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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-21531
UNITED NATURAL FOODS, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware 05-0376157
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
260 Lake Road, Dayville, CT 06241
(Address of Principal Executive Offices) (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, 2003 there were 19,464,516 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, 2003
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of April 30, 2003 and
July 31, 2002 3
Consolidated Statements of Operations for the three
and nine months ended April 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the nine
months ended April 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Certifications 24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except per share amounts) April 30, 2003 July 31, 2002
ASSETS
Current assets:
Cash $ 4,956 $ 11,184
Accounts receivable, net 91,982 84,303
Notes receivable, trade 549 513
Inventories 161,205 131,932
Prepaid expenses 6,645 4,493
Deferred income taxes 4,612 4,612
Refundable income taxes -- 58
--------- ---------
Total current assets 269,949 237,095
Property & equipment, net 99,233 82,702
Other assets:
Notes receivable, trade, net 1,354 956
Goodwill 60,901 31,399
Intangibles, net 1,150 248
Other, net 2,678 2,057
--------- ---------
Total assets $ 435,265 $ 354,457
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - line of credit $ 96,842 $ 106,109
Current installments of long-term debt 3,830 1,658
Current installment of obligations under
capital leases 742 1,037
Accounts payable 77,290 52,789
Accrued expenses 26,244 18,185
Financial instruments 7,459 5,620
Income taxes payable 2,651 --
--------- ---------
Total current liabilities 215,058 185,398
Long-term debt, excluding current installments 38,772 7,677
Obligations under capital leases, excluding
current installments 1,200 995
--------- ---------
Total liabilities 255,030 194,070
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value, authorized
5,000 shares, none issued and outstanding -- --
Common stock, $.01 par value, authorized
50,000 shares, issued and outstanding
19,454 at April 30, 2003; issued and
outstanding 19,106 at July 31, 2002 194 191
Additional paid-in capital 84,167 79,711
Unallocated shares of ESOP (1,972) (2,094)
Retained earnings 97,846 82,579
--------- ---------
Total stockholders' equity 180,235 160,387
--------- ---------
Total liabilities and stockholders' equity $ 435,265 $ 354,457
========= =========
See notes to consolidated financial statements.
3
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Quarter Ended Nine Months Ended
April 30, April 30,
--------- ---------
(In thousands, except per share data) 2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 363,611 $ 300,362 $ 1,013,050 $866,139
Cost of sales 290,056 239,408 807,222 688,733
--------- --------- ----------- --------
Gross profit 73,555 60,954 205,828 177,406
--------- --------- ----------- --------
Operating expenses 61,930 50,175 173,301 147,395
Restructuring and asset impairment charges -- -- -- 424
Amortization of intangibles 130 56 234 134
--------- --------- ----------- --------
Total operating expenses 62,060 50,231 173,535 147,953
--------- --------- ----------- --------
Operating income 11,495 10,723 32,293 29,453
--------- --------- ----------- --------
Other expense (income):
Interest expense 1,811 1,934 5,729 5,323
Change in fair value of
financial instruments 360 (234) 1,839 2,195
Other, net (142) 225 (562) 110
--------- --------- ----------- --------
Total other expense 2,029 1,925 7,006 7,628
--------- --------- ----------- --------
Income before income taxes 9,466 8,798 25,287 21,825
Income taxes 3,692 3,519 10,020 8,730
--------- --------- ----------- --------
Net income $ 5,774 $ 5,279 $ 15,267 $ 13,095
========= ========= =========== ========
Per share data (basic):
Basic earnings per share $ 0.30 $ 0.28 $ 0.80 $ 0.69
========= ========= =========== ========
Weighted average shares of common stock 19,242 19,049 19,155 18,874
========= ========= =========== ========
Per share data (diluted):
Diluted earnings per share $ 0.29 $ 0.27 $ 0.78 $ 0.68
========= ========= =========== ========
Weighted average shares of common stock 19,750 19,493 19,636 19,304
========= ========= =========== ========
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor, vendor
payments received for advertising arrangements formerly classified as reductions
of operating expenses have been re-classified as a reduction of cost of sales
for all the periods presented. These changes reduce cost of sales and also
increase operating expenses by $3.1 million and $2.6 million in the third
quarters of fiscal 2003 and 2002, respectively, and $8.4 million and $7.6
million in the first nine months of fiscal 2003 and 2002, respectively. This
accounting change had no impact on reported operating income, net income or
earnings per share for any of the periods presented.
See notes to consolidated financial statements.
4
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
April 30,
(In thousands) 2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,267 $ 13,095
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,663 5,899
Change in fair value of financial instruments 1,839 2,195
(Gain) Loss on disposals of property and equipment (18) 295
Deferred income tax benefit -- (921)
Provision for doubtful accounts 1,952 1,379
Changes in assets and liabilities, net of effects of acquired companies:
Accounts receivable (2,279) (9,197)
Inventory (6,575) (28,928)
Prepaid expenses (183) (172)
Refundable income taxes 58 366
Other assets (2,029) (1,679)
Notes receivable, trade 31 29
Accounts payable 9,606 11,537
Accrued expenses 806 7033
Income taxes payable 2,651 1,727
--------------------
Net cash provided by operating activities 28,789 2,658
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of acquired businesses, net of cash acquired (43,964) (19)
Proceeds from sale of property and equipment 60 31
Capital expenditures (14,975) (23,633)
--------------------
Net cash used in investing activities (58,879) (23,621)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under note payable (9,267) 39,011
Repayments of long-term debt (1,282) (20,739)
Proceeds from long-term debt 30,954 1,234
Principal payments of capital lease obligations (1,002) (840)
Proceeds from exercise of stock options 4,459 2,402
--------------------
Net cash provided by financing activities 23,862 21,068
--------------------
NET (DECREASE) INCREASE IN CASH (6,228) 105
Cash at beginning of period 11,184 6,393
--------------------
Cash at end of period $ 4,956 $ 6,498
====================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,591 $ 5,240
====================
Income taxes $ 4,598 $ 8,980
====================
In the nine months ended April 30, 2003 and 2002, the Company incurred $0 and
$628, respectively, of capital lease obligations. In the nine months ended April
30, 2002 the fair value of common stock issued for the acquisition of subsidiary
was $4,250.
See notes to consolidated financial statements.
5
UNITED NATURAL FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2003 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
United Natural Foods, Inc. (the "Company") and its wholly owned subsidiaries.
The Company is a distributor and retailer of natural and organic foods and
related products and sells its products throughout the United States.
