 114,140 Other assets: Goodwill 64,744 57,242 Notes receivable, trade, net 2,181 1,601 Intangible assets, net 338 154 Other, net 5,770 4,259 64,744 --------- --------- Total assets $ 613,696 $ 508,767 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Notes payable - line of credit $ 150,505 $ 107,004 Accounts payable 106,301 80,875 Accrued expenses and other current liabilities 26,399 29,501 Current portion of long-term debt 5,834 4,766 --------- --------- Total current liabilities 289,039 222,146 Long-term debt, excluding current portion 37,319 43,978 Deferred income taxes 6,469 7,730 Other long-term liabilities 551 137 --------- --------- Total liabilities 333,378 273,991 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock, $0.01 par value, authorized 5,000 shares; none issued and outstanding -- -- Common stock, $0.01 par value, authorized 50,000 shares; 41,029 and 40,118 issued and outstanding at April 30, 2005 and July 31, 2004, respectively 410 401 Additional paid-in capital 116,680 101,118 Unallocated shares of ESOP (1,646) (1,768) Accumulated other comprehensive income 296 240 Retained earnings 164,578 134,785 --------- --------- Total stockholders' equity 280,318 234,776 --------- --------- Total liabilities and stockholders' equity $ 613,696 $ 508,767 ========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 UNITED NATURAL FOODS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
Quarters ended Nine months ended April 30, April 30, --------------------------- -------------------------- 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Net sales $ 534,335 $ 448,900 $ 1,516,587 $ 1,223,530 Cost of sales (Note 1) 432,387 361,323 1,226,872 980,995 ----------- ----------- ----------- ----------- Gross profit 101,948 87,577 289,715 242,535 Operating expenses 82,655 71,388 235,828 199,706 Restructuring charge -- -- 170 -- Amortization of intangibles 177 676 490 1,142 ----------- ----------- ----------- ----------- Total operating expenses 82,832 72,064 236,488 200,848 ----------- ----------- ----------- ----------- Operating income 19,116 15,513 53,227 41,687 ----------- ----------- ----------- ----------- Other expense (income): Interest expense 1,877 1,536 4,887 5,990 Change in fair value of financial instruments -- -- -- (704) Other, net (136) (128) (359) (358) ----------- ----------- ----------- ----------- Total other expense 1,741 1,408 4,528 4,928 ----------- ----------- ----------- ----------- Income before income taxes 17,375 14,105 48,699 36,759 Income taxes 6,689 5,501 18,906 14,336 ----------- ----------- ----------- ----------- Net income $ 10,686 $ 8,604 $ 29,793 $ 22,423 =========== =========== =========== =========== Per share data (basic): Net income $ 0.26 $ 0.22 $ 0.74 $ 0.57 =========== =========== =========== =========== Weighted average shares of common stock 40,900 39,648 40,470 39,296 =========== =========== =========== =========== Per share data (diluted): Net income $ 0.26 $ 0.21 $ 0.72 $ 0.55 =========== =========== =========== =========== Weighted average shares of common stock 41,774 41,344 41,494 40,813 =========== =========== =========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 UNITED NATURAL FOODS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Nine months ended April 30, 2005 2004 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 29,793 $ 22,423 Adjustments to reconcile net income to net cash Provided by (used in) operating activities: Depreciation and amortization 9,944 8,807 Change in fair value of financial instruments -- (704) Loss on disposals of property and equipment (26) (61) Provision for doubtful accounts 1,378 2,521 Changes in assets and liabilities, net of acquired companies: Accounts receivable (29,151) (22,504) Inventory (28,322) (45,345) Prepaid expenses and other assets (5,157) 1,050 Notes receivable, trade (400) (1,108) Accounts payable 20,557 29,344 Accrued expenses and other current liabilities (4,131) (907) Financial instruments -- (5,400) Tax benefit of stock options 7,167 3,870 ----------------------------- Net cash provided by (used in) operating activities 1,652 (8,014) ----------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (41,197) (18,989) Purchases of acquired businesses, net of cash acquired (6,219) (6) Proceeds from sale of property and equipment 248 202 ----------------------------- Net cash used in investing activities (47,168) (18,793) ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under note payable 37,781 18,344 Proceeds from exercise of stock options 8,403 7,477 Repayments of long-term debt (5,591) (3,302) Principal payments on capital lease obligations (513) (759) Proceeds from issuance of long-term debt -- 10,204 ----------------------------- Net cash provided by financing activities 40,080 31,964 ----------------------------- NET (DECREASE) INCREASE IN CASH: (5,436) 5,157 Cash and cash equivalents at beginning of period 13,633 3,645 ----------------------------- Cash and cash equivalents at end of period $ 8,197 $ 8,802 ============================= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 4,903 $ 5,788 ============================= Income taxes $ 14,107 $ 9,686 =============================
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 UNITED NATURAL FOODS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 2005 (Unaudited) 1. BASIS OF PRESENTATION United Natural Foods, Inc. (the "Company") is a distributor and retailer of natural and organic products. The Company primarily sells its products throughout the United States. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year's presentation. The accompanying unaudited condensed consolidated 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. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended July 31, 2004. Net sales consist primarily of sales of natural and organic products to retailers adjusted for customer volume discounts, returns and allowances. Net sales also consist of amounts paid to the Company by customers for shipping and handling. The principal components of cost of sales include the amount paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to the Company's distribution facilities. Cost of sales also includes amounts paid by the Company for shipping and handling, depreciation for manufacturing equipment at the Company's manufacturing segment, Hershey Imports Company, Inc. and consideration received from suppliers in connection with the purchase or promotion of the suppliers' products. Operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, insurance, administrative, and amortization expense. Operating expenses also includes depreciation expense related to the wholesale and retail segments. Other expenses (income) include interest on outstanding indebtedness, interest income, and the change in fair value of financial instruments and miscellaneous income and expenses. 2. STOCK OPTION PLANS The Company grants stock options for a fixed number of shares to employees and certain other individuals with exercise prices equal to the fair value of the shares at the dates of grant. The Company has adopted the disclosure only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 ("SFAS 123"), Accounting for Stock-based Compensation, and will continue to account for its stock option plans in accordance with the provisions of Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees. In addition, the Company has made the appropriate disclosures as required under SFAS No. 148 ("SFAS 148"), Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS 123 and SFAS 148 to stock-based employee compensation: 6
Quarters ended Nine months ended April 30, April 30, -------------- ----------------- 2005 2004 2005 2004 -------- -------- -------- -------- Net income - as reported $ 10,686 $ 8,604 $ 29,793 $ 22,423 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (702) (895) (7,160) (2,294) -------- -------- -------- -------- Net income - pro forma $ 9,984 $ 7,709 $ 22,633 $ 20,129 Basic earnings per share As reported $ 0.26 $ 0.22 $ 0.74 $ 0.57 -------- -------- -------- -------- Pro forma $ 0.24 $ 0.20 $ 0.56 $ 0.52 -------- -------- -------- -------- Diluted earnings per share As reported $ 0.26 $ 0.21 $ 0.72 $ 0.55 -------- -------- -------- -------- Pro forma $ 0.24 $ 0.19 $ 0.55 $ 0.50 -------- -------- -------- --------
The Company estimates the fair value of each option as of the date of grant using the Black-Scholes pricing model with the following weighted average assumptions used for grants in the quarters and the nine months ended April 30, 2005 and 2004:
Quarters ended April 30, Nine months ended April 30, ------------------------- ----------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Expected volatility 40.9% 45.8% 41.4% 49.7% Dividend yield 0.0% 0.0% 0.0% 0.0% Risk free interest rate 3.47% 3.01% 3.16% 3.70% Expected life 3.25 years 3.25 years 3.25 years 3.27 years ---------- ---------- ---------- ----------
