Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted income per share is computed by dividing net income by the weighted average number of common shares outstanding increased for potentially dilutive common shares outstanding during the period. The dilutive effect of stock options, warrants, and their equivalents are calculated using the treasury stock method. Excluded from the three months ended June 30, 2001 dilutive calculation are 637,650 options outstanding as antidilutive. Excluded from the six months ended June 30, 2001 dilutive calculation are 701,438 options outstanding as antidilutive. The following table sets forth the calculation of earnings per share for the three and six months ended June 30, 2001 and 2000 (in thousands, except per share amounts):
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements for the three and six months ended June 30, 2001, and accompanying notes included herein and the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. 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. Future events may differ materially from those discussed herein, due to a number of factors. These factors are discussed more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, in Part I Item 1 under the heading “Risk Factors”.
Results of Operations
Three Months Ended June 30, 2001, Compared to Three Months Ended June 30, 2000
Net Sales. Net sales include product sales and royalties, less returns and allowances. Net sales increased 30% to $38.6 million for the three months ended June 30, 2001 from $29.7 million for the comparable period in 2000. Of this total net sales increase of $8.9 million, increased net sales from US operations were $5.2 million and increased net sales from international operations were $3.7 million. The increase in US net sales was primarily due to the increased sales of existing products to existing accounts and the continued expansion of conventional grocery distribution channels. Milk sales increased 21%, or $3.8 million, for the three months compared to the comparable period in 2000. The primary reason for growth was significant distribution expansion of ultra-pasteurized (UP) milk. This led to UP growth of 86%, or $4.3 million, for the three months compared to the comparable period in 2000. Fresh milk sales decreased by 3%, or $.4 million, in comparison of the same two periods. Dairy sales, driven by re-staging the cheese line as well as increased industrial sales, increased 20%, or $1.3 million, during the three month period compared to the comparable period in 2000. The Company’s juice sales increased 8% to $2.0 million for the three months from $1.9 million for the comparable period in 2000. The increase in international net sales was primarily due to three months of operations from the acquisition of Meadow Farms Limited (Meadow Farms) and Organic Matters Limited (Organic Matters) in the United Kingdom on June 1, 2000 compared to one month for the comparable period in 2000.
Gross Profit. Gross profit consists of net sales, less cost of sales. Cost of sales includes the cost of raw materials, processing fees, inbound freight, milk pooling charges, losses of organic premiums and operating income or loss before goodwill amortization from farm operations. Gross profit increased 19% to $12.1 million for the three months ended June 30, 2001 from $10.2 million for the comparable period in 2000. As a percentage of net sales, gross profit decreased for the three months to 31.5% from 34.5% for the comparable period in 2000. This decrease was due to an increase of $3.7 million in primarily lower margin, private label international sales. In the three months ended June 30, 2001 international sales had gross margins of 22.7% overall compared to 28.2% in the comparable period in 2000. The lower international gross margins reflect the results of a change in product mix to primarily private label products as a result of the Meadow Farms acquisition. The Company launched branded milk sales in its international operations in late 2000. The Company expects the branded milk sales will increase the gross margin percentage over time. The US gross profit margins were 33.7% for the three months ended June 30, 2001 compared to 35.5% for the comparable period in 2000. Company wide efficiencies in processing and milk sourcing costs partially offset increased cost of goods sold associated with the increased product mix of UP milk sales and new processor conversion costs.
Selling Expenses. Selling expenses include direct selling, marketing and distribution costs. Selling expenses for the three months ended June 30, 2001 increased 20% to $7.7 million from $6.4 million for the comparable period in 2000. As a percentage of net sales, selling expenses decreased for the three months to 19.8% from 21.5% for the comparable period in 2000. This decrease was due primarily to three months of private label international sales from Meadow Farms in 2001 compared to one month of private label international sales for the comparable period in 2000. Private label products traditionally have lower selling costs. The US selling costs decreased to 22.1% for the three months from 23.3% for the comparable period in 2000 as a result of efficiencies gained from warehouse consolidation and direct delivery shipments, partially offset by energy surcharges and marketing costs.
