United Natural Foods, Inc. Form 10-Q; Fiscal Quarter Ended April 28, 2007

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended April 28, 2007

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 000-21531

 

UNITED NATURAL FOODS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

05-0376157

(State or Other Jurisdiction of

(I.R.S. Employer Identification No.)

Incorporation or Organization)

 

 

 

260 Lake Road Dayville, CT

06241

(Address of Principal Executive Offices)

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (860) 779-2800

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

 

Yes x      No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer x      Accelerated Filer o      Non-accelerated Filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o>      No x  

 

As of June 1, 2007, there were 42,815,227 shares of the Registrant’s Common Stock, $0.01 par value per share, outstanding.

 

TABLE OF CONTENTS

 

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Income (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4.

Controls and Procedures

22

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

22

 

 

 

Item 1A.

Risk Factors

22

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

Item 3.

Defaults Upon Senior Securities

26

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

26

 

 

 

Item 5.

Other Information

26

 

 

 

Item 6.

Exhibits

27

 

 

 

 

Signatures

28

 

 

2

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

UNITED NATURAL FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except per share amounts)

 

April 28,
2007

  July 29,
2006

ASSETS            
Current assets:  
    Cash and cash equivalents   $ 20,544   $ 20,054  
    Accounts receivable, net of allowance of $4,340 and $4,571, respectively    167,486    147,686  
    Notes receivable, trade, net of allowance of $2,146 and $2,357, respectively    1,285    1,254  
    Inventories    302,468    257,259  
    Prepaid expenses and other current assets    7,887    5,728  
    Deferred income taxes    10,911    10,911  

       Total current assets    510,581    442,892  
Property and equipment, net    163,365    163,247  
Other assets:  
    Goodwill    79,900    78,016  
    Notes receivable, trade, net of allowance of $1,552 and $1,505, respectively    2,320    2,760  
    Intangible assets, net of accumulated amortization of $575 and $484, respectively    5,957    251  
    Assets held for sale    5,935    6,868  
    Other    9,535    6,561  

       Total assets   $ 777,593   $ 700,595  

LIABILITIES AND STOCKHOLDERS' EQUITY  
Current liabilities:  
    Notes payable   $ 114,001   $ 125,005  
    Accounts payable    134,221    102,146  
    Accrued expenses and other current liabilities    33,232    34,245  
    Current portion of long-term debt    6,269    5,433  

       Total current liabilities    287,723    266,829  
Long-term debt, excluding current portion    67,510    59,716  
Deferred income taxes    9,029    9,693  
Other long-term liabilities    874    883  

       Total liabilities    365,136    337,121  

Commitments and contingencies  
 
Stockholders' equity:  
    Preferred stock, $0.01 par value, authorized 5,000 shares  
       at April 28, 2007 and July 29, 2006, none issued and outstanding          
   Common stock, $0.01 par value, authorized 100,000 shares;  
       43,042 issued and 42,813 outstanding shares at April 28, 2007;  
       42,477 issued and 42,248 outstanding shares at July 29, 2006    430    425  
    Additional paid-in capital    162,730    149,840  
    Treasury stock    (6,092 )  (6,092 )
    Unallocated shares of Employee Stock Ownership Plan    (1,257 )  (1,380 )
    Accumulated other comprehensive (loss) income    (17 )  1,047  
    Retained earnings    256,663    219,634  

       Total stockholders' equity    412,457    363,474  

Total liabilities and stockholders' equity   $ 777,593   $ 700,595  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

UNITED NATURAL FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share data)

 

Three months ended

Nine months ended

April 28,
2007

  April 29,
2006

  April 28,
2007

  April 29,
2006

Net sales     $ 732,516   $ 637,068   $ 2,047,494   $ 1,813,790  
Cost of sales    602,573    516,904    1,669,912    1,466,955  

                Gross profit    129,943    120,164    377,582    346,835  

Operating expenses    104,818    97,460    307,126    289,315  
Impairment on assets held for sale            756      

                Total operating expenses    104,818    97,460    307,882    289,315  

                Operating income  
     25,125    22,704    69,700    57,520  

Other expense (income):  
         Interest expense    3,021    2,747    9,282    8,310  
         Interest income    (324 )  (78 )  (618 )  (219 )
         Other, net    (39 )  (84 )  332    (207 )

                Total other expense    2,658    2,585    8,996    7,884  

Income before income taxes    22,467    20,119    60,704    49,636  
Provision for income taxes    8,762    7,819    23,675    19,035  

                Net income   $ 13,705   $ 12,300   $ 37,029   $ 30,601  

Per share data (basic):  
Net income   $ 0.32   $ 0.29   $ 0.87   $ 0.74  

Weighted average shares of common stock    42,595    41,885    42,396    41,568  

Per share data (diluted):  
Net income   $ 0.32   $ 0.29   $ 0.87   $ 0.72  

Weighted average shares of common stock    42,884    42,446    42,784    42,210  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4

UNITED NATURAL FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

Nine months ended

April 28,
2007

  April 29,
2006

CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income   $ 37,029   $ 30,601  
Adjustments to reconcile net income to net cash provided by operating activities:  
    Depreciation and amortization    13,793    12,557  
    Loss (gain) on disposals of property and equipment    1,999    (25 )
    Impairment on assets held for sale    756      
    Provision for doubtful accounts    1,008    2,800  
    Share-based compensation    2,956    4,712  
Changes in assets and liabilities, net of acquisitions:  
    Accounts receivable    (20,808 )  (23,215 )
    Inventories    (43,391 )  (24,479 )
    Prepaid expenses and other assets    (5,688 )  1,067  
    Notes receivable, trade    409    (763 )
    Accounts payable    25,829    12,996  
    Accrued expenses and other liabilities    (2,029 )  (3,258 )
    Income taxes payable    636      

       Net cash provided by operating activities    12,499    12,993  

CASH FLOWS FROM INVESTING ACTIVITIES:  
    Capital expenditures    (20,684 )  (14,804 )
    Purchases of acquired businesses, net of cash acquired    (6,470 )  (3,292 )
    Proceeds from sale of property and equipment    5,448    57  
    Other investing activities    (1,042 )    

       Net cash used in investing activities    (22,748 )  (18,039 )

CASH FLOWS FROM FINANCING ACTIVITIES:  
    Net repayments under note payable    (11,004 )  (6,573 )
    Proceeds from borrowing of long-term debt    10,000      
    Proceeds from exercise of stock options    7,086    17,879  
    Repayments of long-term debt    (4,438 )  (4,401 )
    Tax benefit from exercise of stock options    2,853    5,485  
    Increase (decrease) in bank overdraft    6,246    (7,397 )
    Principal payments of capital lease obligations    (4 )  (409 )
    Purchases of treasury stock        (6,092 )

       Net cash provided by (used in) financing activities    10,739    (1,508 )

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS    490    (6,554 )
Cash and cash equivalents at beginning of period    20,054    12,615  

Cash and cash equivalents at end of period   $ 20,544   $ 6,061  

Supplemental disclosures of cash flow information:  
   Cash paid during the period for:  
       Interest, net of amounts capitalized   $ 9,235   $ 8,021  

       Federal and state income taxes, net of refunds   $ 19,771   $ 14,993  

Supplemental disclosure of noncash investing and financing activities:  
       Fair value of assets acquired   $ 8,498   $  
       Cash paid for assets    (5,498 )    

       Liabilities incurred (see Note 3)   $ 3,000   $  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5

UNITED NATURAL FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

April 28, 2007 (Unaudited)

 

1.   BASIS OF PRESENTATION

 

United Natural Foods, Inc. (the “Company”) is a distributor and retailer of natural and organic products. The Company sells its products primarily throughout the United States.

