Business context and reporting period
The filing is Hain Celestial Group, Inc.’s unaudited Form 10-Q for the quarter and nine months ended March 31, 2021 (fiscal 2021). The supplied request metadata says “2020 Q3,” but the filing itself reports fiscal 2021 Q3. Hain markets organic and natural food, beverage, snack and personal-care products across more than 75 countries. Unless stated otherwise, financial amounts below are in millions of dollars.
The company’s strategy is to simplify its portfolio, strengthen capabilities, improve margins and cash flow, and restore profitable sales growth. It continued divestitures of businesses deemed less strategic.
Financial performance and position
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $492.6 | $553.3 | $1,519.6 | $1,542.2 |
| Gross profit | $129.9 | $132.4 | $379.0 | $335.8 |
| Gross margin | 26.4% | 23.9% | 24.9% | 21.8% |
| Operating income | $49.6 | $19.1 | $65.8 | $30.8 |
| Net income from continuing operations | $34.3 | $25.0 | $25.6 | $21.9 |
| Net income (loss), including discontinued operations | $34.3 | $24.3 | $36.9 | $(83.6) |
| Diluted earnings (loss) per share | $0.34 | $0.23 | $0.36 | $(0.80) |
| Adjusted EBITDA (non-GAAP) | $73.8 | $60.7 | $190.8 | $137.8 |
Cash flow: For the nine months, operating cash flow from continuing operations was $146.5, compared with $64.1 a year earlier. Capital expenditures were $53.1, yielding company-defined operating free cash flow of $93.5 versus $17.1. Cash and cash equivalents were $53.0 at March 31, 2021, up from $37.8 at June 30, 2020.
Debt and liquidity: Debt totaled $256.2, including $255.0 drawn on the revolving credit facility, down from $282.8 at June 30, 2020. Hain reported $738.6 of available borrowing capacity and compliance with its credit covenants. Working capital was $264.9. The revolving facility matures in February 2023; the company reported a weighted-average borrowing rate of 1.11%.
Material changes versus comparable periods
- Q3 reported sales declined 11.0%; on a constant-currency basis, adjusted for divestitures and discontinued brands, sales declined 6.0%. For the nine months, reported sales fell 1.5%, while adjusted constant-currency sales increased 1.6%.
- Q3 gross margin rose 2.5 percentage points, and operating income increased substantially despite lower sales. Management attributed improved margins to productivity savings, product mix and lower trade promotions, alongside lower SG&A and transformation costs.
- Nine-month operating income included a $56.1 reserve associated with the sale of the Fruit business, within total impairment charges of $57.7. Excluding the Fruit reserve, International segment operating income would have increased year over year, according to management.
- Nine-month continuing-operations net income improved to $25.6, but the 55.5% effective tax rate was elevated by discrete tax items, including the Fruit disposal, a UK tax-rate change and a legal-entity reorganization. The prior-year tax benefit included CARES Act effects.
- Nine-month total net income also reflects discontinued operations: FY2021 included $11.3 of income, primarily a deferred tax benefit related to Tilda; FY2020 included a $105.6 loss, including a $95.1 cumulative currency-translation loss reclassified on the Tilda sale.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no specific numeric sales, earnings or cash-flow guidance. Management said its portfolio-simplification and profitable-growth strategy remained unchanged and believed operating cash flows and borrowing capacity would cover anticipated needs for the foreseeable future.
- COVID-19 and demand: At-home consumption had supported demand in several categories, especially earlier in the pandemic; management said the duration of that benefit was uncertain. Labor availability and sourcing disruptions had affected the supply chain, with further disruption possible. European restrictions, virus variants and vaccine effectiveness were cited as uncertainties.
- Portfolio actions: Hain completed the Fruit divestiture in January 2021 for $38.5 cash consideration and recorded a $56.1 pre-tax impairment reserve, followed by a $1.9 pre-tax loss on sale. After quarter-end, it completed the sale of Dream and WestSoy for $33.0, subject to customary adjustments.
- Legal and regulatory exposure: Approximately 25 consumer class actions and six personal-injury cases alleged that Earth’s Best baby food contained unsafe, undisclosed naturally occurring heavy metals. Hain denied the allegations, said it believed its products were safe and properly labeled, and stated it would defend the claims. Government authorities had requested information, and Hain said it was cooperating. A proposed multidistrict litigation hearing was scheduled for May 27, 2021.
- A securities class-action dismissal was on appeal; related stockholder litigation remained stayed while plaintiffs reviewed materials after the board rejected a litigation demand. The filing says other ordinary-course claims were not expected to have a material adverse effect.
- Other investor-relevant items include $80.3 of share repurchases during the nine months, $109.5 remaining under the authorization, and $53.8 received through CARES Act tax-loss carryback refunds. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the correct reporting period: the filing is for fiscal Q3 2021, not 2020 Q3.
- Assess whether adjusted sales trends and margin gains persist after pandemic-related pantry loading, customer inventory changes, foreign exchange and divestitures.
- Review the Fruit disposal accounting and the substantial impairment charge, and distinguish reported results from company-defined non-GAAP measures.
- Monitor the Earth’s Best baby-food litigation and government inquiries; the filing does not quantify a probable loss or provide a clear estimate of potential exposure.
- Track working-capital needs, cash conversion, capital spending, borrowings, covenant headroom and the February 2023 revolving-facility maturity.