An average vesting period of four years was used for the assumption regarding stock options granted, except for options for 844,200 shares that were granted in the second quarter of fiscal 2005 that vested immediately. The after-tax effect of the accelerated vesting is included in stock-based employee compensation expense in the table above for the nine months ended April 30, 2005 and amounted to $4.8 million, or $0.12 per pro-forma diluted share. Shares obtained upon the exercise of options issued under this grant become eligible to be sold in four equal annual installments, beginning on the first anniversary of the grant date. The Company took this as an opportunity to reduce costs in future periods as a result of SFAS No. 123R ("SFAS 123R"), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation, which the Company is expected to adopt in the first quarter of fiscal 2006 (See Note 9). Generally, options granted to officers and other key employees become exercisable in one-quarter increments beginning on the first anniversary of the grant date. At April 30, 2005, the Company had two stock option plans: the 2002 Stock Incentive Plan and the 1996 Stock Option Plan (collectively, the "Plans"). The Plans provide for grants of stock options to employees, officers, directors and others. These options are intended to either qualify as incentive stock options within the meaning of section 422 of the Internal Revenue Code or be "non-statutory stock options." Vesting requirements for awards under the Plans are at the discretion of the Company's Board of Directors and are typically four years for employees and two years for non-employee directors. The maximum term of all incentive stock options granted under the Plans, and non-statutory stock options granted under the 2002 Stock Incentive Plan, is ten years. The maximum term for non-statutory stock options granted under the 1996 Stock Option Plan is at the discretion of the Company's Board of Directors, and all grants to date have had a term of ten years. In the nine months ended April 30, 2005, the Company granted options for the purchase of 864,550 shares under the Plans. At April 30, 2005, the Company also had the 2004 Equity Incentive Plan (the "2004 Plan"). The 2004 Plan provides for the issuance of equity-based compensation awards other than stock options, such as restricted shares and units, performance shares and units, bonus shares and stock appreciation rights. In the nine months ended April 30, 2005, the Company did not make any grants under the 2004 Plan. 3. RESTRUCTURING CHARGE In the first quarter of fiscal 2005, the Company's management approved and implemented plans to restructure certain of its operations at its Mounds View, Minnesota distribution facility, because the facility was not large enough to accommodate the needs of customers relative to product selection and availability. The $170,000 restructuring charge in the first quarter of fiscal 2005 is associated primarily with severance costs related to the termination of approximately 85 employees at this facility. This closing was completed in the third quarter of fiscal 2005. 7 4. EARNINGS PER SHARE Following is a reconciliation of the basic and diluted number of shares used in computing earnings per share:
Quarters ended Nine months ended April 30, April 30, --------------- --------------- (In thousands) 2005 2004 2005 2004 ------ ------ ------ ------ Basic weighted average shares outstanding 40,900 39,648 40,470 39,296 Net effect of dilutive stock options based upon the treasury stock method 874 1,696 1,024 1,517 ------ ------ ------ ------ Diluted weighted average shares outstanding 41,774 41,344 41,494 40,813 ====== ====== ====== ======
For the quarter ended April 30, 2005, there were 6,350 anti-dilutive stock options. There were no anti-dilutive stock options for the quarter ended April 30, 2004. For the nine months ended April 30, 2005 and 2004, there were 856,550 and 6,000 anti-dilutive stock options, respectively. These anti-dilutive stock options were excluded from the calculation of diluted earnings per share. 5. INTEREST RATE SWAP AGREEMENTS In October 1998, the Company entered into an interest rate swap agreement that provided for the Company 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. This swap had been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $60 million at LIBOR plus 1.50%, thereby fixing the effective rate at 6.50%. In October 2003, the counter party exercised its option to extend the original five-year term of the swap agreement to seven years. The inclusion of this option prohibited accounting for the swap as an effective hedge under SFAS No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. The Company entered into an additional interest rate swap agreement effective August 2001. The additional agreement provided for the Company to pay interest for a four-year period at a fixed rate of 4.81% on a notional principal amount of $30 million while receiving interest for the same period at the LIBOR rate on the same notional principal amount. The four-year term of the swap agreement could have been extended to six years at the option of the counter party, which prohibited accounting for the swap as an effective hedge under SFAS 133. The swap had been entered into as a hedge against LIBOR interest rate movements on current and anticipated variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing the effective rate on the notional amount at 6.31%. If LIBOR exceeded 6.0% in a given period, the agreement was suspended for that period. On December 29, 2003, the Company assigned and transferred all of its obligations of its two "ineffective" interest rate swaps to a third party at a cost of $5.4 million plus accrued interest. The Company recorded $0.7 million of income in the statement of operations in the nine months ended April 30, 2004 on these interest rate swap agreements and related option agreements to reflect the change in fair value of the financial instruments. The Company entered into an interest rate swap agreement effective May 2003. The agreement provides for the Company to pay interest for a seven-year period at a fixed rate of 3.68% on a notional principal amount of $30 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 variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing the Company's effective rate on the notional amount at 5.18%. The swap agreement qualifies as an "effective" hedge under SFAS 133. The Company recorded an asset of $0.5 million as of April 30, 2005, and a corresponding increase to accumulated other comprehensive income, net of taxes, in the condensed consolidated balance sheet to reflect the fair value of the instrument. 8 6. COMPREHENSIVE INCOME Total comprehensive income for the three-month period ended April 30, 2005 amounted to $10,829,000 as compared to $9,131,000 in the same period in the prior year. For the nine months ended April 30, 2005 and 2004, comprehensive income amounted to $29,850,000 and $22,326,000, respectively. Comprehensive income is comprised of net income plus the increase/decrease in the fair value of the May 2003 swap agreement discussed in Note 5. 7. ACQUISITION On December 20, 2004, the Company acquired by merger privately held Select Nutrition Distributors, Inc. ("Select Nutrition"), distributor of health and beauty aids and vitamins, minerals and supplements, which serviced customers nationwide from two warehouse facilities in Philadelphia, Pennsylvania and Visalia, California, for cash consideration and debt assumed of approximately $12.6 million. The acquisition was financed by borrowings against the Company's line of credit. The operating results of Select Nutrition have been included in the consolidated financial statements of the Company beginning with the acquisition date. The acquisition resulted in goodwill (based on the preliminary allocation of the purchase price) of $7.2 million, none of which is expected to be deductible for tax purposes. Such goodwill was assigned to the Company's wholesale segment. 8. BUSINESS SEGMENTS The Company has several operating divisions aggregated under the wholesale segment, which is the Company's only reportable segment. These operating divisions have similar products and services, customer channels, distribution methods and historical margins. The wholesale segment is engaged in national distribution of natural foods, produce and related products in the United States. The Company has additional operating divisions that do not meet the quantitative thresholds for reportable segments. Therefore, these operating divisions are aggregated under the caption of "Other" with corporate operating expenses that are not allocated to operating divisions. "Other" includes a retail division, 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 manufacturing division, which engages in importing, roasting and packaging of nuts, seeds, dried fruit and snack items. "Other" also includes corporate expenses, which consist of salaries, retainers, and other related expenses of officers, directors, corporate finance (including professional services), governance, human resources and internal audit that are necessary to operate the Company's headquarters located in Dayville, Connecticut. Non-operating expenses that are not allocated to the operating divisions are under the caption of "Unallocated Expenses." Following is business segment information for the periods indicated:
