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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 October 31, 2004
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 December 1, 2004 there were 40,129,686 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 OCTOBER 31, 2004
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 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
Item 4. Controls and Procedures 20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED NATURAL FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share amounts)
October 31, July 31,
2004 2004
---------- ----------
ASSETS
Current assets:
Cash $ 5,753 $ 13,633
Accounts receivable, net 132,939 106,178
Notes receivable, trade 761 772
Inventories 214,255 196,171
Prepaid expenses 8,507 7,007
Deferred income taxes 8,061 7,610
---------- ----------
Total current assets 370,276 331,371
Property & equipment, net 114,745 114,140
Other assets:
Goodwill 57,399 57,242
Notes receivable, trade, net 1,996 1,601
Intangible assets, net 140 154
Other, net 4,000 4,259
---------- ----------
Total assets $ 548,556 $ 508,767
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 115,541 $ 80,875
Notes payable - line of credit 99,138 107,004
Accrued expenses and other current liabilities 28,677 29,501
Current portion of long-term debt 8,134 4,766
Income taxes payable 5,021 --
---------- ----------
Total current liabilities 256,511 222,146
Long-term debt, excluding current portion 39,318 43,978
Deferred income taxes 7,978 7,730
Other long-term liabilities 89 137
---------- ----------
Total liabilities 303,896 273,991
---------- ----------
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;
40,130 and 40,118 issued and outstanding at October 31, 2004
and July 31, 2004, respectively 401 401
Additional paid-in capital 101,397 101,118
Unallocated shares of ESOP (1,727) (1,768)
Accumulated other comprehensive (loss) income (80) 240
Retained earnings 144,669 134,785
---------- ----------
Total stockholders' equity 244,660 234,776
---------- ----------
Total liabilities and stockholders' equity $ 548,556 $ 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)
Quarter ended October 31,
2004 2003
--------- ---------
Net sales $ 477,542 $ 381,382
Cost of sales (Note 1) 385,099 305,209
--------- ---------
Gross profit 92,443 76,173
Operating expenses 74,597 62,932
Restructuring charge 170 --
Amortization of intangibles 141 232
--------- ---------
Total operating expenses 74,908 63,164
--------- ---------
Operating income 17,535 13,009
--------- ---------
Other expense (income):
Interest expense 1,433 2,320
Change in fair value of financial instruments -- (304)
Other, net (101) (117)
--------- ---------
Total other expense 1,332 1,899
--------- ---------
Income before income taxes 16,203 11,110
Income taxes 6,319 4,333
--------- ---------
Net income $ 9,884 $ 6,777
========= =========
Per share data (basic):
Net income $ 0.25 $ 0.17
========= =========
Weighted average shares of common stock 40,123 39,051
========= =========
Per share data (diluted):
Net income $ 0.24 $ 0.17
========= =========
Weighted average shares of common stock 41,580 40,364
========= =========
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)
Three months ended October 31,
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,884 $ 6,777
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,092 2,744
Change in fair value of financial instruments -- (304)
Loss on disposals of property and equipment 9 2
Provision for doubtful accounts 466 570
Changes in assets and liabilities, net of acquired companies:
Accounts receivable (27,227) (4,350)
Inventory (18,084) (17,499)
Prepaid expenses and other assets (1,876) 951
Notes receivable, trade (384) (357)
Accounts payable 34,666 22,574
Accrued expenses and other liabilities (841) (4,140)
Income taxes payable 5,021 3,230
Tax effect of stock option exercises 74 97
-------- --------
Net cash provided by operating activities 4,800 10,295
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,590) (2,329)
Proceeds from sale of property and equipment 25 57
-------- --------
Net cash used in investing activities (3,565) (2,272)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under note payable (7,866) (583)
Repayments of long-term debt (1,292) (1,014)
Principal payments of capital lease obligations (162) (288)
Proceeds from exercise of stock options 205 366
-------- --------
Net cash used in financing activities (9,115) (1,519)
-------- --------
NET (DECREASE) INCREASE IN CASH (7,880) 6,504
Cash at beginning of period 13,633 3,645
-------- --------
Cash at end of period $ 5,753 $ 10,149
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,377 $ 2,220
======== ========
Income taxes $ 1,166 $ 388
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
UNITED NATURAL FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2004 (Unaudited)
1. BASIS OF PRESENTATION
United Natural Foods, Inc. (the "Company") is a distributor and retailer of
natural and organic products. The Company 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:
Quarters ended October 31,
--------------------------
2004 2003
------ ------
Net income - as reported $9,884 $6,777
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (889) (671)
------ ------
Net income - pro forma $8,995 $6,106
------ ------
6
Basic earnings per share
As reported $ 0.25 $ 0.17
------ ------
Pro forma $ 0.23 $ 0.16
------ ------
Diluted earnings per share
As reported $ 0.24 $ 0.17
------ ------
Pro forma $ 0.22 $ 0.15
------ ------
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 three months ended October
31, 2004 and 2003:
Quarters ended October 31,
---------------------------
2004 2003
---------- ----------
Expected volatility 42.2% 60.5%
Dividend yield 0.0% 0.0%
Risk free interest rate 2.9% 3.55%
Expected life 3.25 years 3.27 years
At October 31, 2004, 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 three months ended October 31, 2004,
the Company granted options for the purchase of 8,000 shares under the Plans.