The financial statements have been prepared pursuant to rules and regulations of
the Securities and Exchange Commission for interim financial information,
including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally required in
complete financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. In our opinion, these financial statements include all adjustments
necessary for a fair presentation of the results of operations for the interim
periods presented. The results of operations for interim periods, however, may
not be indicative of the results that may be expected for a full year.
2. INTEREST RATE SWAP AGREEMENTS
In October 1998, the Company entered into an interest rate swap agreement that
provides for it 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 London Interbank Offered Rate ("LIBOR") rate on the same notional
principal amount. This swap has been entered into as a hedge against LIBOR
interest rate movements on current variable rate indebtedness totaling $60
million at LIBOR plus 1.50%, thereby fixing its effective rate at 6.50%. The
five-year term of the swap agreement may be extended to seven years at the
option of the counter party, which prohibits accounting for the swap as an
effective hedge under Statement of Financial Accounting Standards No. 133 ("SFAS
No. 133"), "Accounting for Derivative Instruments and Hedging Activities." The
Company entered into an additional interest rate swap agreement effective August
1, 2001. The additional agreement provides for it 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 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 its effective rate on
the notional amount at 6.31%. If LIBOR exceeds 6.0% in a given period, the
agreement is suspended for that period. LIBOR was 1.32% as of April 30, 2003.
The four-year term of the swap agreement may be extended to six years at the
option of the counter party, which prohibits accounting for the swap as an
effective hedge under SFAS No. 133.
The Company recorded $0.4 million of expense and $0.2 million of income for the
quarters ended April 30, 2003 and 2002 respectively, on its interest rate swap
agreements and related option agreements to reflect the change in fair value of
the financial instruments. For the nine months ended April 30, 2003 and 2002,
the Company recorded $1.8 million and $2.2 million, respectively, of expense on
its interest rate swap agreements and related option agreements.
3. STOCK OPTION PLANS
At April 30, 2003, the Company had two stock option plans. As permitted by
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), as amended
by Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"),
"Accounting for Stock-Based Compensation," the Company accounts for those plans
under the recognition and measurement principles of Accounting Principles Board
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations.
No stock-based employee compensation costs have been reflected in net income, as
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. 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 No. 123 and SFAS No. 148 to stock-based
employee compensation:
6
(in thousands, except per share data) Quarter ended April 30, Nine months ended April 30,
2003 2002 2003 2002
Net income - as reported $ 5,774 $ 5,279 $15,267 $13,095
------- ------- ------- -------
Deduct:
Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects 922 686 2,596 2,023
------- ------- ------- -------
Net income - pro forma $ 4,852 $ 4,593 $12,671 $11,072
------- ------- ------- -------
Basic earnings per share
As reported $ 0.30 $ 0.28 $ 0.80 $ 0.69
------- ------- ------- -------
Pro forma $ 0.25 $ 0.24 $ 0.66 $ 0.59
------- ------- ------- -------
Diluted earnings per
share
As reported $ 0.29 $ 0.27 $ 0.78 $ 0.68
------- ------- ------- -------
Pro forma $ 0.25 $ 0.24 $ 0.66 $ 0.59
------- ------- ------- -------
The effects of applying SFAS No. 123 and SFAS No. 148 in this pro forma
disclosure are not necessarily indicative of future amounts. 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 2003 and 2002:
Quarter ended April 30, Nine months ended April 30,
2003 2002 2003 2002
Expected volatility 62.0% 64.0% 62.0% 64.0%
Dividend yield 0.0% 0.0% 0.0% 0.0%
Risk-free interest rate 3.3% 4.7% 3.3% 4.7%
Expected life 5 years 5 years 5 years 5 years
The Board of Directors adopted and the stockholders approved the 2002 Stock
Incentive Plan of the Company, which provides for grants of stock options to
employees, officers, directors and others, on October 2, 2002 and December 3,
2002, respectively. 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". In the nine months ended April 30, 2003, the
Company granted approximately 59,004 shares under the 1996 Stock Option Plan and
approximately 458,246 under the 2002 Stock Incentive Plan.
The following table summarizes the stock option activity of the 1996 Stock
Option Plan since its inception through April 30, 2003:
Shares
- ---------------------------------
Authorized 2,500,000
Granted 3,076,100
Cancelled 635,600
---------
Remaining authorized 59,500
- ---------------------------------
The following table summarizes the stock option activity of the 2002 Stock
Incentive Plan since its inception through April 30, 2003:
Shares
- ---------------------------------
Authorized 1,400,000
Granted 458,246
Cancelled 2,500
---------
Remaining authorized 944,254
- ---------------------------------
7
4. EARNINGS PER SHARE
Following is a reconciliation of the basic and diluted number of shares used in
computing earnings per share:
Quarter Ended Nine Months Ended
April 30, April 30,
--------- ---------
(In thousands) 2003 2002 2003 2002
------ ------ ------ ------
Basic weighted average
shares outstanding 19,242 19,049 19,155 18,874
Net effect of dilutive
stock options based upon
the treasury stock method 508 444 481 430
------ ------ ------ ------
Diluted weighted average
shares outstanding 19,750 19,493 19,636 19,304
====== ====== ====== ======
Employee stock options to purchase approximately 0.5 million and 0.3 million
shares in the three months and nine months ended April 30, 2003, respectively
were outstanding, but were not included in the computation of diluted earnings
per share because the exercise price of the stock options was greater than the
average share price of the common shares and, therefore, the effect would have
been antidilutive. There were no antidilutive shares for the three months and
nine months ended April 30, 2002.
5. ACQUISITIONS
On October 11, 2002, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of Blooming Prairie Cooperative
("Blooming Prairie"), a distributor of natural and organic foods and related
products in the Midwest region of the United States, for cash consideration of
$29.6 million. The acquisition was financed by proceeds from the Company's line
of credit. The operating results of Blooming Prairie have been included in the
accompanying condensed consolidated financial statements of the Company
beginning with the acquisition date. The Company has recorded goodwill of $13.7
million related to this acquisition. Blooming Prairie Cooperative carries and
distributes approximately 15,000 products to more than 2,700 customers primarily
in the Midwest region of the United States. Blooming Prairie serves a wide
variety of retail formats including conventional supermarket chains, natural
product superstores, independent retail operators, cooperatives and buying
clubs. The acquisition of Blooming Prairie will help the Company to achieve its
stated goal of broadening its presence and increasing its penetration in the
growing Midwest market. Blooming Prairie's two strategically located
distribution facilities in Iowa and Minnesota will enable the company to broaden
its market share in this region more cost effectively.
