PART
I. FINANCIAL INFORMATION
Item
1. Financial Statements
UNITED
NATURAL FOODS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In
thousands, except per share amounts)
|
|
January 31,
|
|
|
August 2,
|
|
ASSETS
|
|
2009
|
|
|
2008
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
24,636 |
|
|
$ |
25,333 |
|
Accounts receivable, net of
allowance of $6,133 and $5,535, respectively
|
|
|
193,128 |
|
|
|
179,063 |
|
Notes receivable, trade, net of
allowance of $77 and $130, respectively
|
|
|
1,260 |
|
|
|
1,412 |
|
Inventories
|
|
|
406,594 |
|
|
|
394,364 |
|
Prepaid expenses and other current
assets
|
|
|
17,042 |
|
|
|
13,307 |
|
Deferred income
taxes
|
|
|
14,221 |
|
|
|
14,221 |
|
Total current
assets
|
|
|
656,881 |
|
|
|
627,700 |
|
|
|
|
|
|
|
|
|
|
Property & equipment,
net
|
|
|
239,334 |
|
|
|
234,115 |
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
166,471 |
|
|
|
170,609 |
|
Notes receivable, trade, net of
allowance of $1,462 and $1,423, respectively
|
|
|
2,388 |
|
|
|
2,349 |
|
Intangible assets, net of
accumulated amortization of $2,734 and $1,671,
respectively
|
|
|
40,199 |
|
|
|
33,689 |
|
Other
assets
|
|
|
18,655 |
|
|
|
16,021 |
|
Total
assets
|
|
$ |
1,123,928 |
|
|
$ |
1,084,483 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
297,000 |
|
|
$ |
288,050 |
|
Accounts
payable
|
|
|
151,457 |
|
|
|
160,418 |
|
Accrued expenses and other current
liabilities
|
|
|
69,627 |
|
|
|
63,308 |
|
Current portion of long-term
debt
|
|
|
4,951 |
|
|
|
5,027 |
|
Total current
liabilities
|
|
|
523,035 |
|
|
|
516,803 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, excluding current
portion
|
|
|
56,486 |
|
|
|
58,485 |
|
Deferred income
taxes
|
|
|
10,437 |
|
|
|
9,058 |
|
Other long-term
liabilities
|
|
|
24,513 |
|
|
|
20,087 |
|
Total
liabilities
|
|
|
614,471 |
|
|
|
604,433 |
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value,
authorized 5,000 shares; none issued or outstanding
|
|
|
- |
|
|
|
- |
|
Common stock, $0.01 par value,
authorized 100,000 shares; 43,168 issued and 42,939 outstanding shares at
January 31, 2009; 43,100 issued and 42,871 outstanding shares at August 2,
2008
|
|
|
432 |
|
|
|
431 |
|
Additional paid-in
capital
|
|
|
172,832 |
|
|
|
169,238 |
|
Unallocated shares of Employee
Stock Ownership Plan
|
|
|
(958 |
) |
|
|
(1,040 |
) |
Treasury
stock
|
|
|
(6,092 |
) |
|
|
(6,092 |
) |
Accumulated other comprehensive
loss
|
|
|
(1,891 |
) |
|
|
(753 |
) |
Retained
earnings
|
|
|
345,134 |
|
|
|
318,266 |
|
Total stockholders'
equity
|
|
|
509,457 |
|
|
|
480,050 |
|
Total liabilities and
stockholders' equity
|
|
$ |
1,123,928 |
|
|
$ |
1,084,483 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
UNITED
NATURAL FOODS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In
thousands, except per share data)
|
|
Three months
ended
|
|
|
Six months
ended
|
|
|
|
January 31,
|
|
|
January 26,
|
|
|
January 31,
|
|
|
January 26,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
847,635 |
|
|
$ |
830,656 |
|
|
$ |
1,711,871 |
|
|
$ |
1,567,045 |
|
Cost of
sales
|
|
|
685,570 |
|
|
|
675,984 |
|
|
|
1,382,217 |
|
|
|
1,276,902 |
|
Gross
profit
|
|
|
162,065 |
|
|
|
154,672 |
|
|
|
329,654 |
|
|
|
290,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
136,212 |
|
|
|
135,100 |
|
|
|
278,755 |
|
|
|
246,366 |
|
Total operating
expenses
|
|
|
136,212 |
|
|
|
135,100 |
|
|
|
278,755 |
|
|
|
246,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
25,853 |
|
|
|
19,572 |
|
|
|
50,899 |
|
|
|
43,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
(income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
3,200 |
|
|
|
5,059 |
|
|
|
6,611 |
|
|
|
7,950 |
|
Interest
income
|
|
|
(92 |
) |
|
|
(153 |
) |
|
|
(343 |
) |
|
|
(332 |
) |
Other, net
|
|
|
196 |
|
|
|
6 |
|
|
|
147 |
|
|
|
75 |
|
Total other
expense
|
|
|
3,304 |
|
|
|
4,912 |
|
|
|
6,415 |
|
|
|
7,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
22,549 |
|
|
|
14,660 |
|
|
|
44,484 |
|
|
|
36,084 |
|
Provision for income
taxes
|
|
|
8,929 |
|
|
|
5,561 |
|
|
|
17,616 |
|
|
|
13,423 |
|
Net income
|
|
$ |
13,620 |
|
|
$ |
9,099 |
|
|
$ |
26,868 |
|
|
$ |
22,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic per share
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.32 |
|
|
$ |
0.21 |
|
|
$ |
0.63 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares of
common stock
|
|
|
42,821 |
|
|
|
42,676 |
|
|
|
42,803 |
|
|
|
42,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted per share
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
0.32 |
|
|
$ |
0.21 |
|
|
$ |
0.63 |
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares of
common stock
|
|
|
42,910 |
|
|
|
42,884 |
|
|
|
42,931 |
|
|
|
42,860 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
UNITED
NATURAL FOODS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In
thousands)
|
|
Six months
ended
|
|
|
|
January
31,
|
|
|
January
26,
|
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
26,868 |
|
|
$ |
22,661 |
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activites:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
13,288 |
|
|
|
10,160 |
|
Loss
on disposals of property and equipment
|
|
|
68 |
|
|
|
8 |
|
Provision
for doubtful accounts
|
|
|
1,776 |
|
|
|
1,286 |
|
Share-based
compensation
|
|
|
3,312 |
|
|
|
2,387 |
|
Gain
on forgiveness of loan
|
|
|
- |
|
|
|
(157 |
) |
Changes
in assets and liabilities, net of acquired companies:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(15,102 |
) |
|
|
(13,565 |
) |
Inventories
|
|
|
(9,666 |
) |
|
|
(57,392 |
) |
Prepaid
expenses and other assets
|
|
|
(3,392 |
) |
|
|
(5,727 |
) |
Notes
receivable, trade
|
|
|
113 |
|
|
|
(265 |
) |
Accounts
payable
|
|
|
(9,078 |
) |
|
|
(2,729 |
) |
Accrued
expenses
|
|
|
8,370 |
|
|
|
4,371 |
|
Net
cash provided by (used in) operating activities
|
|
|
16,557 |
|
|
|
(38,962 |
) |
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(17,012 |
) |
|
|
(21,466 |
) |
Purchases
of acquired businesses, net of cash acquired
|
|
|
(4,301 |
) |
|
|
(107,235 |
) |
Proceeds
from disposals of property and equipment
|
|
|
- |
|
|
|
165 |
|
Net
cash used in investing activities
|
|
|
(21,313 |
) |
|
|
(128,536 |
) |
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
borrowings under note payable
|
|
|
8,950 |
|
|
|
177,009 |
|
Repayments
of long-term debt
|
|
|
(2,075 |
) |
|
|
(6,411 |
) |
(Decrease)
increase in bank overdraft
|
|
|
(27 |
) |
|
|
4,102 |
|
Payments
on life insurance policy loans
|
|
|
(3,072 |
) |
|
|
- |
|
Proceeds
from exercise of stock options
|
|
|
150 |
|
|
|
810 |
|
Tax
benefit from exercise of stock options
|
|
|
133 |
|
|
|
161 |
|
Net
cash provided by financing activities
|
|
|
4,059 |
|
|
|
175,671 |
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(697 |
) |
|
|
8,173 |
|
Cash
and cash equivalents at beginning of period
|
|
|
25,333 |
|
|
|
17,010 |
|
Cash
and cash equivalents at end of period
|
|
$ |
24,636 |
|
|
$ |
25,183 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
$ |
6,216 |
|
|
$ |
7,146 |
|
Federal
and state income taxes, net of refunds
|
|
$ |
17,621 |
|
|
$ |
15,862 |
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
UNITED
NATURAL FOODS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January
31, 2009 (Unaudited)
United
Natural Foods, Inc. (the “Company”) is a leading national distributor and
retailer of natural, organic and specialty products. The Company sells its
products primarily throughout the United States.
The
accompanying unaudited condensed 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 conformity with accounting principles generally accepted in the United States
of America have been condensed or omitted. In the Company’s 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 August 2, 2008.
