Hain Celestial Group, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019 (first quarter of fiscal 2020). Unless noted, amounts are in U.S. dollars. Comparisons are with the three months ended September 30, 2018.
Business context and material changes
Hain sells organic and natural food, beverage, and personal-care products in more than 70 countries. Its strategy centers on simplifying its portfolio, reducing low-velocity products, and directing resources toward higher-growth, higher-margin brands. The company eliminated approximately 350 low-velocity SKUs in fiscal 2019 and said this was expected to weigh on current-year sales growth.
Hain sold its Tilda business for $342 million in cash on August 27, 2019, following fiscal 2019 sales of its Hain Pure Protein businesses. These disposals are reported as discontinued operations. Hain used Tilda proceeds to repay its term loan and reduce revolving-credit borrowings. Effective July 1, 2019, it reorganized reporting into North America and International segments; prior-period segment figures were recast.
Key financial results
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Net sales | $482.1 million | $518.5 million |
| Gross profit / margin | $97.8 million / 20.3% | $88.9 million / 17.1% |
| Operating income (loss), continuing operations | $2.5 million | $(28.0) million |
| Net loss, continuing operations | $(5.0) million | $(23.1) million |
| Net loss, discontinued operations | $(102.1) million | $(14.3) million |
| Total net loss / diluted loss per share | $(107.0) million / $(1.03) | $(37.4) million / $(0.36) |
| Adjusted EBITDA (non-GAAP) | $32.1 million | $28.7 million |
| Cash used in operating activities, continuing operations | $3.6 million | $19.6 million |
| Operating free cash flow, continuing operations (non-GAAP) | $(16.7) million | $(41.8) million |
Sales declined 7.0% as reported and 4.8% at constant currency. Gross margin improved, primarily from North American supply-chain efficiencies. Continuing-operations results also benefited from the absence of prior-year CEO succession, accounting review, and impairment charges; current-quarter productivity and transformation costs rose to $14.2 million from $10.3 million. The company recorded $2.6 million of insurance proceeds in the quarter.
The larger total net loss chiefly reflects discontinued operations: it includes a $95.1 million reclassification of accumulated Tilda currency-translation losses and $16.5 million of tax expense related to the Tilda sale. These items materially distinguish the reported net loss from continuing-operations performance.
Segments, liquidity, and debt
North America sales were $271.7 million, down 6.7%, and operating income was $15.1 million, compared with $4.5 million. International sales were $210.4 million, down 7.4% as reported and 2.5% at constant currency; operating income was $9.1 million, compared with $5.7 million. Management attributed lower sales in part to discontinued unprofitable SKUs; segment income gains reflected efficiencies and lower uneconomic promotional spending or marketing costs.
Cash and cash equivalents were $20.5 million at September 30, 2019, down from $31.0 million at June 30. Working capital from continuing operations was $244.9 million. Total borrowings were approximately $325.6 million, versus $630.8 million at June 30, following Tilda-related repayments; outstanding revolving-facility borrowings were $321.0 million. The company reported $669.3 million available under its amended credit agreement and compliance with its covenants. The weighted-average borrowing rate was 4.09%.
Capital expenditures were $13.2 million. Management expected fiscal 2020 capital spending of approximately $70–$80 million and noted possible additional productivity and transformation costs. Lease accounting adoption added operating lease right-of-use assets and liabilities to the balance sheet; operating lease liabilities totaled $87.9 million at quarter-end.
Outlook, risks, and unusual items
The filing provides no specific revenue or earnings forecast. Management expects SKU rationalization to pressure near-term sales while aiming to improve profitability, and plans to invest more in marketing and innovation for selected growth brands. Results are seasonal, and the company cautions that first-quarter results are not necessarily indicative of the full year.
Key risks include execution of portfolio and cost-saving initiatives; competition and changing consumer preferences; customer concentration and reliance on distributors; commodity, ingredient, freight, and currency volatility; supply-chain or co-packer disruptions; debt and financial-covenant requirements; and potential impairment of goodwill or intangible assets. Securities and shareholder derivative litigation remained pending, with motions to dismiss fully briefed and decisions awaited. The company reported no material change to previously disclosed risk factors and stated its disclosure controls were effective.
Investor verification points
- Assess underlying sales trends separately from divestitures, currency effects, and SKU exits, including performance of the North America and International segments.
- Track whether improved gross margin and segment operating income persist after transformation costs and planned growth-brand investment.
- Review the final Tilda sale adjustments, tax consequences, and the contribution of discontinued-operation and translation items to reported losses.
- Monitor cash generation, planned fiscal 2020 capital spending, debt levels, and compliance with tightening leverage and interest-coverage covenants.
- Follow the pending securities and derivative litigation and any material developments in contingencies or internal controls.