On December 31, 2002, the Company acquired by merger privately held Northeast
Cooperatives, a natural food distributor, headquartered in Brattleboro, Vermont,
which services customers in the Northeast and Midwest regions of the United
States, for cash consideration of $14.1 million. The acquisition was financed by
proceeds from the Company's line of credit. The operating results of Northeast
Cooperatives have been included in the accompanying condensed consolidated
financial statements of the Company beginning with the acquisition date. Based
on a preliminary purchase price allocation, the Company has recorded goodwill of
$15.8 million related to this acquisition, reflecting the cost of the
acquisition and additional liabilities recorded. The addition of Northeast
Cooperatives will provide the Company with an expanded customer base, new
channels of distribution and significant synergies as it consolidates the
Northeast Cooperatives operation into its expanded Chesterfield, NH distribution
facility in June of 2003.
8
The following presents the unaudited pro forma results assuming that the
acquisitions discussed above had occurred as of the beginning of fiscal 2002.
These pro forma results are not necessarily indicative of the results that will
occur in future periods.
(In thousands except per share data) Quarter ended Nine months ended
April 30, April 30,
2003 2002 2003 2002
Actual Pro forma Pro forma Pro forma
Net sales $ 363,611 $ 365,988 $1,093,334 $1,050,838
========= ========= ========== ==========
Income before income taxes 9,466 8,722 24,557 20,878
========= ========= ========== ==========
Net income 5,774 5,233 14,829 12,527
========= ========= ========== ==========
Basic earnings per common share:
Net income $ 0.30 $ 0.27 $ 0.77 $ 0.66
========= ========= ========== ==========
Diluted earnings per share:
Net income $ 0.29 $ 0.26 $ 0.76 $ 0.65
========= ========= ========== ==========
6. BUSINESS SEGMENTS
The Company has several operating units aggregated under the distribution
segment, which is the Company's only reportable segment. These operating units
have similar products and services, customer types, distribution methods and
historical margins. The distribution segment is engaged in national distribution
of natural and organic foods, produce and related products in the United States.
Other operating segments include the retail unit, which engages in the sale of
natural and organic foods and related products to the general public through
retail storefronts on the east coast of the United States, and a unit engaged in
importing, roasting and packaging of nuts, seeds, dried fruit and snack items.
These other operating units do not meet the quantitative thresholds for
reportable segments and are therefore included in the "Other" caption in the
segment information. The "Other" caption also includes corporate expenses that
are not allocated to operating units.
Following is business segment information for the periods indicated:
Distribution Other Eliminations Consolidated
------------ ----- ------------ ------------
Nine Months Ended April 30, 2003
Net sales $979,151 $ 49,660 $ (15,761) $1,013,050
Operating income (loss) $ 36,794 $ (4,455) $ (46) $ 32,293
Depreciation and amortization $ 6,707 $ 956 $ -- $ 7,663
Capital expenditures $ 14,383 $ 592 $ -- $ 14,975
Total assets $586,627 $ 40,896 $(192,258) $ 435,265
Nine Months Ended April 30, 2002
Net sales $834,020 $ 48,105 $ (15,986) $ 866,139
Operating income (loss) $ 31,438 $ (1,970) $ (15) $ 29,453
Depreciation and amortization $ 5,120 $ 779 $ -- $ 5,899
Capital expenditures $ 22,446 $ 1,187 $ -- $ 23,633
Total assets $471,811 $ 37,315 $(145,829) $ 363,297
9
7. DEBT
The Company entered into a term loan agreement with its bank effective April 30,
2003. The principal amount is $30.0 million and is repayable in seven years.
Interest accrues at LIBOR plus 1.50%. The Company has pledged certain real
property as collateral for its obligations under the term loan agreement. The
proceeds were used to repay a portion of the Company's $150.0 million credit
facility. The Company entered into an additional interest rate swap agreement
effective May 5, 2003. The agreement provides for it to pay interest for a
seven-year period at a fixed rate of 5.18% 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 cash flow
hedge against LIBOR interest rate movements on current variable rate
indebtedness totaling $30.0 million at LIBOR plus 1.50%, thereby fixing its
effective rate on the notional amount at 5.18%. The swap agreement qualifies as
a highly effective cash flow hedge under SFAS No. 133.
8. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
Emerging Issues Task Force issue No. 02-16 (EITF 02-16) "Accounting by a
Reseller for Cash Consideration Received," became effective for the Company
during the third quarter of fiscal 2003. This issue addresses the appropriate
accounting for cash consideration received from a vendor. The consensus reached
on this issue was that cash consideration received from a vendor is presumed to
be a reduction of the cost of sales and should be recorded as a reduction of
cost of goods sold unless the consideration is for either (1) payment for assets
or services and therefore revenue, or (2) a reimbursement of specific,
incremental, identifiable costs incurred to sell the vendor's products and
therefore, a reduction of advertising expense. The Company does not formally
track costs on a specific vendor basis. Therefore, the Company was required to
classify vendor consideration received for advertising as a reduction in cost of
sales. Vendor payments received for advertising arrangements formerly classified
as reductions of operating expenses have been reclassified as a reduction of
cost of sales for all the periods presented. These changes reduce cost of sales
and also increase operating expenses by $3.1 million and $2.6 million in the
third quarters of fiscal 2003 and 2002, respectively, and $8.4 million and $7.6
million in the first nine months of fiscal 2003 and 2002, respectively. This
accounting change had no impact on reported operating income, net income or
earnings per share for any of the periods presented.
In December 2002, the Financial Accounting Standards Board issued SFAS 148. This
statement amends SFAS 123 and provides alternative methods of transition for an
entity that voluntarily changes to the fair value-based method of accounting for
stock-based compensation. It also requires additional disclosures about the
effects on reported net income of an entity's accounting policy with respect to
stock-based employee compensation. As discussed under the accounting for stock
options in note 3, the Company accounts for stock-based compensation in
accordance with Accounting Principles Board No. 25, "Accounting for Stock Issued
to Employees," and has adopted the disclosure-only alternative of SFAS 123. The
Company adopted the disclosure provisions of SFAS 148 for fiscal 2003.
9. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In April 2003, the Financial Accounting Standards Board issued Statement No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." The Statement amends and clarifies financial accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement No. 133. Adoption of
the guidance in this pronouncement is not expected to have a material impact on
the Companies consolidated financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150,
"Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." The Statement requires issuers to classify as
liabilities (or assets in some circumstance) three classes of freestanding
financial instruments that embody obligations for the issuer. Generally, the
Statement is effective for financial instruments entered into or modified after
May 31, 2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company will adopt the provisions of
the Statement on August 1, 2003. Adoption of the guidance in this pronouncement
is not expected to have a material impact on the Companies consolidated
financial position or results of operations.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantee, Including Guarantees of Indebtedness of Others."