Unallocated Wholesale Other Eliminations Expenses Consolidated --------- ----- ------------ -------- ------------ Three months ended April 30, 2005: Net sales $523,833 $18,849 $(8,347) $534,335 Operating income (loss) 20,820 (1,740) 36 19,116 Interest expense $1,877 1,877 Other, net (136) (136) Income before income taxes 17,375 Depreciation and amortization 3,246 255 -- 3,501 Capital expenditures 31,230 128 -- 31,358 Total assets 749,313 60,078 (195,695) 613,696 Three months ended April 30, 2004: Net sales $438,455 $18,355 $(7,910) $448,900 Operating income (loss) 16,756 (1,351) 108 15,513 Interest expense $1,536 1,536 Other, net (128) (128) Income before income taxes 14,105 Depreciation and amortization 2,997 279 3,276 Capital expenditures 9,430 224 9,654 Total assets 663,845 41,132 (194,669) 510,308
9
Unallocated Wholesale Other Eliminations Expenses Consolidated --------- ----- ------------ -------- ------------ Nine months ended April 30, 2005: Net sales $1,486,908 $54,085 $ (24,406) $1,516,587 Operating income (loss) 57,327 (3,906) (194) 53,227 Interest expense $4,887 4,887 Other, net (359) (359) Income before income taxes 48,699 Depreciation and amortization 9,118 826 -- 9,944 Capital expenditures 40,776 421 -- 41,197 Total assets 749,313 60,078 (195,695) 613,696 Nine months ended April 30, 2004: Net sales $1,192,161 $54,149 $(22,780) $1,223,530 Operating income (loss) 45,073 (3,389) 3 41,687 Interest expense $5,990 5,990 Other, net (1,062) (1,062) Income before income taxes 36,759 Depreciation and amortization 7,921 886 8,807 Capital expenditures 18,538 451 18,989 Total assets 663,845 41,132 (194,669) 510,308
9. NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151 ("SFAS 151"), Inventory Costs: an amendment of ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a material impact on its consolidated financial position or results of operations. In December 2004, the FASB issued SFAS No. 123R ("SFAS 123R"), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R will require the Company to, among other things, measure all employee stock-based compensation awards using a fair value method and record such expense in the Company's consolidated financial statements. The original provisions of SFAS 123R were effective for the first interim reporting period that begin after June 15, 2005. The U.S. Securities and Exchange Commission has extended this Statement's effective date to be the first interim or annual reporting period of a registrant's first fiscal year beginning on or after June 15, 2005. As a result, the Statement is still effective for the Company beginning with the first quarter of 2006. Therefore, the Company is expected to adopt SFAS 123R in its first quarter of fiscal 2006. Management is currently evaluating the specific impacts of adoption. 10 In March 2005, the Financial Accounting Standards Board issued Interpretation No. 47 ("FIN 47"), Accounting for Conditional Asset Retirement Obligations. This Interpretation clarifies that the term "conditional asset retirement obligation" as used in Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. This Statement is effective for the Company beginning with the fourth quarter of 2005. The Company does not believe that the adoption of FIN 47 will have a material impact on our consolidated financial position or results of operations. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview We are a leading national distributor of natural and organic foods and related products in the United States. We believe that we are the primary distributor of natural and organic products to a majority of our customers. We carry more than 40,000 high-quality natural and organic products, consisting of national brand, regional brand, private label and master distribution products in six product categories consisting of grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements, bulk and food service products and personal care items. We serve more than 20,000 customers, including independently owned natural products retailers, supernatural chains, (which are comprised of large chains of natural foods supermarkets), and conventional supermarkets located across the United States. Our other distribution channels include food service, international customers and buying clubs. In recent years, our sales to existing and new customers have increased through the continued growth of the natural products industry in general, entry into new sales channels, the acquisition of, or merger with, natural products distributors and the expansion of our existing distribution centers. 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. Through our subsidiary, the Natural Retail Group, Inc. ("NRG), we also own and operate 12 natural products retail stores located primarily in Florida. We believe that our retail business serves as a natural complement to our distribution business because it enables us to develop new marketing programs and improve customer service. In addition, our subsidiary, Hershey Imports Company, Inc. ("Hershey Imports"), specializes in the international importing, roasting and packaging of nuts, seeds, dried fruits and snack items. We have been the primary distributor to the largest supernatural chain in the United States, Whole Foods Market, Inc. ("Whole Foods Market") for more than 10 years. We renewed our primary distribution agreement with Whole Foods Market in December 2004 for an additional three years. During fiscal 2004, we also entered into and consummated a five-year primary distribution agreement with Wild Oats Markets, Inc. ("Wild Oats Markets"). We had previously served as primary distributor for Wild Oats Markets through August 2002. Since our formation, we have completed a number of acquisitions of distributors and suppliers, including Hershey Imports, Albert's Organics, Inc. ("Albert's Organics"), and NRG, all of which have expanded our distribution network, product offerings and customer base. In the second quarter of fiscal 2005, we acquired Select Nutrition Distributors, Inc. ("Select Nutrition"). Our operations are comprised of three principal divisions: o our Wholesale Division, which includes United Distribution, Albert's Organics and Select Nutrition; o our Retail Division, which consists of 12 retail stores; and o our Manufacturing Division, which is comprised of Hershey Imports. In order to maintain our market leadership and improve our operating efficiencies, we are continually: o investing in people, facilities, equipment and technology; o developing additional private label products; o entering into new channels of business o expanding marketing and customer service programs across the regions; o expanding national purchasing opportunities; o consolidating systems applications among physical locations and regions; o integrating administrative and accounting functions; and o reducing geographic overlap between regions. 12 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 expansions of our facilities located in Iowa City, Iowa and Dayville, Connecticut in fiscal 2004. In November 2004, we announced our intention to expand our Midwest operations by opening a new distribution center in Greenwood, Indiana. The new 309,000 square foot facility is scheduled to commence operations in July 2005 and will serve as a distribution hub for our customers in Illinois, Indiana, Ohio and other Midwest states. In March 2005, we announced the purchase of a new facility in Rocklin, California and our plans to move our Auburn, California operations to this facility by September 2005. The new facility is 487,000 square feet and will serve as a distribution hub for customers in northern California and surrounding states. It will also be the largest facility in our nationwide distribution network. The additional storage space in our Iowa City, Iowa and Dayville, Connecticut facilities allows for more product diversity and the elimination of outside storage expenses. We expect the efficiencies created by expanding our Iowa City and Dayville facilities to lower our expenses relative to sales over the long-term. Having completed the Iowa City and Dayville facilities expansion and with the new facilities in Greenwood, Indiana and Rocklin, California, we will have added approximately 1,556,000 square feet to our distribution centers since fiscal 2000, representing a 105% increase in our distribution capacity. Our current capacity utilization, excluding the facilities in Greenwood, Indiana and Rocklin, California, is 73%. In addition, we continue to increase our leading market share of the growing natural products industry by expanding our customer base, increasing our share of existing customers' business and continuing to expand and penetrate into new sales channels and new regions of distribution, particularly in the Midwest market. Our strategy is to continue to provide the leading distribution solution to the natural products industry through our national presence, regional responsiveness, high customer service focus and breadth of product offerings. Our net sales consist primarily of sales of natural and organic products to retailers adjusted for customer volume discounts, returns and allowances. Net sales also consist of amounts paid to us by customers for shipping and handling. 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. Cost of sales also includes amounts paid by us for shipping and handling, depreciation for manufacturing equipment at our manufacturing subsidiary, Hershey Imports and consideration received from suppliers in connection with the purchase or promotion of the suppliers' products. Operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, insurance, administrative, depreciation and amortization expense. Other expenses (income) include interest on outstanding indebtedness, interest income, the change in fair value of financial instruments and miscellaneous income and expenses. