Hain Celestial Group, Inc. — Form 10-Q Summary
Business and period: Hain Celestial manufactures and sells organic and natural food and personal care products across the United States, United Kingdom, Canada and Europe. This unaudited report covers the quarter and six months ended December 31, 2013, the second quarter and first half of fiscal 2014. Comparisons are with the corresponding fiscal 2013 periods.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Year-over-year | Six months ended Dec. 31, 2013 | Year-over-year |
|---|---|---|---|---|
| Net sales | $534.9 million | +17.5% | $1,012.4 million | +24.2% |
| Gross profit / margin | $143.1 million / 26.7% | Margin down from 28.7% | $262.2 million / 25.9% | Margin down from 27.7% |
| Operating income / margin | $64.3 million / 12.0% | +25.5%; margin up from 11.3% | $104.1 million / 10.3% | +24.6%; margin up from 10.2% |
| Net income | $41.2 million | Up from $31.6 million | $68.9 million | Up from $48.0 million |
| Diluted EPS | $0.84 net; $0.81 continuing operations | Net EPS was $0.67; continuing EPS $0.68 | $1.40 net; $1.38 continuing operations | Net EPS was $1.02; continuing EPS $1.11 |
Sales growth was driven mainly by the United States and United Kingdom, including contributions from prior-year acquisitions. Acquisition effects accounted for approximately 54% of U.S. quarterly sales growth and 77% of U.K. quarterly sales growth. Consolidated sales growth was not significantly affected by price or foreign exchange changes.
- Margins and expenses: Gross margin declined because of product and segment mix, higher input costs, and factory start-up costs in the U.K. and Europe. SG&A rose in dollars but fell as a share of sales, reflecting operating leverage and acquired businesses’ lower relative expense levels.
- Interest and taxes: Quarterly net interest expense was $5.6 million, up from $4.7 million, primarily due to higher average revolving-credit borrowings used to fund acquisitions. The six-month effective tax rate was 30.3%, versus 31.7%; the company cited U.K. tax-rate reductions, partly offset by an IRS-audit-related tax reserve and nondeductible contingent-consideration adjustments.
- Segments: Quarterly U.S. sales grew 16.9% and operating margin was 17.2%; U.K. sales grew 21.5%, while operating margin fell to 8.2% amid mix changes and production inefficiencies. Rest-of-World sales grew 11.6%, but operating margin declined to 6.5%, largely due to European factory start-up costs.
Cash flow, debt and liquidity
- First-half operating cash flow was $73.5 million, compared with $61.2 million a year earlier. Capital expenditures were $20.8 million, producing reported operating free cash flow of $52.7 million, up from $36.3 million.
- Cash increased to $67.5 million from $41.3 million at June 30, 2013. Working capital was $372.4 million, up $71.3 million from fiscal year-end.
- Total debt was $627.7 million, down from $665.9 million at June 30, 2013. This included $477.5 million outstanding under an $850 million revolving facility and $150 million of senior notes bearing 5.98% interest and due May 2016. The revolving facility expires in August 2017; no U.K. short-term borrowings were outstanding at period-end.
- Management said cash, projected operating cash flows and credit availability were sufficient for ordinary working capital, expected fiscal 2014 capital spending and other anticipated cash requirements for at least 12 months. Fiscal 2014 capital expenditures were expected to be approximately $35 million.
- First-half investing cash use was $13.7 million, compared with $301.1 million a year earlier, when major acquisitions drove spending. Financing activities used $33.5 million, mainly reflecting debt repayments and employee-tax share withholding.
Material developments, outlook and risks
- On January 13, 2014, after the reporting period, Hain acquired Tilda Limited, a premium branded Basmati and specialty rice company with approximately $190 million of calendar 2013 sales. Consideration included £107 million cash, 1,646,173 Hain shares valued at $150.6 million, and a £20 million vendor loan note payable within one year in cash or shares at Hain’s option. Cash consideration was funded by revolving-credit borrowings.
- Management described a strategy of organic growth and complementary acquisitions, wider brand distribution, new product launches, cost containment and operating-efficiency improvements. It noted that higher input costs were expected to continue and that mitigation could include efficiencies, cost savings and customer price increases. The filing discusses risks to achieving fiscal 2014 net-sales and diluted-EPS guidance but does not provide a clear numerical guidance value in the supplied text.
- Results are seasonal and can be affected by weather, promotions, consumer demand, commodity, energy and labor costs, foreign exchange, international economic conditions, competition, acquisition integration and supply or distribution dependencies. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- A California putative class action concerning historical Avalon Organics and JASON product labeling remained in discovery; Hain said it intended to defend the claims and believed them to be without merit. A summary-judgment motion was heard February 6, 2014. The company also cited an ongoing IRS audit and increased its reserve for unrecognized tax benefits by $0.55 million.
- Management reported no material change in market risk, no off-balance-sheet arrangements, and effective disclosure controls. The filing states that ordinary-course claims and disputes were not expected to have a material adverse effect, based on current facts and circumstances.
Most important facts for investors to verify
- Whether sales growth and acquisition integration can be sustained, and how much growth is organic versus acquisition-driven.
- Whether gross-margin pressure from product mix, input costs and production start-ups eases, particularly in the U.K. and Europe.
- Post-acquisition Tilda performance, final purchase accounting, funding needs and the impact of additional shares and debt on earnings and leverage.
- Debt levels, covenant headroom and cash-flow conversion, including the planned capital expenditure program and management’s 12-month liquidity assessment.
- Developments in the labeling litigation and IRS audit, and whether tax rates or contingent-consideration estimates change materially.