Disclosures related to this interpretation are effective for interim and annual
periods ending after December 15, 2002 and the accounting requirements are
effective beginning January 1, 2003. FIN 45 requires all guarantees and
indemnifications within its scope to be recorded at fair value as liabilities
and the disclosure of the maximum possible loss to the Company under these
guarantees and indemnifications. Management has completed an evaluation of the
impact of the recognition requirements of FIN 45, and has determined that it
does not have a material impact on the Company's consolidated financial
statements.
On January 17, 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an
interpretation of ARB 51." The primary objectives of FIN 46 are to provide
guidance on the identification and consolidate of variable interest entities, or
VIEs, which are entities for which control is achieved through means other than
through voting rights. The Company has completed an analysis of FIN 46 and has
determined that it does not have any VIEs.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are the leading national distributor of natural and organic foods and related
products in the United States. In recent years, our sales to existing and new
customers have increased through the acquisition of or merger with natural and
organic products distributors, the expansion of existing distribution centers
and the continued growth of the natural and organic products industry in
general. Through these efforts, we believe that we have been able to broaden our
geographic penetration, expand our customer base, enhance and diversify our
product selections and increase our market share. Our distribution operations
are divided into three principal units: United Natural Foods, Inc. in the
Eastern Region, Mountain People's Warehouse, Inc., Rainbow Natural Foods, Inc.
and Blooming Prairie in the Western Region, and Albert's Organics in various
markets in the United States. Through our subsidiary, the Natural Retail Group,
we also own and operate 12 natural and organic products retail stores located in
Florida, Maryland and Massachusetts. We believe our retail business serves as a
natural complement to our distribution business, enabling us to develop new
marketing programs and improve customer service. In addition, our Hershey Import
subsidiary is a business that specializes in the roasting and packaging of nuts,
seeds, dried fruits and snack items.
We are continually integrating certain operating functions in order to improve
operating efficiencies, including: (i) expanding marketing and customer service
programs across the three principal units; (ii) expanding national purchasing
opportunities; (iii) consolidating systems applications among physical locations
and principal units; (iv) integrating administrative and accounting functions;
and (v) reducing geographic overlap between principal units. In addition, our
continued growth has created the need for expansion and relocation 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 completed expansions of
our facilities located in Auburn, California, New Oxford, Pennsylvania, Los
Angeles, California, and the relocation of our Atlanta, Georgia facility. We are
in the process of expanding our Chesterfield, New Hampshire distribution
facility from its existing 117,000 square feet to 289,000 square feet. Upon
completion of the expansion of our Chesterfield, New Hampshire facility in June
of 2003, the increased capacity of our distribution centers will be
approximately 1,400,000 square feet greater than it was five years ago.
We continue to increase our leading market share of the growing natural and
organic products industry by expanding our customer base, increasing our share
of existing customers' business and continuing to expand and further penetrate
new distribution territories, particularly in the Midwest and Texas markets. To
this end, on October 11, 2002, we acquired substantially all of the assets of
Blooming Prairie, the largest volume distributor of natural and organic foods
and products in the Midwest region of the United States. The acquisition of
Blooming Prairie's Iowa City, Iowa and Mounds View, Minnesota distribution
facilities has provided us with an immediate physical base and growth platform
with which to broaden our presence in the fast growing Midwest market. On
December 31, 2002, we acquired by merger Northeast Cooperatives, a distributor
of natural and organic foods and products in the Eastern United States,
headquartered in Brattleboro, Vermont, and in business since 1973. The expansion
of our Chesterfield, New Hampshire distribution facility will enable us to
service existing and new customers, integrate our recent acquisition of
Northeast Cooperatives into existing facilities, provide more product diversity,
and enable us to better balance products among our distribution centers in our
Eastern Region. While operating margins may be affected in periods in which
these expansion expenses are incurred, over the long term we expect to benefit
from the increased absorption of our expenses over a larger sales base.
Our net sales consist primarily of sales of natural and organic products to
retailers adjusted for customer incentives, returns and allowances. The
principal components of our cost of sales include the amount paid to
manufacturers and growers for product sold, plus the cost of transportation
necessary to bring the product to our distribution facilities. Operating
expenses include salaries and wages, employee benefits (including payments under
our Employee Stock Ownership Plan), warehousing and delivery, selling,
occupancy, 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.
11
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 policies of insurance reserves,
accounts receivable valuation and the valuation of goodwill and intangible
assets. For all financial statement periods presented, there have been no
material modifications to the application of these critical accounting policies.
Allowance for doubtful accounts
We analyze customer creditworthiness, accounts receivable and notes receivable
balances, payment history, payment terms and historical bad debt levels when
evaluating the adequacy of our allowance for doubtful accounts. Our accounts
receivable balance was $92.0 million, net of allowance for doubtful accounts of
$5.7 million, and $84.3 million, net of allowance for doubtful accounts of $5.8
million, as of April 30, 2003 and July 31, 2002, respectively. Our notes
receivable balance was $1.9 million, net of allowance for doubtful accounts of
$1.8 million, and $1.5 million, net of allowance for doubtful accounts of $0.2
million, as of April 30, 2003 and July 31, 2002, respectively.
Valuation of goodwill and intangible assets
Intangible assets consist principally of goodwill, covenants not to compete and
customer supply agreements. Goodwill represents the excess purchase price over
fair value of net assets acquired in connection with purchase business
combinations. Covenants not to compete and customer supply agreements are
initially recorded at fair value, and are amortized using the straight-line
method over the lives of the respective agreements, generally three to five
years. We adopted the Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
on August 1, 2001. Goodwill is no longer amortized and is tested annually for
impairment. The Company evaluates each of the reporting units with goodwill
during the fourth quarter of each fiscal year or more frequently if impairment
indicators arise. There can be no assurance that upon performance of our annual
review a material impairment charge will not be recorded.
Insurance reserves
It is the Company's policy to record the self-insured portion of its workers'
compensation, health insurance and automobile liabilities based upon actuarial
estimates of 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, the Company's reserves may be insufficient
and additional costs could be recorded in the consolidated financial statements.
