15.11.02

15.11.2002: Meldung: Horizon Organic Holding Corp: Quarterly Report (engl.)

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

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements for the three and nine months ended September 30, 2002, and accompanying notes included herein, our Annual Report on Form 10-K for the year ended December 31, 2001 and our Current Report on Form 8-K dated as of August 14, 2002. Except for the historical information contained herein, the discussion in this Quarterly Report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties, such as statements about our plans, objectives, expectations and intentions. We use words such as "anticipate," "believe," "expect," "future" and "intend" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements due to a number of factors. These factors are discussed more fully in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001, in Part I Item 1 under the heading "Risk Factors".
Presentation Overview
We derive revenue primarily through product sales. Net sales include product sales, less product returns, if any, and allowances. Product sales are comprised primarily of sales of organic fluid milk, organic yogurts, organic butters, organic cheeses and organic juices. Revenue is generally recognized at the time title transfers, which is upon shipment to or pickup by a customer.
Cost of sales includes the cost of raw materials including milk purchased from our Idaho Dairy and Colorado herd which are included in discontinued operations, processing fees, inbound freight costs, milk pooling charges and operating income or loss from our Maryland farm operations. The costs of our farm operations include all costs associated with the milk production from our Maryland organic dairy herd which is included in continuing operations. Such costs primarily include organic feed, cattle depreciation, cull losses, payroll, general operating expenses and fixed asset depreciation. We depreciate our Maryland farm assets using the straight-line method over the estimated useful lives, which range from 3 to 27 years. Cattle are depreciated using a straight-line method over five years commencing with their first milking and have a capitalized cost based on purchase price plus pre-production costs.
We purchase most of our fluid milk supply from various organic farmers and cooperatives throughout the U.S. and the U.K. In the U.S., we generally have contracts with our suppliers with terms of one to three years. In the U.K., terms generally range anywhere from three months to five years. Prices are set based on butterfat content and quality testing criteria and most contracts require that we purchase minimum quantities of organic farm milk. If we cannot use the minimum amounts of milk we are required to purchase under these contracts, either as organic milk or in other organic dairy products, we sell the organic milk as conventional milk, which has a lower selling price. We record the difference between our purchase price for organic milk and the conventional milk price received by us in cost of sales.
Processing fees include payments made to our dairy processors and juice processors to process and package raw ingredients into organic milk, dairy and juice products. Inbound freight costs include all raw material inbound shipping costs to the processors. Milk pooling charges include charges incurred by our processors as calculated by the Federal Milk Market Order System. Because the pooling charge assessments are received from the Market Administrators one month in arrears, we adjust the prior month"s estimates to actual amounts charged.
Gross profit includes net sales less cost of sales.
Selling expenses consist of all expenses required to market and sell our products, including our direct selling, marketing and distribution costs.
General and administrative costs are comprised of all costs of operations and corporate support not specifically included in any of the items above. Most of our depreciation expense, including that associated with our new enterprise resource planning system and general operations and accounting software, is included in this line item.
Intangible assets amortization includes the amortization of intangible assets acquired from the Juniper Valley brand purchase in 1998, The Organic Cow of Vermont brand purchase in 1999 and certain intangibles acquired from the Meadow Farms acquisition in 2000. As of January 1, 2002 we adopted the provisions of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS 142, which requires that all goodwill and certain identifiable intangible assets no longer be amortized, but instead will be reviewed for impairment at least annually in accordance with the provisions of this statement. We performed the impairment reviews in accordance with the provisions of this statement as of January 1, 2002 and as of August 31, 2002, and such reviews indicated that we had no intangible assets impairment at those dates. We believe that there has been no intangible assets impairment since our latest test date. Additionally, we expect to perform our intangible assets impairment review annually at the end of every August and at any other date when conditions exist that warrant impairment reviews to be done.
