Hain Celestial Group, Inc. — Form 10-Q
Reporting period: Three months ended September 30, 2020, the first quarter of fiscal 2021. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and reporting period
Hain Celestial markets and sells organic and natural food, beverage, and personal-care products in more than 75 countries. Its strategy focuses on simplifying its portfolio, strengthening capabilities, improving margins and cash flow, and restoring profitable sales growth. The company continued divestitures, including the July 2020 sale of Danival, and classified its U.K. Fruit business, primarily Orchard House Foods, as held for sale during the quarter.
Key financial results
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $498.6 million | $482.1 million |
| Gross profit / margin | $119.2 million / 23.9% | $97.8 million / 20.3% |
| Operating income | $3.3 million | $2.5 million |
| Continuing-operations net loss | $10.8 million | $5.0 million |
| Net income (loss), including discontinued operations | $0.5 million | $(107.0) million |
| Operating cash flow from continuing operations | $40.7 million | $(3.6) million |
| Capital expenditures | $12.2 million | $13.2 million |
| Operating free cash flow from continuing operations (non-GAAP) | $28.5 million | $(16.7) million |
| Adjusted EBITDA (non-GAAP) | $54.9 million | $32.1 million |
Reported sales rose 3.4%; growth was 1.5% on a constant-currency basis. Gross margin improved 3.6 percentage points. The company attributed the improvement primarily to productivity savings and favorable product mix. Continuing operations remained loss-making; the small consolidated net profit reflected $11.3 million of income from discontinued operations, primarily a deferred tax benefit related to Tilda.
Cash and cash equivalents, including $9.7 million classified within assets held for sale, totaled $37.3 million at quarter-end, down from $37.8 million at June 30, 2020. Working capital from continuing operations was $283.7 million, up from $260.7 million. Total debt was $289.5 million, compared with $282.8 million at June 30; $288.0 million was drawn on the revolving facility. The company reported $702.3 million available under its credit agreement and compliance with its covenants.
Material changes versus the prior comparable period
- Sales increased $16.6 million, with North America up 3.3% and International up 3.6% as reported. International sales declined 1.1% on a constant-currency basis.
- North America operating income increased to $33.3 million from $15.1 million, supported by mix, lower selling expenses, and cost efficiencies. International moved to a $15.9 million operating loss from $9.1 million of income, principally because of the Fruit business impairment.
- The company recorded a $32.5 million pre-tax, non-cash charge to reduce the estimated value of the U.K. Fruit business held for sale. That business represented 7.8% of company sales in the quarter, versus 11.3% a year earlier.
- Productivity and transformation costs declined to $1.8 million from $14.2 million. Interest and other financing expense fell to $2.5 million from $6.3 million, primarily due to lower rates and borrowings.
- Operating cash flow improved by $44.3 million year over year, partly due to working-capital changes. Inventory increased to $293.0 million from $248.2 million at June 30.
- Net income improved sharply from the prior-year loss, but the comparison is heavily affected by discontinued operations: the prior-year period included a $95.1 million currency-translation loss reclassification related to Tilda.
Outlook, management commentary, risks, and unusual items
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It said the strategy remains unchanged and described cash flows and borrowing capacity as adequate for anticipated expenditures for the foreseeable future.
- Management reported that COVID-19 had increased overall demand to date, particularly in grocery, snacks, tea, and some personal-care products, while some offerings, including U.K. fruit and sun care, were adversely affected. It warned that the duration of demand changes and the effects of economic deterioration are uncertain.
- The company cited potential pandemic-related manufacturing, supplier, logistics, and retailer disruptions. It described measures including additional raw materials and inventory, secondary sources of supply, and temporary labor. Some planned innovation and productivity initiatives had been delayed.
- The 589.2% effective tax expense rate on continuing operations was unusually high because of discrete items, including the Fruit reserve, a U.K. tax-rate change, and a legal-entity reorganization. The company received $25.0 million on a CARES Act tax refund claim and reported a further $28.7 million receivable.
- The company repurchased approximately 1.281 million shares for $42.0 million under its $250 million authorization; $147.8 million remained authorized at quarter-end.
- Outstanding securities and stockholder litigation remained a contingency. The securities class action had been dismissed with prejudice, with plaintiffs’ appeal pending; the related stockholder action remained stayed while plaintiffs evaluated the board’s rejection of a demand. Management said other routine claims were not expected to have a material adverse effect.
- Forward-looking risks include COVID-19, consumer demand and competition, supply-chain and commodity costs, customer or distributor concentration, debt covenants, litigation, and possible goodwill or intangible-asset impairment. Management stated disclosure controls were effective and reported no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether the U.K. Fruit business sale proceeds and final disposition value are consistent with the $32.5 million impairment and $71.0 million of assets held for sale.
- Whether improved gross margin, North America profitability, and operating cash flow are sustainable, particularly given inventory growth and International’s operating loss.
- The composition and timing of the $28.7 million remaining CARES Act receivable, and the tax and discontinued-operations items behind reported net income.
- Revolver utilization, covenant headroom, and the effect of continued share repurchases on liquidity and leverage.
- COVID-19’s continuing effect on product demand, operations, and supply partners, as well as developments in the pending litigation and divestiture plans.