12
Results of Operations
The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:
Quarter Ended Nine Months Ended
April 30, April 30,
--------------- ---------------
2003 2002 2003 2002
--------------- ---------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 79.8% 79.7% 79.7% 79.5%
----- ----- ----- -----
Gross profit 20.2% 20.3% 20.3% 20.5%
----- ----- ----- -----
Operating expenses 17.1% 16.7% 17.1% 17.1%
Restructuring and asset impairment charges -- -- -- --
----- ----- ----- -----
Total operating expenses 17.1% 16.7% 17.1% 17.1%
----- ----- ----- -----
Operating income 3.2% 3.6% 3.2% 3.4%
----- ----- ----- -----
Other expense (income):
Interest expense 0.5% 0.6% 0.6% 0.6%
Change in fair value of financial instruments 0.1% (0.1)% 0.2% 0.3%
Other, net 0.0% 0.1% -0.1% 0.0%
----- ----- ----- -----
Total other expense 0.6% 0.6% 0.7% 0.9%
----- ----- ----- -----
Income before income taxes 2.6% 2.9% 2.5% 2.5%
Income taxes 1.0% 1.2% 1.0% 1.0%
----- ----- ----- -----
Net income 1.6% 1.8% 1.5% 1.5%
===== ===== ===== =====
Quarter Ended April 30, 2003 Compared To Quarter Ended April 30, 2002
Net Sales.
Our net sales increased approximately 21.1%, or $63.2 million, to $363.6 million
for the quarter ended April 30, 2003 from $300.4 million for the quarter ended
April 30, 2002. This increase included a full quarter of net sales from our
Blooming Prairie division, acquired on October 11, 2002, and Northeast
Cooperatives, acquired on December 31, 2002. This increase also included growth
in the independent and mass market distribution channels of approximately 38%
and 21%, respectively. Sales in the supernatural distribution channel decreased
approximately 3% compared to the same period last year due primarily to the
previously announced transition of our former second-largest customer, Wild
Oats, Inc., to a new primary distributor. Sales for the quarter, excluding the
effect of acquisitions, decreased approximately 1%. Sales growth was also
impacted by the transition of the Company's former second-largest customer, Wild
Oats, Inc., to a new primary distributor. Sales growth excluding the effect of
acquisitions and sales in each period to our former second largest customer,
Wild Oats, Inc., was approximately 14%. We believe sales growth for the quarter
ending July 31, 2003 will be in the 15% to 19% range.
Sales to our largest customer, Whole Foods Market, Inc. represented
approximately 24% of net sales for the quarter ended April 30, 2003. Whole Foods
Market, Inc. represented approximately 19% and Wild Oats, Inc. represented
approximately 13% of net sales for the quarter ended April 30, 2002. Whole Foods
Market, Inc. has extended its current distribution arrangement through August
31, 2004. Our contract as primary distributor to Wild Oats, Inc. was not renewed
past its expiration date of August 31, 2002. However, we continue to distribute
to Wild Oats, Inc. and expect revenue of approximately $30 million to $35
million in fiscal 2003.
13
Gross Profit.
Our gross profit increased approximately 20.7%, or $12.6 million, to $73.6
million for the quarter ended April 30, 2003 from $61.0 million for the quarter
ended April 30, 2002. Our gross profit as a percentage of net sales decreased to
20.2% from 20.3% for the quarter ended April 30, 2002. Our increase in gross
profit as a result of losing the Wild Oats, Inc. business, which as a large
customer received volume discounts, was more than offset by lower gross profit
margins in our acquired businesses and a lower than expected gross profit at our
Hershey Import division. The gross profit figures reflect the impact of the
adoption of the Financial Accounting Standards Board's Emerging Issues Task
Force Issue No. 02-16, Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor, which requires the
reclassification of advertising income to cost of goods sold from operating
expenses. These changes reduced cost of sales and also increased operating
expenses by $3.1 million and $2.6 million in the third quarters of fiscal 2003
and 2002, respectively. This accounting change had no impact on reported
operating income, net income or earnings per share for any of the periods
presented. We expect our gross margin as a percentage of sales to be in the high
19% to low 20% range for the remainder of fiscal 2003.
Operating Expenses.
Our total operating expenses increased approximately 23.5% or $11.8 million, to
$62.0 million for the quarter ended April 30, 2003 from $50.2 million for the
quarter ended April 30, 2002. As a percentage of net sales, operating expenses
increased to 17.1% for the quarter ended April 30, 2003 from 16.7% for the
quarter ended April 30, 2002. The increase in operating expenses was due
primarily to lower productivity caused by the transition of the Wild Oats, Inc.
business and higher operating expense levels at our recent acquisitions,
Blooming Prairie and Northeast Cooperatives. We believe we will be able to
decrease operating expenses as a percentage of sales as we focus on increasing
market share to replace Wild Oats, Inc. sales and integrating Blooming Prairie
and Northeast Cooperatives into our Western and Eastern regions, respectively,
resulting in more efficient routing and warehouse operations. Transportation,
warehouse labor, and utilities costs continued to track at levels consistent
with past quarters as a percentage of sales. Fuel expense, as a percentage of
sales, increased approximately 20 basis points compared to the same period last
year, due primarily to the marked increase in average diesel prices during the
period. The operating expense figures reflect the impact of the adoption of the
Financial Accounting Standards Board's Emerging Issues Task Force Issue No.
02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor, which requires the reclassification of advertising
income to cost of goods sold from operating expenses. These changes reduced cost
of sales and also increased operating expenses by $3.1 million and $2.6 million
in the third quarters of fiscal 2003 and 2002, respectively. This accounting
change had no impact on reported operating income, net income or earnings per
share for any of the periods presented
14
Operating expenses for the quarter ended April 30, 2003 included $0.3 million
related to the expansion of our Chesterfield, New Hampshire facility. Operating
expenses for the quarter ended April 30, 2002 included $0.7 million related
primarily to the startup of our Fontana, California distribution facility. We
expect operating expenses as a percentage of sales to be in the low to mid-17%
range for the fiscal year 2003 due to the reclassification of advertising income
to cost of goods sold from operating expenses, absorption of fixed costs over a
lower sales base resulting from the reduction of our Wild Oats, Inc. business
and our continued integration of the Blooming Prairie and Northeast Cooperatives
acquisitions. We expect to incur additional expansion charges as we increase our
warehouse capacity.
Operating Income.
Operating income increased $0.8 million to $11.5 million or 3.2% of sales for
the quarter ended April 30, 2003 compared to $10.7 million, or 3.6% of sales for
the quarter ended April 30, 2002.
Other Expense (Income).