Discontinued operations includes the net costs of our milk production from our Idaho Dairy and Colorado herd which are assets held for sale. Such cost factors primarily include organic feed, cattle depreciation, cull losses, payroll, general operating expenses, fixed asset depreciation, goodwill amortization, interest expense and expected loss on disposal which includes transaction costs. We ceased depreciating our assets held for sale upon their classification as such and recognized on the measurement date of March 31, 2002 the expected loss on disposal at that time. Prior to the measurement date, we depreciated our Idaho Dairy and Colorado herd assets using the straight-line method over the estimated useful lives, which ranged from 3 to 27 years. Cattle were depreciated using a straight-line method over five years commencing with their first milking and had a capitalized cost based on purchase price plus pre-production costs. We follow generally accepted accounting principles for ceasing amortization of goodwill which took effect on January 1, 2002. Prior to January 1, 2002, goodwill associated with the Idaho Dairy was amortized and was included in discontinued operations with approximately $0.2 million amortized annually. As of September 30, 2002 because of delays in the anticipated closing schedule of the Idaho Dairy asset sale, we recognized an additional loss on disposal equaling the anticipated decline in sale price expected to be incurred during the 2002 fourth quarter which is equal to the depreciation charges that would have been recorded in that period including an additional $0.1 million in anticipated disposal costs. We currently anticipate that the Idaho Dairy asset sale will be closed by December 31, 2002.
Results of Operations
Three Months Ended September 30, 2002, Compared to Three Months Ended September 30, 2001
Net Sales. Net sales increased by 22.1%, or $8.6 million, to
$47.6 million for the three months ended September 30, 2002 from $39.0 million
for the comparable period in 2001. Net sales from U.S. operations increased
25.4%, or $8.0 million, to $39.3 million from $31.3 million resulting primarily
from increased sales of existing products to existing accounts and continued
expansion of conventional grocery distribution channels.
Changes in our U.S. product category sales were as follows:
Fluid Milk
• Total fluid milk sales increased 24.3%, or $5.4 million, to $27.7 million for the three months ended September 30, 2002 from $22.3 million for the comparable period in 2001.
• Sales of ultra-pasteurized (UP) fluid milk increased 51.0%, or $5.1 million, to $15.1 million for the three months ended September 30, 2002 from $10.0 million for the comparable period in
2001. This increase was primarily due to expansion of UP milk to new customers throughout the period including new single serve milk sales.
• Sales of traditional pasteurized fluid milk increased 2.5%, or $0.3 million, to $12.6 million for the three months ended September 30, 2002 from $12.3 million for the comparable period in 2001. The increase was primarily the result of new customers.
• As a result of these shifts, our fluid milk product line mix shifted to 45% traditional pasteurized fluid milk for the three months ended September 30, 2002 from 55% for the comparable period in 2001.
Other Dairy
• Sales of our other dairy products increased 27.4%, or $1.8 million, to $8.4 million for the three months ended September 30, 2002 from $6.6 million for the comparable period in 2001, due primarily to increased sales of our butter, cheese and cottage cheese products as well as to the sales of our new line of pudding products.
• Sales of butter increased 25.7%, or $0.4 million, to $2.3 million for the three months ended September 30, 2002 from $1.9 million for the comparable period in 2001. This increase resulted primarily from increased sales to new and existing customers.
• Sales of cheese increased 32.6%, or $0.4 million, to $1.5 million for the three months ended September 30, 2002 from $1.1 million for the comparable period in 2001. This increase resulted primarily from increased sales to new and existing customers.
• Sales of industrial products, such as powdered milk and cheeses sold for further processing into finished goods, and of foodservice products, such as single serve milk sold to restaurants and other service providers, increased 84.2%, or $0.8 million, to $1.7 million for the three months ended September 30, 2002 from $0.9 million for the comparable period in 2001. This increase was primarily the result of our introduction of yogurt and single-serve milk products into approximately 2,500 Starbucks Corporation stores nationwide.
Juice
• Sales of our juice products decreased 5.8%, or $0.1 million, to $2.0 million for the three months ended September 30, 2002 from $2.1 million for the comparable period in 2001. We believe that this decrease was primarily the result of aggressive pricing on conventional juice, which widened the price gap between conventional and organic juice.
Changes in our International sales were as follows:
• Net sales from international operations increased 8.6%, or $0.6 million, to $8.3 million for the three months ended September 30, 2002 from $7.7 million in 2001. Expressed in British pounds, sales increased 0.9%; however, shifts in the exchange rate in the two periods produced the balance of the dollar-denominated increase. This sales consistency was primarily due to our UK business transitioning significantly from lower priced private label product sales to higher priced Rachel"s Organic branded product sales, which resulted in decreased sales volume offset by higher prices.
• Net sales of Rachel"s Organic products which consist primarily of milk, yogurt, double cream, crme fraiche, and butter increased 88.5%, or $1.9 million, to $4.0 million for the three months ended September 30, 2002 from $2.1 million for the comparable period in 2001. Expressed in British pounds, sales increased 75.0%; however, shifts in the exchange rate in the two periods produced the balance of the dollar-denominated increase.