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses. We include purchasing and outbound transportation expenses within our operating expenses rather than our cost of sales. Critical Accounting Policies The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and require our most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the following: (i) determining our allowance for doubtful accounts, (ii) determining our reserve for the self-insured portion of our workers' compensation, health insurance and automobile liabilities and (iii) valuing goodwill and intangible assets. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies. 13 Allowance for doubtful accounts We analyze customer creditworthiness, accounts and notes receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of our allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are conducted using either cash-on-delivery terms, or the account is closely monitored so that as agreed upon payments are received, orders are released; a failure to pay results in held or cancelled orders. Our accounts receivable balance was $137.7 million and $106.2 million, net of the allowance for doubtful accounts of $3.9 million and $5.6 million, as of April 30, 2005 and July 31, 2004, respectively. Our notes receivable balance was $2.8 million and $2.4 million, net of the allowance of doubtful accounts of $5.1 million and $4.2 million, as of April 30, 2005 and July 31, 2004, respectively. Insurance reserves It is our policy to record the self-insured portion of our workers' compensation, health insurance and automobile liabilities based upon actuarial methods of estimating the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported. Any projection of losses concerning workers' compensation and automobile liability is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting litigation trends, benefit level changes and claim settlement patterns. If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in the consolidated financial statements. Valuation of goodwill and intangible assets SFAS No. 142, Goodwill and Other Intangible Assets, requires that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have elected to perform our annual tests for indications of goodwill impairment as of July 31 of each year. Impairment losses are determined based upon the excess of carrying amounts over discounted expected future cash flows of the underlying business. The assessment of the recoverability of long-lived assets will be impacted if estimated future cash flows are not achieved. For reporting units that indicated potential impairment, we determined the implied fair value of that reporting unit using a discounted cash flow analysis and compared such values to the respective reporting units' carrying amounts. Total goodwill was $64.7 million and $57.2 million, as of April 30, 2005 and July 31, 2004, respectively. 14 Results of Operations The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:
Quarters ended Nine Months Ended April 30, April 30, --------------------------- ----------------------- 2005 2004 2005 2004 --------------------------- ----------------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 80.9% 80.5% 80.9% 80.2% --------------------------- ----------------------- Gross profit 19.1% 19.5% 19.1% 19.8% --------------------------- ----------------------- Operating expenses 15.5% 15.9% 15.5% 16.3% Restructuring charge 0.0% 0.0% 0.0% 0.0% Amortization of intangibles 0.0% 0.2% 0.0% 0.1% --------------------------- ----------------------- Total operating expenses 15.5% 16.1% 15.6%* 16.4% --------------------------- ----------------------- Operating income 3.6% 3.5% 3.5% 3.4% --------------------------- ----------------------- Other expense (income): Interest expense 0.4% 0.3% 0.3% 0.5% Change in fair value of financial instruments 0.0% 0.0% 0.0% (0.1)% Other, net (0.0)% (0.0)% (0.0)% (0.0)% --------------------------- ----------------------- Total other expense 0.3%* 0.3% 0.3% 0.4% --------------------------- ----------------------- Income before income taxes 3.3% 3.1%* 3.2% 3.0% Income taxes 1.3% 1.2% 1.2% 1.2% --------------------------- ----------------------- Net income 2.0% 1.9% 2.0% 1.8% =========================== =======================
* Total reflects rounding Quarter Ended April 30, 2005 Compared To Quarter Ended April 30, 2004 Net Sales Our net sales increased approximately 19.0%, or $85.4 million, to $534.3 million for the quarter ended April 30, 2005 from $448.9 million for the quarter ended April 30, 2004. This increase was due to organic growth in our wholesale segment of 14.6%, the implementation of our primary distribution agreement with Wild Oats Markets in the third quarter of fiscal 2004 and the inclusion of sales related to Select Nutrition that were not included in fiscal 2004. Our organic growth is due to the continued growth of the natural products industry in general, increased market share through better service and added value services, and the expansion of our existing distribution centers. For the quarter ended April 30, 2005, we experienced growth in all channels with the most significant growth in the supernatural chains distribution channel, which includes sales to Whole Foods Market and Wild Oats Markets. In the quarter ended April 30, 2005, Whole Foods Market comprised approximately 26.0% of net sales and Wild Oats Markets comprised approximately 11.3% of net sales. In the third quarter of fiscal 2004, Whole Foods Market comprised approximately 25.1% of net sales and was the only customer that accounted for more than 10% of net sales. 15 The following table lists the percentage of sales by customer channel for the quarters ended April 30, 2005 and 2004: Customer channel Percentage of Net Sales - ---------------- ----------------------- 2005 2004 ---- ---- Independently owned natural products retailers 46% 47% Supernatural chains 37% 34% SuperMarket 13% 14% Other 4% 5% The shift in our sales mix to supernatural chains from independently owned natural products retailers was the result of the implementation of our primary distribution agreement with Wild Oats Markets in the third quarter of fiscal 2004 and the continued strong growth in this channel. Gross Profit Our gross profit increased approximately 16.4%, or $14.3 million, to $101.9 million for the quarter ended April 30, 2005 from $87.6 million for the quarter ended April 30, 2004. Our gross profit as a percentage of net sales was 19.1% and 19.5% for the quarters ended April 30, 2005 and 2004, respectively. This decrease in gross profit as a percentage of net sales in comparison to the quarter ended April 30, 2004 was primarily the result of the change in our sales mix to supernatural chains, as we implemented our primary distribution agreement with Wild Oats Markets during the third quarter of fiscal 2004. In addition, we initiated an aggressive product rationalization program in the second quarter of fiscal 2005 which will continue through the fiscal year. As our sales channel mix has shifted, we expect gross margins to be in the low 19 percent range in the future. Total Operating Expenses Total operating expenses, excluding special items, increased approximately 16.4%, or $11.6 million, to $82.7 million for the quarter ended April 30, 2005 from $71.1 million for the quarter ended April 30, 2004. As a percentage of net sales, total operating expenses, excluding special items, decreased to approximately 15.5% for the quarter ended April 30, 2005 from approximately 15.8% for the quarter ended April 30, 2004. The increase in total operating expenses, excluding special items, for the quarter ended April 30, 2005 was due to the increase in our infrastructure to support our continued sales growth, an increase in fuel costs as a percentage of sales of 22 basis points and the inclusion of operating expenses related to Select Nutrition that were not included in the quarter ended April 30, 2004. Total operating expenses for the quarter ended April 30, 2005 included a special item of $0.1 million for certain non-recurring labor costs associated with the closing of our Mounds View, Minnesota facility and costs related to the opening of the Greenwood, Indiana facility. Total operating expenses for the quarter ended April 30, 2004 included a special item of $1.0 million in start-up and transition costs for certain equipment rental and labor costs incurred in connection with the implementation of our primary distribution agreement with Wild Oats Markets. Total operating expenses, including special items, increased approximately 14.9%, or $10.7 million, to $82.8 million from $72.1 million for the quarter ended April 30, 2004. As a percentage of sales, total operating expenses, including special items, decreased to 15.5% for the quarter ended April 30, 2005 from 16.1% for the quarter ended April 30, 2004. The decrease in total operating expenses as a percentage of net sales was primarily attributable to a decrease in salaries and wages as a percentage of sales due to improved operating efficiencies and sales growth. The improved operating efficiencies were a result of our recent facility expansions and recent integration of management