Other expense increased $0.1 million to $2.0 million for the quarter ended April
30, 2003 from $1.9 million for the quarter ended April 30, 2002. This increase
was primarily due to the non-cash expense from our interest rate swap agreements
and related option agreements. The non-cash expense due to the change in fair
value of financial instruments for the quarter ended April 30, 2003 was $0.4
million compared to non-cash income of $0.2 million for the quarter ended April
30, 2002. We will continue to recognize either income or expense quarterly for
the duration of the swap agreements until either October 2003 or 2005 for the
swap agreement entered into in October 1998, and either August 2005 or 2007 for
the swap agreement entered into in August 2001, depending on whether the
agreements are extended by the counter party. The recognition of income or
expense in any given quarter, and the magnitude of that item, is dependent on
yield curves and the remaining term of the contracts. Upon expiration of any
such contract, the cumulative earnings impact from the changes in fair value of
the instruments will be zero. Since our interest rate swap agreements fix our
effective rates at 6.5% and 6.3%, we have paid higher interest expense than had
we not entered into these agreements. The decrease of $0.1 million in interest
expense was the result of increased debt due to acquisitions offset by lower
variable interest rates.
Income Taxes.
Our effective income tax rate was 39.0% for the quarter ended April 30, 2003 and
40.0% for the quarter ended April 30, 2002. The effective rates were higher than
the federal statutory rate primarily due to state and local income taxes.
Net Income.
Net income increased $0.5 million to $5.8 million, or $0.29 per diluted share,
for the quarter ended April 30, 2003, compared to $5.3 million, or $0.27 per
diluted share, for the quarter ended April 30, 2002.
Nine Months Ended April 30, 2003 compared to Nine Months Ended April 30, 2002
Net Sales.
Our net sales increased approximately 17.0%, or $146.9 million, to $1,013.0
million for the nine months ended April 30, 2003 from $866.1 million for the
nine months ended April 30, 2002. This increase was due primarily to net sales
from Blooming Prairie, acquired on October 11, 2002, and net sales from
Northeast Cooperatives, acquired on December 31, 2002. Sales to independent and
mass market customers increased approximately 26% and 24%, respectively. Sales
to the supernatural distribution channel grew approximately 1% compared to the
nine months ended April 30, 2002. The lower growth rate for the supernatural
channel was due primarily to the previously announced transition of our former
second-largest customer, Wild Oats, Inc., to a new primary distributor. Sales to
the supernatural distribution channel, excluding acquisitions and sales to Wild
Oats, Inc. in both periods, increased approximately 34%. Sales to our largest
customer, Whole Foods Market, Inc. represented approximately 24% and 19% of net
sales for the nine months ended April 30, 2003 and April 30, 2002, respectively.
Our current contract with Whole Foods Market, Inc., extends through August 31,
2004. Sales to our former second-largest customer, Wild Oats, Inc., represented
approximately 14% of net sales for the nine months ended April 30, 2002.
Gross Profit.
Our gross profit increased approximately 16%, or $28.4 million, to $205.8
million for the nine months ended April 30, 2003 from $177.4 million for the
nine months ended April 30, 2002. Our gross profit as a percentage of net sales
decreased to 20.3% for the nine months ended April 30, 2003 from 20.5% for the
same period last year. Our increase in gross profit as a result of losing the
Wild Oats, Inc., which as a large customer received volume discounts, was more
than offset by lower gross profit margins in our acquired businesses and a lower
than planned gross profit at our Hershey Import division. Wild Oats was our
second largest customer and subject to large volume discounts. The gross profit
figures reflect the impact of the adoption of the Financial Accounting Standards
Board's Emerging Issues Task Force Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor, which
requires the reclassification of advertising income to cost of goods sold from
operating expenses. These changes reduced cost of sales and also increased
operating expenses by $8.4 million and $7.6 million in the nine months ended
April 30, 2003 and 2002, respectively. This accounting change had no impact on
reported operating income, net income or earnings per share for any of the
periods presented.
15
Operating Expenses.
Our total operating expenses increased approximately 17.3%, or $25.6 million, to
$173.5 million for the nine months ended April 30, 2003 from $147.9 million for
the nine months ended April 30, 2002. As a percentage of net sales, operating
expenses remained unchanged at 17.1% for each of the nine month periods ended
April 30, 2003 and April 30, 2002. The increase in operating expenses was due to
lower productivity caused by the transition of the Wild Oats, Inc. business and
higher operating expense levels at our recent acquisitions, Blooming Prairie and
Northeast Cooperatives. The operating expense figures reflect the impact of the
adoption of the Financial Accounting Standards Board's Emerging Issues Task
Force Issue No. 02-16, Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor, which requires the
reclassification of advertising income to cost of goods sold from operating
expenses. These changes reduced cost of sales and also increased operating
expenses by $8.4 million and $7.6 million in the nine months ended April 30,
2003 and 2002, respectively. This accounting change had no impact on reported
operating income, net income or earnings per share for any of the periods
presented.
Operating expenses for the nine months ended April 30, 2003 included
approximately $0.6 of costs related to the transition of our second largest
customer, Wild Oats, Inc. and approximately $0.4 million of labor costs related
to the expansion of our Chesterfield, New Hampshire distribution facility. While
we anticipate short-term incremental costs of approximately $1.0 million, we
expect to realize transportation and warehouse savings once the expanded
Chesterfield facility is fully operational in the fourth quarter of our fiscal
year 2003. Operating expenses for the nine months ended April 30, 2002 included
approximately $1.4 million related to the relocation of our Atlanta, Georgia
facility, of which approximately $0.4 million related to asset impairment and
restructuring costs and $1.0 million of other transition costs. In addition we
incurred expenses of approximately $0.7 million related to the startup of our
Fontana, California distribution facility that consisted primarily of moving and
other costs.
Operating Income.
Operating income increased $2.8 million to $32.3 million for the nine months
ended April 30, 2003 from $29.5 million for the nine months ended April 30,
2002. As a percentage of sales, operating income decreased to 3.2% for the nine
months ended April 30, 2003 from 3.4% for the nine months ended April 30, 2002.
Other Expense (Income).
Other expense decreased $0.6 million to $7.0 million for the nine months ended
April 30, 2003 from $7.6 million for the nine months ended April 30, 2002.