Net
sales consist primarily of sales of natural, organic and specialty products to
retailers, adjusted for customer volume discounts, returns and
allowances. Net sales also includes amounts charged by the Company to
customers for shipping and handling and fuel surcharges. The
principal components of cost of sales include the amounts 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 incurred by the Company’s manufacturing subsidiary,
Hershey Import Company, Inc. (“Hershey Imports”) for inbound transportation
costs, depreciation for manufacturing equipment 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 the Company’s Employee Stock Ownership Plan),
warehousing and delivery, selling, occupancy, insurance, administrative,
share-based compensation and amortization expense. Other expenses
(income) include interest on outstanding indebtedness, interest income and
miscellaneous income and expenses.
2.
|
SHARE-BASED
COMPENSATION
|
The
Company has a share-based compensation program that provides its Board of
Directors broad discretion in creating employee equity incentives. This program
includes incentive and non-statutory stock options, nonvested stock awards
(consisting of awards of restricted stock and restricted stock units), and
performance-based shares and units. These awards to employees are
granted under various plans which are stockholder approved. Stock options are
generally time-based, vesting 25% on each annual anniversary of the grant date
over four years and generally expire ten years from the grant date. Awards of
restricted stock and restricted stock units to employees are generally
time-based and vest 25% on each annual anniversary of the grant date over four
years. Awards of performance shares and performance share units vest
upon the satisfaction of the relevant performance criteria over the performance
period established by the Compensation Committee of the Board of Directors when
the award is made. As of January 31, 2009, the Company had
approximately 0.5 million shares of common stock reserved for future issuance
under its share-based compensation plans.
The
Company recognizes share-based compensation expense in accordance with Financial
Accounting Standards Board (the “FASB”) Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS
123(R)”) over the requisite service period of the individual grants, which
generally equals the vesting period. The Company recognized
share-based compensation expense for the three months ended January 31, 2009 and
January 26, 2008 of $1.6 million and $1.4 million, respectively. For the six months ended
January 31, 2009 and January 26, 2008, the Company recognized $3.3 million and
$2.4 million, respectively, of share-based compensation expense. The
effect on net income from recognizing share-based compensation expense for the
three months ended January 31, 2009 and January 26, 2008 was $1.0 million, or
$0.02 per basic and diluted share, and $0.9 million, or $0.02 per basic and
diluted share, respectively. The effect on net income from
recognizing share-based compensation expense for the six months ended January
31, 2009 and January 26, 2008 was $2.0 million, or $0.05 per basic and diluted
share, and $1.5 million, or $0.03 per basic and diluted share,
respectively. The Company recorded related tax benefits for the six
months ended January 31, 2009 and January 26, 2008 of $0.1 million and $0.2
million, respectively.
As
of January 31, 2009, there was $15.8 million of total unrecognized compensation
cost related to outstanding share-based compensation arrangements (including
stock option, restricted stock and restricted stock unit
awards). This cost is expected to be recognized over a
weighted-average period of 1.5 years.
There
were no option awards granted during the three months ended January 31,
2009. The weighted average grant-date fair value of options granted
during the six months ended January 31, 2009 and January 26, 2008 was $6.93 and
$7.35, respectively. The fair value of stock option awards was
estimated using the Black-Scholes model with the following weighted-average
assumptions for the three months and six months ended January 31, 2009 and
January 26, 2008, respectively:
|
Three
months ended
|
|
Six
months ended
|
|
January
31,
2009
|
January
26,
2008
|
|
January
31,
2009
|
January
26,
2008
|
|
|
|
|
|
|
Expected
volatility
|
-
|
32.7%
|
|
38.1%
|
32.7%
|
Dividend
yield
|
-
|
0.0%
|
|
0.0%
|
0.0%
|
Risk
free interest rate
|
-
|
3.1%
|
|
2.1%
|
3.1%
|
Expected
life
|
-
|
3.0
years
|
|
3.0
years
|
3.0
years
|
The
computation of expected volatility is based on the historical volatility of the
Company’s stock price. The computation of expected life is based on
historical exercise patterns and other factors. The interest rate for
periods within the contractual life of the award is based on the U.S. Treasury
yield curve in effect at the time of grant.
During
the six months ended January 31, 2009, the Company acquired substantially all of
the assets and liabilities of three branded products companies, which the
Company includes in the other category. See Note 7 “Business
Segments” for a description of the Company’s reportable segment and the “other”
category. The total cash consideration paid for these product lines
was approximately $4.3 million, in addition to approximately $0.5 million of
holdbacks recorded in accrued expenses in the consolidated balance
sheets. No goodwill was recorded in connection with the
acquisitions. The cash paid was financed by borrowings under the
Company’s existing revolving credit facility.
The
Company has completed the final purchase price allocation for its acquisition of
Distribution Holdings, Inc. and its wholly owned subsidiary Millbrook
Distribution Services, Inc. with the assistance of a third-party valuation
firm’s independent appraisal of the fair value of certain assets
acquired. As a result of the final purchase price allocation, during
the six months ended January 31, 2009 goodwill decreased by approximately $4.1
million, due primarily to a reclassification of $5.6 million to the valuation of
customer list intangibles offset by an increase in related deferred tax
liabilities.
Following
is a reconciliation of the basic and diluted number of shares used in computing
earnings per share:
|
Three
months ended
|
|
Six
months ended
|
|
|
|
|
|
|
|
|
(In
thousands)
|
January
31,
2009
|
|
January
26,
2008
|
|
January
31,
2009
|
|
January
26,
2008
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
42,821
|
|
42,676
|
|
42,803
|
|
42,645
|
|
|
|
|
|
|
|
|
Net
effect of dilutive stock awards based upon the treasury stock
method
|
89
|
|
208
|
|
128
|
|
215
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
42,910
|
|
42,884
|
|
42,931
|
|
42,860
|
There
were 1,636,358 and 740,814 anti-dilutive stock awards outstanding for the three
months ended January 31, 2009 and January 26, 2008, respectively. For
the six months ended January 31, 2009 and January 26, 2008, there
were 1,435,320 and 742,314 anti-dilutive stock awards outstanding,
respectively. These anti-dilutive stock awards were excluded from the
calculation of diluted earnings per share.
5.
|
FAIR
VALUE MEASUREMENTS OF FINANCIAL
INSTRUMENTS
|
On
August 1, 2005, the Company entered into an interest rate swap agreement
effective July 29, 2005. The agreement provides for the Company to pay interest
for a seven-year period at a fixed rate of 4.70% on an initial amortizing
notional principal amount of $50.0 million while receiving interest for the same
period at the one-month London Interbank Offered Rate (“LIBOR”) on the same
notional principal amount. The swap has been entered into as a hedge
against LIBOR movements on current variable rate indebtedness at one-month LIBOR
plus 1.00%, thereby fixing its effective rate on the notional amount at
5.70%. The swap agreement qualified as an “effective” hedge under
SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (“SFAS
133”). One-month LIBOR was 0.42% and 3.31% as of January 31, 2009 and
January 26, 2008, respectively.
The interest rate swap is designated as a cash flow hedge and is reflected at fair value in the
Company’s consolidated balance sheet and related
gains or losses, net of income taxes, are deferred in stockholders’ equity as a component of accumulated other comprehensive loss. The Company does not enter
into derivative agreements
for trading purposes.
As of August 3, 2008, the Company
adopted SFAS No. 157, Fair Value
Measurements (“SFAS 157”), for financial assets and liabilities
and for non-financial assets and liabilities that we recognize or disclose at
fair value on at least an
annual basis. SFAS 157 defines fair value as the price that would be
received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When
determining the fair value measurements for assets and
liabilities required or permitted to be recorded at fair value, the Company
considers the principal or most advantageous market in which it would transact
and considers assumptions that market participants would use when
pricing the asset or liability, such as
inherent risk, transfer restrictions, and risk of nonperformance. SFAS 157
establishes a fair value hierarchy that requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS 157
establishes three levels of inputs that may be used to measure fair
value:
|
•
|
|
Level 1 Inputs – Unadjusted quoted prices in
active markets for identical assets or liabilities.
|
|
•
|
|
Level 2 Inputs – Inputs other than quoted prices included in
Level 1 that are either directly or indirectly observable through
correlation with market data. These include quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or
similar assets or liabilities in markets that are
not active; and inputs to valuation models or other pricing methodologies
that do not require significant judgment because the inputs used in the
model, such as interest rates and volatility, can be corroborated by
readily observable market
data.
|
|
•
|
|
Level 3 Inputs – One or more significant inputs
that are unobservable and supported by little or no market activity, and
that reflect the use of significant management judgment. Level 3 assets
and liabilities include those whose fair value measurements
are determined using pricing models, discounted cash flow methodologies or
similar valuation techniques, and significant management judgment or
estimation.
|
The following table provides the fair
values hierarchy for financial assets and liabilities (in millions) measured on a recurring
basis:
|
Fair
Value at January 31, 2009
|
|
Level
1
|
Level
2
|
Level
3
|
Description
|
|
|
|
Liabilities
|
|
|
|
Interest
Rate Swap
|
-
|
$3.1
|
-
|
Total
|
-
|
$3.1
|
-
|
The
Company’s determination of the fair value of its interest rate swap is
calculated using a discounted cash flow analysis based on the terms of the swap
contract and the observable interest rate curve. The Company had no commodity
swap agreements during the six months ended January 31, 2009 or January 26,
2008.