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 the 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
2004 is associated primarily with severance costs related to the termination of
approximately 85 employees at this facility. The Company's management expects
these amount will be paid in the second and third quarter of fiscal 2005.
4. EARNINGS PER SHARE
Following is a reconciliation of the basic and diluted number of shares used in
computing earnings per share:
Quarters ended
October 31,
------------------
(In thousands) 2004 2003
------ ------
Basic weighted average shares outstanding 40,123 39,051
Net effect of dilutive stock options based upon
the treasury stock method 1,457 1,313
------ ------
Diluted weighted average shares outstanding 41,580 40,364
====== ======
There were 2,880 and 5,000 anti-dilutive stock options excluded from the diluted
earnings per share calculation for the quarters ended October 31, 2004 and 2003,
respectively.
7
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.
The Company recorded $0.3 million of income for the quarter ended October 31,
2003 on these interest rate swap agreements and related option agreements to
reflect the change in fair value of the financial instruments.
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. As a result of this assignment,
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
for the first quarter of fiscal 2004.
The Company also 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 a liability of $0.1 million as of October
31, 2004, and a corresponding increase to accumulated other comprehensive
(loss)/income, net of taxes, in the condensed consolidated balance sheet to
reflect the fair value of the instrument.
6. COMPREHENSIVE INCOME
Total comprehensive income for the three-month period ended October 31, 2004
amounted to $9,564,000 as compared to $6,385,000 in the same period in the prior
year. 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. 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 types, 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."
8
Following is business segment information for the periods indicated:
Unallocated
Wholesale Other Eliminations Expenses Consolidated
--------- ----- ------------ -------- ------------
Three months ended October 31, 2004:
Net sales $468,549 $17,739 $ (8,746) $477,542
Operating income (loss) 18,785 (1,241) (9) 17,535
Interest expense $1,433 1,433
Other, net (101) (101)
Income before income taxes 16,203
Depreciation and amortization 2,809 283 3,092
Capital expenditures 3,519 71 3,590
Total assets 699,530 38,547 (189,521) 548,556
Three months ended October 31, 2003:
Net sales $371,157 $17,872 $(7,647) $381,382
Operating income (loss) 14,341 (1,252) (80) 13,009
Interest expense $2,320 2,320
Other, net (421) (421)
Income before income taxes 11,110
Depreciation and amortization 2,445 299 -- 2,744
Capital expenditures 2,259 70 -- 2,329
Total assets 611,121 40,359 (195,017) 456,463
8. NEW ACCOUNTING PRONOUNCEMENTS
The Company has determined that there are no recently issued accounting
pronouncements that are expected to have a material impact on the Company's
consolidated financial position or results of operations.
9
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
35,000 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 18,000 customers, including
independently owned natural products retailers, supernatural chains, (which are
comprised of small and 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, 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., 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"),
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. 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, Albert's Organics, Inc. ("Albert's"), and 11
retail stores, all of which have expanded our distribution network, product
offerings and customer base. During fiscal 2003, we acquired both Blooming
Prairie Cooperative and Northeast Cooperative. Our operations are comprised of
three principal divisions:
o our wholesale division, which includes our Eastern Region, Western
Region and Albert's;
o our retail division, which consists of 12 retail stores; and
o our manufacturing division, which is comprised of Hershey.
In order to maintain our market leadership and improve our operating
efficiencies, we are continually:
o investing in people, facilities, equipment and technology;
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.
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 recent 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
distribution center in Greenwood, Indiana. The center 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.
10
The additional storage space in our Iowa City and Dayville facilities allows for
more product diversity and the elimination of outside storage expenses. While we
will experience incremental short-term costs during the first half of fiscal
2005, 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, we have now added
approximately 1,380,000 square feet to our distribution centers since fiscal
2000, which represents a 93% increase in our distribution capacity.
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
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 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,
depreciation and amortization expense. Other expenses (income) include interest
on outstanding indebtedness, interest income, and 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.