Interest expense for the nine months ended April 30, 2003 was $5.7 million
compared to $5.3 million for the nine months ended April 30, 2002. This increase
in interest expense was attributable to higher debt levels due to the
acquisitions of Blooming Prairie and Northeast Cooperatives. The change in fair
value of financial instruments decreased $0.4 million to $1.8 million for the
nine months ended April 30, 2003 from $2.2 million for the nine months ended
April 30, 2002. This decrease was primarily due to the decrease in non-cash
expense from our interest rate swap agreements and related option agreements due
to a more favorable yield curve for the nine months ended April 30, 2003
compared to the same period last year.
Income Taxes.
Our effective income tax rate was 40% for each of the nine-month periods ended
April 30, 2003 and 2002. The effective rates were higher than the federal
statutory rate primarily due to state and local income taxes.
Net Income.
As a result of the foregoing, net income increased $2.2 million to $15.3
million, or $0.78 per diluted share, for the nine months ended April 30, 2003,
compared to $13.1 million, or $0.68 per diluted share, for the nine months ended
April 30, 2002.
16
Liquidity and Capital Resources
We finance our operations and growth primarily with cash flows from operations,
borrowings under our credit facility, seller financing of acquisitions,
operating and capital leases, trade payables, bank indebtedness and the sale of
equity and debt securities. Our secured revolving credit facility is $150
million. Interest accrues, at the Company's option, at the New York Prime Rate
or 1.50% above the banks' London Interbank Offered Rate. As of April 30, 2003,
we had an unused availability of $46.6 million. On April 28, 2003 we executed
the sixth amendment to our loan and security agreement, which released and
discharged mortgages and amended UCC-1 filings on certain real property.
Additionally, on April 30, 2003 we executed a term loan agreement in the
principal amount of $30.0 million secured by the real property that was released
in accordance with the aforementioned sixth amendment. Proceeds received from
the term loan were used to reduce the outstanding balance on our $150.0 million
credit facility on which interest accrues at the New York Prime Rate or the
banks' London Interbank Offered Rate ("LIBOR") plus 1.50%.
Net cash provided by operations was $28.8 million for the nine months ended
April 30, 2003 and $2.7 million for the nine months ended April 30, 2002 and was
the result of cash collected from customers net of cash paid to vendors. We also
made larger investments in inventory and receivables in 2002, which were not
repeated in 2003. Days in inventory was 48 days for April 30, 2003 and 49 days
for April 30, 2002. Days sales outstanding at April 30, 2003 was 23 days
compared to 29 days at April 30, 2002. The reduction was due primarily to lower
sales terms at Blooming Prairie and Northeast Cooperatives and to the loss of
Wild Oats, Inc. at terms of net 30 days.
Net cash used in investing activities was $59.0 million for the nine months
ended April 30, 2003, and was due primarily to the purchase of substantially all
the assets of Blooming Prairie, the merger with privately held Northeast
Cooperatives, and the expansion of our Chesterfield, New Hampshire facility. Net
cash used in investing activities was $23.6 million for the same period last
year, and was due primarily to the development of our new Atlanta, Georgia and
Fontana, California facilities.
Net cash provided by financing activities was $23.9 million for the nine months
ended April 30, 2003, due to the financing of our real estate with the
establishment of a $30.0 million long term loan, offset by repayments on our
line of credit and equipment financing lines. The proceeds from the long term
note were used to pay down existing debt under our $150 million secured
revolving credit facility. Net cash provided by financing activities was $21.1
million for the nine months ended April 30, 2002, due primarily to increased
borrowings on our line of credit offset by repayment of long-term debt as a
result of the establishment of our $150 million secured revolving credit
facility.
In October 1998, we entered into an interest rate swap agreement. The agreement
provides for us to pay interest for a five-year period at a fixed rate of 5% on
a notional principal amount of $60 million, while receiving interest for the
same period at the LIBOR rate on the same notional principal amount. The swap
has been entered into as a hedge against LIBOR interest rate movements on
current variable rate indebtedness totaling $60 million at LIBOR plus 1.50%,
thereby fixing the Company's effective rate at 6.50%. The five-year term of the
swap agreement may be extended to seven years at the option of the counter
party, which prohibits accounting for the swap as an effective hedge under SFAS
No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). We entered into an additional interest rate swap agreement effective
August 1, 2001. The additional agreement provides for us 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 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 6.31%. If LIBOR exceeds 6.0% in a given period, the
agreement is suspended for that period. LIBOR was 1.32% as of April 30, 2003.
The four-year term of the swap agreement may be extended to six years at the
option of the counter party, which prohibits accounting for the swap as an
effective hedge under SFAS No. 133
IMPACT OF INFLATION
Historically, we have been able to pass along inflation-related increases.
Consequently, inflation has not had a material impact upon the results of our
operations or profitability.
17
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 and
organic products, supply shortages and general economic conditions.
Certain Factors That May Affect Future Results
This Form 10-Q and the documents incorporated by reference in this Form 10-Q
contain forward-looking statements that involve substantial risks and
uncertainties. In some cases you can identify these statements by
forward-looking words such as "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "should," "will," and "would," or similar words. You
should read statements that contain these words carefully because they discuss
future expectations contain projections of future results of operations or of
financial position, or state other "forward-looking" information. The important
factors listed below as well as any cautionary language in this Form 10-Q,
provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations described in these
forward-looking statements. You should be aware that the occurrence of the
events described in the risk factors below and elsewhere in this Form 10-Q could
have an adverse effect on our business, results of operations and financial
position.
Any forward-looking statements in this Form 10-Q and the documents incorporated
by reference in this Form 10-Q are not guarantees of future performance, and
actual results, developments and business decisions may differ from those
envisaged by such forward-looking statements, possibly materially. We disclaim
any duty to update any forward-looking statements, all of which are expressly
qualified by the statement in this section, until the effective date of our
future reports required by applicable securities laws.
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 and organic
products, including our acquisition of substantially all of the assets of
Blooming Prairie Cooperative Warehouse on October 11, 2002 and the merger with
Northeast Cooperatives on December 31, 2002. Successful integration of mergers
is critical to our future operating and financial performance. Integration
requires, among other things:
maintaining the customer base,
optimizing delivery routes,
coordinating administrative, distribution and finance functions, and
integrating management information systems and personnel.
The integration process could divert the attention of management and any
difficulties or problems encountered in the transition process could have a
material adverse effect on our business, financial condition or results of
operations. In addition, the process of combining companies could cause the
interruption of, or a loss of momentum in, the activities of the respective
businesses, which could have an adverse effect on their combined operations. We
may also lose key employees of the acquired company. There can be no assurance
that we will realize any of the anticipated benefits of mergers.