General and Administrative Expenses. General and administrative expenses include operations and corporate support. General and administrative expenses for the three months ended June 30, 2001 decreased 4% to $2.0 million from $2.1 million from the comparable period in 2000. As a percentage of net sales, general and administrative expenses decreased to 5.2% from 7.0%. The US general and administrative expenses as a percentage of net sales decreased to 5.5% for the three months from 6.3% for the comparable period in 2000 due to improved productivity. The international general and administrative expenses as a percentage of net sales decreased to 3.7% for the three months from 11.1% for the comparable period in 2000 due to the increased leverage of general and administrative expenses over a larger revenue base.
Goodwill Amortization. Goodwill amortization includes amortization of the excess purchase price of the businesses acquired and the related transaction costs over the net tangible assets acquired. Goodwill amortization for the three months ended June 30, 2001 was $.8 million, an increase of $.3 million, or 54%, from $.5 million during the comparable period in 2000. This increase in goodwill amortization was due to three months of amortization of intangible assets associated with the acquisitions of Meadow Farms and Organic Matters on June 1, 2000 compared to one month for the comparable period in 2000.
Other Income (Expense), Net. Other income (expense), net for the three months ended June 30, 2001 was an expense of $.9 million compared to expense of $.4 million during the comparable period in 2000. This change was due to a reduced cash position as a result of the acquisitions of Meadow Farms and Organic Matters, increased working capital and other capital expenditures. Additionally, this change was due to a full three months of the increased interest expense associated with the $25 million term note used to finance the Meadow Farms and Organic Matters acquisitions and the increase in amounts outstanding under the Company’s line of credit compared to one month for the comparable period in 2000.
Income Tax Expense. Income tax expense for the three months ended June 30, 2001 was $.3 million, or 40% of income before income taxes, virtually unchanged from the comparable period in 2000. The relationship between the expected income tax expense computed by applying the United States federal statutory rate of 34% to income before income taxes and actual income tax expense results primarily because of (i) foreign income tax expense provided on foreign earnings, (ii) state and local income taxes and (iii) amortization of certain goodwill not deductible for United States tax purposes.
Net Income. The Company generated net income of $.4 million for the three months ended June 30, 2001, a decrease of $.1 million compared to net income of $.5 million for the comparable period in 2000. The decrease in net income was primarily due to increased goodwill amortization and interest expense associated with the acquisitions of Meadow Farms and Organic Matters and with working capital costs.
Comprehensive Income. Comprehensive income was $.4 million for the three months ended June 30, 2001, virtually unchanged from the comparable period in 2000. The Company translates its U.K. assets and liabilities at the exchange rate in effect at the end of the period. At June 30, 2001, December 31, 2000, and June 30, 2000, U.K. pound sterling translated to U.S. dollars at approximately 1.415, 1.494 and 1.518 dollars to the pound sterling, respectively.
Six Months Ended June 30, 2001, Compared to Six Months Ended June 30, 2000
Net Sales. Net sales include product sales and royalties, less returns and allowances. Net sales increased 36% to $76.2 million for the six months ended June 30, 2001 from $56.0 million for the comparable period in 2000. Of this total net sales increase of $20.2 million, increased net sales from US operations were $10.0 million and increased net sales from international operations were $10.2 million. The increase in US net sales was primarily due to the increased sales of existing products to existing accounts and the continued expansion of conventional grocery distribution channels. Milk sales increased 21%, or $7.6 million, for the six months compared to the comparable period in 2000. The primary reason for growth was significant distribution expansion of ultra-pasteurized (UP) milk. This led to UP growth of 112%, or $9.3 million, for the six months compared to the comparable period in 2000. Fresh milk sales decreased by 6%, or $1.7 million, in comparison of the same two periods. Dairy sales, driven by re-staging the cheese line as well as increased industrial sales, increased 15%, or $1.9 million, during the six month period compared to the comparable period in 2000. The Company’s juice sales increased 19% to $4.1 million for the six months from $3.4 million for the comparable period in 2000. The increase in international net sales was primarily due to six months of operations from the acquisition of Meadow Farms and Organic Matters in the United Kingdom on June 1, 2000 compared to one month in the comparable period in 2000.