information systems following our fiscal 2003 acquisition of Blooming Prairie Cooperative. This improvement was partially offset by higher fuel costs and the inclusion of a full quarter of operating expenses related to Select Nutrition that were not included in the quarter ended April 30, 2004. Operating Income Operating income, excluding special items, increased $2.7 million to $19.2 million for the quarter ended April 30, 2005 from $16.5 million for the quarter ended April 30, 2004. As a percentage of sales, operating income, excluding special items, decreased from 3.7% for the quarter ended April 30, 2004 to 3.6% for the quarter ended April 30, 2005. Operating income for the quarter ended 16 April 30, 2005 included a special item of $0.1 million for certain non-recurring labor costs associated with the closing of the Mounds View, Minnesota facility and costs related to the opening of the Greenwood, Indiana facility. Excluding the incremental effect of higher fuel costs and the results of Select Nutrition, operating income would have been approximately 3.8%. Operating income for the quarter ended April 30, 2004 included a special item of $1.0 million of start-up and transition costs for certain equipment rental and labor costs incurred in connection with the implementation of our primary distribution agreement with Wild Oats Markets. Operating income, including special items, was $19.1 million for the quarter ended April 30, 2005 and $15.5 million for the quarter April 30, 2004. Operating income, including special items, as a percentage of sales, improved from 3.5% for the quarter ended April 30, 2004 to 3.6% for the quarter ended April 30, 2005. Other Expense (Income) Other expense increased $0.3 million to $1.7 million for the quarter ended April 30, 2005 from $1.4 million for the quarter ended April 30, 2004. Interest expense for the quarter ended April 30, 2005 increased to $1.9 million from $1.5 million in the quarter ended April 30, 2004. The increase in interest expense was due to higher average debt levels as a result of our acquisition of Select Nutrition in the second quarter of fiscal 2005, recent facility expansions and an increase in inventory levels to support the growth in our business combined with rising interest rates. Income Taxes Our effective income tax rate was 38.5% and 39.0% for the quarters ended April 30, 2005 and 2004, respectively. The effective rate was higher than the federal statutory rate primarily due to state and local income taxes. Net Income Net income, excluding special items, increased $1.6 million to $10.8 million, or $0.26 per diluted share, for the quarter ended April 30, 2005, compared to $9.2 million, or $0.22 per diluted share, for the quarter ended April 30, 2004. Net income, including special items, increased $2.1 million to $10.7 million, or $0.26 per diluted share, for the quarter ended April 30, 2005, compared to $8.6 million, or $0.21 per diluted share, for the quarter ended April 30, 2004. Special Items The following tables present, for the periods indicated, a reconciliation of income and per share amounts excluding special items to income and per share amounts including special items:
- ----------------------------------------------------------------------------------------------- Quarter ended April 30, 2005 Pretax Per diluted (in thousands, except per share data) income Net of tax share ------------------------------------- Income, excluding special items: $17,489 $10,756 $0.26 Special items - Income/(Expense): Related to the closing of the Mounds View, Minnesota facility (included in operating expenses) (103) (63) (0.00) Related to the opening of the Greenwood, Indiana facility (included in operating expenses) (11) (7) (0.00) - ----------------------------------------------------------------------------------------------- Income, including special items: $17,375 $10,686 $0.26 ===============================================================================================
17
- ----------------------------------------------------------------------------------------------- Quarter ended April 30, 2004 Pretax Per diluted (in thousands, except per share data) income Net of tax share ------------------------------------- Income, excluding special items: $15,115 $9,220 $0.22 Special items - Income/(Expense): Wild Oats Markets, Inc. primary distributorship start-up and transition related costs (included in operating expenses) (1,010) (616) (0.01) - ----------------------------------------------------------------------------------------------- Income, including special items: $14,105 $8,604 $0.21 ===============================================================================================
The special items for the quarter ended April 30, 2005 included (i) certain labor costs associated with the closing of the Mounds View, Minnesota facility, which was completed in the quarter, and (ii) certain labor costs associated with opening the Greenwood, Indiana facility, which is planned to be completed by the end of July 2005. Special items for the quarter ended April 30, 2004 included start-up and transition costs associated with implementing the Company's primary distribution relationship with Wild Oats Markets consisting of certain equipment rental and labor costs. Nine Months Ended April 30, 2005 Compared To Nine Months Ended April 30, 2004 Net Sales Our net sales increased approximately 24.0%, or $293.1 million, to $1,517 million for the nine months ended April 30, 2005 from $1,224 million for the nine months ended April 30, 2004. This increase was due to organic growth in our wholesale segment of 13.9%, the implementation of our primary distribution agreement with Wild Oats Markets in the third quarter of fiscal 2004 and the inclusion of sales related to Select Nutrition since December 2004. Our organic growth is due to the continued growth of the natural products industry in general, increased market share through better service and added value services, and the expansion of our existing distribution centers. For the nine months ended April 30, 2005, we experienced growth in all channels with the most significant growth in the supernatural chains distribution channel, which includes sales to Whole Foods Market and Wild Oats Markets. This was primarily due to the increase in sales to Wild Oats Markets discussed above. In the nine months ended April 30, 2005, Whole Foods Market comprised approximately 26.0% of net sales and Wild Oats Markets comprised approximately 11.6% of net sales. In the nine months ended April 30, 2004, Whole Foods Market comprised approximately 25.9% of net sales and was the only customer that accounted for more than 10% of net sales. In December 2004, we announced a definitive three-year distribution agreement with Whole Foods Market, which commenced on January 1, 2005, under which we will continue to serve as the primary U.S. distributor to it in the regions where we previously served. The following table lists the percentage of sales by customer channel for the nine months ended April 30, 2005 and 2004: Customer channel Percentage of Net Sales - ---------------- ----------------------- 2005 2004 ---- ---- Independently owned natural products retailers 45% 49% Supernatural chains 38% 31% SuperMarket 13% 15% Other 4% 5% The shift in our sales mix to supernatural chains from independently owned natural products retailers was the result of the implementation of our primary distribution agreement with Wild Oats Markets in the third quarter of fiscal 2004 and the continued strong growth in this channel. 18 Gross Profit Our gross profit increased approximately 19.5%, or $47.2 million, to $289.7 million for the nine months ended April 30, 2005 from $242.5 million for the nine months ended April 30, 2004. Our gross profit as a percentage of net sales was 19.1% and 19.8% for the nine months ended April 30, 2005 and 2004, respectively. The decrease in gross profit as a percentage of net sales in comparison to the nine months ended April 30, 2004 was the result of an increase in the sales to supernaturals as part of our overall sales mix, as we implemented our primary distribution agreement with Wild Oats Markets during the third quarter of fiscal 2004. In addition, we initiated an aggressive product rationalization program in the second quarter of fiscal 2005 which continued through the third quarter. As our sales channel mix has shifted, we expect gross margins to be in the low 19 percent range in the future. Operating Expenses Total operating expenses, excluding special items, increased approximately 18.4%, or $36.7 million, to $236.0 million for the nine months ended April 30, 2005 from $199.3 million for the nine months ended April 30, 2004. As a percentage of net sales, total operating expenses, excluding special items, decreased to approximately 15.6% for the nine months ended April 30, 2005 from approximately 16.3% for the nine months ended April 30, 2004. The approximately $36.7 million increase in total operating expenses excluding special items for the nine months ended April 30, 2005 was due to the increase in our infrastructure to support our continued sales growth, an increase in fuel costs as a percentage of sales of 19 basis points and the inclusion of approximately four and a half months of operating expenses related to Select Nutrition that were not included