Hain Celestial Group, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended June 30, 2019, not a fiscal 2018 fourth-quarter filing. It also reports the quarter ended June 30, 2019; fiscal 2018 fourth-quarter figures are included for comparison.
Business context and reporting period
Hain Celestial markets and manufactures organic, natural and “better-for-you” food, snack, tea and personal-care products in more than 80 countries. Its reportable segments are the United States, United Kingdom and Rest of World. International sales were approximately 54% of fiscal 2019 net sales. The fiscal 2019 results exclude Hain Pure Protein, which was reported as discontinued operations.
Key financial metrics
| Metric | FY ended June 30, 2019 | FY ended June 30, 2018 |
|---|---|---|
| Net sales | $2,302.5 million | $2,457.8 million |
| Gross profit / margin | $445.2 million / 19.3% | $515.4 million / 21.0% |
| Operating income (loss) | $(14.9) million | $106.0 million |
| Continuing-operations net income (loss) | $(49.9) million | $82.4 million |
| Net income (loss), including discontinued operations | $(183.3) million | $9.7 million |
| Diluted earnings (loss) per share | $(1.76) | $0.09 |
| Adjusted EBITDA (non-GAAP) | $191.4 million | $255.9 million |
| Cash from continuing operating activities | $49.5 million | $121.3 million |
| Operating free cash flow (non-GAAP) | $(27.6) million | $50.4 million |
Fiscal 2019 net sales fell 6.3% reported and 4.2% at constant currency; foreign exchange reduced sales by $52.6 million. Sales declined in all three reportable segments. U.S. sales fell 7.0%, U.K. sales fell 5.6% reported (1.8% constant currency), and Rest of World sales fell 6.3% reported (2.5% constant currency).
At June 30, 2019, cash and cash equivalents were $39.5 million, working capital was $318.6 million, and total assets were $2.58 billion. Borrowings under the credit agreement were $626.8 million, with $569.7 million available under the revolving facility; the broader debt table reports $639.5 million including Tilda and other borrowings. The weighted-average credit-agreement interest rate was 4.20%. The company reported compliance with amended debt covenants.
Material changes and unusual items
- Gross margin declined 170 basis points. The filing cites a $12.4 million inventory write-down tied to discontinued slow-moving SKUs, higher trade and promotional spending, and higher freight and commodity costs; Project Terra savings partly offset these pressures.
- Fiscal 2019 operating results included $30.2 million of CEO succession expense, $40.1 million of Project Terra and other costs, $33.7 million of long-lived asset and intangible impairments, and $4.3 million of accounting review and remediation costs, net of insurance proceeds. Interest and financing expense rose 34.0% to $36.1 million.
- Discontinued operations generated a $133.4 million net loss, including $109.3 million of asset impairments and approximately $40.9 million of losses on sales. Hain completed the sale of the remaining Hain Pure Protein and Empire businesses on June 28, 2019.
- Fourth-quarter fiscal 2019 sales were $557.7 million, versus $619.6 million in the prior-year quarter. Fourth-quarter operating income was $0.7 million, versus $16.6 million; net loss was $13.6 million, versus $69.9 million. The prior-year quarter included substantial Hain Pure Protein impairment charges.
- Cash from continuing operations decreased to $49.5 million, while capital expenditures rose to $77.1 million, resulting in negative operating free cash flow. Cash declined to $39.5 million at year-end.
Outlook, management commentary and risks
Management’s fiscal 2019 strategy emphasized portfolio simplification and profitable growth: directing more resources, marketing and innovation toward stronger “Get Bigger” brands while simplifying “Get Better” brands. The company eliminated approximately 350 low-velocity SKUs; management expected this to weigh on sales growth in the next fiscal year while supporting profitability. Fiscal 2020 capital expenditures were expected to be approximately $70–$80 million. The filing provides no clear fiscal 2020 revenue or earnings guidance.
On August 27, 2019, after year-end, the company sold its Tilda business for $342 million in cash, subject to customary adjustments. The filing does not establish the final adjusted proceeds or the resulting post-sale debt position. Management said cash, expected operating cash flows and available credit were sufficient for ordinary working capital and expected cash needs for at least 12 months.
- Key exposures include intense competition, changing consumer preferences, customer concentration and reliance on independent distributors, commodity and freight cost volatility, foreign exchange, and uncertainty related to Brexit. Two customers each represented roughly 10%–11% of consolidated sales.
- Debt covenants were amended to allow higher leverage thresholds, and the credit facility is secured by specified company and domestic-subsidiary assets. A 1-percentage-point interest-rate change was estimated to affect next-year net interest expense by approximately $5.9 million.
- Goodwill was $1.01 billion and trademarks and other intangible assets were $465.2 million. The annual goodwill test found no impairment indicators, but Grocery and Snacks and Tilda fair values exceeded carrying values by only 8% and 13%, respectively; management warned that adverse assumptions or conditions could cause future impairment.
- Securities class-action and shareholder derivative litigation related to the company’s accounting review remained pending. A prior securities complaint was dismissed without prejudice, but an amended complaint and motions to dismiss were ongoing. Management said other ordinary-course claims were not expected to have a material effect.
- Management and the auditor reported effective internal control over financial reporting as of June 30, 2019; management said the previously identified inventory-control material weakness had been remediated. The financial-statement audit opinion was unqualified.
- CEO Mark Schiller succeeded Irwin Simon in November 2018. The Chief Accounting Officer announced his resignation effective August 30, 2019; the CFO was to serve as interim principal accounting officer.
Most important facts for investors to verify
- Confirm the requested period: this is FY2019, with fiscal 2019 fourth-quarter data, rather than a fiscal 2018 Q4 filing.
- Review the drivers and durability of the sales decline, margin contraction and lower adjusted EBITDA, including the expected effects of SKU rationalization and transformation savings.
- Check final Tilda sale adjustments, transaction costs, proceeds deployment and updated debt, covenant headroom and liquidity after the sale.
- Assess cash generation against planned capital spending and ongoing restructuring costs, and distinguish management’s non-GAAP adjusted EBITDA and free-cash-flow measures from GAAP results.
- Monitor impairment headroom for goodwill and brands, pending litigation and any subsequent developments in internal controls or accounting leadership.