 

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year's presentation.

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally required in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In our opinion, these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for interim periods, however, may not be indicative of the results that may be expected for a full year. These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 29, 2006.

 

Net sales consist primarily of sales of natural and organic products to retailers adjusted for customer volume discounts, returns and allowances. Net sales also consist of amounts due to the Company from 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 for inbound transportation costs and depreciation for manufacturing equipment at the Company’s manufacturing segment, Hershey Import Company, Inc. (“Hershey Imports”), and consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products. Operating expenses include salaries and wages, employee benefits (including payments under the Company’s Employee Stock Ownership Plan), warehousing and delivery (including shipping and handling), selling, occupancy, insurance, administrative, share-based compensation and amortization expense. Operating expenses also includes depreciation expense related to our wholesale and retail divisions. Other expense (income) includes 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 our Board of Directors broad discretion in creating employee equity incentives. This program includes incentive and non-statutory stock options and nonvested stock awards (also known as restricted stock). 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. Nonvested stock awards to employees are generally time-based and vest 25% on each annual anniversary of the grant date over four years. As of April 28, 2007, we had approximately 1.1 million shares of common stock reserved for future issuance under our stock option plans.

 

Effective August 1, 2005, the Company adopted the fair value recognition provisions of the Financial Accounting Standards Board (the “FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), using the modified-prospective transition method. Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS No. 123, are recognized in net earnings in the periods after the date of adoption. The Company recognizes share-based compensation expense 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 April 28, 2007 and April 29, 2006 of $1.0 million and $1.2 million, respectively. In the nine months ended April 28, 2007 and April 29, 2006, the Company recognized $3.0 million and $4.7 million, respectively, of share-based

 

6

compensation expense. During the nine months ended April 29, 2006, certain options were accelerated pursuant to the employment transition agreement the Company entered into during the first quarter of fiscal 2006 with the Company's former President and Chief Executive Officer. This acceleration resulted in $1.0 million of share-based compensation expense for the quarter ended October 29, 2005. The Company recorded related tax benefits for the nine months ended April 28, 2007 and April 29, 2006 of $2.9 million and $5.5 million, respectively. The effect on net income from recognizing share-based compensation for the three months ended April 28, 2007 and April 29, 2006 was $0.6 million, or $0.01 per basic and diluted share, and $0.8 million, or $0.02 per basic and diluted share, respectively.

 

As of April 28, 2007, there was $9.5 million of total unrecognized compensation cost related to outstanding share-based compensation arrangements (including stock option and nonvested share awards). This cost is expected to be recognized over a weighted-average period of 1.6 years.

 

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 nine months ended April 28, 2007 and April 29, 2006, respectively:

 

 

Three months ended

 

Nine months ended

 

April 28,
2007

April 29,
2006

 

April 28,
2007

April 29,
2006

 

 

 

 

 

 

Expected volatility

33.7%

36.7%

 

34.6%

36.7%

Dividend yield

0.0%

0.0%

 

0.0%

0.0%

Risk free interest rate

4.6%

4.6%

 

4.5%

4.4%

Expected life

3.0 years

3.0 years

 

3.0 years

3.0 years

 

Our computation of expected volatility for the quarter ended April 28, 2007 is based on a combination of historical and market-based implied volatility. Our computation of expected life is based on historical exercise patterns. 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. The weighted average grant-date fair value of options granted during the nine months ended April 28, 2007 and April 29, 2006 was $10.53 and $7.75, respectively.

 

Stock option activity for the nine months ended April 28, 2007, is as follows:

 

 

Number
of Shares

 

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term

 

 

Aggregate
Intrinsic
Value

 

 

 

 

 

Outstanding at July 29, 2006

1,531,943

$20.42

 

 

Granted

322,690

$36.40

 

 

Exercised

(427,717)

$16.94

 

 

Canceled

(57,900)

$25.85

 

 

Outstanding at April 28, 2007

1,369,016

$25.17

7.5

$34,456,000

Exercisable at April 28, 2007

809,493

$21.46

6.6

$17,374,000

 

 

7

The following table summarizes our nonvested stock activity for the nine months ended April 28, 2007:

 

 

Number
of Shares

Weighted
Average
Grant-Date
Fair Value

 

 

 

Nonvested at July 29, 2006

113,276

$26.34

Granted

148,728

$35.46

Vested

(43,306)

$28.39

Canceled

(7,350)

$25.37

Nonvested at April 28, 2007

211,348

$32.29

 

The total fair value of shares vested during the nine months ended April 28, 2007 was $1.2 million.

 

3.   ACQUISITIONS

On April 2, 2007, the Company acquired certain assets of Organic Brands LLC (“Organic Brands”) for cash consideration of approximately $5.5 million and notes payable totaling $3.0 million. The cash portion of the purchase price was financed by borrowings against the Company’s line of credit. The operating results of Organic Brands have been included in the consolidated financial statements of the Company beginning with the acquisition date. The acquisition resulted in goodwill of $1.8 million, all of which is expected to be deductible for tax purposes. The goodwill recorded is subject to potential future adjustments. Such goodwill was assigned to the Company’s manufacturing division. Other intangible assets acquired were $5.0 million.

During the three months ended April 28, 2007, the Company acquired certain assets related to additional product lines outside of the wholesale segment. The total cash consideration paid for these three product lines was approximately $1.0 million in addition to approximately $0.1 million of holdbacks recorded in accrued expenses in the consolidated balance sheets. The cash paid was financed by borrowings against the Company’s line of credit. The consolidated financial statements of the Company have included operating results of each of these product lines since the respective acquisition dates. Resulting goodwill of $0.1 million is expected to be deductible for tax purposes and is subject to potential future adjustment. Other intangible assets acquired were $0.7 million.

4.