in the nine months ended April 30, 2004. In addition, the hurricanes which devastated Florida in the first quarter of fiscal 2005 increased operating expenses by approximately $0.5 million and we recorded a $0.2 million restructuring charge in the first quarter of fiscal 2005 related to severance costs, which resulted from our plan to reduce operations at our Mounds View, Minnesota facility. Total operating expenses for the nine months ended April 30, 2005 included a special item of $0.5 million for certain labor costs associated with the closing of the Mounds View, Minnesota facility and costs related to the opening of the Greenwood, Indiana facility. Total operating expenses for the nine months ended April 30, 2004 included a special item of $1.6 million in start-up and transition costs for certain equipment rental and labor costs incurred in connection with the implementation of our primary distribution agreement with Wild Oats Markets. Total operating expenses, including special items, increased approximately 17.7%, or $35.7 million, to $236.5 million for the nine months ended April 30, 2005 from $200.8 million for the nine months ended April 30, 2004. As a percentage of sales, total operating expenses, including special items, decreased to 15.6% for the nine months ended April 30, 2005 from 16.4% for the nine months ended April 30, 2004 as sales grew at a faster rate than operating expenses. Operating Income Operating income, excluding special items, increased $10.5 million to $53.7 million for the nine months ended April 30, 2005 from $43.2 million for the nine months ended April 30, 2004. As a percentage of sales, operating income, excluding special items, remained consistent at 3.5% for the nine months ended April 30, 2005 and 2004. Operating income for the nine months ended April 30, 2005 included a special item of $0.5 million for certain labor costs associated with the closing of the Mounds View, Minnesota facility and costs related to the opening of the Greenwood, Indiana facility. Excluding the incremental effect of higher fuel costs and Select Nutrition, operating income would have been approximately 3.7%. Operating income for the nine months ended April 30, 2004 included a special item of $1.6 million in start-up and transition costs for certain equipment rental and labor costs incurred in connection with the implementation of our primary distribution agreement with Wild Oats Markets. Operating income, including special items, was $53.2 million for the nine months ended April 30, 2005 and $41.7 million for the nine months ended April 30, 2004. Operating income, including special items, as a percentage of sales, increased to 3.5% for the nine months ended April 30, 2005 compared to 3.4% for the nine months ended April 30, 2004. Other Expense (Income) Other expense, excluding special items, decreased $1.1 million to $4.5 million for the nine months ended April 30, 2005 from $5.6 million for the nine months ended April 30, 2004. Interest expense for the nine months ended April 30, 2005 was $4.9 million compared to $6.0 million for the nine months ended April 30, 2004. The decrease in interest expense was due to the novation of two of our interest rate swap agreements in December 2003, which served to lower our effective interest rate, partially offset by higher average debt levels as a result of our acquisition of Select Nutrition in the second quarter of fiscal 2005, recent facility expansions and an increase in inventory levels to support 19 the growth in our business and rising interest rates. Other expense (income), including special items, decreased by $0.4 million resulting in expense of $4.5 million for the nine months ended April 30, 2005 compared to expense of $4.9 million for the nine months ended April 30, 2004. This decrease was due to the novation of our "ineffective" swap agreements and decreased interest expense as discussed above. These "ineffective" swaps were included as a special item for the nine months ended April 30, 2004. Income Taxes Our effective income tax rate was 38.8% and 39.0% for the nine months ended April 30, 2005 and 2004, respectively. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes. Net Income Net income, excluding special items, increased $7.1 million, or 31.1%, to $30.1 million, or $0.72 per diluted share, for the nine months ended April 30, 2005, compared to $22.9 million, or $0.56 per diluted share, for the nine months ended April 30, 2004. Net income, including special items, increased $7.4 million to $29.8 million, or $0.72 per diluted share, for the nine months ended April 30, 2005, compared to $22.4 million, or $0.55 per diluted share, for the nine months ended April 30, 2004. Special Items The following tables present, for the periods indicated, a reconciliation of income and per share amounts excluding special items to income and per share amounts including special items:
- ----------------------------------------------------------------------------------------------- Nine months ended April 30, 2005 Pretax Per diluted (in thousands, except per share data) income Net of tax share ------------------------------------- Income, excluding special items: $49,166 $30,079 $0.72 Special items - Income/(Expense): Related to the closing of the Mounds View, Minnesota facility (included in operating expenses) (456) (279) (0.01) Related to the opening of the Greenwood, Indiana facility (included in operating expenses) (11) (7) (0.00) - ----------------------------------------------------------------------------------------------- Income, including special items: $48,699 $29,793 $0.72* ===============================================================================================
20
- ----------------------------------------------------------------------------------------------- Nine months ended April 30, 2004 Pretax Per diluted (in thousands, except per share data) income Net of tax share ------------------------------------- Income, excluding special items: $37,616 $22,946 $0.56 Special items - Income/(Expense): Wild Oats Markets, Inc. primary distributorship transition related costs (included in operating expenses) (1,561) (952) (0.02) Interest rate swap agreements (change in fair value of financial instruments) 704 429 0.01 - ----------------------------------------------------------------------------------------------- Income, including special items: $36,759 $22,423 $0.55 ===============================================================================================
* Total reflects rounding The special items for the nine months ended April 30, 2005 included (i) certain labor costs associated with the closing of the Mounds View, Minnesota facility, which was completed in the quarter, and (ii) certain labor costs associated with opening the Greenwood, Indiana facility, which is planned to be completed by the end of July 2005. Special items for the nine months ended April 30, 2004 included: (i) the start-up and transition costs of the new Wild Oats Markets primary distribution agreement consisting of certain equipment rental and labor costs and (ii) the non-cash items from the change in fair value on interest rate swap agreements which were caused by favorable changes in interest rate yield curves. In December 2003, we assigned and transferred all of our obligations of our two "ineffective" interest rate swaps to a third party. As a result of this novation, these "ineffective" swaps will no longer be included as a special item for future fiscal periods. These "ineffective" swaps were included as a special item through the second quarter of fiscal 2004. We entered into interest rate swap agreements in October 1998, August 2001 and May 2003. The October 1998 and August 2001 agreements were "ineffective" hedges as a result of the options held by the counter parties that could extend the original term of the interest rate swap agreements. Applicable accounting treatment required that we record the changes in fair value of the October 1998 and August 2001 agreements in our consolidated statement of income, rather than within "accumulated other comprehensive income" in our statement of stockholders' equity. The changes in fair value are dependent upon the forward looking yield curves for each swap. The May 2003 agreement is an "effective" hedge and therefore does not require this treatment. We believe that our October 1998 and August 2001 agreements were special items that are excludable as non-recurring items. First, we only intend to enter into "effective" hedges going forward. This stated intention began with the May 2003 agreement. Second, we believe that the October 1998 and August 2001 agreements may distort and confuse investors if the change in fair value cannot be treated as a special item because their inclusion directly impacts our reported earnings per share. A change in fair value, whether positive or negative, can significantly increase or decrease our reported earnings per share. For example, we recorded a positive change in fair value for the second quarter of fiscal 2004 that increased our diluted earnings per share by $0.01, and in the first quarter of fiscal 2003, we recorded a negative change in fair value that decreased our diluted earnings per share by $0.03. If we were prohibited from excluding this item as a special item, it would artificially inflate our reported