Business context and reporting period
Hain Celestial Group, Inc. filed this unaudited Form 10-Q for the three months ended September 30, 2018, its first quarter of fiscal 2019. The company markets organic and natural consumer products in more than 80 countries. Results are presented with Hain Pure Protein classified as discontinued operations in both periods.
Financial performance and position
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales from continuing operations | $560.8 million | $589.2 million |
| Gross profit / margin | $99.6 million / 17.8% | $123.4 million / 20.9% |
| Operating income (loss) | ($24.1 million) | $29.2 million |
| Net income (loss) from continuing operations | ($23.1 million) | $18.6 million |
| Net income (loss), including discontinued operations | ($37.4 million) | $19.8 million |
| Diluted net income (loss) per share | ($0.36) | $0.19 |
| Adjusted EBITDA, non-GAAP | $34.1 million | $53.5 million |
| Operating cash flow from continuing operations | ($18.3 million) | ($1.1 million) |
| Operating free cash flow from continuing operations, non-GAAP | ($40.8 million) | ($12.3 million) |
At September 30, 2018, cash and cash equivalents from continuing operations were $55.9 million, working capital was $383.2 million, and total debt was $721.9 million. The company had $580.2 million available under its credit agreement and reported compliance with its covenants. Total assets were $2.90 billion and stockholders’ equity was $1.69 billion.
Material changes versus the prior comparable period
- Continuing-operations sales declined 4.8% reported and 4.2% on a constant-currency basis; sales declined in all three reportable segments. U.S. sales fell 7.5%, U.K. sales 1.7%, and Rest of World sales 4.7%.
- Gross margin fell 3.1 percentage points. Management cited increased U.S. trade and promotional investment and higher freight and commodity costs, partly offset by Project Terra savings.
- Operating results deteriorated to a loss, including $19.6 million of net CEO succession expense, $10.3 million of Project Terra costs and other, $3.4 million of accounting review and remediation costs, and a $4.2 million non-cash long-lived asset impairment.
- Hain Pure Protein generated a $14.3 million discontinued-operations loss versus $1.2 million income a year earlier. Its sales decreased to $113.5 million from $119.1 million, and cost of sales exceeded revenue in the quarter.
- Cash from continuing operations decreased by $49.6 million during the quarter. Capital expenditures were $22.5 million, compared with $11.2 million in the prior-year quarter. Cash used in continuing operating activities rose to $18.3 million.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2019 capital spending of approximately $80–$100 million and noted that additional Project Terra costs may be incurred. Project Terra targets $350 million in global savings by fiscal 2020, with some savings intended for reinvestment in brands. The filing provides no clear full-year revenue or earnings guidance.
- Management attributed U.S. sales weakness partly to declines in Pantry and Better-For-You Snacks and to deliberately discontinuing certain lower-margin SKUs. It cited pricing pressure from excess turkey inventory as a factor in Hain Pure Protein’s losses.
- The company planned to sell Hain Pure Protein, a strategic shift expected to materially affect its operations and financial results. It had recorded an $81.4 million impairment reserve against the held-for-sale business by September 30, 2018, including a further $3.0 million charge in the quarter.
- Mark Schiller was appointed CEO on October 26, 2018, succeeding Irwin Simon, whose employment ended November 4. The filing reports a $34.3 million cash separation payment under the succession agreement, with expense recognized over the transition period.
- Disclosure controls related to the previously identified material weakness in internal control over financial reporting were not effective as of September 30, 2018. Management said remediation was ongoing. The company also disclosed a proposed SEC settlement, subject to Commission approval, with no finding of intentional wrongdoing and no monetary penalty.
- A proposed $0.6 million settlement of a California Proposition 65 acrylamide case was subject to court approval; additional contingent payments could apply under certain future options. Securities and stockholder lawsuits remained pending. The company stated other ordinary-course claims were not expected to have a material adverse effect.
- Key risks include consumer demand and competition, supply-chain execution, commodity and freight costs, international and currency exposure, execution of cost savings, internal-control remediation, litigation, and potential goodwill or intangible-asset impairment. Management cautioned that first-quarter results are not necessarily indicative of the full fiscal year; the first fiscal quarter has typically been the lowest for sales and diluted earnings per share.
Important facts for investors to verify
- Whether subsequent results confirm a recovery in sales and gross margin, particularly in U.S. Pantry and snack products, and whether planned trade investment produces the expected growth.
- Progress toward Project Terra’s savings target, including actual savings, implementation costs, and the amount reinvested in brands.
- The timing, proceeds, and final carrying value of the Hain Pure Protein sale, given continuing losses and the recorded impairment reserve.
- Cash generation, working-capital needs, capital spending, debt levels, covenant headroom, and the effect of variable interest rates.
- Progress in remediating the material weakness and the outcome of the SEC settlement and remaining litigation, including court approval of the Proposition 65 consent judgment.