• We anticipate that the net sales of Rachel"s Organic branded products will continue to increase as we continue our introduction of branded fluid milk under the Rachel"s Organic brand. Previously, our fluid milk sales were either private label or branded under the Horizon Organic label. In early 2002 we replaced Horizon Organic branded milk with Rachel"s Organic branded milk to leverage the existing strength of the Rachel"s Organic brand. As part of our December 2001 agreement with Dairy Crest Limited, in February 2002 Dairy Crest replaced their own brands of organic fluid milk with Rachel"s Organic branded fluid milk in its direct home delivery system and in grocery stores throughout the U.K.
Cost of Sales and Gross Profit. Cost of sales increased 20.1%, or
$5.5 million, to $32.7 million for the three months ended September 30, 2002
from $27.2 million for the comparable period in 2001. The increase in cost of
sales was primarily the result of our increased sales. Gross profit increased
26.6%, or $3.2 million, to $15.0 million for the three months ended
September 30, 2002 from $11.8 million for the comparable period in 2001. As a
percentage of net sales, gross profit increased to 31.4% for the three months
ended September 30, 2002 from 30.3% for the comparable period in 2001. Our gross
profit in the U.S. increased to 33.1% for the three months ended September 30,
2002 from 31.8% for the comparable period in 2001 primarily due to increased
efficiencies and economies of scale gained with our U.S. processors and
partially due to better matching of supply and demand in our U.S. milk supply,
which resulted in fewer sales of organic milk as conventional milk at lower
conventional prices, versus the comparable three month period a year ago. Our
gross profit in the U.K. decreased to 23.2% for the three months ended
September 30, 2002 from 24.0% for the comparable period in 2001. This was
primarily the result of a suppressed market for organic cream which, in
conjunction with not having a benefit in 2002 of a similar temporary price
reduction from a major milk supplier that we had in 2001, offset the increased
gross profit from the increased Rachel"s Organic branded sales. Branded product
sales generally yield a higher gross profit than sales of private label
products.
Selling Expenses. Selling expenses increased 36.2%, or $2.9 million,
to $10.8 million for the three months ended September 30, 2002 from $7.9 million
for the comparable period in 2001. This increase was a result of increased U.S.
sales support in the form of primarily increased trade promotion, consumer
promotion and a national public relations campaign in conjunction with the
October 2002 implementation of the new USDA organic regulations. As a result,
selling expenses as a percentage of net sales increased to 22.6% for the three
months ended September 30, 2002 from 20.3% for the comparable period in 2001.
General and Administrative Expenses. General and administrative
expenses increased 27.9%, or $0.6 million, to $2.5 million for the three months
ended September 30, 2002 from $1.9 million for the comparable period in 2001.
This increase was primarily due to increased overhead, and partially due to
increased depreciation and administrative costs arising from the new information
system installed in October 2001. As a result, our general and administrative
expenses as a percentage of net sales increased to 5.2% in 2002 from 5.0% in
2001.
Intangible Asset Amortization. Amortization expense related to
intangible assets decreased 57.9%, or $0.5 million, to $0.3 million for the
three months ended September 30, 2002 from $0.8 million for the comparable
period in 2001. This decrease was a result of our January 1, 2002, adoption of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which requires that we cease to amortize goodwill and
requires review for impairment at least annually in accordance with the
provisions of this statement.
Other Expense, Net. Other expense, net decreased 61.4%, or
$0.3 million, to $0.2 million for the three months ended September 30, 2002 from
$0.5 million for the comparable period in 2001. The decrease was primarily
attributable to a decrease in the average interest rate on our debt facilities
and partially attributable to a decrease in our outstanding debt balances. Our
average interest rate on our LIBOR-based debt facilities decreased to 4.3% for
the three months ended September 30, 2002 from 7.0% for the comparable period in
2001.
Income Tax Expense. Income tax expense increased $0.2 million to
$0.5 million for the three months ended September 30, 2002 from $0.3 million for
the comparable period in 2001. Our effective income tax rate of 39.0% for the
three months ended September 30, 2002 decreased from 39.9% for the comparable
period in 2001. The 2001 comparable period income tax expense was calculated at
a higher effective rate due to the uncertainty at September 30, 2001, of our
ability to utilize the loss from the U.K. operations.
Income From Continuing Operations. Income from continuing operations
increased $0.3 million to $0.7 million for the three months ended September 30,
2002 from $0.4 million for the comparable period in 2001.
• Income from continuing operations for U.S. operations increased $0.1 million to $0.7 million for the three months ended September 30, 2002 from $0.6 million for the comparable period in 2001.
