Hain Celestial Group, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended December 31, 2011. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context and reporting period
Hain manufactures, markets and sells natural and organic food, beverage, personal-care and household products in one operating segment. On October 25, 2011, it acquired the UK chilled-foods business Daniels Group, expanding its UK presence and adding products including soup, juice and desserts. It also acquired the Europe’s Best frozen-food brand in October. Daniels’ results are included from the acquisition date.
Key financial metrics
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $385.6 | $291.9 | $677.9 | $549.8 |
| Gross profit | $105.5 | $85.4 | $185.4 | $155.5 |
| Gross margin | 27.4% | 29.3% | 27.3% | 28.3% |
| Operating income | $34.9 | $29.7 | $57.8 | $48.3 |
| Operating margin | 9.1% | 10.2% | 8.5% | 8.8% |
| Net income | $20.0 | $16.3 | $31.7 | $25.4 |
| Diluted EPS | $0.44 | $0.37 | $0.70 | $0.57 |
| Operating cash flow | Not separately presented | Not separately presented | $37.9 | $10.7 |
For the six months, capital expenditures were $6.9 million; operating cash flow less these expenditures was approximately $31.0 million. The company reported trailing-12-month operating free cash flow of $72.3 million, versus $59.6 million a year earlier.
At December 31, 2011, cash was $23.9 million and total current assets were $448.5 million, against current liabilities of $212.7 million. Long-term debt, including current portion, was $450.8 million: $300 million drawn on a $400 million revolving facility and $150 million of senior notes bearing 5.98% interest. Total assets were $1.648 billion and stockholders’ equity was $895.6 million.
Material changes versus the prior comparable period
- Q2 sales increased 32.1%; six-month sales increased 23.3%. Management attributed growth to increased consumption and expanded distribution in North America, as well as Daniels and earlier European acquisitions.
- Q2 net income rose to $20.0 million from $16.3 million; six-month net income rose to $31.7 million from $25.4 million. Diluted EPS increased to $0.44 from $0.37 for the quarter and to $0.70 from $0.57 for the six-month period.
- Gross and operating margins declined year over year. Management cited product mix, Daniels’ relatively lower margins and higher input costs; productivity savings and price increases partly offset cost pressures.
- Acquisition and restructuring expenses increased to $5.2 million in Q2 and $7.0 million for six months, primarily related to Daniels and integration activity. Interest and other expense also rose, reflecting higher average revolver borrowings.
- Six-month operating cash flow improved to $37.9 million from $10.7 million. Investing cash outflow rose to $240.3 million, principally due to acquisitions; financing provided $194.8 million, including $221.0 million in revolving-credit borrowings.
- Debt increased substantially from June 30, 2011, when long-term and current debt totaled about $230.2 million, largely to fund Daniels. Cash declined by $3.6 million from fiscal year-end.
Outlook, commentary, risks and unusual items
- Management expected the economic environment to remain challenging, with consumer uncertainty and higher input costs. It cited efficiency measures, cost savings, promotional discipline and price increases as responses.
- The company expected fiscal 2012 capital spending of approximately $20 million and stated that cash, projected operating cash flows and available credit were sufficient for anticipated needs for at least 12 months. The filing refers to fiscal 2012 sales and diluted-EPS guidance as a risk factor, but the supplied text does not provide clear numerical guidance.
- The $400 million revolving facility expires in July 2015 and contains financial covenants, including a minimum interest-coverage ratio of 4.00:1 and maximum leverage ratio of 3.50:1, temporarily rising to 4.00:1 after a permitted acquisition.
- Daniels’ purchase-price allocation remained preliminary. The acquisition included $123.2 million of goodwill; additional contingent consideration of up to £13 million depends on specified operating results. The company recorded $18.4 million fair value for Daniels contingent consideration.
- Hain recorded a $2.1 million reserve for a Daniels uncertain tax position and a matching seller indemnification asset. It continued to maintain a valuation allowance on certain UK tax-loss carryforwards.
- Management said pending ordinary-course litigation was not expected to have a material adverse effect. It considered the Yeo Hiap Seng investment decline temporary and recorded no earnings loss. No material market-risk changes were reported.
- Disclosure-control effectiveness was concluded for the period, but the assessment excluded Daniels, which represented 19.5% of consolidated assets and 15.6% of Q2 sales.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects acquired businesses, particularly Daniels, versus organic growth; assess the company’s unaudited acquisition pro forma results with their stated limitations.
- Whether Daniels integration, acquired-business margins and contingent payments meet expectations, and whether preliminary purchase-price estimates change.
- Whether input-cost inflation, pricing actions and productivity savings stabilize gross margins.
- Debt levels, revolver availability and covenant headroom following acquisition funding; the filing text does not state the unused facility balance explicitly.
- Cash conversion and working-capital trends, particularly receivables, inventories and payables, alongside planned capital expenditures.
- Progress toward UK profitability and realization of tax-loss carryforwards, plus any change in the Daniels tax reserve or related indemnification.