Hain Celestial Group, Inc. — Q2 FY2018 Form 10-Q
Business context and reporting period. Hain Celestial markets organic and natural “better-for-you” food, beverage and personal-care products in more than 80 countries. This unaudited report covers the quarter and six months ended December 31, 2017; comparisons are with the corresponding prior-year periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Net sales | $775.2, up 4.8% reported; up 1.9% constant currency | $1,483.5, up 4.4% reported; up 2.6% constant currency |
| Gross profit / margin | $144.3 / 18.6%, versus $138.4 / 18.7% | $275.9 / 18.6%, versus $248.3 / 17.5% |
| Operating income / margin | $36.3 / 4.7%, versus $41.4 / 5.6% | $67.8 / 4.6%, versus $55.2 / 3.9% |
| Net income | $47.1, versus $27.2; diluted EPS $0.45, versus $0.26 | $66.9, versus $35.8; diluted EPS $0.64, versus $0.34 |
| Adjusted EBITDA (non-GAAP) | $82.7, versus $69.5 | $142.2, versus $115.1 |
Second-quarter operating income declined despite sales growth, mainly reflecting weaker U.S. performance and higher costs; the net-income increase was substantially affected by the tax benefit described below. For the six months, operating margin improved year over year.
- Cash flow: Six-month operating cash flow was $25.4, down from $116.1. The company cited $102.9 more cash used in working-capital accounts, primarily inventory, receivables and other current assets. Capital expenditures were $31.0, making operating free cash flow (non-GAAP) negative $5.6, versus positive $87.4.
- Liquidity: Cash was $139.2 at December 31, versus $147.0 at June 30; working capital was $578.2, up from $534.3. The company reported $255.9 of availability under its revolving credit facility and compliance with covenants.
- Debt: Total debt and borrowings were $767.1, including $735.1 outstanding under the credit agreement; the latter carried a 3.00% weighted-average rate. Current debt was $25.0. The company reported $8.976 of letters of credit outstanding.
- Balance sheet: Total assets were $3,087.3 and stockholders’ equity $1,822.5 at December 31. Inventories increased to $502.4 from $427.3 at June 30.
Changes versus the prior comparable period
- Quarterly sales grew 4.8% as reported but only 1.9% on a constant-currency basis. U.S. segment sales fell 3.0%; U.K. sales rose 12.2%, Hain Pure Protein 3.9%, and Rest of World 12.1%.
- Quarterly U.S. segment operating income dropped $18.1 to $21.9. Management cited lower sales, marketing investment, freight and commodity costs, unfavorable mix, and costs related to a facility closure. Quarterly consolidated operating income fell 12.3%.
- Six-month sales increased 4.4% as reported, with growth across all reportable segments. Gross margin rose 110 basis points, while SG&A as a share of sales increased 20 basis points.
- Interest and financing expense rose 27.8% for the quarter and 26.0% for the half, primarily due to higher variable interest rates. Reported net income benefited from the Tax Cuts and Jobs Act accounting impact.
Outlook, management commentary, risks and unusual items
- Management expected FY2018 capital spending of approximately $75 million and said cash, projected operating cash flows and facility availability should fund ordinary working capital, planned capital spending and other expected needs for at least 12 months. No specific earnings or sales guidance was provided in the filing text.
- The company was exploring a possible divestiture of Hain Pure Protein but gave no assurance that a transaction or other action would occur, or as to its timing or outcome. It also incurred consulting fees for its Project Terra strategic review.
- The February 6, 2018 credit agreement amendment, subsequent to quarter-end, extended the $1.0 billion revolving facility to February 2023 and added a $300 million term loan. Quarterly term-loan principal payments of $3.75 million begin June 30, 2018.
- The new U.S. tax law produced a provisional $29.3 million reduction in net deferred tax liabilities, partly offset by an estimated $5.2 million transition tax. The company had not completed its accounting, and final amounts could differ materially. The resulting tax benefit contributed to the quarter’s unusually low effective tax rate of (53.6%) and six-month rate of (13.4%).
- A $3.4 million non-cash impairment charge related to a U.S. manufacturing facility being closed as the company shifted to third-party manufacturers; $4.9 million of related assets were classified as held for sale. Acquisition, restructuring and integration charges were $4.8 million for the quarter and $10.6 million for the half.
- Disclosure controls remained ineffective at December 31 because of previously identified material weaknesses in internal control over financial reporting. Management said remediation was ongoing and significant progress had been made.
- Securities class actions and stockholder derivative litigation were pending; the SEC had issued subpoenas in its investigation, and the company said it was responding and intended to cooperate. The company stated that other ordinary-course claims were not expected to have a material adverse effect. It reported no material changes to previously disclosed risk factors.
- Results are subject to seasonality, foreign-currency movements, commodity and freight costs, competition, consumer preferences, customer and supplier relationships, and the outcome of litigation and the SEC investigation. The company cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether working capital—especially inventory—converts to cash and operating cash flow recovers after the sharp year-over-year decline.
- Whether U.S. sales and operating profitability stabilize, and whether the facility closure, SKU rationalization and third-party manufacturing strategy deliver expected benefits.
- How much reported growth reflects currency and acquisitions versus underlying organic performance; review segment results and constant-currency disclosures.
- Final tax-law accounting, including the deferred-tax remeasurement and transition tax, and the resulting effect on future effective tax rates and cash taxes.
- Terms, covenant capacity and repayment profile under the amended credit agreement, alongside leverage and interest expense.
- Progress in remediating internal-control weaknesses and material developments in the securities litigation and SEC investigation.
- Any decision or outcome regarding a potential Hain Pure Protein divestiture; the filing provides no assurance of a transaction.