• Income (loss) from continuing operations for international operations increased $0.2 million to essentially breakeven for the three months ended September 30, 2002 from a loss of $0.2 million for the comparable period in 2001.
Income (Loss) From Discontinued Operations. Income (loss) from
discontinued operations decreased $0.6 million to a $0.4 million loss from
discontinued operations for the three months ended September 30, 2002 from
$0.2 million income from discontinued operations for the comparable period in
2001. The decrease was primarily due to increases in cost of sales, which
consists of feed and cattle costs, of the Idaho Dairy and Colorado herd
discontinued operations, and partially due to fixed management fees of the
Colorado herd through the termination date despite significant decreased milk
production from the reduction in cattle inventory during the period in
conjunction with the transferring of the Colorado herd to the Idaho Dairy.
If we had determined that the pending sale of our Idaho Dairy assets, including the transferred Colorado herd, had not met the definition of a disposal group under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of the Idaho Dairy and Colorado herd would have been recorded in continuing operations. Accordingly, for the three months ended September 30, 2002, an operating loss before interest and income taxes of $349,000 from the Idaho Dairy and Colorado herd would have been included in cost of sales, thereby increasing our cost of sales which in turn would have decreased our gross profit to $14.6 million for the three months ended September 30, 2002. For the three months ended September 30, 2001, operating income before interest, amortization and income taxes of $732,000 from the Idaho Dairy and Colorado herd would have been included in cost of sales, thereby decreasing our cost of sales which in turn would have increased our gross profit to $12.5 million for the three months ended September 30, 2001. Additionally, if we had included the Idaho Dairy and Colorado herd operations with continuing operations, our reported net income would have been $253,000, or $.02 per basic and diluted share, for the three months ended September 30, 2002, and our reported net income would have remained $592,000, or $.06 per basic and diluted share, for the three months ended September 30, 2001.
Net Income. Net income decreased approximately $0.27 million to
$0.32 million for the three months ended September 30, 2002 from $0.59 million
for the comparable period in 2001.
• Net income for U.S. operations decreased $0.44 million to $0.35 million for the three months ended September 30, 2002 from $0.79 million for the comparable period in 2001. The decrease was primarily due to increased feed and cattle costs of the Idaho Dairy and Colorado herd
discontinued operations, and partially due to fixed management fees of the Colorado herd up to the termination date despite significant decreased milk production from the herd.
• Net loss for international operations decreased $0.17 million to a net loss of $30,000 for the three months ended September 30, 2002 from a net loss of $0.20 million for the comparable period in 2001. The decrease in net loss was primarily due to the decrease in intangible assets amortization and partially due to decreased interest expense.
Comprehensive Income. Comprehensive income decreased $1.0 million to
$0.9 million for the three months ended September 30, 2002 from $1.9 million for
the comparable period in 2001. This decrease was primarily due to a $0.6 million
unrealized gain on translation adjustment from the British pound to the U.S.
dollar for the three months ended September 30, 2002, compared to $1.3 million
unrealized gain on translation adjustment for the same period in 2001. We
translated our investment in our U.K. subsidiaries from pounds sterling to U.S.
dollars at the rate in effect at the end of the period. At September 30, 2002,
December 31, 2001 and September 30, 2001, the British pound was worth
approximately U.S. $1.561, U.S. $1.452 and U.S. $1.475, respectively.
Nine Months Ended September 30, 2002, Compared to Nine Months Ended September 30, 2001
Net Sales. Net sales increased by 16.8%, or $19.4 million, to
$134.6 million for the nine months ended September 30, 2002 from $115.2 million
for the comparable period in 2001. Net sales from U.S. operations increased
20.3%, or $18.6 million, to $110.3 million from $91.7 million resulting
primarily from increased sales of existing products to existing accounts and
continued expansion of conventional grocery distribution channels.
Changes in our U.S. product category sales were as follows:
Fluid Milk
• Total fluid milk sales increased 18.3%, or $12.0 million, to $77.5 million for the nine months ended September 30, 2002 from $65.5 million for the comparable period in 2001.
• Sales of ultra-pasteurized (UP) fluid milk increased 47.4%, or $13.1 million, to $40.8 million for the nine months ended September 30, 2002 from $27.7 million for the comparable period in 2001. This increase was primarily due to expansion of UP milk to new customers throughout the period including new single serve milk sales.
• Sales of traditional pasteurized fluid milk decreased 2.8%, or $1.1 million, to $36.8 million for the nine months ended September 30, 2002 from $37.9 million for the comparable period in 2001. The decrease was primarily the result of some customers substituting UP milk for traditional pasteurized milk.