Gross Profit. Gross profit consists of net sales, less cost of sales. Cost of sales includes the cost of raw materials, processing fees, inbound freight, milk pooling charges, losses of organic premiums and operating income or loss before goodwill amortization from farm operations. Gross profit increased 25% to $23.2 million for the six months ended June 30, 2001 from $18.6 million for the comparable period in 2000. As a percentage of net sales, gross profit decreased for the six months to 30.4% from 33.3% for the comparable period in 2000. This decrease was due to an increase of $10.2 million in primarily lower margin, private label international sales. In the six months ended June 30, 2001 international sales had gross margins of 22.3% overall compared to 30.8% in the comparable period in 2000. The lower international gross margins reflect the results of a change in product mix to primarily private label products as a result of the Meadow Farms acquisition. The Company launched branded milk sales in its international operations in late 2000. The Company expects the branded milk sales will increase the gross margin percentage over time. The US gross profit margins were 32.6% for the six months ended June 30, 2001 compared to 33.5% for the comparable period in 2000. Company wide efficiencies in processing and milk sourcing costs partially offset increased cost of goods sold associated with the increased product mix of UP milk sales and new processor conversion costs.
Selling Expenses. Selling expenses include direct selling, marketing and distribution costs. Selling expenses for the six months ended June 30, 2001 increased 29% to $15.3 million from $11.8 million for the comparable period in 2000. As a percentage of net sales, selling expenses decreased for the six months to 20.1% from 21.1% for the comparable period in 2000. This decrease was due to six months of private label international sales from Meadow Farms in 2001 compared to one month of primarily private label international sales for the comparable period in 2000. Private label products traditionally have lower selling costs. International selling expenses decreased to 10.6% for the six months from 11.5% for the comparable period in 2000. The US selling costs increased to 22.6% for the six months from 22.2% for the comparable period in 2000 as a result of national promotions with natural foods customers and energy surcharges, partially offset by efficiencies gained from warehouse consolidation and direct delivery shipments.
General and Administrative Expenses. General and administrative expenses include operations and corporate support. General and administrative expenses for the six months ended June 30, 2001 decreased to $3.9 million from $4.0 million for the comparable period in 2000. As a percentage of net sales, general and administrative expenses decreased to 5.2% from 7.2%. The US general and administrative expenses as a percentage of net sales decreased to 5.3% for the six months from 6.3% for the comparable period in 2000 due to improved productivity. The international general and administrative expenses as a percentage of net sales decreased to 4.5% for the six months from 14.7% for the comparable period in 2000 due to the increased leverage of general and administrative expenses over a larger revenue base.
Goodwill Amortization. Goodwill amortization includes amortization of the excess purchase price of the businesses acquired and the related transaction costs over the net tangible assets acquired. Goodwill amortization for the six months ended June 30, 2001 was $1.6 million, an increase of $.7 million, or 82%, from $.9 million during the comparable period in 2000. This increase in goodwill amortization was due to six months of amortization of intangible assets associated with the acquisitions of Meadow Farms and Organic Matters on June 1, 2000 compared to one month for the comparable period in 2000.
Other Income (Expense), Net. Other income (expense), net for the six months ended June 30, 2001 was an expense of $2.0 million compared to expense of $.5 million during the comparable period in 2000. This change was due to a reduced cash position as a result of the acquisitions of Meadow Farms, Organic Matters, increases in accounts receivable and inventories and other capital expenditures. Additionally, this change was due to the increased interest expense associated with the $25 million term note used to finance the Meadow Farms and Organic Matters acquisitions and the increase in amounts outstanding under the Company’s line of credit.
