Business context and reporting period
The filing is Hain Celestial Group, Inc.’s Form 10-K for the fiscal year ended June 30, 2011, filed August 29, 2011. This is not a fiscal 2010 fourth-quarter filing; it includes unaudited quarterly data for fiscal 2011 and fiscal 2010. Hain manufactures, markets and sells natural and organic food, beverage, personal-care and household products. It reports one operating segment. Results are in U.S. dollars; financial statement amounts below are in millions unless noted.
Financial performance and position
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $1,130.3 | $917.3 |
| Gross profit / gross margin | $319.5 / 28.3% | $251.2 / 27.4% |
| Operating income / operating margin | $106.7 / 9.4% | $71.1 / 7.8% |
| Net income attributable to Hain / diluted EPS | $55.0 / $1.23 | $28.6 / $0.69 |
| Cash from operating activities | $58.7 | $71.0 |
| Operating free cash flow, company-defined non-GAAP | $47.2 | $59.6 |
- Sales rose $212.9 million, led by U.S. sales growth, stronger consumption, and acquired brands. U.S. sales were $910.1 million; international sales were $220.2 million, or 19.5% of consolidated sales.
- Gross margin improved with sales mix, including Greek Gods and Sensible Portions, and productivity and cost-saving measures that partly offset higher input costs. SG&A was $212.5 million, 18.8% of sales, versus $172.7 million and 18.8% in FY2010.
- Cash from operations fell $12.4 million, principally due to working-capital demands from higher sales and acquisitions and increased income-tax payments. Capital expenditures were $11.5 million.
- At June 30, 2011, cash was $27.5 million, working capital $200.4 million, total assets $1,333.5 million and stockholders’ equity $866.7 million. Long-term debt was $229.5 million; total debt including current maturities and capitalized leases was $230.2 million.
- Debt included $150 million of 5.98% senior notes due May 2016 and $79 million drawn on a $400 million revolving facility due July 2015. Management said cash, projected operating cash flow and facility availability should fund ordinary working capital needs, FY2012 capital spending and near-term obligations.
Material changes versus prior periods
- FY2011 sales increased about 23% and net income nearly doubled year over year. Sales growth included the full-year contribution from Sensible Portions, acquired late in FY2010, and Greek Gods, acquired July 2010, as well as Danival and GG UniqueFiber, acquired in early 2011.
- Snack sales increased to $196.4 million from $94.8 million, reflecting the Sensible Portions acquisition. Grocery sales rose to $688.1 million from $593.4 million. Personal-care sales rose to $105.6 million from $92.8 million.
- Operating cash flow and operating free cash flow declined despite higher earnings, primarily because of working-capital use. Accounts receivable and inventory increased.
- Comparability with FY2009 is affected by Hain’s June 2009 deconsolidation of Hain Pure Protein (HPP); HPP sales and expenses are no longer consolidated after June 30, 2009. FY2009 also included $52.6 million of goodwill and intangible impairment charges.
- For the June 2011 quarter, net sales were $292.0 million and net income was $12.8 million, compared with $222.8 million and $6.7 million in the June 2010 quarter.
Outlook, commentary, risks and unusual items
- Management anticipated higher input costs and ongoing economic uncertainty, and said it would seek to offset cost pressure through efficiencies, savings and customer price increases. The filing specifies approximately $20 million of expected FY2012 capital spending. It refers to FY2012 sales and EPS guidance as a risk factor but does not provide clear numerical guidance in the supplied filing text.
- Management reported improved consumption trends at certain retailers and encouraging initial results from recent European acquisitions, while pursuing further complementary acquisitions and expanded distribution. These expectations are forward-looking and not assured.
- A hypothetical 10% change in weighted-average costs of primary inputs would change cost of sales by approximately $33 million, based on FY2011 costs; Hain does not hedge most ingredient-price exposure. A 1 percentage-point interest-rate change was not expected to have a material effect, based on the filing’s stated assumptions.
- Key risks include commodity and organic-ingredient availability and costs; competition and private labels; reliance on United Natural Foods, Inc. (21% of FY2011 sales); reliance on co-packers and third-party distribution; consumer demand shifts; product safety, labeling and regulatory exposure; seasonality; foreign exchange; acquisition integration; and goodwill impairment. Goodwill and other intangible assets totaled approximately $789 million. The Europe reporting unit had less than 10% fair-value headroom in the annual impairment test; a 1 percentage-point increase in its discount rate would have indicated possible impairment.
- FY2011 included $3.5 million of acquisition and integration expenses, offset by a $4.2 million net reduction from contingent-consideration adjustments, and approximately $0.8 million of restructuring expenses. Contingent consideration liabilities were $37.1 million at year-end. HPP’s equity-method results included Hain’s $3.9 million share of an impairment-related loss at HPP.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements and internal controls; acquired businesses accounting for less than 4% of sales were excluded from management’s internal-control assessment.
Most important facts for investors to verify
- Separate acquired-brand sales contributions from underlying growth, and confirm the basis for management’s consumption-trend claims.
- Track working-capital conversion and operating cash flow against earnings, particularly receivables and inventory growth.
- Assess whether pricing and productivity can offset the disclosed commodity-cost exposure without weakening demand or margins.
- Review acquisition earn-outs, integration performance, and the FY2012 cash requirements associated with acquisitions and debt.
- Monitor the Europe reporting unit’s valuation assumptions, goodwill and intangible-asset carrying values, and U.K. tax valuation allowances.
- Confirm the exact FY2012 sales and EPS outlook from the company’s applicable guidance disclosures; numerical guidance is not clear in this filing text.