Total
comprehensive income for the three months ended January 31, 2009 and January 26,
2008 amounted to approximately $12.8 million and $7.8 million,
respectively. Total comprehensive income for the six months ended
January 31, 2009 and January 26, 2008 was approximately $25.7 million and $20.9
million, respectively. Comprehensive income is
comprised of net income plus the change in the fair value of the interest rate
swap agreement. For
the three months ended January 31, 2009 and January 26, 2008, the change in fair
value of this financial instrument was a $1.4 million pre-tax loss ($0.9 million
after-tax loss) and a $2.0 million pre-tax loss ($1.3 million after-tax loss),
respectively. The change in fair value of this derivative financial
instrument was a $1.9 million pre-tax loss ($1.1 million after-tax loss) and a
$2.8 million pre-tax loss ($1.7 million after-tax loss) for the six months ended
January 31, 2009 and January 26, 2008, respectively.
The
Company has several operating divisions aggregated under the wholesale segment,
which is the Company’s only reportable segment. These operating
divisions have similar products and services, customer channels, distribution
methods and historical margins. The wholesale segment is engaged in
national distribution of natural, organic and specialty 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. Non-operating expenses that are not allocated
to the operating divisions are under the caption of “Unallocated
Expenses.” “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, a manufacturing division,
which engages in importing, roasting and packaging nuts, seeds, dried fruit and
snack items through Hershey Imports, and our Blue Marble branded
product lines. “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.
Following
is business segment information for the periods indicated (in
thousands):
|
|
Wholesale
|
|
|
Other
|
|
|
Eliminations
|
|
|
Unallocated
Expenses
|
|
|
Consolidated
|
|
Three
months ended January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
833,223 |
|
|
$ |
32,459 |
|
|
$ |
(18,047 |
) |
|
|
|
|
$ |
847,635 |
|
Operating
income (loss)
|
|
|
28,907 |
|
|
|
(5,000 |
) |
|
|
1,946 |
|
|
|
|
|
|
25,853 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,200 |
|
|
|
3,200 |
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92 |
) |
|
|
(92 |
) |
Other,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196 |
|
|
|
196 |
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,549 |
|
Depreciation
and amortization
|
|
|
6,178 |
|
|
|
741 |
|
|
|
|
|
|
|
|
|
|
|
6,919 |
|
Capital
expenditures
|
|
|
5,011 |
|
|
|
586 |
|
|
|
|
|
|
|
|
|
|
|
5,597 |
|
Goodwill
|
|
|
149,982 |
|
|
|
16,489 |
|
|
|
|
|
|
|
|
|
|
|
166,471 |
|
Total
assets
|
|
|
995,859 |
|
|
|
135,168 |
|
|
|
(7,099 |
) |
|
|
|
|
|
|
1,123,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended January 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
819,278 |
|
|
$ |
31,122 |
|
|
$ |
(19,744 |
) |
|
|
|
|
|
$ |
830,656 |
|
Operating
income (loss)
|
|
|
20,333 |
|
|
|
(433 |
) |
|
|
(328 |
) |
|
|
|
|
|
|
19,572 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,059 |
|
|
|
5,059 |
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153 |
) |
|
|
(153 |
) |
Other,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,660 |
|
Depreciation
and amortization
|
|
|
5,196 |
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
5,482 |
|
Capital
expenditures
|
|
|
8,700 |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
8,842 |
|
Goodwill
|
|
|
164,098 |
|
|
|
15,871 |
|
|
|
|
|
|
|
|
|
|
|
179,969 |
|
Total
assets
|
|
|
943,336 |
|
|
|
129,962 |
|
|
|
(8,669 |
) |
|
|
|
|
|
|
1,064,629 |
|
|
|
Wholesale
|
|
|
Other
|
|
|
Eliminations
|
|
|
Unallocated
Expenses
|
|
|
Consolidated
|
|
Six
months ended January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,682,948 |
|
|
$ |
68,478 |
|
|
$ |
(39,555 |
) |
|
|
|
|
$ |
1,711,871 |
|
Operating
income (loss)
|
|
|
57,677 |
|
|
|
(7,737 |
) |
|
|
959 |
|
|
|
|
|
|
50,899 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,611 |
|
|
|
6,611 |
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(343 |
) |
|
|
(343 |
) |
Other,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
147 |
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,484 |
|
Depreciation
and amortization
|
|
|
12,201 |
|
|
|
1,087 |
|
|
|
|
|
|
|
|
|
|
|
13,288 |
|
Capital
expenditures
|
|
|
15,020 |
|
|
|
1,992 |
|
|
|
|
|
|
|
|
|
|
|
17,012 |
|
Goodwill
|
|
|
149,982 |
|
|
|
16,489 |
|
|
|
|
|
|
|
|
|
|
|
166,471 |
|
Total
assets
|
|
|
995,859 |
|
|
|
135,168 |
|
|
|
(7,099 |
) |
|
|
|
|
|
|
1,123,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended January 26, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,544,007 |
|
|
$ |
62,900 |
|
|
$ |
(39,862 |
) |
|
|
|
|
|
$ |
1,567,045 |
|
Operating
income (loss)
|
|
|
43,393 |
|
|
|
841 |
|
|
|
(457 |
) |
|
|
|
|
|
|
43,777 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,950 |
|
|
|
7,950 |
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(332 |
) |
|
|
(332 |
) |
Other,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
|
75 |
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,084 |
|
Depreciation
and amortization
|
|
|
9,578 |
|
|
|
582 |
|
|
|
|
|
|
|
|
|
|
|
10,160 |
|
Capital
expenditures
|
|
|
21,048 |
|
|
|
418 |
|
|
|
|
|
|
|
|
|
|
|
21,466 |
|
Goodwill
|
|
|
164,098 |
|
|
|
15,871 |
|
|
|
|
|
|
|
|
|
|
|
179,969 |
|
Total
assets
|
|
|
943,336 |
|
|
|
129,962 |
|
|
|
(8,669 |
) |
|
|
|
|
|
|
1,064,629 |
|
8.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
In
September 2006, the FASB issued SFAS 157. SFAS 157 defines fair
value, establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements under other accounting pronouncements,
but does not change the existing guidance as to whether or not an instrument is
carried at fair value. The statement is effective for fiscal years beginning
after November 15, 2007. In February 2008, the FASB issued FASB Staff Position
157-2, Effective Date of FASB
Statement No. 157 (“FSP 157-2”) which delays the effective date of SFAS
157 by one year for nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on at least an
annual basis. In October 2008, the FASB issued FASB Staff Position
157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not Active
(“FSP 157-3”), which clarifies the application of SFAS 157 in an inactive market
and illustrates how an entity would determine fair value when the market for a
financial asset is not active. The Company has adopted SFAS 157 and
FSP 157-3 effective August 3, 2008, and it did not have a material effect on its
consolidated financial statements. In accordance with FSP 157-2, the
Company has delayed the implementation of the provisions of SFAS 157 related to
the fair value of goodwill, other intangible assets, and non-financial
long-lived assets until its 2010 fiscal year. The Company does not
expect the full adoption of SFAS 157 in accordance with FSP 157-2 to have a
material effect on the disclosures that accompany its consolidated financial
statements. Refer to Note 5 for further discussion regarding the
adoption of SFAS 157.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value, and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. The statement is effective for fiscal years beginning after
November 15, 2007. As of January 31, 2009, the Company has not
elected to adopt the fair value option under SFAS 159 for any financial
instruments or other items.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141(R)”), which is a revision of SFAS No. 141, Business
Combinations. SFAS 141(R) continues to require the purchase
method of accounting for business combinations and the identification and
recognition of intangible assets separately from goodwill. SFAS 141(R) requires,
among other things, the buyer to: (1) account for the fair value of assets and
liabilities acquired as of the acquisition date (i.e., a “fair value” model
rather than a “cost allocation” model); (2) expense acquisition-related costs;
(3) recognize assets or liabilities assumed arising from contractual
contingencies at the acquisition date using acquisition-date fair values; (4)
recognize goodwill as the excess of the consideration transferred plus the fair
value of any noncontrolling interest over the acquisition-date fair value of net
assets acquired; (5) recognize at acquisition any contingent consideration using
acquisition-date fair values (i.e., fair value earn-outs in the initial
accounting for the acquisition); and (6) eliminate the recognition of
liabilities for restructuring costs expected to be incurred as a result of the
business combination. SFAS 141(R) also defines a “bargain” purchase as a
business combination where the total acquisition-date fair value of the
identifiable net assets acquired exceeds the fair value of the consideration
transferred plus the fair value of any noncontrolling interest. Under this
circumstance, the buyer is required to recognize such excess (formerly referred
to as “negative goodwill”) in earnings as a gain. In addition, if the buyer
determines that some or all of its previously booked deferred tax valuation
allowance is no longer needed as a result of the business combination, SFAS
141(R) requires that the reduction or elimination of the valuation allowance be
accounted as a reduction of income tax expense. SFAS 141(R) is effective for
fiscal years beginning on or after December 15, 2008. The Company will apply
SFAS 141(R) to any acquisitions that are made on or after August 2,
2009.