Income Tax Expense. Income tax expense for the six months ended June 30, 2001 was $.2 million, or 42% of income before income taxes, a decrease of $.4 million from $.6 million income tax expense, or 40% of income before income taxes, for the comparable period in 2000. This increase in the effective income tax rate results from the inability to fully utilize foreign tax credits from the United Kingdom. The relationship between the expected income tax expense computed by applying the United States federal statutory rate of 34% to income before income taxes and actual income tax expense results primarily because of (i) foreign income tax expense provided on foreign earnings, (ii) state and local income taxes and (iii) amortization of certain goodwill not deductible for United States tax purposes.
Net Income. The Company generated net income of $.2 million for the six months ended June 30, 2001, a decrease of $.6 million compared to net income of $.8 million for the comparable period in 2000. The decrease in net income was primarily due to increased goodwill amortization and interest expense associated with the acquisitions of Meadow Farms and Organic Matters and with working capital costs.
Comprehensive Income (Loss). Comprehensive income (loss) decreased to a loss of $1.5 million for the six months ended June 30, 2001 from $.8 million in income during the comparable period in 2000. This decrease was primarily due to the translation of the Company’s investment in its U.K. subsidiaries to U.S. dollars from pound sterling ($1.7 million). The Company translates its U.K. assets and liabilities at the exchange rate in effect at the end of the period. At June 30, 2001, December 31, 2000, and June 30, 2000, U.K. pound sterling translated to U.S. dollars at approximately 1.415, 1.494 and 1.518 dollars to the pound sterling, respectively.
Liquidity and Capital Resources
Cash Provided by (Used in) Operations. Cash provided by operations during the six months ended June 30, 2001 was $5.0 million, an increase of $8.3 million from cash used by operations of $3.3 million during the comparable period in 2000. The increase in cash provided by operations was due primarily to $.7 million decrease in inventories and $.5 million decrease in trade accounts receivable during the six months compared to $7.1 million increase in inventories and $3.0 million increase in trade accounts receivable during the comparable period in 2000. The increase in cash provided by the reduction in inventories and trade accounts receivable was partially offset by cash used in operations from decreasing current liabilities from December 31, 2000.
Cash Used in Investing Activities. Cash used in investing activities during the six months ended June 30, 2001 totaled $4.3 million, compared to $25.6 million for the corresponding period in 2000. The decrease was primarily due to no acquisitions during the six months compared to acquisition costs of $27.3 million for Meadow Farms and Organic Matters partially offset by the sale of marketable securities of $8.2 million during the comparable period in 2000.
Cash Provided by (Used in) Financing Activities. Cash used in financing activities during the six months ended June 30, 2001 totaled $1.2 million, compared to $28.2 million provided by financing activities for the corresponding period in 2000. This decrease was primarily due to the Company servicing its term loan and credit line facilities with US Bank as well as its H.P. Hood Inc. promissory note during the six month period in 2001, partially offset by $3.8 million drawn on the credit line. In contrast, the Company drew $30.3 million on the US Bank notes to primarily facilitate the Meadow Farms and Organic Matters acquisitions during the comparable period in 2000, partially offset by servicing the H.P. Hood Inc. promissory note.
Company management believes that cash and cash equivalents, cash expected to be generated from operations and the availability of funds under the line of credit will be sufficient to meet the Company’s current operating and capital expenditure needs.
Long-term Debt. On May 31, 2000 the Company entered into a $25.0 million Senior Secured Term Loan with US Bank to finance the Meadow Farms acquisition. The note has a due date of May 31, 2005 and bears interest at LIBOR plus a varying margin spread of 1.65% to 3.75% (6.84% at June 30, 2001) with quarterly principal payments. Interest payments are made in conjunction with LIBOR pricing maturity dates.
The Company also has a $25.0 million credit line facility with US Bank. The credit line is collateral based, has a May 31, 2003 due date and bears interest at LIBOR plus a varying margin spread of 1.65% to 3.75% (6.84% at June 30, 2001). At June 30, 2001, the Company has borrowed $18.4 million against the credit line facility. The availability of the $25 million line of credit is reduced by outstanding letters of credit, which at June 30, 2001, were $5.1 million, primarily associated with The Organic Cow acquisition. Total availability under the line of credit is $1.5 million at June 30, 2001. Both loans are secured by substantially all of the assets of the Company and contain certain covenants that, among other things, limit the Company’s ability to incur additional debt, create liens, pay dividends or enter into certain other transactions, and which require the Company to meet certain financial covenants.