• As a result of these shifts, our fluid milk product line mix shifted to 47% traditional pasteurized fluid milk for the nine months ended September 30, 2002 from 58% for the comparable period in 2001.
Other Dairy
• Sales of our other dairy products increased 27.0%, or $5.1 million, to $23.8 million for the nine months ended September 30, 2002 from $18.7 million for the comparable period in 2001, due primarily to increased sales of our butter, cheese and cottage cheese products as well as to the sales of our new line of pudding products.
• Sales of butter increased 42.8%, or $2.1 million, to $6.9 million for the nine months ended September 30, 2002 from $4.8 million for the comparable period in 2001. This increase resulted primarily from increased sales to new and existing customers.
• Sales of cheese increased 25.9%, or $0.9 million, to $4.3 million for the nine months ended September 30, 2002 from $3.4 million for the comparable period in 2001. This increase resulted primarily from increased sales to new and existing customers.
• Sales of industrial products, such as powdered milk and cheeses sold for further processing into finished goods, and of foodservice products, such as single serve milk sold to restaurants and other service providers, increased 50.3%, or $1.4 million, to $4.4 million for the nine months ended September 30, 2002 from $3.0 million for the comparable period in 2001. This increase was primarily the result of our introduction of yogurt and single-serve milk products into approximately 2,500 Starbucks Corporation stores nationwide.
Juice
• Sales of our juice products decreased 4.6%, or $0.3 million, to $5.9 million for the nine months ended September 30, 2002, from $6.2 million for the comparable period in 2001. This decrease was primarily the result of an increase in sales during the first three months of 2001 as a result of a trade promotion that we discontinued, and partially the result of aggressive pricing on conventional juice, which widened the price gap between conventional and organic juice.
Changes in our International sales were as follows:
• Net sales from international operations increased 3.2%, or $0.8 million, to $24.3 million for the nine months ended September 30, 2002 from $23.5 million in 2001. Expressed in British pounds, sales were essentially flat; however, shifts in the exchange rate in the two periods produced the dollar-denominated increase. This sales consistency was primarily due to our UK business transitioning significantly from lower priced private label product sales to higher priced Rachel"s Organic branded product sales, which resulted in decreased sales volume offset by higher prices.
• Net sales of Rachel"s Organic products which consist primarily of milk, yogurt, double cream, crme fraiche, and butter increased 79.8%, or $4.9 million, to $11.1 million for the nine months ended September 30, 2002 from $6.2 million for the comparable period in 2001. Expressed in British pounds, sales increased 74.8%; however, shifts in the exchange rate in the two periods produced the balance of the dollar-denominated increase.
• We anticipate that the net sales of Rachel"s Organic branded products will continue to increase as we continue our introduction of branded fluid milk under the Rachel"s Organic brand. Previously, our fluid milk sales were either private label or branded under the Horizon Organic label. In early 2002 we replaced Horizon Organic branded milk with Rachel"s Organic branded milk to leverage the existing strength of the Rachel"s Organic brand. As part of our December 2001 agreement with Dairy Crest, in February 2002 Dairy Crest replaced their own brands of organic fluid milk with Rachel"s Organic branded fluid milk in its direct home delivery system and in grocery stores throughout the U.K.
Cost of Sales and Gross Profit. Cost of sales increased 12.4%, or $10.1 million, to $91.7 million for the nine months ended September 30, 2002 from $81.6 million for the comparable period in 2001. The increase in cost of sales was primarily the result of our increased sales. Gross profit increased 27.4%, or $9.2 million, to $42.9 million for the nine months ended September 30, 2002 from $33.7 million for the comparable period in 2001. As a percentage of net sales, gross profit increased to 31.9% for the nine months ended September 30, 2002 from 29.2% for the comparable period in 2001. Our gross profit in the U.S. increased to 33.6% for the nine months ended September 30, 2002 from 30.8% for the comparable period in 2001 primarily due to increased efficiencies and economies of scale gained with our U.S. processors and partially due to better matching of supply and demand in our U.S. milk supply, which resulted in fewer sales of organic milk as conventional milk at lower conventional prices, versus the comparable nine month period a year ago. Our gross profit in the U.K. increased to 23.8% for the nine months ended September 30, 2002 from 22.9% for the comparable period in 2001. This was primarily the result of the increased Rachel"s Organic branded sales. Branded product sales generally yield a higher gross profit than sales of private label products.