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51 (“SFAS
160”). This statement establishes accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement is effective for fiscal years beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS 160 to have
a material effect on its consolidated financial statements.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an Amendment of SFAS No. 133 ("SFAS
161"). SFAS 161 enhances required disclosures regarding derivatives and hedging
activities, including enhanced disclosures regarding how: (a) an entity uses
derivative instruments; (b) derivative instruments and related hedged items are
accounted for under SFAS No. 133; and (c) derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS 161 is effective for fiscal years and interim
periods beginning after November 15, 2008 and early adoption is
permitted. The Company does not expect the adoption of SFAS 161 to
have a material effect on the disclosures that accompany its consolidated
financial statements.
In
April 2008, the FASB staff issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets ("FSP 142-3"). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible
Assets. The intent of FSP 142-3 is to improve the consistency
between the useful life of a recognized intangible asset under Statement 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS 141(R). FSP 142-3 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early adoption is
prohibited. The Company does not expect the adoption of FSP 142-3 to
have a material effect on its consolidated financial
statements.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
This
Quarterly Report on Form 10-Q contains 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 condition or state other
“forward-looking” information. The risk factors listed in Item 1A of
Part II of this report, as well as any cautionary language elsewhere in this
Quarterly Report on 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
in Item 1A of Part II of this report and elsewhere in this Quarterly Report on
Form 10-Q could have an adverse effect on our business, results of operations
and financial condition.
Any
forward-looking statements in this Quarterly Report on 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 any obligation to update any
information in this report 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.
Overview
We
are a leading national distributor of natural, organic and specialty foods and
non-food products in the United States. We carry more than 60,000
high-quality natural, organic and specialty foods and non-food products,
consisting of national brand, regional brand, private label and master
distribution products, in six product categories: grocery and general
merchandise, produce, perishables and frozen foods, nutritional supplements,
bulk and food service products and personal care items. We serve more
than 17,000 customers primarily located across the United States, the majority
of which can be classified into one of the following categories: independently
owned natural products retailers; supernatural chains, which are comprised of
large chains of natural foods supermarkets; and conventional
supermarkets. Our other distribution channels include food service,
international and buying clubs.
Our
operations are comprised of three principal operating
divisions. These operating divisions are:
|
·
|
our
wholesale division, which includes our broadline natural and organic
distribution business, our specialty distribution business, Albert’s
Organics, Inc., which is a leading distributor of organically grown
produce and perishable items, and Select Nutrition, which distributes
vitamins, minerals and supplements;
|
|
·
|
our
retail division, consisting of the Natural Retail Group, which operates
our 13 natural products retail stores;
and
|
|
·
|
our
manufacturing division, which is comprised of Hershey Import Company, Inc.
(“Hershey Imports”), which specializes in the international importation,
roasting and packaging of nuts, dried fruit, seeds, trail mixes, natural
and organic products, and confections, and our Blue Marble branded product
lines.
|
In
recent years, our sales to existing and new customers have increased through the
continued growth of the natural and organic products industry in general;
increased market share through our high quality service and a broader product
selection, and the acquisition of, or merger with, natural and specialty
products distributors; the expansion of our existing distribution centers; the
construction of new distribution centers; and the development of our own line of
natural and organic branded products. 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.
We
have been the primary distributor to Whole Foods Market, Inc. (“Whole Foods
Market”), our largest customer, for more than 10 years. In August
2007, Whole Foods Market acquired Wild Oats Markets, Inc. (“Wild Oats
Markets”). We had served as the primary distributor of natural and
organic foods and non-food products for Wild Oats Markets prior to the
acquisition, and our relationship with Whole Foods Market expanded to cover the
former Wild Oats Markets stores retained by Whole Foods Market following the
acquisition. Whole Foods Market accounted for approximately 34% and
33% of our net sales for the three months ended January 31, 2009, and January
26, 2008, respectively. On a combined basis and excluding sales to
Wild Oats Markets’ former Henry’s and Sun Harvest store locations (which were
sold by Whole Foods Market to a subsidiary of Smart & Final Inc. on
September 30, 2007), Whole Foods Market and Wild Oats Markets accounted for
approximately 33% and 34% of our net sales for the six months ended January 31,
2009 and January 26, 2008, respectively.
On
November 2, 2007, we acquired Distribution Holdings, Inc. (“DHI”) and its wholly
owned subsidiary Millbrook Distribution Services, Inc. (“Millbrook”), which we
now refer to as UNFI Specialty Distribution. Through UNFI Specialty
Distribution, we distribute specialty food items (including ethnic, kosher,
gourmet, organic and natural foods), health and beauty care items and other
non-food items.
We
believe that our acquisition of UNFI Specialty Distribution accomplishes several
of our strategic objectives, including accelerating our expansion into a number
of high-growth business segments and establishing immediate market share in the
fast-growing specialty foods market. We believe that UNFI Specialty
Distribution’s customer base enhances our conventional supermarket business
channel and that the organizations’ complementary product lines present
opportunities for cross-selling.
In
order to maintain our market leadership and improve our operating efficiencies,
we seek to continually:
|
·
|
expand
our marketing and customer service programs across
regions;
|
|
·
|
expand
our national purchasing
opportunities;
|
|
·
|
offer
a broader product selection;
|
|
·
|
consolidate
systems applications among physical locations and
regions;
|
|
·
|
increase
our investment in people, facilities, equipment and
technology;
|
|
·
|
integrate
administrative and accounting functions;
and
|
|
·
|
reduce
geographic overlap between regions.
|
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. Our new, 613,000 square foot distribution center in Moreno
Valley, California commenced operations in September 2008 and serves our
customers in Southern California, Arizona, Southern Nevada, Southern Utah, and
Hawaii. Our newly leased, 675,000 square foot distribution center in
York, Pennsylvania commenced operations in January 2009 and serves our customers
in New York, New Jersey, Pennsylvania, Delaware, Maryland, Ohio, Virginia and
West Virginia.
Our
net sales consist primarily of sales of natural, organic and specialty products
to retailers, adjusted for customer volume discounts, returns and
allowances. Net sales also consist of amounts charged by us to
customers for shipping and handling and fuel surcharges. The
principal components of our cost of sales include the amounts 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 incurred by us at our manufacturing subsidiary,
Hershey Imports, for inbound transportation costs and depreciation for
manufacturing equipment and consideration received from suppliers in connection
with the purchase or promotion of the suppliers’ products. 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 in our cost of
sales. Total operating expenses include salaries and wages, employee
benefits (including payments under our Employee Stock Ownership Plan),
warehousing and delivery, selling, occupancy, insurance, administrative,
share-based compensation, depreciation and amortization
expense. Other expenses (income) include interest on our outstanding
indebtedness, interest income and miscellaneous income and
expenses.
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 Securities and Exchange Commission (“SEC”) has
defined critical accounting policies as those that are both most important to
the portrayal of our financial condition and results of operations 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
reserves for the self-insured portions of our workers’ compensation 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 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 $193.1 million and $179.1 million, net of the allowance for doubtful
accounts of $6.1 million and $5.5 million, as of January 31, 2009 and August 2,
2008, respectively. Our notes receivable
balances were $3.6 million and $3.8 million, net of the allowance for doubtful
accounts of $1.5 million and $1.6 million, as of January
31, 2009 and August 2, 2008, respectively.
Insurance
reserves
We
record the self-insured portions of our workers’ compensation 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 our consolidated financial
statements. Accruals for workers’ compensation and automobile
liabilities totaled $15.8 million and $12.5 million as of January 31, 2009 and
August 2, 2008, respectively.
Valuation
of goodwill and intangible assets
Statement
of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets, requires that companies 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 during the fourth quarter 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 goodwill will be
impacted if estimated future cash flows are not achieved. For
reporting units that indicate potential impairment, we determine the implied
fair value of that reporting unit using a discounted cash flow analysis and
compare such values to the respective reporting units’ carrying
amounts. Total goodwill as of January 31, 2009 and August 2, 2008 was
$166.5 million and $170.6 million, respectively.
Intangible
assets with indefinite lives are tested for impairment at least annually and
between annual tests if events occur or circumstances change that would indicate
that the value of the asset may be impaired. Impairment is measured
as the difference between the fair value of the asset and its carrying
value. Total indefinite-lived intangible assets as of January 31,
2009 and August 2, 2008 were $28.2 million and $25.9 million,
respectively.
Intangible
assets with finite lives are tested for impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Cash
flows expected to be generated by the related assets are estimated over the
asset’s useful life based on updated projections. If the evaluation indicates
that the carrying amount of the asset may not be recoverable, the potential
impairment is measured based on a projected discounted cash flow
model. Total finite-lived intangible assets as of January 31, 2009
and August 2, 2008 were $12.0 million and $7.8 million,
respectively.
