Hain Celestial Group, Inc. — Form 10-Q
Period: Quarter ended March 31, 2018 (fiscal third quarter; nine months ended March 31, 2018). The request metadata says “2017 Q3,” but the filing is for fiscal 2018 Q3. Unless noted, amounts are in millions of dollars. Current-period continuing operations exclude Hain Pure Protein, which was reclassified as discontinued operations in both periods.
Business context
Hain Celestial markets organic and natural food, beverage, and personal care products in more than 80 countries. In March 2018, the board approved a plan to sell the Hain Pure Protein businesses, citing a desire to simplify operations and focus on more profitable core businesses. The company was marketing the businesses and anticipated a sale within 12 months.
Financial performance
| Metric | Three months ended March 31, 2018 | Prior-year quarter | Nine months ended March 31, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $632.7 | $588.8 | $1,838.2 | $1,740.6 |
| Gross profit / margin | $133.0 / 21.0% | $139.2 / 23.6% | $390.4 / 21.2% | $375.5 / 21.6% |
| Operating income / margin | $29.3 / 4.6% | $49.6 / 8.4% | $89.5 / 4.9% | $102.2 / 5.9% |
| Continuing-operations net income | $25.2 | $32.8 | $87.0 | $67.0 |
| Net income, including discontinued operations | $12.7 | $31.3 | $79.6 | $67.1 |
| Adjusted EBITDA | $73.4 | $75.0 | $194.6 | $183.3 |
Quarterly sales increased 7.5% as reported, but 1.6% on a constant-currency basis. Nine-month sales rose 5.6% reported and 2.2% constant currency. Sales growth in the U.K. and Rest of World offset weaker U.S. sales. Operating performance weakened in the quarter: higher commodity and freight costs, trade investment, marketing, and SKU-rationalization costs contributed to lower gross and operating margins. For the nine months, U.S. segment operating income fell 34.3%, while U.K. and Rest of World operating income increased.
Quarterly diluted EPS was $0.24 from continuing operations and $0.12 including discontinued operations, versus $0.31 and $0.30, respectively, a year earlier. Nine-month diluted EPS was $0.83 from continuing operations and $0.76 including discontinued operations, versus $0.64 for both measures in the prior year.
Cash from continuing operations was $67.4 for the nine months, compared with $163.2 a year earlier. Capital expenditures were $48.4, leaving operating free cash flow of $19.0 versus $132.5. Management attributed the cash-flow decline primarily to $99.7 more cash used in working capital, including inventory and receivables, and higher capital spending.
At March 31, continuing-operations cash was $117.2, down from $137.1 at June 30, 2017; working capital was $488.7. Debt was approximately $749.1, including $428.4 under the revolver and a $300.0 term loan. The company reported $562.6 available under its credit agreement and compliance with its covenants. The revolver was extended to February 2023; the facility also includes the term loan and customary financial covenants.
Material changes, outlook, and risks
- Portfolio sale: Hain Pure Protein generated $118.2 of sales and a $12.6 net loss in the quarter. The loss included $10.7 of deferred tax expense recorded when the business was classified as held for sale. Its assets and liabilities were reclassified as current; the company reported no impairment of held-for-sale assets.
- Tax items: Continuing-operations results for the nine months included a $29.3 benefit from remeasuring deferred tax liabilities after U.S. tax reform, partly offset by an estimated $5.2 transition tax. The tax accounting remained provisional and could change materially. A $3.8 benefit from release of an uncertain tax position also affected the period.
- Restructuring and rationalization: The company recorded $8.3 of long-lived asset impairment for the nine months and a $4.9 inventory write-down for discontinued SKUs in the quarter. It expected up to approximately $6.3 of additional costs over the following 12 months from a U.K. soup-facility closure, primarily lease termination and severance costs.
- Project Terra: The company’s target is $350 of global savings by fiscal 2020, with some savings intended for reinvestment in brands. It reported savings of approximately $19.0 for the quarter and $43.1 for the nine months, excluding Hain Pure Protein, and had identified more than 1,100 SKUs for removal to date.
- Outlook: No earnings or revenue guidance is stated in the provided filing text. Management expected fiscal 2018 capital spending of approximately $75 and said cash, operating cash flows, and credit availability should fund ordinary working capital, capital expenditures, and other expected needs for at least 12 months.
- Controls and investigations: Management concluded disclosure controls were not effective at March 31 because previously identified material weaknesses in internal control over financial reporting remained under remediation. The SEC investigation, securities class action and shareholder litigation remained ongoing. A Proposition 65 case involving alleged acrylamide exposure was scheduled for a liability-phase trial in October 2018.
- Other risks: Management cited commodity, freight, foreign-exchange, consumer-demand, competitive, execution, legal, and internal-control risks. Approximately 91.3% of continuing-operations cash was held outside the U.S. and was intended to remain invested abroad, subject to further evaluation of repatriation options.
Important facts for investors to verify
- Progress, timing, and final sale terms for Hain Pure Protein, including any tax or other separation consequences.
- Whether U.S. sales and operating margins stabilize, and whether reported growth persists after currency effects and acquisitions.
- Working-capital trends, capital spending, and the company’s ability to restore operating cash flow and free cash flow.
- Actual Project Terra savings, implementation costs, and whether savings offset commodity, freight, and marketing pressures.
- Final tax-reform accounting and the potential effect of litigation and the SEC investigation.
- Remediation of material weaknesses and whether internal controls become effective; also monitor compliance with credit-agreement covenants and debt levels.