Access to capital and the cost of that capital
We finance our operations and growth primarily with cash flows from operations,
borrowings under our credit facility, seller financing of acquisitions,
operating and capital leases, trade payables, bank indebtedness and the sale of
equity and debt securities. As of April 30, 2003, we had an unused availability
of $46.6 million under our secured credit facility of $150.0 million.
Additionally, we procured $30.0 million in additional long-term financing
secured by our real estate during the third quarter of our fiscal year 2003,
which increased availability on our credit facility. Future low cash
availability levels could restrict our ability to expand our business. In order
to maintain our profit margins, we rely on strategic investment buying
initiatives, such as discounted bulk purchases, which require spending
significant amounts of working capital. In the event that capital market turmoil
significantly increases our cost of capital or limits our ability to borrow
funds or raise equity capital, we could suffer reduced profit margins and be
unable to grow our business organically or through acquisitions, which could
have a material adverse effect on our business, financial condition or results
of operations.
18
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 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 and organic 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 and organic
products and more directly compete with us or that new competitors will not
enter the market. These mass-market grocery distributors may have been in
business longer than we have, may have substantially greater financial and other
resources than we do and may be better established in their markets than we are.
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 us to evolving industry trends or changing market conditions. It is
also possible that alliances among competitors may develop 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 current distribution arrangement with our top customer, Whole Foods Market,
Inc., is effective through August 31, 2004. Whole Foods Market, Inc. accounted
for approximately 24% and 19%, of our net sales during the quarters ended April
30, 2003 and April 30, 2002, respectively, and for the nine months ended April
30, 2003 and April 30, 2002, respectively. As a result of this concentration of
our customer base, the loss or cancellation of business from Whole Foods Market,
Inc. 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 and organic products industry, and the growth of
supernatural chains, may reduce our profit margins in the future as more
customers qualify for greater volume discounts.
Our industry is sensitive to economic downturns
The grocery industry is 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:
difficulties with the collection of accounts receivable,
difficulties with inventory control,
competitive pricing pressures, and
unplanned increases in fuel or other transportation-related costs.
19
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
Steven H. Townsend, President and Chief Executive Officer, Rick D. Puckett, Vice
President, Chief Financial Officer and Treasurer, Kevin Michel, President of the
Western Region and Assistant Secretary, Daniel V. Atwood, Senior Vice President
and Secretary, Richard Antonelli, President of the Eastern Region, Michael S.
Funk, Chair of the Board of Directors, and other key management employees. Loss
of the services of any additional officers or any other key management employee
could have a material adverse affect on our business, financial condition or
results of operations.
Our operating results are subject to significant fluctuations
Our net sales and operating results may vary significantly from period to period
as a result of:
changes in our operating expenses,
management's ability to execute our business and growth strategies,
personnel changes,
demand for natural and organic products,
supply shortages,
general economic conditions,
changes in customer preferences and demands for natural and organic
products, including levels of enthusiasm for health, fitness and
environmental issues,
fluctuation of natural product prices due to competitive pressures,
lack of an adequate supply of high quality agricultural products due to
poor growing conditions, natural disasters or otherwise,
volatility in prices of high quality agricultural products resulting from
poor growing conditions, natural disasters or otherwise, and
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:
our products are subject to inspection by the U.S. Food and Drug
Administration,
our warehouse and distribution facilities are subject to inspection by the
U.S. Department of Agriculture and state health authorities, and
our trucking operations are subject to regulation by the U.S. Department
of Transportation and the U.S. Federal Highway Administration.
20
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.
Union-organizing activities could cause labor relations difficulties
As of April 30, 2003, approximately 307 employees, representing approximately 9%
of our approximately 3,500 employees, were union members. We have in the past
been the focus of union organizing efforts. As we increase our employee base and
broaden our distribution operations to new geographic markets, our increased
visibility could result in increased or expanded union organizing efforts. We
are currently in negotiations with a union representing our warehouse and
delivery employees at our Washington facility. On May 31, 2003, the union
employees at our Washington facility rejected our proposed contract. On June 20,
2003, we will enter into non-binding mediation with the union. If we reach an
agreement with the union, the agreement will be voted upon by the union members.
If we cannot reach an agreement with the union or the union members reject the
agreement, a work stoppage may ensue at our Washington facility. Although we
have not experienced a work stoppage to date, if additional employees were to
unionize, we could be subject to work stoppages and increases in labor costs,
either of which could materially adversely affect our business, financial
condition or results of operations.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We do not believe that there is any material market risk exposure with respect
to derivative or other financial instruments that would require disclosure under
this item.
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-14 and 15d-14 of the Securities Exchange Act of 1934, as
amended) as of a date within 90 days prior to the filing date of this
quarterly report (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. Since the Evaluation Date, there have not
been any significant changes to our internal controls or in other factors
that could significantly affect those internal controls.
21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
- -------------------------------------------------------------------------------
Exhibit
No. Description Page
- -------------------------------------------------------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - CEO 28
- -------------------------------------------------------------------------------
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 - CFO 29
- -------------------------------------------------------------------------------
99.3 Sixth Amendment to Loan and Security with Fleet Capital
Corporation dated April 30, 2003. 30
- -------------------------------------------------------------------------------
99.4 Term Loan Agreement with Fleet Capital Corporation dated
April 30, 2003 67
- -------------------------------------------------------------------------------
Reports on Form 8-K
Current Report on Form 8-K, filed with the Commission on March 6, 2003
22
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 16, 2003
23
CERTIFICATION
Each of the undersigned, in his capacity as the Chief Executive Officer
and Chief Financial Officer of United Natural Foods, Inc., as the case may be,
provides the following certifications required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer
I, Steven H. Townsend, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of United
Natural Foods, Inc., a Delaware corporation (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.
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 officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended) for the Company
and we have:
(a) designed such disclosure controls and procedures 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 as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The Company's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the audit committee of the Company's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls.
6. The Company's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Steven H. Townsend
------------------------
Steven H. Townsend
Chief Executive Officer
June 16, 2003
24
Certification of Chief Financial Officer
I, Rick D. Puckett, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of United
Natural Foods, Inc., a Delaware corporation (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.
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 officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the
Securities Exchange Act of 1934, as amended) for the Company
and we have:
(a) designed such disclosure controls and procedures 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 as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The Company's other certifying officer and I have disclosed,
based on our most recent evaluation, to the Company's auditors
and the audit committee of the Company's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls.
6. The Company's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Rick D. Puckett
------------------------
Rick D. Puckett
Chief Financial Officer
June 16, 2003
25