Business context and reporting period
Hain Celestial manufactures, markets and sells organic and natural food, beverage and personal-care products. This Form 10-Q covers the quarter and nine months ended March 31, 2016 (fiscal 2016); the supplied metadata’s “2015 Q3” does not match the filing period. Comparisons are with the corresponding 2015 periods.
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $749.9 million, up 13.1% | $2,189.6 million, up 10.0% |
| Gross profit / margin | $173.2 million / 23.1%, versus 23.8% | $502.8 million / 23.0%, versus 22.7% |
| Operating income / margin | $69.0 million / 9.2%, versus $60.2 million / 9.1% | $214.2 million / 9.8%, versus $163.0 million / 8.2% |
| Net income | $49.0 million, versus $33.4 million | $137.2 million, versus $96.8 million |
| Diluted EPS | $0.47, versus $0.32 | $1.32, versus $0.94 |
| Operating cash flow | Not separately stated | $131.9 million, versus $70.2 million |
| Capital expenditures | Not separately stated | $58.0 million, versus $36.3 million |
| Operating free cash flow | Not separately stated | $73.8 million, versus $33.9 million |
At March 31, cash was $125.4 million and working capital was $581.7 million. Total debt was $917.4 million, including $879.6 million classified as long-term. The $1.0 billion revolving facility had $276.7 million available after outstanding borrowings and letters of credit; the company reported covenant compliance. On May 2, 2016, it used the facility to redeem $150 million of senior notes due that day; afterward, $146.7 million remained available.
Changes versus comparable periods
- Quarterly sales growth was driven substantially by acquisitions; management attributed approximately $93.5 million of Q3 sales to Orchard House, Mona, Empire and Belvedere, including growth under Hain’s ownership. Nine-month acquisition-related sales were approximately $206.5 million.
- Sales increased 15% in Q3 and 13% year to date on a constant-currency basis. Foreign exchange reduced reported sales by $13.9 million in Q3 and $56.6 million year to date.
- Quarterly gross margin contracted 70 basis points, reflecting U.S. product mix, higher U.S.-dollar-denominated Canadian input costs and $2.6 million of costs from a turkey-facility chiller breakdown. Year-to-date gross margin improved 30 basis points, helped by procurement, poultry mix and lower recall-related costs.
- Year-to-date SG&A was nearly flat in dollars but fell to 12.0% of sales from 13.2%. Operating income benefited from sales growth, acquisition contributions, lower U.K. factory start-up costs and lower prior-year recall costs.
- Net income includes a $9.0 million fire-insurance recovery gain. The company also recorded $11.9 million of acquisition, restructuring and integration charges year to date.
Outlook, commentary and risks
- Project Terra, launched in Q3, targets approximately $100 million of global cost savings during fiscal 2017–2019 through plant, co-packer and procurement optimization and product-portfolio rationalization, with savings partly reinvested in brand building. Hain plans five U.S. strategic platforms beginning in fiscal 2017 and intends to sell brands representing approximately $30 million in sales that no longer fit its strategy.
- Management expects fiscal 2016 capital spending of approximately $65 million and said cash, expected operating cash flow and credit availability should fund ordinary working capital, planned capex and other expected cash needs for at least 12 months. It expects Q4 sales and earnings to exceed Q3, while cautioning that seasonality and future acquisitions can affect results.
- Risks include foreign-exchange and commodity-cost volatility, customer and consumer demand changes, acquisition integration, supply-chain or facility interruptions, product recalls, competition, and potential impairment of goodwill or intangibles. Management reported no material changes to previously disclosed risk factors.
- The personal-care labeling class action was finally approved and dismissed on February 17, 2016; the previously recorded settlement was $7.5 million plus consumer coupons of up to $2.0 million. Management said other ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Project Terra delivers the targeted savings and whether the planned brand divestiture proceeds on expected terms.
- How much reported growth reflects acquisitions versus organic growth, particularly in the U.S. segment, where nine-month sales declined 0.9%.
- Whether gross-margin pressure, Celestial Seasonings tea weakness following its packaging change, and the turkey-facility disruption improve or persist.
- Debt capacity, covenant headroom and liquidity after the May 2 senior-note refinancing; approximately 54% of cash was held outside the U.S., and repatriation could incur significant U.S. taxes.
- The effect of currency movements, contingent acquisition consideration and the sensitivity of U.K. goodwill and intangible valuations to assumptions.