EARNINGS PER SHARE

 

Following is a reconciliation of the basic and diluted number of shares used in computing earnings per share:

 

Three months ended

Nine months ended

(In thousands) April 28,
2007

  April 29,
2006

  April 28,
2007

  April 29,
2006

Basic weighted average shares outstanding      42,595    41,885    42,396    41,568  
Net effect of dilutive stock options based upon the treasury stock method    289    561    388    642  

Diluted weighted average shares outstanding    42,884    42,446    42,784    42,210  

 

There were 321,040 and 6,700 anti-dilutive stock options outstanding for the three months ended April 28, 2007 and April 29, 2006, respectively. For the nine months ended April 28, 2007 and April 29, 2006, there were 309,040 and 17,700 anti-dilutive stock options outstanding, respectively. These anti-dilutive stock options were excluded from the calculation of diluted earnings per share.

 

 

8

 

5.    DERIVATIVE 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 a notional principal amount of $50.0 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 interest rate movements on current variable rate indebtedness totaling $50.0 million 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 5.32% and 5.04% as of April 28, 2007 and April 29, 2006, respectively.

 

The Company entered into commodity swap agreements to reduce price risk associated with anticipated purchases of diesel fuel. The outstanding commodity swap agreements hedge a portion of the Company’s expected fuel usage for the periods set forth in the agreements. The Company monitors the commodity (NYMEX #2 Heating oil) used in its swap agreements to determine that the correlation between the commodity and diesel fuel is deemed to be “highly effective.” At April 28, 2007, the Company had one outstanding commodity swap agreement which matures on June 30, 2007.

 

Interest rate swap and commodity swap agreements are designated as cash flow hedges and are 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 income (loss). The Company does not enter into derivative agreements for trading purposes.

 

6.   COMPREHENSIVE INCOME

 

Total comprehensive income for the three months ended April 28, 2007 and April 29, 2006 amounted to approximately $14.0 million and $12.9 million, respectively. Total comprehensive income for the nine months ended April 28, 2007 and April 29, 2006 amounted to approximately $36.0 million and $31.6 million, respectively. Comprehensive income is comprised of net income plus the increase/decrease in the fair value of the interest rate swap agreement and the commodity swap agreement discussed in Note 5. For the three months ended April 28, 2007 and April 29, 2006, the change in fair value of these financial instruments was $0.5 million pre-tax gain ($0.3 million after-tax gain) and $1.0 million pre-tax gain ($0.6 million after-tax gain), respectively. The change in fair value of these derivative financial instruments was $1.7 million pre-tax loss ($1.1 million after-tax loss) and $1.6 million pre-tax gain ($1.0 million after-tax gain) for the nine months ended April 28, 2007 and April 29, 2006, respectively.

 

7.   ASSETS HELD FOR SALE

 

In November 2005, the Company transitioned all remaining operations at one of its two Auburn, California facilities to a new facility in Rocklin, California. As a result, the Company reclassified $7.4 million of long-lived assets related to the Auburn facility that were previously included in property and equipment as held for sale, which was included in prepaid expenses and other current assets in the consolidated balance sheet. In June 2006, the Company sold a portion of these long-lived assets for less than $0.1 million, resulting in a loss of $0.5 million, which was recorded in operating expenses in the fourth quarter of fiscal 2006. In January 2007, the Company sold the remaining long-lived assets for $5.4 million, resulting in a loss of $1.5 million, which was recorded in operating expenses in the second quarter of fiscal 2007.

 

In the nine months ended April 28, 2007, the Company transitioned its remaining Auburn, California operations to its Rocklin, California facility, reached a decision to sell the second Auburn, California facility and related assets and recorded an impairment loss of $0.8 million. The impairment loss was recognized based on management’s estimate of fair value of the facility, less costs of disposal. As a result, the Company reclassified, to assets held for sale, $5.9 million of long-lived assets, net of the $0.8 million impairment loss, that were previously included in property and equipment in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets.

 

9

 

8.   BUSINESS SEGMENTS

 

The Company has several operating divisions aggregated under the wholesale segment, which is the Company’s only reportable segment. These operating divisions have similar products and services, customer channels, distribution methods and historical margins. The wholesale segment is engaged in national distribution of natural foods, produce and related products in the United States. The Company has additional operating divisions that do not meet the quantitative thresholds for reportable segments. Therefore, these operating divisions are aggregated under the caption of “Other” with corporate operating expenses that are not allocated to operating divisions. 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, and a manufacturing division, which engages in importing, roasting and packaging nuts, seeds, dried fruit and snack items. “Other” also includes corporate expenses, which consist of salaries, retainers, and other related expenses of officers, directors, corporate finance (including professional services), governance, human resources and internal audit that are necessary to operate the Company’s headquarters located in Dayville, Connecticut.

 

Following is business segment information for the periods indicated (in thousands):

 

 

Wholesale

Other

Eliminations

Unallocated
Expenses

Consolidated

Three months ended April 28, 2007:

 

 

 

 

 

Net sales

$720,219

$30,486

$(18,189)

 

$732,516

Operating income (loss)

26,475

196

(1,546)

 

25,125

Interest expense

 

 

 

$3,021

3,021

Interest income

 

 

 

(324)

(324)

Other, net

 

 

 

(39)

(39)

Income before income taxes

 

 

 

 

22,467

Depreciation and amortization

4,165

250

 

4,415

Capital expenditures

3,520

2,623

 

6,143

Goodwill

64,032

15,868

 

79,900

Total assets

697,759

87,662

(7,828)

 

777,593

 

 

 

 

 

 

Three months ended April 29, 2006:

 

 

 

 

 

Net sales

$625,823

$19,969

$(8,724)

 

$637,068

Operating income (loss)

26,368

(3,653)

(11)

 

22,704

Interest expense

 

 

 

$2,747

2,747

Interest income

 

 

 

(78)

(78)

Other, net

 

 

 

(84)

(84)

Income before income taxes

 

 

 

 

20,119

Depreciation and amortization

4,324

246

 

4,570

Capital expenditures

2,926

104

 

3,030

Goodwill

62,984

13,977

 

76,961

Total assets

650,469

49,617

(2,960)

 

697,126

 

 

 

 

10

 

Wholesale

Other

Eliminations

Unallocated
Expenses

Consolidated

Nine months ended April 28, 2007:

 

 

 

 

 

Net sales

$2,013,548

$83,455

$(49,509)

 

$2,047,494

Operating income (loss)

71,731

1,619

(3,650)

 

69,700

Interest expense

 

 

 

$9,282

9,282

Interest income

 

 

 

(618)

(618)

Other, net

 

 

 

332

332

Income before income taxes

 

 

 

 

60,704

Depreciation and amortization

13,076

717

 

13,793

Capital expenditures

17,721

2,963

 

20,684

Goodwill

64,032

15,868

 

79,900

Total assets

697,759

87,662

(7,828)

 

777,593

 

 

 

 

 

 

Nine months ended April 29, 2006:

 

 

 

 

 

Net sales

$1,782,519

$57,421

$(26,150)

 

$1,813,790

Operating income (loss)

71,957

(14,243)

(194)

 

57,520

Interest expense

 

 

 

$8,310

8,310

Interest income

 

 

 

(219)

(219)

Other, net

 

 

 

(207)

(207)

Income before income taxes

 

 

 

 

49,636

Depreciation and amortization

11,747

810

 

12,557

Capital expenditures

14,408

396

 

14,804

Goodwill

62,984

13,977

 

76,961

Total assets

650,469

49,617

(2,960)

 

697,126

 

9.   NEW ACCOUNTING PRONOUNCEMENTS

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The Company will adopt FIN 48 in fiscal 2008 and is currently evaluating whether the adoption of FIN 48 will have a material effect on its consolidated financial statements.