Selling Expenses. Selling expenses increased 29.8%, or $6.9 million, to $30.1 million for the nine months ended September 30, 2002 from $23.2 million for the comparable period in 2001. This increase was a result of increased U.S. sales support in the form of primarily increased trade promotion, consumer promotion, billboard and national magazine advertising, and a national public relations campaign in conjunction with the October 2002 implementation of the new USDA organic regulations. Our recent advertising campaign, You Are What You Drink, was rolled out in February 2002 in our most highly developed markets including San Francisco, Los Angeles, Denver and New York. As a result, selling expenses as a percentage of net sales increased to 22.4% for the nine months ended September 30, 2002 from 20.1% for the comparable period in 2001.

General and Administrative Expenses. General and administrative expenses increased 30.7%, or $1.8 million, to $7.7 million for the nine months ended September 30, 2002 from $5.9 million for the comparable period in 2001. This increase was primarily due to increased overhead, including costs resulting from our commitment to corporate development such as consulting fees, and partially due to increased depreciation and administrative costs arising from the new information system installed in October 2001. As a result, our general and administrative expenses as a percentage of net sales increased to 5.7% in 2002 from 5.1% in 2001.
Intangible Asset Amortization. Amortization expense related to intangible assets decreased 58.1%, or $1.3 million, to $1.0 million for the nine months ended September 30, 2002 from $2.3 million for the comparable period in 2001. This decrease was a result of our January 1, 2002, adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which requires that we cease to amortize goodwill and requires review for impairment at least annually in accordance with the provisions of this statement.

Other Expense, Net. Other expense, net decreased 68.6%, or $1.1 million, to $0.5 million for the nine months ended September 30, 2002 from $1.6 million for the comparable period in 2001. The decrease was primarily attributable to a decrease in the average interest rate on our debt facilities and partially attributable to a decrease in our outstanding debt balances. Our average interest rate on our LIBOR-based debt facilities decreased to 4.4% for the nine months ended September 30, 2002 from 7.5% for the comparable period in 2001.

Income Tax Expense. Income tax expense increased $1.1 million to
$1.4 million for the nine months ended September 30, 2002 from $0.3 million for the comparable period in 2001. Our effective income tax rate of 39.0% for the nine months ended September 30, 2002 decreased from 40.9% for the comparable period in 2001. The 2001 comparable period income tax expense was calculated at a higher effective rate due to the uncertainty at September 30, 2001, of our ability to utilize the loss from the U.K. operations.

Income From Continuing Operations. Income from continuing operations increased $1.8 million to $2.2 million for the nine months ended September 30, 2002 from $0.4 million for the comparable period in 2001.
• Income from continuing operations for U.S. operations increased $0.8 million to $2.0 for the nine months ended September 30, 2002 from $1.2 million for the comparable period in 2001.
• Income (loss) from continuing operations for international operations increased $1.0 million to income of $0.2 million for the nine months ended September 30, 2002 from a loss of $0.8 million for the comparable period in 2001.
Income (Loss) From Discontinued Operations. Income (loss) from discontinued operations decreased $3.6 million to a $3.2 million loss from discontinued operations for the nine months ended September 30, 2002 from $0.4 million income from discontinued operations for the comparable period in 2001. The decrease was primarily due to the anticipated loss on disposal of the Idaho Dairy, including the transferred Colorado herd, of $3.0 million after income taxes, and partially due to increased costs of sales, which consists of feed and cattle costs, of the Idaho Dairy and Colorado herd discontinued operations.
If we had determined that the pending sale of our Idaho Dairy assets, including the transferred Colorado herd, had not met the definition of a disposal group under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of the Idaho Dairy and Colorado herd would have been recorded in continuing operations. Had we not determined to sell our Idaho Dairy, including the transferred Colorado herd, the results of the Idaho Dairy would not have included additional loss on disposal charges of $1.9 million net of income taxes because we would not have incurred these anticipated losses associated with the disposal of the Idaho Dairy. Accordingly, for the nine months ended September 30, 2002, an operating loss before interest and income taxes of $0.8 million from the Idaho Dairy and Colorado herd would have been included in cost of sales, thereby increasing our cost of sales which in turn would have decreased our gross profit to $42.0 million for the nine months ended September 30, 2002. For the nine months ended September 30, 2001, operating income before interest, amortization and income taxes of $2.1 million from the Idaho Dairy and Colorado herd would have been included in cost of sales, thereby decreasing our cost of sales which in turn would have increased our gross profit to $35.7 million for the nine months ended September 30, 2001. Additionally, if we had included the Idaho Dairy and Colorado herd operations with continuing operations and had not incurred an anticipated additional loss on disposal of $1.9 million net of income taxes during 2002, we would have reported net income of $920,000, or $.09 per basic and diluted share, for the nine months ended September 30, 2002, and our reported net income would have remained $799,000, or $.08 per basic and diluted share, for the nine months ended September 30, 2001.
