Business context and reporting period
Hain Celestial markets organic and natural food, beverage, and personal-care products in more than 80 countries. This filing covers the quarter and six months ended December 31, 2016 (fiscal 2017 Q2). The request metadata says “2015 Q2,” but the filing itself identifies the reporting period as December 31, 2016.
The reports were filed late after internal and Audit Committee reviews of distributor concessions and revenue recognition. The company filed this Form 10-Q concurrently with its fiscal 2016 Form 10-K and fiscal 2017 Q1 and Q3 Forms 10-Q.
Key financial metrics
| Metric | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 |
|---|---|---|
| Net sales | $740.0 million; down 0.5% reported, up 4.5% constant currency | $1,421.5 million; up 0.7% reported, up 5.4% constant currency |
| Gross profit and margin | $138.4 million; 18.7% (prior year: 22.4%) | $248.3 million; 17.5% (prior year: 21.6%) |
| Operating income and margin | $41.4 million; 5.6% (prior year: $90.1 million; 12.1%) | $55.2 million; 3.9% (prior year: $144.4 million; 10.2%) |
| Net income and diluted EPS | $27.2 million; $0.26 (prior year: $58.1 million; $0.56) | $35.8 million; $0.34 (prior year: $87.2 million; $0.84) |
| Adjusted EBITDA | $69.5 million (prior year: $112.8 million) | $115.1 million (prior year: $189.7 million) |
| Operating cash flow | Not presented by quarter | $112.8 million (prior year: $99.6 million) |
| Operating free cash flow, non-GAAP | Not presented by quarter | $84.1 million (prior year: $58.5 million) |
At December 31, 2016, cash was $157.1 million, working capital was $531.0 million, total debt was $803.1 million, and total liabilities were $1,303.7 million. Revolver borrowings were $783.9 million; $209.9 million of facility capacity remained available, with $6.2 million of letters of credit outstanding. The company reported covenant compliance based on limited waivers and extensions related to delayed financial reporting.
Six-month investing cash outflow was $22.3 million, including $28.7 million of capital expenditures and $5.4 million of proceeds from a business sale. Financing cash outflow was $55.3 million, principally reflecting debt repayments. Cash increased by $29.2 million over the six months.
Material changes versus the prior comparable period
- Quarterly sales were nearly flat as reported, but rose 4.5% at constant currency; foreign exchange reduced quarterly sales by $36.7 million. Six-month constant-currency sales rose 5.4%, while foreign exchange reduced sales by $66.2 million.
- Profitability declined sharply: quarterly operating income fell 54.0% and net income fell 53.2%; six-month operating income fell 61.8% and net income fell 59.0%.
- Margins were pressured by U.S. price adjustments, customer mix and trade spending; Orchard House acquisition-related margin dilution and UK production costs; foreign-currency-related input costs; and start-up costs and inefficiencies at the FreeBird facility. The prior-year Hain Pure Protein results benefited from poultry supply shortages that supported volume and pricing.
- Orchard House contributed approximately $33.7 million of quarterly sales and $79.7 million of six-month sales in the current period, compared with $2.1 million in each prior-year comparable period. The United States segment declined, while UK and Rest of World sales increased; Hain Pure Protein sales rose modestly.
- Prior-year comparative results were revised for errors deemed immaterial to the previously issued statements. Revised 2015 sales were $743.4 million for the quarter and $1,411.2 million for six months; revised net income was $58.1 million and $87.2 million, respectively.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2017 capital spending of approximately $70 million and said cash, operating cash flows, and available credit were expected to fund ordinary working capital, planned capital expenditures, and other expected requirements for at least the next 12 months. No specific sales or earnings guidance is provided in this filing.
- Project Terra includes refocusing U.S. brands into core platforms, investing in selected smaller brands through Cultivate Ventures, identifying brands for divestiture, and pursuing global cost savings over three fiscal years, some of which management intends to reinvest in brands. The company also planned to shift U.S. trade investment toward more consumer-facing activity.
- Accounting review costs were $7.0 million for the quarter and $13.0 million for six months. Management concluded that the financial statements were fairly stated in all material respects under U.S. GAAP, and the Audit Committee review found no evidence of intentional wrongdoing. The reviews identified immaterial prior-period errors and material weaknesses in internal control.
- Disclosure controls were deemed ineffective at December 31, 2016 because of material weaknesses involving the control environment and revenue recognition, including controls over distributor concessions, side agreements, documentation, and trade-promotion timing and classification. Remediation included hiring finance leaders, enhancing contract and accrual reviews and training, creating an internal audit function, and developing a global contract-management system.
- The company faced securities class actions, stockholder derivative claims, and an SEC investigation; the SEC issued a subpoena on January 31, 2017, and the company said it was responding and intended to cooperate. The filing does not quantify a potential loss for these matters.
- Foreign currency, commodity and ingredient costs, customer relationships and competition, operational integration and production constraints, and the effectiveness of financial-reporting controls remain relevant risks. Results may also be affected by seasonality and holiday timing.
Most important facts for investors to verify
- Confirm the intended period: the supplied metadata says 2015 Q2, while the filing covers fiscal 2017 Q2, ended December 31, 2016.
- Review the full concurrent fiscal 2016 Form 10-K and fiscal 2017 Q1 and Q3 filings, including the explanations and effects of revised prior-period figures.
- Track whether the material weaknesses are fully remediated and whether subsequent filings are timely and supported by effective controls.
- Assess whether margin pressure, customer inventory realignment, SKU rationalization, and production issues improve, particularly in the UK and Hain Pure Protein segments.
- Monitor debt, covenant terms and waivers, available revolver capacity, and the company’s ability to meet its stated liquidity outlook.
- Follow developments in the SEC investigation and shareholder litigation, including any disclosed financial exposure or changes in status.