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. The Company will adopt SFAS 157 in fiscal 2009 and is currently evaluating whether the adoption of SFAS 157 will have a material effect on its consolidated financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The Company does not believe that this staff accounting bulletin will have a material effect on its consolidated financial statements.

 

11

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 and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The statement is effective for fiscal years beginning after November 15, 2007. The Company will adopt SFAS 159 in fiscal 2009 and is currently evaluating whether the adoption of SFAS 159 will 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 position 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 position.

 

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 and organic foods and related products in the United States. 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 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. We also own and operate 12 retail natural products stores, located primarily in Florida, through our subsidiary, the Natural Retail Group. We believe that our retail business serves as a natural complement to our distribution business because it enables us to develop new marketing programs and improve customer service. In addition, our subsidiary, Hershey Imports, specializes in the importing, roasting and packaging of nuts, seeds, dried fruits and snack items. Our operations are comprised of three principal divisions:

    our wholesale division, which includes our broadline distribution business, Albert’s Organics and Select Nutrition;

    our retail division, which consists of our 12 retail stores; and

    our manufacturing division, which is comprised of Hershey Imports and our branded product lines.

In order to maintain our market leadership and improve our operating efficiencies, we continually seek to:

    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;

 

12

    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. In February 2007, we announced plans to construct a new 237,000 square foot distribution center in Ridgefield, Washington, to serve as a regional distribution hub for customers in Portland, Oregon and other Northwest states. The distribution center is scheduled to commence operations in the second quarter of fiscal 2008. In August 2006, we announced plans for new facilities in Florida and Texas in the succeeding 18 to 24 months and, in March 2007, we entered into lease agreement to rent warehouse space in central Florida. The warehouse in central Florida is expected to open in the first quarter of fiscal 2008. This will reduce the geographic area served by the Atlanta, Georgia facility and is expected to contribute to lower transportation costs. We have made significant capital expenditures and incurred considerable expenses in connection with the opening and expansion of facilities. In October 2005, we opened our Rocklin, California distribution center and have moved our Auburn, California operations to this facility. The Rocklin distribution center is 487,000 square feet and serves as a distribution hub for customers in northern California and surrounding states. The Rocklin distribution center is the largest facility in our nationwide distribution network. In August 2005, we expanded our Midwest operations by opening a new 311,000 square foot distribution center in Greenwood, Indiana, which serves as a distribution hub for our customers in Illinois, Indiana, Ohio and other Midwest states.

With the opening of the Greenwood and Rocklin facilities, we have added approximately 1,300,000 square feet to our distribution centers since fiscal 2002, representing a 71% increase in our distribution capacity. Our current capacity utilization is approximately 75%.

Our net sales consist primarily of sales of natural and organic products to retailers, adjusted for customer volume discounts, returns and allowances. Net sales also consist of amounts due to us from 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 for inbound transportation costs, depreciation for manufacturing equipment at our manufacturing subsidiary, Hershey Imports, and consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products. Total operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery (including shipping and handling), selling, occupancy, insurance, administrative, share-based compensation, depreciation and amortization expense. Other expense (income) includes interest on our outstanding indebtedness, interest income and miscellaneous income and expenses. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses. We include purchasing and outbound transportation expenses within our operating expenses rather than in our cost of sales.

On February 21, 2007, Whole Foods Market, Inc. (“Whole Foods Market”) and Wild Oats Markets, Inc. (“Wild Oats Markets”) announced that the two companies had entered into an agreement and plan of merger under which Whole Foods Market will commence an offer to purchase all the outstanding shares of Wild Oats Markets and following the tender offer, Wild Oats Markets will merge with and into a subsidiary of Whole Foods Market. As discussed below, sales to Wild Oats Markets accounted for approximately 8.4% and 8.8% of our net sales for the three and nine-month periods ended April 28, 2007, respectively. Sales to Whole Foods Market accounted for approximately 29.1% and 27.4% of our net sales for the three and nine month periods ended April 28, 2007, respectively. At this time, we cannot accurately estimate the impact, if any, that this proposed merger, if completed, will have on our business, financial condition or results of operations.

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 SEC has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and require our most difficult, complex or subjective judgments or estimates.

 

13

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 either cash-on-delivery terms, or the account is closely monitored so that as agreed upon payments are received, orders are released; a failure to pay results in held or cancelled orders. Our accounts receivable balance was $167.5 million and $147.7 million, net of the allowance for doubtful accounts of $4.3 million and $4.6 million, as of April 28, 2007 and July 29, 2006, respectively. Our notes receivable balances were $3.6 million and $4.0 million, net of the allowance of doubtful accounts of $3.7 million and $3.9 million, as of April 28, 2007 and July 29, 2006, respectively.       

Insurance reserves

It is our policy to 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 the consolidated financial statements.

Valuation of goodwill and intangible assets

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 long-lived assets will be impacted if estimated future cash flows are not achieved. For reporting units that indicated potential impairment, we determined the implied fair value of that reporting unit using a discounted cash flow analysis and compared such values to the respective reporting units’ carrying amounts. Total goodwill as of April 28, 2007 and July 29, 2006 was $79.9 million and $78.0 million, respectively.

 

14

Results of Operations

 

The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales:

 

 

Three months ended

 

Nine months ended

 

April 28,
2007

 

April 29,
2006

 

April 28,
2007

 

April 29,
2006

Net sales

100.0%

 

100.0%

 

100.0%

 

100.0%

Cost of sales

82.3%

 

81.1%

 

81.6%

 

80.9%

Gross profit

17.7%

 

18.9%

 

18.4%

 

19.1%

 

 

 

 

 

 

 

 

Operating expenses

14.3%

 

15.3%

 

15.0%

 

16.0%

Impairment on assets held for sale

0.0%

 

0.0%

 

0.0%

 

0.0%

Total operating expenses

14.3%

 

15.3%

 

15.0%

 

16.0%

 

 

 

 

 

 

 

 

Operating income

3.4%

 

3.6%

 

3.4%

 

3.2%*

 

 

 

 

 

 

 

 

Other expense (income):

 

 

 

 

 

 

 

Interest expense

0.4%

 

0.4%

 

0.5%

 

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%

 

0.4%

 

0.4%*

 

0.4%*

 

 

 

 

 

 

 

 

Income before income taxes

3.1%*

 

3.2%

 

3.0%

 

2.7%

 

 

 

 

 

 

 

 

Provision for income taxes

1.2%

 

1.2%

 

1.2%

 

1.0%

 

 

 

 

 

 

 

 

Net income

1.9%

 

1.9%*

 

1.8%

 

1.7%

 

* Total reflects rounding

 

Three Months Ended April 28, 2007 Compared To Three Months Ended April 29, 2006

 

Net Sales

 

Our net sales increased approximately 15.0%, or $95.4 million, to $732.5 million for the three months ended April 28, 2007, from $637.1 million for the three months ended April 29, 2006. This increase was primarily due to organic growth (growth excluding the impact of acquisitions) in our wholesale division of $94.4 million. Our organic growth is due to the continued growth of the natural products industry in general, increased market share through our focus on service and value added services, the opening of new distribution centers, which allows us to carry a broader selection of products, and approximately 4.0% sales growth as a result of our expanded Whole Foods Market relationship in the Southern Pacific region of the United States.