Net Income (Loss). Net income (loss) decreased $1.8 million to a loss
of $1.0 million for the nine months ended September 30, 2002 from net income of $0.8 million for the comparable period in 2001.
• Net income (loss) for U.S. operations decreased $2.8 million to a loss of $1.2 million for the nine months ended September 30, 2002 from net income of $1.6 million for the comparable period in 2001. The decrease was primarily due to the anticipated loss on disposal of the Idaho Dairy, including the transferred Colorado herd, and partially due to increased feed and cattle costs of the Idaho Dairy and Colorado herd discontinued operations.
• Net income (loss) for international operations increased $1.0 million to net income of $0.2 million for the nine months ended September 30, 2002 from a net loss of $0.8 million for the comparable period in 2001. The increase in net income was primarily due to the decrease in intangible assets amortization and partially due to decreased interest expense.
Comprehensive Income. Comprehensive income increased $0.9 million to $1.3 million for the nine months ended September 30, 2002 from $0.4 million for the comparable period in 2001. This increase was due to a $2.3 million unrealized gain on translation adjustment from the British pound to the U.S.dollar for the nine months ended September 30, 2002, compared to $0.4 million unrealized loss on translation adjustment for the same period in 2001. The total net change of $2.7 million in foreign currency translation gain for the nine months ended September 30, 2002 compared to the comparable period in 2001 fully offset a $1.8 million decrease in net income for the nine months ended September 30, 2002 compared to the comparable period in 2001. We translated our investment in our U.K. subsidiaries from pounds sterling to U.S. dollars at the rate in effect at the end of the period. At September 30, 2002, December 31, 2001 and September 30, 2001, the British pound was worth approximately U.S. $1.561, U.S. $1.452 and U.S. $1.475, respectively.

Liquidity and Capital Resources
We have generally used funds generated from operations, trade payables, bank indebtedness and the sale of equity securities to meet our capital requirements.
Net cash provided by operations was $7.9 million for the nine months ended September 30, 2002, an increase of $2.4 million from $5.5 million for the comparable period in 2001. Cash provided by operations in 2002 was primarily attributable to an increase in trade accounts payable and other accrued expenses of $4.0 million as well as an increase in income as adjusted by the $3.0 million non-cash loss on the disposal of the Idaho Dairy and Colorado herd, net of income taxes; depreciation and amortization charges; and a decrease in inventories partially offset by primarily increased prepaid and other current assets and trade accounts receivable. Cash provided by operations in 2001 was primarily attributable to increases in income as adjusted by depreciation and amortization and increases in other accrued expenses and income taxes payable and a decrease in inventories partially offset primarily by decreased trade accounts payable.
Net cash used in investing activities was $2.6 million for the nine months ended September 30, 2002, an increase of $0.8 million from $1.8 million for the comparable period in 2001. Cash used in investing activities in 2002 was primarily attributable to $1.2 million used by discontinued operations primarily in its seasonal buildup of feed inventories, $0.8 million used in the purchases of property and equipment net of proceeds from equipment sales and $0.4 million used in purchases of cattle for our Maryland farm operations net of proceeds from cattle sales. Cash used in investing activities in 2001 was primarily attributable to $3.0 million in the purchases of property and equipment net of proceeds from equipment sales, and $0.3 million used in purchases of cattle for our Maryland farm operations net of proceeds from cattle sales, partially offset by $1.7 million received from the Idaho Dairy and Colorado herd discontinued operations. Purchases in 2002 were primarily attributable to miscellaneous equipment and milk production equipment. Purchases in 2001 were primarily attributable to the purchase of enterprise resource planning software.
Net cash used in financing activities was $6.3 million for the nine months ended September 30, 2002, an increase of $2.5 million from $3.8 million for the comparable period in 2001. This increase in the use of cash in financing activities is due to our pay-downs of term debt and our net pay-downs of our outstanding credit line balance during the nine month period ended September 30, 2002, compared to the comparable period in 2001 where pay-downs of term debt and pay-downs of our outstanding credit line balance were partially offset by borrowings against the line of credit.
