Hain Celestial Group, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended June 30, 2013. The filing also reports the quarter ended June 30, 2013; the supplied filing is not a fiscal 2012 annual report.
Business context
Hain Celestial manufactures, markets and distributes natural and organic grocery, snack, tea and personal-care products. It reports geographically across the United States, United Kingdom, Canada and Europe; Canada and Europe are combined as “Rest of World.” Sales growth in FY2013 included significant contributions from acquisitions, particularly UK packaged-grocery brands.
Key financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $1.735 billion | $1.378 billion |
| Gross profit / margin | $474.9 million / 27.4% | $382.5 million / 27.8% |
| Operating income / margin | $174.3 million / 10.0% | $151.5 million / 11.0% |
| Continuing-operations income | $119.8 million; $2.52 diluted EPS | $94.2 million; $2.05 diluted EPS |
| Net income | $114.7 million; $2.41 diluted EPS | $79.2 million; $1.73 diluted EPS |
| Operating cash flow | $121.0 million | $122.0 million |
| Operating free cash flow* | $48.1 million | $101.5 million |
*Company-defined non-GAAP measure: operating cash flow less capital expenditures.
Sales increased 25.9%; management attributed the increase primarily to improved U.S. consumption, expanded distribution and acquisitions. Gross margin declined 0.4 percentage points, reflecting acquired-business/product mix and higher input costs. Operating margin fell 1.0 point, with higher acquisition, restructuring and integration charges contributing. FY2013 included $13.6 million of acquisition-related, restructuring and integration expenses, plus $2.3 million of additional BluePrint contingent-consideration expense. The FY2012 comparison included a $14.6 million net reduction in acquisition-related expense, principally from a contingent-consideration reversal.
U.S. sales rose 10.5% to $1.096 billion; U.K. sales rose 118.6% to $420.4 million, primarily due to acquisitions; Rest of World sales increased 12.4% to $218.4 million. The U.K. contributed $31.1 million in segment operating income versus $9.7 million in FY2012.
For the June 2013 quarter, sales were $463.5 million, gross profit $122.7 million, operating income $39.7 million and net income $25.9 million. Quarterly operating income included $10.0 million of acquisition-related, restructuring, integration and factory start-up costs; quarterly net income benefited from discrete tax items, including a $1.7 million benefit in the quarter.
Liquidity, debt and capital allocation
At June 30, 2013, cash was $41.3 million, working capital $301.0 million and total assets $2.258 billion. Total debt was $665.9 million, including $503.4 million outstanding under the revolving credit facility and $150 million of senior notes; long-term debt, less current portion, was $653.5 million. The $850 million revolving facility expires in August 2017, with an additional uncommitted $150 million potentially available subject to conditions. The company reported compliance with customary financial covenants; the facility sets a minimum interest coverage ratio of 4.0x and a maximum leverage ratio generally of 3.5x, with a temporary permitted-acquisition step-up.
FY2013 capital expenditures were $72.9 million, versus $20.4 million in FY2012; management expected FY2014 capital spending of approximately $35 million. Management stated that cash, projected operating cash flow and credit availability were sufficient for ordinary FY2014 needs. No dividends had been paid, and none were anticipated in the foreseeable future.
Acquisitions, outlook and risks
- FY2013 acquisitions included UK Ambient Grocery Brands for approximately $321.8 million in cash and stock, Ella’s Kitchen for approximately $103.5 million in cash and stock, and BluePrint for approximately $26.2 million upfront plus contingent consideration. BluePrint contingent payments could reach approximately $82.4 million, subject to operating results.
- The company sold its U.K. chilled ready-meals business and disposed of its sandwich business; discontinued operations generated a $5.1 million loss in FY2013, including a $4.2 million after-tax loss on disposal.
- Management expected higher input costs to persist and cited efficiency initiatives and customer price increases as mitigants. Its outlook emphasized continued U.S. consumption, distribution gains, new products, cost containment and acquisition integration. The filing text does not provide clear numerical FY2014 sales or earnings guidance.
- Key risks include acquisition integration and performance, competition and private-label products, commodity and organic-ingredient costs, reliance on distributors/co-packers, customer concentration, foreign exchange, seasonality, product safety and regulation. One distributor/customer accounted for approximately 15% of FY2013 sales; Walmart, Sam’s Club and ASDA together accounted for approximately 10%.
- Goodwill and other intangible assets totaled approximately $1.37 billion. FY2013 impairment testing found no impairment; management identified the Europe reporting unit as most sensitive, with estimated fair value about 10% above carrying value.
- A hypothetical 1 percentage-point increase in interest rates was estimated to raise annual net interest expense by about $4.6 million. A 10% adverse currency movement was estimated to reduce sales by about $63 million and operating income by about $4 million. A 10% change in primary input costs was estimated to affect cost of sales by about $79 million.
Notable matters and controls
The company reported an unqualified audit opinion on its financial statements and internal control over financial reporting. However, acquired businesses representing 24.2% of total assets, 11.5% of sales and 14.3% of continuing-operations income were excluded from management’s internal-control assessment. A putative shareholder lawsuit concerning proxy disclosures was dismissed with prejudice in June 2013. Management said ordinary-course litigation was not expected to have a material adverse effect.
Investor facts to verify
- How much of reported sales and earnings growth reflects acquired businesses versus comparable, underlying growth, particularly in the U.K.?
- Whether gross-margin pressure, elevated acquisition/integration costs and the sharp drop in operating free cash flow persist as integration and capital projects continue.
- Debt reduction, covenant headroom, variable-rate exposure and the availability of cash held overseas without potentially significant repatriation taxes.
- Actual performance and integration costs of the UK Ambient Grocery Brands, Ella’s Kitchen and BluePrint, including BluePrint contingent consideration.
- Whether the acquired businesses’ internal controls are incorporated into the company’s control assessment, and whether the sensitive Europe reporting-unit valuation changes.