earnings per share and thereby mislead investors as to our results of operations and our financial condition. Liquidity and Capital Resources We finance operations and growth primarily with cash flows from operations, borrowings under our credit facility, operating leases, trade payables, bank indebtedness and the sale of equity and debt securities. On April 30, 2004, we entered into an amended and restated four-year $250 million revolving credit facility with a bank group that was led by Bank of America Business Capital (formerly Fleet Capital Corporation) as the administrative agent. The amended and restated credit facility provides for improved terms and conditions that provide us with more financial and operational flexibility, reduced costs and increased liquidity. The amended and restated credit facility replaced an existing $150 million revolving credit facility. Our amended and restated secured revolving credit facility allows for borrowing up to $250 million, on which interest accrues at LIBOR plus 0.90%. The $250 million credit facility matures on March 31, 2008. This increased credit facility will support our working capital requirements in the ordinary course of business and provide capital to grow our business organically or through acquisitions. As of April 30, 2005, our borrowing base, based on accounts receivable and inventory levels, was $250.0 million, with remaining availability of $87.6 million. In April 2003, 21 we executed a term loan agreement in the principal amount of $30 million secured by the real property that was released in accordance with an amendment to the loan and security agreement related to the revolving credit facility. The $30 million term loan is repayable over seven years based on a fifteen-year amortization schedule. Interest on the term loan accrues at LIBOR plus 1.50%. In December 2003, we amended this term loan agreement by increasing the principal amount from $30 million to $40 million under the existing terms and conditions. We believe that our capital requirements for fiscal 2005 will be between $45 and $50 million and that we will finance these requirements with cash generated from operations and the use of our existing credit facilities. These expenditures will provide both new facilities and technologies that will provide us with the capacity to continue to support the growth and expansion of our customers. We believe that our future capital requirements will be lower than our anticipated fiscal 2005 requirements, as we continue to invest in our growth by upgrading our infrastructure and expanding our facilities. Future investments in acquisitions will be financed through either equity or long term debt negotiated at the time of the potential acquisition. Net cash provided by operations was $1.7 million for the nine months ended April 30, 2005 and was the result of net income and the change in cash collected from customers net of cash paid to vendors and a $28.3 million investment in inventory. The increase in inventory levels relate to supporting increased sales with wider product assortment and availability. Days in inventory improved to 45 days at April 30, 2005 compared to 51 days at July 31, 2004. Days sales outstanding remained consistent at 24 days at April 30, 2005 and July 31, 2004. Net cash used in operations was $8.0 million for the nine months ended April 30, 2004 and was due to the change in cash collected from customers, net of cash paid to vendors, partially offset by increased inventory levels of $45.3 million as a result of increased sales. Working capital decreased by $4.1 million, or 3.7%, to $105.2 million at April 30, 2005, compared to working capital of $109.2 million at July 31, 2004. Net cash used in investing activities increased $28.4 million to $47.2 million for the nine months ended April 30, 2005 compared to $18.8 million for the same period last year. The increase was due to the acquisition of Select Nutrition in December 2004, the purchase of the Rocklin, California facility and the expenditures related to opening the Greenwood, Indiana facility. Net cash provided by financing activities was $40.1 million for the nine months ended April 30, 2005 primarily due to $37.8 million in borrowings under our $250 million secured revolving credit facility and proceeds from the exercise of stock options, partially offset by repayments of long-term debt and capital lease obligations. Net cash provided by financing activities was $32.0 million for the nine months ended April 30, 2004, due to $18.3 million in borrowings under our secured revolving credit facility, $10.2 million in additional long-term debt and proceeds from the exercise of stock options, partially offset by $4.1 million in repayments of our long-term debt and capital lease obligations. In May 2003, we entered into an interest rate swap agreement. The agreement provides for us to pay interest for a seven-year period at a fixed rate of 3.68% on a notional principal amount of $30 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 variable rate indebtedness totaling $30 million at LIBOR plus 1.50%, thereby fixing our effective rate on the notional amount at 5.18%. The swap agreement qualifies as an "effective" hedge under SFAS No. 133. There have been no material changes to our commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the year ended July 31, 2004. 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. 22 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 November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151 ("SFAS 151"), Inventory Costs: an amendment of ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe that the adoption of SFAS 151 will have a material impact on our consolidated financial position or results of operations. In December 2004, the FASB issued SFAS No. 123R ("SFAS 123R"), Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123R will require the Company to, among other things, measure all employee stock-based compensation awards using a fair value method and record such expense in the Company's consolidated financial statements. The original provisions of SFAS 123R were effective for the first interim reporting period that begin after June 15, 2005. The U.S. Securities and Exchange Commission has extended this Statement's effective date to be the first interim or annual reporting period of a registrant's first fiscal year beginning on or after June 15, 2005. As a result, the Statement is still effective for the Company beginning with the first quarter of 2006. Therefore, we will adopt SFAS 123R in our first quarter of fiscal 2006. Management is currently evaluating the specific impacts of adoption. In March 2005, the Financial Accounting Standards Board issued Interpretation No. 47 ("FIN 47"), Accounting for Conditional Asset Retirement Obligations. This Interpretation clarifies that the term "conditional asset retirement obligation" as used in Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. This Interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. This Statement is effective for the Company beginning with the fourth quarter of 2005. We do not believe that the adoption of FIN 47 will have a material impact on our consolidated financial position or results of operations. Use of Non-GAAP Results Financial measures included in this Management's Discussion and Analysis of Financial Condition and Results of Operations that are not in accordance with generally accepted accounting principles ("GAAP") are referred to as non-GAAP financial measures. To supplement our financial statements presented on a GAAP basis, we use non-GAAP additional measures of operating results, net earnings and earnings per share adjusted to exclude special items. We believe that the use of these additional measures is appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future as these special items are not expected to be part of our ongoing business. The adjustments to our GAAP results are made with the intent of providing both management and investors with a more complete understanding of the underlying operational results and trends and its marketplace performance. For example, these adjusted non-GAAP results are among the primary indicators management uses as a basis for our planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net earnings or diluted earnings per share prepared in accordance with generally accepted accounting principles in the United States. A comparison and reconciliation from non-GAAP to GAAP results is included in the table under "Special Items" above. 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. 