Results
of Operations
The
following table presents, for the periods indicated, certain income and expense
items expressed as a percentage of net sales:
|
Three
months ended
|
|
Six
months ended
|
|
January
31,
|
|
January
26,
|
|
January
31,
|
|
January
26,
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
Net
sales
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
Cost
of sales
|
80.9%
|
|
81.4%
|
|
80.7%
|
|
81.5%
|
Gross
profit
|
19.1%
|
|
18.6%
|
|
19.3%
|
|
18.5%
|
|
|
|
|
|
|
|
|
Operating
expenses
|
16.0%
|
|
16.3%
|
|
16.2%
|
|
15.7%
|
Amortization
of intangible assets
|
0.1%
|
|
0.0%
|
|
0.1%
|
|
0.0%
|
Total
operating expenses
|
16.1%
|
|
16.3%
|
|
16.3%
|
|
15.7%
|
|
|
|
|
|
|
|
|
Operating
income
|
3.1%*
|
|
2.4%*
|
|
3.0%
|
|
2.8%
|
|
|
|
|
|
|
|
|
Other
expense (income):
|
|
|
|
|
|
|
|
Interest
expense
|
0.4%
|
|
0.6%
|
|
0.4%
|
|
0.5%
|
Interest
income
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Other,
net
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Total
other expense
|
0.4%
|
|
0.6%
|
|
0.4%
|
|
0.5%
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
2.7%
|
|
1.8%
|
|
2.6%
|
|
2.3%
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
1.1%
|
|
0.7%
|
|
1.0%
|
|
0.9%
|
|
|
|
|
|
|
|
|
Net
income
|
1.6%
|
|
1.1%
|
|
1.6%
|
|
1.4%
|
*
Total reflects rounding
Three
Months Ended January 31, 2009 Compared To Three Months Ended January 26,
2008
Net
Sales
Our
net sales increased approximately 2.0%, or $17.0 million, to $847.6 million for
the three months ended January 31, 2009, from $830.7 million for the three
months ended January 26, 2008. This increase was primarily due to
organic sales growth (sales growth excluding the impact of acquisitions) in our
wholesale segment of $30.9 million. We acquired UNFI Specialty
Distribution (formerly DHI and Millbrook) on November 2, 2007, and amounts
attributable to this business were first included in our financial statements
for the three months ended January 26, 2008. Our organic growth is
due to the continued growth of the natural products industry in general,
increased market share as a result of our focus on service and added value
services, and the opening of new, and expansion of existing, distribution
centers, which allow us to carry a broader selection of products.
Whole
Foods Market accounted for approximately 34% and 33% of our net sales for the
three months ended January 31, 2009 and January 26, 2008,
respectively. Whole Foods Market is our only supernatural chain
customer following its acquisition of Wild Oats Markets in August
2007.
The
following table lists the percentage of sales by customer type for the three
months ended January 31, 2009 and January 26, 2008:
Customer
type
|
Percentage of Net
Sales
|
|
2009
|
2008
|
Independently
owned natural products retailers
|
41%
|
41%
|
Supernatural
chains
|
34%
|
33%
|
Conventional
supermarkets
|
20%
|
22%
|
Other
|
5%
|
4%
|
Compared
to sales for the three months ended January 26, 2008, sales in the conventional
supermarket channel in the three months ended January 31, 2009 were negatively
impacted by customer losses within UNFI Specialty Distribution that were in
process before our acquisition of Millbrook.
Gross
Profit
Our
gross profit increased approximately 4.8%, or $7.4 million, to $162.1 million
for the three months ended January 31, 2009, from $154.7 million for the three
months ended January 26, 2008. Our gross profit as a
percentage of net sales was 19.1% and 18.6% for the three months ended January
31, 2009 and January 26, 2008, respectively. Gross profit as a
percentage of net sales during the three months ended January 31, 2009 was
positively impacted by sales from our UNFI Specialty Distribution as well as
increased fuel surcharge revenues. We expect UNFI Specialty
Distribution’s full service supermarket model to generate a higher gross margin
over the long-term in our core distribution business; however, we also expect to
incur higher operating expenses in providing those services. Under
this model, we provide services typically performed by supermarket employees to
our customers, such as stocking shelves, placing sales orders and rotating out
damaged and expired products. We continue to focus on increasing our
branded product revenues through our Blue Marble Brands division, which we
believe will allow us to generate higher gross margins over the long-term, as
branded product revenues generally yield higher margins.
Operating
Expenses
Our
total operating expenses increased approximately 0.8%, or $1.1 million, to
$136.2 million for the three months ended January 31, 2009, from $135.1 million
for the three months ended January 26, 2008. The increase in total
operating expenses for the three months ended January 31, 2009 was primarily due
to increases in our wholesale division to support our sales
growth. During the quarter ended January 31, 2009, we incurred $2.6
million of labor and other duplicate expenses associated with the September 2008
relocation of our Fontana, California facility to a new facility in Moreno
Valley, California and the January 2009 relocation of our New Oxford,
Pennsylvania facility to a new facility in York,
Pennsylvania. Operating expenses for the three months ended January
26, 2008 included $0.7 million of costs associated with opening the Ridgefield,
Washington facility. Total operating expenses for the three months
ended January 31, 2009 and January 26, 2008 includes share-based compensation
expense of $1.6 million and $1.4 million, respectively. See Note 2 to our condensed
consolidated financial statements.
As
a percentage of net sales, total operating expenses decreased to approximately
16.1% for the three months ended January 31, 2009, from approximately 16.3%
for the three months ended January 26, 2008. The decrease in total
operating expenses as a percentage of net sales was primarily attributable to
lower fuel expenses and expense control programs across all of our
divisions.
Operating
Income
Operating
income increased approximately 32.1%, or $6.3 million, to $25.9 million for the
three months ended January 31, 2009 from $19.6 million for the three months
ended January 26, 2008. As a percentage of net sales, operating
income was 3.1% for the three months ended January 31, 2009, compared to 2.4%
for the three months ended January 26, 2008. The increase in
operating income as a percentage of net sales is attributable to the smaller
operating loss within UNFI Specialty as well as the decrease in total operating
expenses as a percentage of net sales for the three months ended January 31,
2009, compared to the three months ended January 26, 2008.
Other
Expense (Income)
Other
expense (income) decreased $1.6 million to $3.3 million for the three months
ended January 31, 2009, from $4.9 million for the three months ended January 26,
2008. Interest expense
of $3.2 million for the three months ended January 31, 2009 represented a
decrease of 36.7% from the three months ended January 26, 2008 due primarily to
lower interest rates, partially offset by higher average debt levels during the
three months ended January 31, 2009.
Provision
for Income Taxes
Our
effective income tax rate was 39.6% and 37.9% for the three months ended January
31, 2009 and January 26, 2008, respectively. The increase in the
effective income tax rate was primarily due to the prior year benefit of tax
credits associated with the solar panel installation projects at our Rocklin,
California and Dayville, Connecticut distribution facilities. Our
effective income tax rate was also affected by share-based compensation for
incentive stock options and the timing of disqualifying dispositions of certain
share-based compensation awards. SFAS 123(R) provides that the tax
effect of the book compensation cost previously recognized for an incentive
stock option that an employee does not retain for the minimum holding period
required by the Internal Revenue Code (a “disqualified disposition”) is
recognized as a tax benefit in the period the disqualifying disposition
occurs. Our effective income tax rate will continue to be effected by
the tax impact related to incentive stock options and the timing of tax benefits
related to disqualifying dispositions.
Net
Income
Net
income increased $4.5 million to $13.6 million, or $0.32 per diluted share, for
the three months ended January 31, 2009, compared to $9.1 million, or $0.21 per
diluted share, for the three months ended January 26, 2008.
Six
Months Ended January 31, 2009 Compared To Six Months Ended January 26,
2008
Net
Sales
Our
net sales increased approximately 9.2%, or $144.8 million, to $1,712 million for
the six months ended January 31, 2009, from $1,567 million for the six months
ended January 26, 2008. This increase was primarily due to organic
sales growth (sales growth excluding the impact of acquisitions) in our
wholesale segment of $102.8 million. Additionally, net sales from
UNFI Specialty Distribution were $108.5 million for the six months ended January
31, 2009, as compared to net sales of $72.3 million for the six months ended
January 26, 2008. We acquired UNFI Specialty Distribution (formerly
DHI and Millbrook) on November 2, 2007, and our results for the six months ended
January 26, 2008 include amounts attributable to this business for only
approximately three months. Our organic growth is due to the
continued growth of the natural products industry in general, increased market
share as a result of our focus on service and added value services, and the
opening of new, and expansion of existing, distribution centers, which allow us
to carry a broader selection of products.
On
a combined basis, and excluding sales to Henry’s and Sun Harvest store
locations, Whole Foods Market and Wild Oats Markets accounted for approximately
33% and 34% of our net sales for the six months ended January 31, 2009 and
January 26, 2008, respectively. Whole Foods Market is our only
supernatural chain customer following its acquisition of Wild Oats Markets in
August 2007.
The
following table lists the percentage of sales by customer type for the six
months ended January 31, 2009 and January 26, 2008:
Customer
type
|
Percentage of Net
Sales
|
|
2009
|
2008
|
Independently
owned natural products retailers
|
42%
|
42%
|
Supernatural
chains
|
33%
|
34%
|
Conventional
supermarkets
|
20%
|
20%
|
Other
|
5%
|
4%
|
Compared
to sales for the six months ended January 26, 2008, sales in the conventional
supermarket channel grew by 13.3% in the six months ended January 31, 2009 due
primarily to the acquisition of UNFI Specialty Distribution.