Allowance for doubtful accounts
We analyze customer creditworthiness, accounts 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 $132.9 million and $106.2 million, net of the allowance
for doubtful accounts of $4.7 million and $5.6 million, as of October 31, 2004
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 $4.5 million and
$4.2 million, as of October 31, 2004 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.
11
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 as of October 31, 2004 and July 31, 2004 was
approximately $57 million.
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
October 31,
----------------------
2004 2003
----------------------
Net sales 100.0% 100.0%
Cost of sales 80.6% 80.0%
----------------------
Gross profit 19.4% 20.0%
----------------------
Operating expenses 15.6% 16.5%
Restructuring charge 0.0% 0.0%
Amortization of intangibles 0.0% 0.1%
----------------------
Total operating expenses 15.7%* 16.6%
----------------------
Operating income 3.7% 3.4%
----------------------
Other expense (income):
Interest expense 0.3% 0.6%
Change in fair value of financial instruments 0.0% (0.1)%
Other, net (0.0)% (0.0)%
----------------------
Total other expense 0.3% 0.5%
----------------------
Income before income taxes 3.4% 2.9%
Income taxes 1.3% 1.1%
----------------------
Net income 2.1% 1.8%
======================
* Total reflects rounding
Quarter Ended October 31, 2004 Compared To Quarter Ended October 31, 2003
Net Sales
Our net sales increased approximately 25.2%, or $96.2 million, to $477.5 million
for the quarter ended October 31, 2004 from $381.4 million for the quarter ended
October 31, 2003. This increase was due to our organic growth and the
implementation of our primary distribution agreement with Wild Oats Markets,
Inc. ("Wild Oats Markets") during the third quarter of fiscal 2004. Our organic
growth is due to the continued growth of the natural products industry in
general and the expansion of our existing distribution centers. This increase
was offset by the impact of the recent hurricanes in Florida which effected our
wholesale and retail divisions.
12
For the quarter, we experienced the most significant growth in the supernatural
chains distribution channel, which primarily includes sales to Whole Foods
Market, Inc. ("Whole Foods Market") and Wild Oats Markets. This was primarily
due to the increase in sales to Wild Oats Markets discussed above. Net sales
excluding Wild Oats increased approximately 11.6% compared to the same period in
the prior year.
In the first quarter of fiscal 2005, Whole Foods Market comprised approximately
26% of net sales and Wild Oats Markets comprised approximately 12% of net sales.
In the first quarter of fiscal 2004, Whole Foods Market comprised approximately
26% of net sales and was the only customer that accounted for more than 10% of
net sales. Our distribution agreement with Whole Foods Market has been extended
through December 31, 2004.
The following table lists the percentage of sales by customer type for the
quarters ended October 31, 2004 and 2003:
Customer type Percentage of Net Sales
------------- -----------------------
2004 2003
---- ----
Independently owned natural products retailers 44% 50%
Supernatural chains 37% 29%
Conventional supermarkets 13% 15%
Other 6% 6%
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.
Gross Profit
Our gross profit increased approximately 21.4%, or $16.3 million, to $92.4
million for the quarter ended October 31, 2004 from $76.2 million for the
quarter ended October 31, 2003. Our gross profit as a percentage of net sales
was 19.4% and 20.0% for the quarters ended October 31, 2004 and 2003,
respectively. This decrease in gross profit as a percentage of net sales in
comparison to the quarter ended October 31, 2003 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. As our sales channel mix has shifted, we expect gross margins to be in the
low to mid 19 percent range going forward.
Operating Expenses
Total operating expenses increased approximately 18.6%, or $11.7 million, to
$74.9 million for the quarter ended October 31, 2004 from $63.2 million for the
quarter ended October 31, 2003. The increase in operating expenses for the
quarter ended October 31, 2004 was due primarily to an increase in our
infrastructure to support our continued growth. Additionally, the recent
hurricanes in Florida 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.
As a percentage of net sales, total operating expenses decreased to
approximately 15.7% for the quarter ended October 31, 2004 from approximately
16.6% for the quarter ended October 31, 2003. The decrease in 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. 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. This improvement was
partially offset by the impact of the hurricanes in Florida and the
restructuring costs discussed above.
13
Operating Income
Operating income increased $4.5 million to $17.5 million for the quarter ended
October 31, 2004 from $13.0 million for the quarter ended October 31, 2003. As a
percentage of sales, operating income improved from 3.4% for the quarter ended
October 31, 2003 to 3.7% for the quarter ended October 31, 2004. The improvement
in operating income as a percentage of sales was primarily due to improved
operating efficiencies as a result of our recent facility expansions and recent
integration of management information systems from our fiscal 2003 acquisition
of Blooming Prairie. This improvement was partially offset by the impact of the
hurricanes in Florida in the three months ended October 31, 2004.