23 Any forward-looking statements in this Form 10-Q and the documents incorporated by reference in this Form 10-Q are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, possibly materially. We do not undertake to update any information in the foregoing reports until the effective date of our future reports required by applicable laws. Any projections of future results of operations should not be construed in any manner as a guarantee that such results will in fact occur. These projections are subject to change and could differ materially from final reported results. We may from time to time update these publicly announced projections, but we are not obligated to do so. Acquisitions We continually evaluate opportunities to acquire other companies. We believe that there are risks related to acquiring companies including overpaying for acquisitions, losing key employees of acquired companies and failing to achieve potential synergies. Additionally, 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. Successful integration of mergers is critical to our future operating and financial performance. Integration requires, among other things: o maintaining the customer base; o optimizing of delivery routes; o coordinating administrative, distribution and finance functions; and o integrating management information systems and personnel. The integration process has and 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 companies has and 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 we will realize any of the anticipated benefits of mergers. 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 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 24 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 we do 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 two largest customers, Whole Foods Market and Wild Oats Markets, is an important element to our continued growth. In December 2004, we announced a definitive three-year distribution agreement with Whole Foods Market, which commenced on January 1, 2005, under which we will continue to serve as the primary U.S. distributor to it in the regions where we previously served. Whole Foods Market accounted for approximately 26.0% and 25.1% of our net sales during the quarters ended April 30, 2005 and 2004, respectively, and 26.0% and 25.9% of our net sales for the nine months ended April 30, 2005 and 2004, respectively. In January 2004, we entered into a five-year distribution agreement, as primary distributor, with Wild Oats Markets. For the quarter and nine months ended April 30, 2005, Wild Oats Markets accounted for approximately 11.3% and 11.6% of our net sales, respectively. 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 supernatural chains may reduce our profit margins in the future as more customers qualify for greater volume discounts, and we experience pricing pressures from both ends of the supply chain. Our operations are 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 Richard Antonelli (President of United Distribution), Daniel V. Atwood (Senior Vice President of Marketing and Secretary), Michael D. Beaudry (Vice President of Distribution), Barclay Hope (President of Albert's Organics), Rick D. Puckett (Chief Financial Officer and Treasurer), Steven H. Townsend (Chairman, President and Chief Executive Officer), and other key management employees. Loss of the services of any officers or any other key management employee could have a material adverse effect on our business, financial condition or results of operations. 25 Our operating results are subject to significant fluctuations Our net sales and operating results may vary significantly from period to period due to: o demand for natural products; o changes in our operating expenses, including in fuel and insurance; o management's ability to execute our business and growth strategies; 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 personnel changes; o supply shortages; o general economic conditions; 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. 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 the U.S. Department of Transportation and the U.S. Federal Highway Administration regulate our trucking operations. 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. 26 Union-organizing activities could cause labor relations difficulties As of April 30, 2005, we had approximately 4,000 full and part-time employees. An aggregate of approximately 420, or 10.5%, of the employees at our Auburn, Washington, Iowa City, Iowa and Edison, New Jersey facilities are covered by collective bargaining agreements. These agreements expire in March 2006, June 2006 and June 2005, respectively. Negotiations for the collective bargaining agreement which expires in June 2005 are in process. 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 We have a secured revolving credit facility, with available credit under it of $250 million at an interest rate of LIBOR plus 0.90% maturing on March 31, 2008. As of April 30, 2005, our borrowing base, based on accounts receivable and inventory levels, was $250.0 million, with remaining availability of $87.8 million. In April 2003, we executed a term loan agreement in the principal amount of $30 million secured by the real property that was released in accordance with an amendment to the loan and security agreement related to the revolving credit facility. The $30 million term loan is repayable over seven years based on a fifteen-year amortization schedule. Interest on the term loan accrues at LIBOR plus 1.50%. In December 2003, we amended this term loan agreement by increasing the principal amount from $30 million to $40 million under the existing terms and conditions. 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 our cost of capital increases or our ability to borrow funds or raise equity capital is limited, 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 Our exposure to market risks results primarily from fluctuations in interest rates on our borrowings. As more fully described in the notes to the condensed consolidated financial statements, we use interest rate swap agreements to modify variable rate obligations to fixed rate obligations for a portion of our debt. There have been no material changes to our exposure to market risks from those disclosed in our Annual Report on Form 10-K for the year ended July 31, 2004. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this quarterly report on Form 10-Q (the "Evaluation Date"). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in timely reporting material information required to be included in our periodic reports filed with the Securities and Exchange Commission. (b) Changes in internal controls. There has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 27 PART II. OTHER INFORMATION Items 1, 2, 3, 4 and 5 are not applicable and have been omitted. Item 6. Exhibits and Reports on Form 8-K Exhibits Exhibit No. Description 31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - CEO 31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - CFO 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CEO 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - CFO Reports on Form 8-K March 3, 2005 The Company announced its financial results for the quarter a nd six months ended January 31, 2005. March 4, 2005 The Company announced the acquisition of a new distribution facility in Rocklin, California. * * * We would be pleased to furnish a copy of this Form 10-Q to any stockholder who requests it by writing to: United Natural Foods, Inc. Investor Relations 260 Lake Road Dayville, CT 06241 28 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/ Rick D. Puckett ----------------------------------- Rick D. Puckett Chief Financial Officer (Principal Financial and Accounting Officer) Dated: June 9, 2005 29 EX-31.1 2 ex31-1.txt Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven H. Townsend, in my capacity as the Chief Executive Officer of United Natural Foods, Inc. (the "Company"), hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report. 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) for the Company and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. /s/ Steven H. Townsend ---------------------- Steven H. Townsend Chief Executive Officer June 9, 2005 Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-31.2 3 ex31-2.txt Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Rick D. Puckett, in my capacity as the Chief Financial Officer of United Natural Foods, Inc. (the "Company"), hereby certify that: 1. I have reviewed this quarterly report on Form 10-Q of the Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report. 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) for the Company and we have: 1. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; 2. evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and 3. disclosed in this quarterly report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. /s/ Rick D. Puckett ----------------------- Rick D. Puckett Chief Financial Officer June 9, 2005 Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.1 4 ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, in his capacity as the Chief Executive Officer of United Natural Foods, Inc., a Delaware corporation (the "Company"), hereby certifies that the Quarterly Report of the Company on Form 10-Q for the period ended April 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company. /s/ Steven H. Townsend ---------------------- Steven H. Townsend Chief Executive Officer June 9, 2005 Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 5 ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, in his capacity as the Chief Financial Officer of United Natural Foods, Inc., a Delaware corporation (the "Company"), hereby certifies that the Quarterly Report of the Company on Form 10-Q for the period ended April 30, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of the Company. /s/ Rick D. Puckett ------------------------ Rick D. Puckett Chief Financial Officer June 9, 2005 Note: A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----