Gross
Profit
Our
gross profit increased approximately 13.6%, or $39.5 million, to $329.7 million
for the six months ended January 31, 2009, from $290.1 million for the six
months ended January 26, 2008. Our gross profit as a
percentage of net sales was 19.3% and 18.5% for the six months ended January 31,
2009 and January 26, 2008, respectively. Gross profit as a
percentage of net sales during the six months ended January 31, 2009 was
positively impacted by sales from our UNFI Specialty Distribution as well as
increased fuel surcharge revenues and increased focus on efficiencies such as
forward buying by our purchasing teams. We expect UNFI Specialty
Distribution’s full service supermarket model to continue to generate a higher
gross margin over the long-term in our core distribution business; however, we
also expect to incur higher operating expenses in providing those
services. Under this model, we provide services typically performed
by supermarket employees to our customers, such as stocking shelves, placing
sales orders and rotating out damaged and expired products. We
continue to focus on increasing our branded product revenues through our Blue
Marble Brands division, which we believe will allow us to generate higher gross
margins over the long-term, as branded product revenues generally yield higher
margins.
Gross
profit as a percentage of net sales during the six months ended January 26, 2008
was negatively impacted by missed forward buying opportunities that were
temporary.
Operating
Expenses
Our
total operating expenses increased approximately 13.1%, or $32.4 million, to
$278.8 million for the six months ended January 31, 2009, from $246.4 million
for the six months ended January 26, 2008. The increase in total
operating expenses for the six months ended January 31, 2009 was primarily due
to increases of approximately $22.2 million in infrastructure, fuel and other
distribution expenses in our wholesale segment to support our sales growth and
the increase in operating expenses as a result of UNFI Specialty Distribution’s
higher cost supermarket model. During the six months ended
January 31, 2009, we incurred $5.1 million of labor and other duplicate expenses
associated with the September 2008 relocation of our Fontana, California
facility to a new facility in Moreno Valley, California and the January 2009
relocation of our New Oxford, Pennsylvania facility to a new facility in York,
Pennsylvania. Total operating expenses for the six months ended January 26, 2008
included $35.2 million of infrastructure and personnel costs within our
wholesale segment as a result of our acquisition of UNFI Specialty Distribution
and our continued sales growth, and $3.1 million of costs associated with
opening our Sarasota, Florida and Ridgefield, Washington
facilities. Total operating expenses for the six months ended January
31, 2009 and January 26, 2008 includes share-based compensation expense of $3.3
million and $2.4 million, respectively. See Note 2 to our condensed
consolidated financial statements.
As
a percentage of net sales, total operating expenses increased to approximately
16.3% for the six months ended January 31, 2009, from approximately 15.7%
for the six months ended January 26, 2008. The increase in total
operating expenses as a percentage of net sales was primarily attributable to
UNFI Specialty Distribution, as well as increased fuel expenses and labor and
other duplicate expenses related to the opening of our Moreno Valley, California
and York, Pennsylvania distribution facilities. Despite the
inefficiencies associated with opening our Moreno Valley, California and York,
Pennsylvania distribution facilities, we expect that the opening of these new
facilities will contribute efficiencies and lead to lower operating expenses as
a percentage of sales over the long-term.
Operating
Income
Operating
income increased approximately 16.3%, or $7.1 million, to $50.9 million for the
six months ended January 31, 2009 from $43.8 million for the six months ended
January 26, 2008. As a percentage of net sales, operating income was
3.0% for the six months ended January 31, 2009, compared to 2.8% for the six
months ended January 26, 2008. The increase in operating income as a
percentage of net sales is attributable to the increase in gross margin as a
percentage of net sales for the six months ended January 31, 2009, compared to
the six months ended January 26, 2008, as well as a smaller operating loss
within UNFI Specialty Distribution.
Other
Expense (Income)
Other
expense (income) decreased $1.3 million to $6.4 million for the six months ended
January 31, 2009, from $7.7 million for the six months ended January 26,
2008. Interest expense
of $6.6 million for the six months ended January 31, 2009 represented a decrease
of 16.8% from interest expense of $8.0 million for the six months ended January
26, 2008. This decrease was due primarily to lower interest rates,
partially offset by higher debt levels during the six months ended January 31,
2009.
Provision
for Income Taxes
Our
effective income tax rate was 39.6% and 37.2% for the six months ended January
31, 2009 and January 26, 2008, respectively. The increase in the
effective income tax rate was primarily due to the prior year benefit of tax
credits associated with the solar panel installation projects at our Rocklin,
California and Dayville, Connecticut distribution facilities. Our
effective income tax rate was also affected by share-based compensation for
incentive stock options and the timing of disqualifying dispositions of certain
share-based compensation awards. SFAS 123(R) provides that the tax
effect of the book compensation cost previously recognized for an incentive
stock option that an employee does not retain for the minimum holding period
required by the Internal Revenue Code (a “disqualified disposition”) is
recognized as a tax benefit in the period the disqualifying disposition
occurs. Our effective income tax rate will continue to be effected by
the tax impact related to incentive stock options and the timing of tax benefits
related to disqualifying dispositions.
Net
Income
Net
income increased $4.2 million to $26.9 million, or $0.63 per diluted share, for
the six months ended January 31, 2009, compared to $22.7 million, or $0.53 per
diluted share, for the six months ended January 26, 2008.
Liquidity and Capital
Resources
We
finance our operations and growth primarily with cash flows from operations,
borrowings under our credit facility, operating leases, trade payables and bank
indebtedness. In addition, from time to time, we may issue equity and
debt securities.
On
November 2, 2007, we amended our $250 million secured revolving credit facility
with a bank group led by Bank of America Business Capital as the administrative
agent, to temporarily increase the maximum borrowing base under the credit
facility from $250 million to $270 million. We used the funds
available to us as a result of this amendment to fund a portion of the purchase
price for our acquisition of UNFI Specialty Distribution. On November
27, 2007, we further amended this facility to increase the maximum borrowing
base under the credit facility from $270 million to $400 million and provide the
Company with a one-time option, subject to approval by the lenders under the
credit facility, to increase the borrowing base by up to an additional $50
million. Interest accrues on borrowings under the credit facility, at
our option, at either the base rate (the applicable prime lending rate of Bank
of America Business Capital, as announced from time to time) or at the one-month
London Interbank Offered Rate (“LIBOR”) plus 0.75%. The $400 million credit
facility matures on November 27, 2012. The amended and restated
credit facility supports our working capital requirements in the ordinary course
of business and provides capital to grow our business organically or through
acquisitions. As of January 31, 2009, our borrowing base, based on
accounts receivable and inventory levels, was $388.4 million, with remaining
availability of $69.4 million.
In
April 2003, we executed a term loan agreement in the principal amount of $30
million, secured by certain real property that was released from the lien under
our amended and restated credit facility in accordance with an amendment to the
loan and security agreement related to that facility. The term loan
is repayable over seven years based on a fifteen-year amortization
schedule. Interest on the term loan initially accrued at one-month
LIBOR plus 1.50%. On July 29, 2005, we entered into an amended term
loan agreement which increased the principal amount of this term loan to up to
$75 million and decreased the rate at which interest accrues to one-month LIBOR
plus 1.00%. In connection with the amendments to our amended and
restated revolving credit facility described above, effective November 2, 2007
and November 27, 2007, we amended the term loan agreement to conform certain
terms and conditions to the corresponding terms and conditions in the credit
agreement that establishes our amended and restated revolving credit
facility. As of January 31, 2009, approximately $59.2 million was
outstanding under the term loan agreement.
We
believe that our capital expenditure requirements for fiscal 2009 will be
between $40 and $45 million. We expect to finance these requirements
with cash generated from operations and borrowings under our existing credit
facilities. These projects will provide both expanded facilities and
enhanced technology that we believe will provide us with the capacity to
continue to support the growth and expansion of our customer base. We
believe that our future capital expenditure requirements will be lower than our
anticipated fiscal 2009 requirements, both in dollars and as a percentage of net
sales. Future investments in acquisitions that we may pursue will be
financed through our existing credit facilities, equity or long-term debt
negotiated at the time of the potential acquisition.
Net
cash provided by operations was $16.6 million for the six months ended January
31, 2009, and was the result of net income of $26.9 million, the change in cash
collected from customers net of cash paid to vendors and a $9.7 million
investment in inventory. The increase in inventory
levels primarily related to continued elevated inventory levels related to the
opening of our Moreno Valley, California and our York, Pennsylvania facilities
in September 2008 and January 2009, respectively. Net cash used in operations
was $39.0 million for the six months ended January 26, 2008, as the result of
net income of $22.7 million, the change in cash collected from customers net of
cash paid to vendors and a $57.4 million investment in
inventory. Days in inventory was 58 days at January 31, 2009 and 52
days at January 26, 2008. This increase was due primarily to
inventory purchased in anticipation of the opening of our Moreno Valley,
California and our York, Pennsylvania facilities. Days sales
outstanding improved to 20 days at January 31, 2009, compared to 21 days at
January 26, 2008. Working capital increased by $22.9 million, or 21%,
to $133.8 million at January 31, 2009, compared to working capital of $110.9
million at August 2, 2008.
Net
cash used in investing activities decreased $107.2 million to $21.3 million for
the six months ended January 31, 2009, compared to $128.5 million for the six
months ended January 26, 2008. This decrease was primarily due to the
cash paid for the acquisition of UNFI Specialty Distribution in the six months
ended January 26, 2008.
Net
cash provided by financing activities was $4.1 million for the six months ended
January 31, 2009 compared to $175.7 million for the six months ended January 26,
2008. The decrease was primarily due to the increase in borrowings under
our credit facility related to our acquisition of UNFI Specialty Distribution
during the six months ended January 26, 2008.