Other Expense (Income)
Other expense (income) decreased $0.6 million to $1.3 million for the quarter
ended October 31, 2004 from $1.9 million for the quarter ended October 31, 2003.
At $1.4 million, interest expense for the quarter ended October 31, 2004 was
$0.9 million lower than for the quarter ended October 31, 2003. 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 recent
facility expansions and an increase in inventory levels to support the growth in
our business. Other expense (income) for the quarter ended October 31, 2003
included a special item of $0.3 million in income related to the change in the
fair value of financial instruments. 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 assignment, these "ineffective" swaps will
not 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.
Income Taxes
Our effective income tax rate was 39.0% for the quarters ended October 31, 2004
and 2003. 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 $3.3 million to $9.9 million, or
$0.24 per diluted share, for the quarter ended October 31, 2004, compared to
$6.6 million, or $0.16 per diluted share, for the quarter ended October 31,
2003. Net income, including special items, increased $3.1 million to $9.9
million, or $0.24 per diluted share, for the quarter ended October 31, 2004,
compared to $6.8 million, or $0.17 per diluted share, for the quarter ended
October 31, 2003.
Special Items
There were no special items in the quarter ended October 31, 2004. The following
table presents a reconciliation of income and per share items excluding special
items to income and per share items including special items for the quarter
ended October 31, 2003:
- ----------------------------------------------------------------------------------------------------
Quarter ended October 31, 2003 Pretax Per diluted
(in thousands, except per share data) income Net of tax share
----------------------------------------
Income, excluding special items: $10,806 $6,591 $0.16
Special items - Income (Expense):
Interest rate swap agreement (change in fair value
of financial instruments) 304 186 0.01
- ----------------------------------------------------------------------------------------------------
Income, including special items: $11,110 $6,777 $0.17
====================================================================================================
14
The non-cash item from the change in fair value on interest rate swap agreements
was 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 new 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 1.25%. 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 October 31, 2004, our borrowing base,
based on accounts receivable and inventory levels, was $245.2 million, with
remaining availability of $134.7 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.
We believe that our capital requirements for fiscal 2005 will be in the $35 to
$38 million range, and that we will finance these requirements with cash
generated from operations and the use of our existing credit facilities. These
projects will provide both new facilities and technology 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 similar to
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 $4.8 million for the three months ended
October 31, 2004 and was the result of net income and the change in cash
collected from customers net of cash paid to vendors and an $18.1 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 49 days at October 31, 2004 compared to 50 days at October
31, 2003. Days sales outstanding remained consistent at 24 days at October 31,
2004 and 2003. Net cash provided by operations was $10.3 million for the three
months ended October 31, 2003 and was due to the change in cash collected from
customers, net of cash paid to vendors, and partially offset by increased
inventory levels of $17.5 million as a result of increased sales. Working
capital increased by $4.5 million, or 4.2%, to $113.8 million at October 31,
2004 compared to working capital of $109.2 million at July 31, 2004.
15
Net cash used in investing activities was $3.6 million for the three months
ended October 31, 2004 compared to $2.3 million for the same period last year
and was primarily due to capital expenditures.
Net cash used in financing activities was $9.1 million for the quarter ended
October 31, 2004 primarily due to repayments of long-term debt and repayments on
our $250 million secured revolving credit facility, partially offset by proceeds
from the exercise of stock options. Net cash used in financing activities was
$1.5 million for the quarter ended October 31, 2003, due to repayments of
long-term debt and repayments on our $150 million secured revolving credit
facility, partially offset by proceeds from the exercise of stock options.
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.
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
We have determined that there are no recently issued accounting standards that
are expected to 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.
16
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 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.
17
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
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. Our current distribution arrangement with our
largest customer, Whole Foods Market, has been extended and is in effect through
December 31, 2004. Whole Foods Market accounted for approximately 26% of our net
sales during the quarters ended October 31, 2004 and 2003, respectively. In
January 2004, we entered into a five-year distribution agreement, as primary
distributor, with Wild Oats Markets. For the quarter ended October 31, 2004,
Wild Oats Markets accounted for approximately 12% of our net sales. 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.
18
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.
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.
19
Union-organizing activities could cause labor relations difficulties
As of October 31, 2004, 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. 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 1.25% maturing on March 31,
2008. As of October 31, 2004, our borrowing base, based on accounts receivable
and inventory levels, was $245.2 million, with remaining availability of $134.7
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.
20
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
- --------------------------------------------------------------------------------
10.1 2004 Equity Incentive Plan.
- --------------------------------------------------------------------------------
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
August 31, 2004 The Company announced its financial results for the fiscal
year ended July 31, 2004.
* * *
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
21
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: December 10, 2004
22