In the three months ended April 28, 2007, sales to Whole Foods Market comprised approximately 29.1% of net sales and sales to Wild Oats Markets comprised approximately 8.4% of net sales. In the three months ended April 29, 2006, sales to Whole Foods Market comprised approximately 26.6% of net sales and sales to Wild Oats Markets comprised approximately 9.2% of net sales. As discussed above under “Overview,” a merger between Whole Foods Market and Wild Oats Markets was announced in February 2007. At this time, we cannot accurately estimate the impact, if any, that this merger, if completed, will have on our business, financial condition or results of operations.

 

15

The following table lists the percentage of sales by customer type for the three months ended April 28, 2007 and April 29, 2006:

 

Customer type

Percentage of Net Sales

 

2007

2006

Independently owned natural products retailers

44%

46%

Supernatural chains

38%

36%

Conventional supermarkets

15%

14%

Other

3%

4%

 

Sales by channel have been adjusted to properly reflect changes in customer types resulting from a review of our customer lists. As a result of this adjustment, sales to the independents sales channel decreased 1.0% for the quarter ended April 29, 2006 and sales to the supermarket sales channel increased 1.0% for the quarter ended April 29, 2006.

Gross Profit

Our gross profit increased approximately 8.1%, or $9.8 million, to $129.9 million for the three months ended April 28, 2007, from $120.2 million for the three months ended April 29, 2006. Our gross profit as a percentage of net sales was 17.7% and 18.9% for the three months ended April 28, 2007 and April 29, 2006, respectively. The decrease in gross profit as a percentage of net sales was due primarily to missed forward buying opportunities of approximately $1.9 million because of our focus on our expanded Whole Foods Market relationship in the Southern Pacific region of the United States, which we commenced in January 2007, new customer agreements that were in place during the three months ended April 28, 2007 as compared to the three months ended April 29, 2006, and incremental inventory adjustments in our broadline distribution business amounting to $1.9 million during the three months ended April 28, 2007. We believe that the decline in gross profit as a percent of sales is temporary and we expect to see an increase in the next fiscal quarter. Additionally, our intention is to increase our branded product revenues, which we believe will allow us to generate higher gross margins over the long-term, as branded product revenues generally yield relatively higher margins.

Operating Expenses

Our total operating expenses increased approximately 7.5%, or $7.4 million, to $104.8 million for the three months ended April 28, 2007, from $97.5 million for the three months ended April 29, 2006. The increase in total operating expenses for the three months ended April 28, 2007 was due primarily to additional distribution-related costs within our wholesale division of approximately $5.9 million as well as increased administrative expenses within that division of $3.5 million. This was partially offset by lower bad debt expense of $1.0 million in the three months ended April 28, 2007 compared to the three months ended April 29, 2006. The increased distribution costs are a result of increased sales as well as $0.5 million of increased expense related to our fuel hedging program. Total operating expenses for the three months ended April 28, 2007 includes share-based compensation expense of $1.0 million. Share-based compensation expense for the three months ended April 29, 2006 was $1.2 million.

As a percentage of net sales, total operating expenses decreased to approximately 14.3% for the three months ended April 28, 2007, from approximately 15.3% for the three months ended April 29, 2006. The decrease in operating expenses as a percentage of net sales was attributable to further leveraging our fixed operating costs due to our increased sales, improved operations in our Select Nutrition division and improved operations at certain locations within our Albert’s Organics division. We expect these efficiencies to continue to lower operating expenses relative to sales over the long-term. We also expect to open new facilities that will contribute efficiencies and lead to lower operating expenses related to sales over the long-term.

 

16

Operating Income

 

Operating income increased approximately 10.7%, or $2.4 million, to $25.1 million for the three months ended April 28, 2007, from $22.7 million for the three months ended April 29, 2006. As a percentage of net sales, operating income was 3.4% for the three months ended April 28, 2007, compared to 3.6% for the three months ended April 29, 2006. The decrease in operating income as a percentage of net sales is attributable to the decrease in gross profit as a percentage of net sales for the three months ended April 28, 2007, compared to the three months ended April 29, 2006.

 

Other Expense (Income)

 

Other expense (income) increased $0.1 million to $2.7 million for the three months ended April 28, 2007 from $2.6 million for the three months ended April 29, 2006. Interest expense for the three months ended April 28, 2007 increased to $3.0 million from $2.7 million in the three months ended April 29, 2006. The increase in interest expense was due to higher interest rates during the quarter ended April 28, 2007 than during the quarter ended April 29, 2006. Interest income for the three months ended April 28, 2007 increased to $0.3 million from $0.1 million in the three months ended April 29, 2006. The increase in interest income was due to higher average cash levels during the quarter ended April 28, 2007 than during the quarter ended April 29, 2006.

Provision for Income Taxes

 

Our effective income tax rate was 39.0% and 38.9% for the three months ended April 28, 2007 and April 29, 2006, respectively. The effective rate was higher than the federal statutory rate primarily due to state and local income taxes. The increase in the effective tax rate was primarily due to 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 (“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 $1.4 million to $13.7 million, or $0.32 per diluted share, for the three months ended April 28, 2007, compared to $12.3 million, or $0.29 per diluted share, for the three months ended April 29, 2006.

 

Nine Months Ended April 28, 2007 Compared To Nine Months Ended April 29, 2006

 

Net Sales

 

Our net sales increased approximately 12.9%, or $233.7 million, to $2,047 million for the nine months ended April 28, 2007, from $1,814 million for the nine months ended April 29, 2006. This increase was primarily due to organic growth (growth excluding the impact of acquisitions) in our wholesale division of $231.0 million. Our organic growth is due to the continued growth of the natural products industry in general, increased market share through our focus on service and added value services, and the opening of new, expansion of existing, distribution centers, which allows us to carry a broader selection of products, and approximately 2.0% sales growth as a result of our expanded Whole Foods Market relationship in the Southern Pacific region of the United States.