Our cash and cash equivalents were $2.7 million at September 30, 2002 and $2.3 million at September 30, 2001. We have a five year $25.0 million term loan with US Bank which bears an interest rate of LIBOR plus a variable margin spread ranging from 1.65% to 3.75%. At September 30, 2002, the interest rate was 4.4%. At September 30, 2002 we had an outstanding balance of $18.6 million. In addition, we have a line of credit with US Bank that provides funding of up to $25.0 million and bears interest primarily at a rate of LIBOR plus a variable margin spread ranging from 1.65% to 3.75%. At September 30, 2002, we had borrowed $14.8 million against the credit line facility in addition to credit line encumbrances of $2.5 million. Of this $14.8 million outstanding credit line balance, $13.6 million was at an interest rate of 4.4% and $1.2 million was at an adjustable interest rate of prime plus 0.75%, or 5.5%. We may borrow additional amounts under the revolving line of credit, subject to the terms of the credit agreement, until the facility"s maturity date of May 31, 2003. We expect to use a substantial portion of the proceeds from the sale of assets held for sale to repay outstanding debt and we are working with US Bank on a plan to extend or replace our line of credit before it matures on May 31, 2003.
We currently anticipate that our available cash resources, funds generated by operations and available credit facilities, will be sufficient to meet our presently anticipated capital needs, but may be insufficient for cash acquisitions under our corporate development program. If additional funds are required, we may seek additional equity or debt financing. Such financing may not be available to us on terms that are acceptable to us, if at all, or on terms that would not be dilutive to our stockholders.
Critical Accounting Policies
The critical accounting policies effective during the nine months ended September 30, 2002 were consistent with the significant accounting policies reported in the Company"s Form 10-K for the year ended December 31, 2001 except for no longer amortizing goodwill as of the Company"s adoption on January 1, 2002 of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS 142, which requires that goodwill and certain identifiable intangible assets not be amortized, but instead will be reviewed for impairment at least annually in accordance with the provisions of this statement. Other identifiable intangibles with finite lives will continue to be amortized over their estimated useful lives. Additionally, the Company is reporting the Idaho Dairy and Colorado herd operations as discontinued operations and assets held for sale beginning March 31, 2002 and has reclassified prior periods accordingly. Pursuant to SFAS 144, the Company ceased depreciating the related assets as of March 31, 2002 and wrote the assets down to the expected disposal value, less costs to sell. See note 4.
Effect of Recently Issued Accounting Standards
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS 142, which requires that all intangible assets acquired, other than those acquired in a business combination, be initially recognized and measured based on the asset"s fair value. We adopted the provisions of SFAS 142 effective January 1, 2002. Goodwill and certain identifiable intangible assets are not amortized under SFAS 142, but instead will be reviewed for impairment at least annually in accordance with the provisions of this statement. Other identifiable intangibles will continue to be amortized over their useful lives. We do not believe the adoption of this statement will have an impact on our cash flows. We performed the impairment reviews in accordance with the provisions of this statement as of January 1, 2002, and as of August 31, 2002, and such reviews indicated that we had no intangible assets impairment at those dates. We believe that there has been no intangible assets impairment since our latest test date. Additionally, we expect to perform our intangible assets impairment review annually at the end of every August and at any other date when conditions exist that warrant impairment reviews to be done. The effects of no goodwill impairment and the ceasing of goodwill amortization will increase our earnings from continuing operations before income taxes by approximately $1.8 million annually.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, or SFAS 143, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal use of the asset. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, we will recognize a gain or loss on settlement. We have adopted the provisions of SFAS 143 effective January 1, 2002 and have not experienced any impact on our financial position, results of operations or cash flows as a result of its implementation.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. SFAS 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. We have adopted the provisions of SFAS 144 effective January 1, 2002, and we believe that our discontinued operations as reported under SFAS 144 are the same as that which would have been reported had we continued to report under the accounting and reporting provisions of APB Opinion No. 30.
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections, or SFAS 145. This statement provides guidance on the classification of gains and losses from the extinguishment of debt and on the accounting for certain specified lease transactions. We believe that SFAS 145 will not have any material impact on our financial position, results of operations or cash flows upon its adoption.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, or SFAS 146, which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Generally, SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized as incurred, whereas EITF Issue No. 94-3 required such a liability to be recognized at the time that an entity committed to an exit play. The Company is currently evaluating the provisions of the new rule, which is effective for exit or disposal activities that are initiated after December 31, 2002.
Nach oben scrollen
ECOreporter Journalistenpreise
Anmelden
x