Hain Celestial Group, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2012; filed May 9, 2012. The filing covers fiscal 2012, notwithstanding the request metadata’s “2011 Q3” label. Amounts below are in U.S. dollars; financial statements are unaudited.
Business context and performance
Hain manufactures, markets and distributes natural and organic food, beverage, personal care and household products through a portfolio of brands. It reports one business segment. Growth strategy includes developing existing brands and acquiring complementary businesses. The Daniels Group, acquired in October 2011, substantially expanded U.K. chilled-food operations and contributed to reported growth.
Key financial metrics
| Metric | Three months ended Mar. 31, 2012 | Three months ended Mar. 31, 2011 | Nine months ended Mar. 31, 2012 | Nine months ended Mar. 31, 2011 |
|---|---|---|---|---|
| Net sales | $379.4 million | $288.4 million | $1,041.0 million | $838.2 million |
| Gross profit / margin | $104.3 million / 27.5% | $82.6 million / 28.6% | $288.4 million / 27.7% | $238.1 million / 28.4% |
| Operating income / margin | $40.6 million / 10.7% | $30.8 million / 10.7% | $98.1 million / 9.4% | $79.1 million / 9.4% |
| Net income | $24.1 million | $16.8 million | $55.8 million | $42.1 million |
| Diluted EPS | $0.52 | $0.38 | $1.22 | $0.95 |
| Operating cash flow | Not separately presented | Not separately presented | $77.7 million | $40.4 million |
Quarterly sales rose 31.5% and nine-month sales rose 24.2%. Net income increased approximately 43.7% for the quarter and 32.5% for the nine months. Gross margin declined in both comparisons, which management attributed to product mix, Daniels’ lower relative margins and higher input costs, partly offset by productivity savings and pricing. Operating margin was flat in the quarter and nine-month comparison.
For the nine months, investing cash outflow was $249.3 million, principally $243.4 million net for acquisitions and $13.0 million of capital expenditures. Financing provided $181.9 million, including $201.0 million of revolving-facility borrowings. Management’s trailing-twelve-month operating free cash flow measure was $79.3 million, versus $61.0 million a year earlier; it is a non-GAAP measure that deducts capital expenditures from operating cash flow.
Balance sheet, debt and liquidity
- At March 31, 2012, cash and cash equivalents were $41.2 million; total assets were $1.683 billion and stockholders’ equity was $942.5 million.
- Long-term debt, including current portion, was approximately $430.7 million: $280.0 million outstanding on the $400 million revolving facility and $150.0 million of 5.98% senior notes due May 2016. The revolver expires in July 2015.
- The credit agreement requires a minimum interest-coverage ratio of 4.00-to-1.00 and a maximum leverage ratio of 3.50-to-1.00, with a permitted-acquisition provision allowing up to 4.00-to-1.00 for a specified period. The filing does not provide the company’s actual covenant ratios.
- Management stated that cash, projected operating cash flow and credit-facility availability should cover anticipated working-capital, capital-spending and other cash needs for at least 12 months. Fiscal 2012 capital spending was expected to be about $20 million.
Material developments, outlook and risks
- Acquisitions and divestiture: Daniels was acquired for approximately $233.8 million cash, plus contingent consideration; its results contributed $100.3 million of sales and $12.8 million of pretax continuing income from acquisition through March 31. Hain also acquired Europe’s Best for $9.5 million. In the quarter, it decided to sell Daniels’ U.K. private-label chilled ready-meals operation, classifying it as discontinued operations. That business generated $21.0 million of quarterly sales and $0.1 million of operating income; the sale was expected by March 31, 2013. On April 27, 2012, Hain acquired Ireland’s Cully & Sully for an initial approximately $13.5 million plus up to approximately $5.8 million contingent consideration.
- Management outlook: Management expected a challenging economic environment and continued higher input costs. It planned to address cost pressure through efficiencies, cost savings and price increases, and to support U.S. demand through expanded distribution, promotions and new products. The filing refers to fiscal 2012 net-sales and diluted-EPS guidance as a risk factor but does not state clear numerical guidance values in the provided text.
- Risks and unusual items: Risks highlighted include economic weakness in the U.S. and Europe, acquisition integration and U.K. performance, commodity and ingredient costs, foreign exchange, competition, customer and consumer trends, third-party suppliers and manufacturers, seasonality, and goodwill/intangible-asset impairment. The nine-month acquisition-related and restructuring expense was $7.5 million. The effective tax rate fell to 34.0% for the quarter and 36.2% for the nine months, partly reflecting Daniels’ lower-tax-jurisdiction income and an $0.8 million discrete benefit from an expired tax statute; nondeductible Daniels transaction costs adversely affected tax expense by $1.2 million. Contingent consideration was a $21.3 million fair-value liability, based on Level 3 estimates.
- Management said pending ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were deemed effective; however, the period-end assessment excluded Daniels, which represented 18.3% of consolidated assets and 9.6% of nine-month continuing-operations sales.
Important facts for investors to verify
- Obtain management’s complete fiscal 2012 sales and diluted-EPS guidance and compare it with subsequent results.
- Track organic and acquired sales separately, especially Daniels’ contribution, integration progress and U.K. profitability.
- Monitor gross-margin recovery, pricing, input-cost trends and whether productivity savings offset cost inflation.
- Review debt, covenant headroom, interest expense and cash generation after acquisitions and contingent-consideration payments.
- Confirm completion and financial impact of the chilled ready-meals sale, and assess the purchase price, performance and integration of Cully & Sully.
- Assess the effect of acquisition-related intangible assets, goodwill and Level 3 contingent-consideration estimates, as well as the company’s tax valuation allowances.