In conjunction with The Organic Cow acquisition, the Company issued an $8.5 million promissory note payable to the seller, bearing interest at 5.3%, and payable in four annual installments with a final maturity in 2003. At June 30, 2001, the balance of the note was $4.4 million and reduces the availability of the line of credit with US Bank as noted above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Contracts. The Company occasionally enters into forward financial instruments with a financial institution to manage and reduce the impact of changes in foreign currency rates. Generally, these instruments are marked-to-market at the end of each month and gains and losses are recorded in the statement of operations.
Interest Rates. At December 31, 2000, the Company had approximately $8.1 million of fixed rate long-term debt (including current maturities). The fair value of long-term fixed interest rate debt is subject to interest rate risk. Generally, among other factors including credit ratings, the fair value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Company’s total fixed rate long-term debt with fixed interest rate (including current portion) at December 31, 2000 was $7.6 million, which was less than the carrying value by $0.5 million. Fair values were determined primarily from quoted market rates. A full percentage point decrease from prevailing interest rates at December 31, 2000, would result in an estimated increase in fair value of total fixed interest rate long-term debt of approximately $0.4 million. Additionally at June 30, 2001, the Company had approximately $44.6 million of floating rate long-term debt (including current maturities) subject to interest rate risk. A full percentage point fluctuation in interest rates would result in decreasing or increasing interest expense by approximately $0.4 million over a twelve month period.
Effect of Recently Issued Accounting Standards
On June 30, 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Intangible Assets”. Major provisions of these Statements are as follows: all business combinations initiated after June 30, 2001 must use the purchase method of accounting; the pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; and effective January 1, 2002, goodwill will no longer be subject to amortization. Although it is still reviewing the provisions of these Statements, management’s preliminary assessment is that these Statements will increase the Company’s results of operations by approximately $3.1 million annually through 2011 before income taxes, approximately $3.0 million in 2012 before income taxes, approximately $2.6 million in 2013 before income taxes, approximately $2.0 million in 2014 before income taxes and approximately $.7 million in 2015 before income taxes. However, periodic impairment reviews may result in future write-downs which could offset or partially offset these goodwill amortization reductions.
PART II - OTHER INFORMATION
| Item 4. | Submission of Matters to a Vote of Security Holders |
| | |
| A) | The Company held its Annual Meeting of Stockholders on Wednesday, May 16, 2001. |
| | |
| B) | No response is required. |
| | |
| C) | In addition to electing one director at the Company’s Annual Meeting of Stockholders, the stockholders also voted on the ratification of the selection of KPMG LLP as the independent auditors of the Company for the fiscal year ending December 31, 2001. 7,371,770 votes were cast for this resolution, 53,554 votes were cast against this resolution, 14,563 shares were abstained from voting and there were no Broker Non-votes. |
| | |
| Item 6. | Exhibits and Reports on Form 8-K | |
| | | |
| A) | Exhibits | |
| | | |
| | 3.1+ | Amended and Restated Certificate of Incorporation |
| | | |
| | 3.2+ | Amended and Restated Bylaws of the Company |
| | | |
| | 4.1+ | Reference is made to Exhibits 3.1 and 3.2 |
| | | |
| | 4.2+ | Specimen Stock Certificate representing shares of common stock of the Company |
| | | |
| | Exhibits identified above are incorporated by reference as follows: |
| + | Incorporated by reference to Registrant’s Registration Statement on Form S-1, No. 333-51465 |
| | |
| B) | Reports on Form 8-K |
| | |
| | None. |
| | |
| | | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | HORIZON ORGANIC HOLDING CORPORATION |
| | | |
| Date: August 14, 2001 | | /s/ Thomas P. Briggs |
| | |
|
| | | Thomas P. Briggs |
| | | Senior Vice President, Finance and Administration, Chief
Financial Officer, Treasurer and Assistant Secretary |
| | | (principal financial and accounting officer of the Company) |