In the nine months ended April 28, 2007, sales to Whole Foods Market comprised approximately 27.4% of net sales and sales to Wild Oats Markets comprised approximately 8.8% of net sales. In the nine months ended April 29, 2006, sales to Whole Foods Market comprised approximately 26.5% of net sales and sales to Wild Oats Markets comprised approximately 9.7% of net sales. As discussed above under “Overview”, a merger between Whole Foods Market and Wild Oats Markets was announced in February 2007. At this time, we cannot accurately estimate the impact, if any, that this merger, if completed, will have on our business, financial condition or results of operations.

 

 

17

The following table lists the percentage of sales by customer type for the nine months ended April 28, 2007 and April 29, 2006:

 

Customer type

Percentage of Net Sales

 

2007

2006

Independently owned natural products retailers

45%

46%

Supernatural chains

36%

36%

Conventional supermarkets

15%

14%

Other

4%

4%

 

Sales by channel have been adjusted to properly reflect changes in customer types resulting from a review of our customer lists. As a result of this adjustment, sales to the independents sales channel decreased 0.9% for the nine months ended April 29, 2006 and sales to the supermarket sales channel increased 0.8% for the nine months ended April 29, 2006.

Gross Profit

Our gross profit increased approximately 8.9%, or $30.7 million, to $377.6 million for the nine months ended April 28, 2007, from $346.8 million for the nine months ended April 29, 2006. Our gross profit as a percentage of net sales was 18.4% and 19.1% for the nine months ended April 28, 2007 and April 29, 2006, respectively. The decrease in gross profit as a percentage of net sales was driven by a reduction resulting from low gross margin at our former Albert’s Organics operations at our Greenwood, Indiana facility of $0.2 million, which operations were transferred to the Albert’s Organics facility in Minneapolis, Minnesota, effective October 31, 2006; missed forward buying opportunities of $1.9 million due to our focus on our expanded Whole Foods Market relationship in the Southern Pacific region of the United States, which we commenced in January 2007; the full quarter effect of new customer agreements; $0.5 million of spoilage issues related to certain inventory at our Albert’s Organics division; $1.9 million of incremental inventory adjustments within our broadline distribution business; partially offset by increases in rates within our fuel surcharge program, which passes to our customers the increased product costs and fuel surcharges we pay to vendors. We believe that the decline in gross profit as a percent of sales is temporary and we expect to see an increase in the next fiscal quarter. Additionally, our intention is to increase our branded product revenues, which we believe will allow us to generate higher gross margins over the long-term, as branded product revenues generally yield relatively higher margins.

 

Operating Expenses

 

Our total operating expenses increased approximately 6.4%, or $18.6 million, to $307.9 million for the nine months ended April 28, 2007, from $289.3 million for the nine months ended April 29, 2006. The increase in total operating expenses for the nine months ended April 28, 2007 was primarily due to increases in infrastructure and personnel within our wholesale division of $19.6 million to support our continued sales growth; $1.7 million of increased expense related to our fuel hedging program; increased depreciation expense of approximately $1.2 million; a loss of $1.5 million related to the sale of one of our Auburn, California facilities; an impairment charge of $0.8 million related to the reclassification of the remaining Auburn, California facility to held-for-sale; an operating loss of $0.6 million related to our former Albert’s Organics operations in Greenwood, Indiana; and $1.0 million of costs to transition the expanded relationship with Whole Foods Market in the Southern Pacific region of the United States to our facility located in Fontana, California, all recorded during the nine months ended April 28, 2007. These increases were offset by reductions of $1.8 million in bad debt expense. Additionally, the nine months ended April 29, 2006 included $3.5 million of expenses incurred in connection with the employment transition agreement entered into during with our former President and Chief Executive Officer, $0.9 million of incremental and redundant costs incurred in connection with the transition from our former warehouses and outside storage facility in Auburn, California into our new facility in Rocklin, California and $0.1 million of costs associated with opening the new Greenwood, Indiana facility. Total operating expenses for the first nine months of fiscal 2007 includes share-based compensation expense of $3.0 million, compared to $4.7 million in the first nine months of 2006, resulting from the adoption of SFAS 123(R). The $4.7 million of share-based compensation expense recorded in the first nine months of 2006 included $1.0 million related to the accelerated vesting of certain stock options pursuant to the employment transition agreement entered into during the first quarter of fiscal 2006 with our former President and Chief Executive Officer. See Note 2 to the condensed consolidated financial statements.

 

18

As a percentage of net sales, total operating expenses decreased to approximately 15.0% for the nine months ended April 28, 2007, from approximately 16.0% for the nine months ended April 29, 2006. The decrease in operating expenses as a percentage of net sales was primarily attributable to further leveraging our fixed operating costs due to our increased sales, improved operations in our Select Nutrition division and increased efficiencies due to our recent distribution facility openings, offset by operating losses related to the Albert’s Organics Greenwood, Indiana location (which operations were transferred to the Albert’s Organics Minneapolis, Minnesota facility effective October 31, 2006). We expect these efficiencies to continue to lower operating expenses relative to sales over the long-term. We also expect to open new facilities that will contribute efficiencies and lead to lower operating expenses related to sales over the long-term.

 

Operating Income

 

Operating income increased approximately 21.2%, or $12.2 million, to $69.7 million for the nine months ended April 28, 2007, from $57.5 million for the nine months ended April 29, 2006. As a percentage of net sales, operating income was 3.4% for the nine months ended April 28, 2007, compared to 3.2% for the nine months ended April 29, 2006.

 

Other Expense (Income)

 

Other expense (income) increased $1.1 million to $9.0 million for the nine months ended April 28, 2007, from $7.9 million for the nine months ended April 29, 2006. Interest expense for the nine months ended April 28, 2007 increased to $9.3 million from $8.3 million in the nine months ended April 29, 2006. The increase in interest expense was due to an increase in our short-term and long-term borrowings and effective interest rates. Interest income for the nine months ended April 28, 2007 increased to $0.6 million from $0.2 million in the nine months ended April 29, 2006. The increase in interest income was due to higher average cash levels during the nine months ended April 28, 2007 than during the nine months ended April 29, 2006.

Provision for Income Taxes

 

Our effective income tax rate was 39.0% and 38.3% for the nine months ended April 28, 2007 and April 29, 2006, respectively. The effective rate was higher than the federal statutory rate primarily due to state and local income taxes. The increase in the effective tax rate was primarily due to 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 (“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 $6.4 million to $37.0 million, or $0.87 per diluted share, for the nine months ended April 28, 2007, compared to $30.6 million, or $0.72 per diluted share, for the nine months ended April 29, 2006.

 

Liquidity and Capital Resources

 

We finance operations and growth primarily with cash flows from operations, borrowings under our credit facility, operating leases, trade payables, bank indebtedness and the sale of equity and debt securities.