On
December 1, 2004, our Board of Directors authorized the repurchase of up to $50
million of common stock from time to time in the open market or in privately
negotiated transactions. As part of the stock repurchase program, we
have purchased 228,800 shares of our common stock for our treasury at an
aggregate cost of approximately $6.1 million. All shares were
purchased at prevailing market prices. We may continue or, from time
to time, suspend repurchases of shares under our stock repurchase program,
depending on prevailing market conditions, alternate uses of capital and other
factors. Whether and when to initiate and/or complete any purchase of common
stock and the amount of common stock purchased will be determined in our
complete discretion. We did not make any such common stock
repurchases in the six months ended January 31, 2009 or January 26,
2008.
In
August 2005, we entered into an interest rate swap agreement effective July 29,
2005. This agreement provides for us to pay interest for a seven-year
period at a fixed rate of 4.70% on an initial amortizing notional principal
amount of $50 million while receiving interest for the same period at one-month
LIBOR on the same notional principal amount. The swap has been
entered into as a hedge against LIBOR movements on current variable rate
indebtedness at one-month LIBOR plus 1.00%, thereby fixing our effective rate on
the notional amount at 5.70%. One-month LIBOR was 0.42% as of January
31, 2009. The swap agreement qualifies as an “effective” hedge under
SFAS 133.
Contractual
Obligations
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 August 2, 2008,
except for an operating lease signed with respect to office space for our new
corporate headquarters in Providence, Rhode Island. Commitments
related to the Providence, Rhode Island lease agreement amount to $0.2 million
in fiscal year 2009, $0.8 million in fiscal year 2010, $1.1 million in fiscal
year 2011, $1.2 million in each of fiscal years 2012 and 2013, and $7.1 million
in the aggregate thereafter.
Seasonality
Generally,
we do not experience any material seasonality. However, our sales and
operating results may vary significantly from quarter to quarter due to factors
such as changes in our operating expenses, management’s ability to execute our
operating and growth strategies, personnel changes, demand for natural products,
supply shortages and general economic conditions.
Recently
Issued Financial Accounting Standards
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value and requires enhanced disclosures about fair
value measurements under other accounting pronouncements, but does not change
the existing guidance as to whether or not an instrument is carried at fair
value. The statement is effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”), which delays the effective date of SFAS 157 by one
year for nonfinancial assets and liabilities, except those that are recognized
or disclosed at fair value in the financial statements on at least an annual
basis. In October 2008, the FASB issued FASB Staff Position 157-3,
Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active (“FSP
157-3”), which clarifies the application of SFAS 157 in an inactive market and
illustrates how an entity would determine fair value when the market for a
financial asset is not active. We adopted SFAS 157 and FSP 157-3
effective August 3, 2008, and it did not have a material effect on our
consolidated financial statements. In accordance with FSP 157-2, we
have delayed the implementation of the provisions of SFAS 157 related to the
fair value of goodwill, other intangible assets, and non-financial long-lived
assets until our fiscal year beginning August 2, 2009. We do not
expect the full adoption of SFAS 157 in accordance with FSP 157-2 to have a
material effect on the disclosures that accompany our consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”). SFAS 159 permits entities
to choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value, and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. The statement is effective for fiscal years beginning after
November 15, 2007. As of January 31, 2009, we have not elected to
adopt the fair value option under SFAS 159 for any financial instruments or
other items.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141(R)”), which is a revision of SFAS No. 141, Business
Combinations. SFAS 141(R) continues to require the purchase method of
accounting for business combinations and the identification and recognition of
intangible assets separately from goodwill. SFAS 141(R) requires, among other
things, the buyer to: (1) fair value assets and liabilities acquired as of the
acquisition date (i.e., a “fair value” model rather than a “cost allocation”
model); (2) expense acquisition-related costs; (3) recognize assets or
liabilities assumed arising from contractual contingencies at the acquisition
date using acquisition-date fair values; (4) recognize goodwill as the excess of
the consideration transferred plus the fair value of any noncontrolling interest
over the acquisition-date fair value of net assets acquired; (5) recognize at
acquisition any contingent consideration using acquisition-date fair values
(i.e., fair value earn-outs in the initial accounting for the acquisition); and
(6) eliminate the recognition of liabilities for restructuring costs expected to
be incurred as a result of the business combination. SFAS 141(R) also defines a
“bargain” purchase as a business combination where the total acquisition-date
fair value of the identifiable net assets acquired exceeds the fair value of the
consideration transferred plus the fair value of any noncontrolling interest.
Under this circumstance, the buyer is required to recognize such excess
(formerly referred to as “negative goodwill”) in earnings as a gain. In
addition, if the buyer determines that some or all of its previously booked
deferred tax valuation allowance is no longer needed as a result of the business
combination, SFAS 141(R) requires that the reduction or elimination of the
valuation allowance be accounted as a reduction of income tax expense. SFAS
141(R) is effective for fiscal years beginning on or after December 15, 2008. We
will apply SFAS 141(R) to any acquisitions that are made on or after August 2,
2009.
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51 (“SFAS
160”). This statement establishes accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement is effective for fiscal years beginning on or after
December 15, 2008. We do not expect the adoption of SFAS 160 to have a material
effect on our consolidated financial statements.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an Amendment of SFAS No. 133 ("SFAS
161"). SFAS 161 enhances required disclosures regarding derivatives and hedging
activities, including enhanced disclosures regarding how: (a) an entity uses
derivative instruments; (b) derivative instruments and related hedged items are
accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities; and (c) derivative instruments and
related hedged items affect an entity's financial position, financial
performance, and cash flows. SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008 and early adoption is
permitted. We do not expect the adoption of SFAS 161 to have a
material effect on the disclosures that accompany our consolidated financial
statements.
In
April 2008, the FASB staff issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets ("FSP 142-3"). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible
Assets. The intent of FSP 142-3 is to improve the consistency
between the useful life of a recognized intangible asset under Statement 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS 141(R). FSP 142-3 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. Early adoption is
prohibited. We do not expect the adoption of FSP 142-3 to have a
material effect on our consolidated financial statements.
Our
exposure to market risk results primarily from fluctuations in interest rates on
our borrowings and price increases in diesel fuel. As more fully described in
Note 5 to the condensed consolidated financial statements, we use an interest
rate swap agreement to modify variable rate obligations to fixed rate
obligations for a portion of our debt. In addition, from time to time
we use commodity swap agreements to hedge a portion of our expected diesel fuel
usage. 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 August 2,
2008.
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.
|
(b)
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Changes in internal
controls. There has been no change in our internal
control over financial reporting that occurred during the first fiscal
quarter of 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
|
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
Not
applicable.
Item
1A. Risk Factors
Our
business, financial condition and results of operations are subject to various
risks and uncertainties, including those described below and elsewhere in this
Quarterly Report on Form 10-Q. This section discusses factors that,
individually or in the aggregate, we think could cause our actual results to
differ materially from expected and historical results. Our business, financial
condition or results of operations could be materially adversely affected by any
of these risks.
We
note these factors for investors as permitted by the Private Securities
Litigation Reform Act of 1995. You should understand that it is not possible to
predict or identify all such factors. Consequently, you should not consider the
following to be a complete discussion of all potential risks or uncertainties
applicable to our business. See “Part I. Item 2, Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
We
depend heavily on our principal customer.
Our
ability to maintain a close, mutually beneficial relationship with our largest
customer, Whole Foods Market, is an important element to our continued
growth. In October 2006, we announced a seven-year distribution
agreement with Whole Foods Market, which commenced on September 26, 2006, under
which we serve as the primary U.S. distributor to Whole Foods Market in the
regions where we previously served. In January 2007, we expanded our
Whole Foods Market relationship in the Southern Pacific region of the United
States. In August 2007, Whole Foods Market and Wild Oats Markets
completed their merger, as a result of which, Wild Oats Markets became a
wholly-owned subsidiary of Whole Foods Market. We service all of the
stores previously owned by Wild Oats Markets and now owned by Whole Foods Market
under the terms of our distribution agreement with Whole Foods
Market. Whole Foods Market accounted for approximately 33% and 34% of
our net sales for the six months ended January 31, 2009 and January 26, 2008,
respectively. As a result of this concentration of our customer base,
the loss or cancellation of business from Whole Foods Market, including from
increased distribution to their own facilities or store closures, could
materially and adversely affect our business, financial condition or results of
operations.
Our
operations are 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 that impact consumer spending, including discretionary
spending. Future economic conditions such as employment levels, business
conditions, interest rates, energy and fuel costs and tax rates could reduce
consumer spending or change consumer purchasing habits. Among these
changes could be a reduction in the number of organic products that consumers
purchase where there are non-organic (or “conventional”) alternatives, given
that many organic products, and particularly organic foods, often have higher
retail prices than do their conventional counterparts. In addition,
consumers may choose to purchase private label organic products rather than
branded organic products, which have higher retail prices than do their private
label counterparts.
In
addition, our operating results are particularly sensitive to, and may be
materially adversely affected by:
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·
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difficulties
with the collectability of accounts
receivable;
|
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·
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difficulties
with inventory control;
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·
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competitive
pricing pressures; and
|
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·
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unexpected
increases in fuel or other transportation-related
costs.
|
We
cannot assure you that one or more of such factors will not materially adversely
affect our business, financial condition or results of operations.