On April 30, 2004, we entered into an amended and restated four-year, $250 million revolving credit facility with a bank group that was led by Bank of America Business Capital (formerly Fleet Capital Corporation) as the administrative agent. This credit facility replaced an existing $150 million revolving credit facility. The terms and conditions of our amended and restated credit facility provide us with more financial and operational flexibility, reduced costs and increased liquidity than did our prior credit facility. We further amended this facility effective as of January 1, 2006, reducing the rate at which interest accrues on LIBOR borrowings from one-month LIBOR plus 0.90% to one-month LIBOR plus 0.75%. Our amended and restated credit facility, which matures on March 31, 2008, supports our working capital requirements in the ordinary course of business and provides capital to grow our business organically or through acquisitions. As of April 28, 2007, our borrowing base, based on accounts receivable and inventory levels, was $250.0 million, with remaining availability of $123.9 million.

 

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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%. In December 2003, we amended this term loan agreement by increasing the principal amount from $30 million to $40 million under the existing terms and conditions. On July 29, 2005, we entered into an amended term loan agreement which further increased the principal amount of this term loan from $40 million to up to $75 million and decreased the rate at which interest accrues to one-month LIBOR plus 1.00%. As of April 28, 2007, approximately $67.5 million was outstanding under the term loan agreement.

We believe that our capital requirements for fiscal 2007 will be between $40 and $45 million. We will finance these requirements with cash generated from operations and the use of our existing credit facilities. These projects will provide both expanded facilities and 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 requirements will be similar to our anticipated fiscal 2007 requirements, as a percentage of net sales, as we plan to continue to invest in our growth by upgrading our infrastructure and expanding our facilities. Future investments in acquisitions that we may pursue will be financed through either equity or long-term debt negotiated at the time of the potential acquisition.

Net cash provided by operations was $12.5 million for the nine months ended April 28, 2007, and was the result of net income of $37.0 million and the change in cash collected from customers net of cash paid to vendors and a $43.4 million investment in inventory. The increase in inventory levels primarily related to supporting increased sales with wider product assortment and availability. Days in inventory was 45 days at April 28, 2007 and 46 days at April 29, 2006. Days sales outstanding improved to 21 days at April 28, 2007, compared to 24 days at April 29, 2006. Net cash provided by operations was $13.0 million for the nine months ended April 29, 2006, and was the result of net income and the change in cash collected from customers net of cash paid to vendors and a $24.5 million investment in inventory related to the opening of the Greenwood, Indiana and the Rocklin, California facilities in August 2005 and October 2005, respectively. Working capital increased by $46.8 million, or 26.6%, to $222.9 million at April 28, 2007, compared to working capital of $176.1 million at July 29, 2006. The loss on disposals of property and equipment for the nine months ended April 28, 2007 relates primarily to the sale of one of our Auburn, California facilities. See Note 7 to the condensed consolidated financial statements.

Net cash used in investing activities increased $4.7 million to $22.7 million for the nine months ended April 28, 2007, compared to $18.0 million for the same period in 2006. This increase was primarily due to purchases of acquired businesses of $6.5 million and increased capital expenditures of $5.9 million, offset by proceeds of $5.4 million recorded in the nine months ended April 28, 2007 related to the sale of one of our Auburn, California facilities.

Net cash provided by financing activities was $10.7 million for the nine months ended April 28, 2007, primarily due to $10.0 million in proceeds received from the increase in borrowings under our term loan agreement, the increase in our bank overdraft and proceeds from, and the tax benefit due to, the exercise of stock options, partially offset by repayments of long-term debt and notes payable. Net cash used in financing activities was $1.5 million for the nine months ended April 29, 2006, primarily due to $23.4 million in proceeds from, and the tax benefit due to, the exercise of stock options, offset by the decrease in our bank overdraft, purchases of treasury stock and repayments on our amended and restated credit facility and long-term debt.

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.

 

 

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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 a 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 totaling $50 million at one-month LIBOR plus 1.00%, thereby fixing our effective rate on the notional amount at 5.70%. One-month LIBOR was 5.32% as of April 28, 2007. The swap agreement qualifies as an “effective” hedge under SFAS 133.

We entered into commodity swap agreements to reduce price risk associated with anticipated purchases of diesel fuel. The outstanding commodity swap agreements hedge a portion of our expected fuel usage for the periods set forth in the agreements. We monitor the commodity (NYMEX #2 Heating oil) used in our swap agreements to determine that the correlation between the commodity and diesel fuel is deemed to be “highly effective.” At April 28, 2007, we had one outstanding commodity swap agreement which matures on June 30, 2007.

 

There have been no material changes to our commitments and contingencies from those disclosed in our Annual Report on Form 10-K for the year ended July 29, 2006, except for an operating lease signed with respect to warehouse space in central Florida. Commitments related to that lease agreement amount to $0.1 million in fiscal year 2007, $5.2 million in fiscal years 2008 through 2010, $3.9 million in fiscal years 2011 and 2012, and $10.4 million 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, demand for natural products, supply shortages and general economic conditions.

 

RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. We will adopt FIN 48 in fiscal 2008 and are currently evaluating whether the adoption of FIN 48 will have a material effect on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. (“SFAS”) 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. We will adopt SFAS 157 in fiscal 2009 and currently are evaluating whether the adoption of SFAS 157 will have a material effect on our consolidated financial statements.

In September 2006, the SEC staff issued SAB 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. We do not believe that this staff accounting bulletin will have a material effect on 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 and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The statement is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS 159 in fiscal 2009 and currently are evaluating whether the adoption of SFAS 159 will have a material effect on our consolidated financial statements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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 interest rate swap agreements to modify variable rate obligations to fixed rate obligations for a portion of our debt, and 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 July 29, 2006.

 

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)   Changes in internal controls. There has been no change in our internal control over financial reporting that occurred during the third fiscal quarter of 2007 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

The statements in this item describe the major risks to our business and should be considered carefully. We provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are 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 the occurrence of any of the events or conditions described in any of these risk factors.

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 customers

Our ability to maintain close, mutually beneficial relationships with our two largest customers, Whole Foods Market and Wild Oats Markets, is an important element to our continued growth. In October 2006, we announced a seven-year distribution agreement with Whole Foods Market, which commenced on September 26, 2006, under which we will continue to serve as the primary U.S. distributor to Whole Foods Market in the regions where we previously served. In November 2006, we entered into an amendment to that distribution agreement, under which we were named the primary wholesale natural grocery distributor to Whole Foods Market in the Southern Pacific region of the United States, which includes Southern California, Arizona and Southern Nevada, and is a region we did not previously serve. We began expanding our relationship with Whole Foods Market for this region in January 2007. Whole Foods Market accounted for approximately 29.1% of our net sales in the quarter ended April 28, 2007. In January 2004, we entered into a five-year primary distribution agreement with Wild Oats Markets. We had previously served as primary distributor for Wild Oats Markets through August 2002. Wild Oats Markets accounted for approximately 8.4% of our net sales in the quarter ended April 28, 2007. As a result of this concentration of our customer base, the loss or cancellation of business from either of these customers including from increased distribution to their own facilities, could materially and adversely affect our business, financial condition or results of operations.

 

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As discussed above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview,” Whole Foods Market and Wild Oats Markets announced on February 21, 2007 that the two companies have entered into a merger agreement. If the transactions contemplated by the merger agreement are consummated, Wild Oats Markets will become a wholly-owned subsidiary of Whole Foods Market. We cannot assure you that this merger, if consummated, will not have any impact on our future sales to Wild Oats Markets, on our margins, our financial condition or our results of operations.

We sell products under purchase orders, and we generally have no agreements with or commitments from our customers for the purchase of products. 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.

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.

Acquisitions

We continually evaluate opportunities to acquire other companies. We believe that there are risks related to acquiring companies, including overpaying for acquisitions, losing key employees of acquired companies and failing to achieve potential synergies. Additionally, our business could be adversely affected if we are unable to integrate our acquisitions and mergers.

A significant portion of our historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. Successful integration of merger partners is critical to our future operating and financial performance. Integration requires, among other things:

    maintaining the customer base;

    optimizing of delivery routes;

    coordinating administrative, distribution and finance functions; and

    integrating management information systems and personnel.

The integration process has and could divert the attention of management and any difficulties or problems encountered in the transition process could have a material adverse effect on our business, financial condition or results of operations. In addition, the process of combining companies has 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. We cannot assure you that we will realize any of the anticipated benefits of mergers.

We may have difficulty in managing our growth

The growth in the size of our business and operations has placed and is expected to continue to place a significant strain on our management. Our future growth is limited in part by the size and location of our distribution centers. 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. In addition, our growth strategy to expand our market presence includes possible additional acquisitions. To the extent our future growth includes acquisitions, we cannot assure you that we will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. Our ability to compete effectively and to manage future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage our work force. We cannot assure you that our personnel, systems, procedures and controls will be adequate to support our operations. Our inability to manage our growth effectively could have a material adverse effect on our business, financial condition or results of operations. Our focus on growth may temporarily redirect resources previously focused on reducing product cost, resulting in lower gross profits in relation to sales.

 

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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 us, may have substantially greater financial and other resources than us, 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.

Our operations are sensitive to economic downturns

The grocery industry is also sensitive to national and regional economic conditions and the demand for our products may be adversely affected from time to time by economic downturns. In addition, our operating results are particularly sensitive to, and may be materially adversely affected by:

    difficulties with the collectibility of accounts receivable;

    difficulties with inventory control;

    competitive pricing pressures; and

    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.

Increased Fuel Costs

Increased fuel costs may have a negative impact on our results of operations. The high cost of diesel fuel can also 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. Our one existing derivative agreement matures on June 30, 2007. We cannot assure you that we will be able to replace this derivative agreement on terms satisfactory to us. If we do not enter into a replacement derivative agreement, our exposure to volatility in the price of diesel fuel will be increased. We do not enter into fuel hedge contracts for speculative purposes.

 

Our operating results are subject to significant fluctuations

Our net sales and operating results may vary significantly from period to period due to:

    demand for natural products;

 

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    changes in our operating expenses, including in fuel and insurance;

    management’s ability to execute our business and growth strategies;

    changes in customer preferences and demands for natural products, including levels of enthusiasm for health, fitness and environmental issues;

    fluctuation of natural product prices due to competitive pressures;

    personnel changes;

    supply shortages;

    general economic conditions;

    lack of an adequate supply of high-quality agricultural products due to poor growing conditions, natural disasters or otherwise;

    volatility in prices of high-quality agricultural products resulting from poor growing conditions, natural disasters or otherwise; and

    future acquisitions, particularly in periods immediately following the consummation of such acquisition transactions while the operations of the acquired businesses are being integrated into our operations.

Due to the foregoing factors, we believe that period-to-period comparisons of our operating results may not necessarily be meaningful and that such comparisons cannot be relied upon as indicators of future performance.

Access to capital and the cost of that capital

We have an amended and restated $250 million secured revolving credit facility, under which borrowings accrue interest at one-month LIBOR plus 0.75%, which matures on March 31, 2008. As of April 28, 2007, our borrowing base, based on accounts receivable and inventory levels, was $250.0 million, with remaining availability of $123.9 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%. In December 2003, we amended this term loan agreement by increasing the principal amount from $30 million to $40 million under the existing terms and conditions. In July 2005, we further amended the term loan agreement, which further increased the principal amount from $40 million to a maximum of up to $75 million and which reduced the interest rate on borrowings to one-month LIBOR plus 1.00%. The term loan is repayable over seven years from the date of amendment, based on a fifteen-year amortization schedule, and the amendment did not affect any of the other terms and conditions under the loan agreement. As of April 28, 2007, $67.5 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.

 

We are subject to significant governmental regulation

Our business is highly regulated at the federal, state and local levels and our products and distribution operations require various licenses, permits and approvals. In particular:

    our products are subject to inspection by the U.S. Food and Drug Administration;

 

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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

    the U.S. Department of Transportation and the U.S. Federal Highway Administration regulate our trucking operations.

The loss or revocation of any existing licenses, permits or approvals or the failure to obtain any additional licenses, permits or approvals in new jurisdictions where we intend to do business could have a material adverse effect on our business, financial condition or results of operations.

We are dependent on a number of key executives

Management of our business is substantially dependent upon the services of Richard Antonelli (Executive Vice President, Chief Operating Officer and President of Distribution), Daniel V. Atwood (Executive Vice President, Chief Marketing Officer, and President of United Natural Brands), Michael D. Beaudry (President of the Eastern Region), Thomas A. Dziki (National Vice President of Real Estate and Construction), Michael S. Funk (President and Chief Executive Officer), Gary A. Glenn (Vice President of Information Technology), Randle Lindberg (President of the Western Region), Mark E. Shamber (Vice President, Chief Financial Officer and Treasurer), and other key management employees. Loss of the services of any officers or any other key management employee could have a material adverse effect on our business, financial condition or results of operations.

Union-organizing activities could cause labor relations difficulties

As of April 28, 2007, we had approximately 4,700 full and part-time employees. An aggregate of approximately 7% of our total employees, or approximately 350 of the employees at our Auburn, Washington, Iowa City, Iowa and Edison, New Jersey facilities, are covered by collective bargaining agreements. The Edison, New Jersey, Auburn, Washington, and Iowa City, Iowa agreements expire in June 2008, February 2009 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

 

None.

 

Item 5. Other Information

 

None.

 

 

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Item 6. Exhibits

 

Exhibits

 

Exhibit No.

Description

10.33

Lease between the Registrant and MERIDIANHUDSON McINTOSH LLC, a Delaware limited liability company, dated March 16, 2007

31.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – CEO

31.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – CFO

32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – CEO

32.2

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – CFO

 

 

*          *          *

 

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

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

UNITED NATURAL FOODS, INC.

 

 

 

 

 

/s/ Mark E. Shamber

 

Mark E. Shamber

 

Chief Financial Officer

 

(Principal Financial and Accounting Officer)

 

 

Dated: June 7, 2007

 

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