Our
customers generally are not obligated to continue purchasing products from
us.
We
generally sell products under purchase orders, and we generally do not have
agreements with or commitments from our customers for the purchase of
products. We cannot assure you 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. Decreases in our customers’ sales volumes or orders for
products supplied by us may have an adverse affect on our business, financial
condition or results of operations.
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
acquisition strategy may adversely affect our business.
We
continually evaluate opportunities to acquire other companies. To the
extent that our future growth includes acquisitions, we cannot assure you that
we will successfully identify suitable acquisition candidates, consummate such
potential acquisitions, integrate any acquired entities or successfully expand
into new markets as a result of our acquisitions. 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 the companies acquired in our
acquisitions and mergers.
A
significant portion of our past growth has been achieved through acquisitions of
or mergers with other distributors of natural products. The
successful integration of any acquired entity is critical to our future
operating and financial performance. Integration requires, among
other things:
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·
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maintaining
the customer base;
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·
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optimizing
delivery routes;
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·
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coordinating
administrative, distribution and finance functions;
and
|
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·
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integrating
management information systems and
personnel.
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The
integration process has diverted 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 particular, the integration process may temporarily
redirect resources previously focused on reducing product cost, resulting in
lower gross profits in relation to sales. In addition, the process of
combining companies has caused 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. For example, our
acquisition of UNFI Specialty Distribution has diverted the attention of
management away from our core business, not yet produced the purchasing
efficiencies and other synergies we expect to result from the acquisition and
negatively affected our operating expenses. Although we expect to
achieve efficiencies from this acquisition in future periods, we cannot assure
you that we will realize any of the anticipated benefits of this or other
mergers.
We
may have difficulty 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 may be limited by our inability to acquire new distribution facilities or
expand our existing distribution facilities, make acquisitions, successfully
integrate acquired entities, implement information systems or adequately manage
our personnel. Our future growth is limited in part by the size and
location of our distribution centers. We cannot assure you 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. Even if we are able to expand our distribution network, 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. We cannot assure you that our existing personnel,
systems, procedures and controls will be adequate to support the future growth
of our operations. Our inability to manage our growth effectively
could have a material adverse effect on our business, financial condition or
results of operations.
We
have significant competition from a variety of sources.
We
operate in competitive markets and our future success will be largely dependent
on our ability to provide quality products and services at competitive
prices. Our competition comes from a variety of sources, including
other distributors of natural products as well as specialty grocery and mass
market grocery distributors. We cannot assure you 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 we
have, may have substantially greater financial and other resources than we have
and may be better established in their markets. We cannot assure you
that our current or potential competitors will not provide products or 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. We cannot assure you that we will be able to compete
effectively against current and future competitors.
Increased
fuel costs may have a negative impact on our results of operations.
Increased
fuel costs may have a negative impact on our results of operations. The high
cost of diesel fuel can increase the price we pay for products as well as the
costs we incur to deliver products to our customers. These factors, in turn, may
negatively impact our net sales, margins, operating expenses and operating
results. To manage this risk, we have in the past periodically
entered, and may in the future periodically enter, into heating oil derivative
contracts to hedge a portion of our projected diesel fuel
requirements. Heating crude oil prices have a highly correlated
relationship to fuel prices, making these derivatives effective in offsetting
changes in the cost of diesel fuel. We are not party to any commodity
swap agreements and, as a result, our exposure to volatility in the price of
diesel fuel has increased relative to our exposure to volatility in prior
periods in which we had outstanding heating oil derivative
contracts. We do not enter into fuel hedge contracts for speculative
purposes. We also have maintained a fuel surcharge program since
fiscal 2005 which allows us to pass some of our higher fuel costs through to our
customers. We cannot guarantee that we will continue to be able to
pass a comparable proportion or any of our higher fuel costs to our customers in
the future.
The
cost of the capital available to us and any limitations on our ability to access
additional capital may have a material adverse effect on our business, financial
condition or results of operations.
We
have an amended $400 million secured revolving credit facility, which matures on
November 27, 2012, and under which borrowings accrue interest, at our option, at
either (i) the base rate (the applicable prime lending rate of Bank of America
Business Capital, as announced from time to time) or (ii) one-month LIBOR plus
0.75%. As of January 31, 2009, our borrowing base, based on accounts
receivable and inventory levels, was $388.4 million, with remaining availability
of $69.4 million.
We
have a term loan agreement in the principal amount of $75 million secured by
certain real property. The term loan is repayable over seven years
based on a fifteen-year amortization schedule. Interest on the term
loan accrues at one-month LIBOR plus 1.0%. As of January 31, 2009,
$59.2 million was outstanding under the term loan agreement.
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.
Our
operating results are subject to significant fluctuations.
Our
operating results may vary significantly from period to period due
to:
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demand
for natural products;
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changes
in our operating expenses, including in fuel and insurance
expenses;
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management’s
ability to execute our business and growth
strategies;
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general
economic conditions;
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changes
in customer preferences, including levels of enthusiasm for health,
fitness and environmental issues;
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fluctuation
of natural product prices due to competitive
pressures;
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supply
shortages, including a lack of an adequate supply of high-quality
agricultural products due to poor growing conditions, natural disasters or
otherwise;
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·
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volatility
in prices of high-quality agricultural products resulting from poor
growing conditions, natural disasters or otherwise;
and
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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.
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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:
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·
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our
products are subject to inspection by the U.S. Food and Drug
Administration;
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our
warehouse and distribution facilities are subject to inspection by the
U.S. Department of Agriculture and state health authorities;
and
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our
trucking operations are regulated by the U.S. Department of Transportation
and the U.S. Federal Highway
Administration.
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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. In addition,
as a distributor and manufacturer of natural, organic, and specialty foods, we
are subject to increasing governmental scrutiny of and public awareness
regarding food safety. If we were to manufacture or distribute foods
that are or are perceived to be contaminated, any resulting product recalls,
such as the peanut-related recall in January 2009, could have an adverse effect
on our operating and financial results.
We
are dependent on a number of key executives.
Management
of our business is substantially dependent upon the services of certain 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.
Union-organizing
activities could cause labor relations difficulties.
As
of January 31, 2009, we had approximately 6,100 full and part-time
employees. An aggregate of approximately 7% of our total employees,
or approximately 419 of the employees at our Auburn, Washington, East Brunswick,
New Jersey, Edison, New Jersey, Iowa City, Iowa and Leicester, Massachusetts
facilities, are covered by collective bargaining agreements. The Edison, New Jersey;
Auburn, Washington; East Brunswick, New Jersey; Leicester, Massachusetts and
Iowa City, Iowa agreements expire in June 2011, February 2009, June 2009, March
2013 and July 2009, 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 or we are not successful in reaching agreement with these employees, 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
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3. Defaults Upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
At
the Annual Meeting of Stockholders of the Company held on December 12, 2008, the
stockholders of the Company considered and voted on three
proposals:
1.
Election of Directors. The stockholders elected Michael S. Funk, James P.
Heffernan and Steven L. Spinner, to serve as Class III directors until the
Company’s 2011 annual meeting of stockholders. The terms of office as directors
of Gordon D. Barker, Gail A. Graham, Thomas B. Simone, Joseph M. Cianciolo and
Peter Roy continued after the Annual Meeting. The stockholders voted in the
following manner:
Name
|
Votes
“FOR”
|
Votes
“WITHHELD”
|
|
|
|
Michael
S. Funk
|
36,857,023
|
1,912,181
|
James
P. Heffernan
|
38,018,977
|
750,227
|
Steven
L. Spinner
|
36,283,378
|
2,485,826
|
2.
Amendment to the Company’s 2004 Equity Incentive Plan (the “2004 Plan”). The
stockholders (i) approved an amendment to increase the number of shares of
common stock reserved for issuance under the 2004 Plan from 1,000,000 to
2,500,000, and (ii) reapproved the performance criteria applicable to grants of
performance-based awards granted under the 2004 Plan. The
stockholders voted in the following manner: (i) 28,204,616 votes were cast “FOR”
the proposal; (ii) 5,087,252 votes were cast “AGAINST” the proposal; and (iii)
133,739 votes were cast to “ABSTAIN” from the proposal.
3.
Independent Auditor. The stockholders ratified the appointment of KPMG LLP as
the Company's independent registered public accounting firm for the fiscal year
ending August 1, 2009. The stockholders voted in the following manner: (i)
38,455,276 votes were cast “FOR” the proposal; (ii) 264,151 votes were cast
“AGAINST” the proposal; and (iii) 49,777 votes were cast to “ABSTAIN” from the
proposal.
Item
5. Other Information
None.
Item
6. Exhibits
Exhibits
Exhibit No.
|
Description
|
10.62*
|
Performance
Unit Agreement between Steven L. Spinner and the Registrant, effective
November 5, 2008.
|
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
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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
|
*
Certain confidential portions of this exhibit were omitted by means of redacting
a portion of the text. This exhibit has been filed separately with
the Securities and Exchange Commission accompanied by a confidential treatment
request pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as
amended.
* * *
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
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.
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UNITED
NATURAL FOODS, INC.
|
|
|
|
|
|
|
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/s/ Mark E.
Shamber
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Mark
E. Shamber
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Chief
Financial Officer
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|
(Principal
Financial and Accounting Officer)
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Dated: March
11, 2009