Hain Celestial Group, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014; filed August 26, 2014. Although the request metadata says “2013 Q4,” this filing reports FY2014, with comparative FY2013 and FY2012 results. All amounts below are U.S. dollars.
Business context
Hain manufactures, markets, distributes and sells organic and natural food, beverage and personal-care products. It reports U.S., U.K. and combined Rest of World segments. FY2014 growth included the acquisitions of Tilda and Rudi’s; the U.K. segment also reflected a full year of the prior-year UK Ambient Grocery Brands acquisition. On July 17, 2014, after year-end, Hain acquired the remaining 51.3% of Hain Pure Protein (HPP), making it wholly owned.
Financial results and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $2,153.6 million | $1,734.7 million | +24.2% |
| Gross profit / gross margin | $567.2 million / 26.3% | $474.9 million / 27.4% | Margin down 1.1 percentage points |
| Operating income / operating margin | $227.7 million / 10.6% | $174.3 million / 10.0% | +30.6%; margin up 0.6 points |
| Income from continuing operations | $141.5 million | $119.8 million | +18.1% |
| Net income | $139.9 million | $114.7 million | +22.0% |
| Diluted EPS | $2.80 | $2.41 | +16.2% |
| Cash from operations | $184.8 million | $121.0 million | +$63.8 million |
| Capital expenditures | $41.6 million | $72.9 million | Lower by $31.3 million |
| Operating free cash flow (non-GAAP) | $143.2 million | $48.1 million | +$95.1 million |
FY2014 fourth-quarter net sales were $583.8 million, operating income $60.0 million, net income $35.7 million and diluted EPS $0.70.
At June 30, 2014, cash and cash equivalents were $123.8 million and working capital was $379.4 million. Total debt was $867.9 million, including $614.5 million drawn on the revolving facility, $150.0 million of senior notes and $66.0 million of Tilda short-term borrowings. The revolver had an $850 million commitment and expires in August 2017; its stated draw was subject to the facility’s covenants. Senior notes bear 5.98% and mature in May 2016. Management said cash, projected operating cash flows and credit availability were expected to cover ordinary working capital needs, approximately $40 million of FY2015 capital spending and FY2015 debt and lease obligations.
Material changes and drivers
- Sales rose 24.2%, primarily from acquisitions and increased volume/distribution. U.S. sales grew 17.0%; U.K. sales grew 51.6%, including Tilda and the full-year impact of UK Ambient Grocery Brands. Foreign exchange increased consolidated sales by $18.3 million.
- Gross margin fell from 27.4% to 26.3%. The filing cites U.S. promotional spending reclassified from selling expense to contra-revenue (about 50 basis points), a $6.0 million nut-butter recall charge (about 30 basis points), factory start-up costs and higher input costs; Tilda’s relatively higher margins partly offset these pressures.
- Operating margin increased to 10.6% from 10.0%, as sales growth and operating leverage more than offset gross-margin pressure and other costs. SG&A declined to 14.5% of sales from 15.8%.
- Income tax expense rose to $70.1 million from $34.3 million; the effective rate increased to 33.8% from 22.3%. FY2013 benefited from a $13.2 million tax item related to a U.S. worthless-stock deduction.
- Net interest expense increased to $23.4 million from $19.4 million, mainly due to higher average revolving borrowings used to fund acquisitions. Cash from operations increased, with management citing earnings growth and improved working-capital management.
- Goodwill and other intangible assets totaled approximately $1.79 billion at year-end. Annual impairment testing identified no FY2014 impairment; the Europe reporting unit and New Covent Garden Soup Co. trademark were identified as particularly sensitive to valuation assumptions.
Outlook, risks and unusual items
- Management emphasized continued growth through new products, distribution, operational efficiencies and acquisitions, while noting economic and political uncertainty, volatile commodity and energy costs, and the growing share of international sales (40% in FY2014). No numerical FY2015 sales or EPS guidance is provided in the supplied filing text; it refers to guidance without stating the amounts.
- Management expected FY2015 capital expenditures of approximately $40 million and anticipated higher input costs, to be addressed through efficiencies, cost savings and price increases.
- A voluntary recall of certain nut butters was announced August 19, 2014. Hain recorded $6.0 million in FY2014 for product and inventory costs and said additional FY2015 pre-tax costs could be $4–8 million; it was pursuing insurance recovery and did not expect total costs to materially affect liquidity.
- A California putative class action concerning historical labeling of certain Avalon Organics and JASON products remained in discovery. The court denied Hain’s summary-judgment motion in February 2014; Hain said it intended to defend the case and considered the claims without merit. Management assessed other ordinary-course matters as not expected to have a material adverse effect.
- Key exposures include customer and distributor concentration (United Natural Foods represented 13% of FY2014 sales; Walmart/Sam’s Club/ASDA 11%), dependence on co-packers and suppliers, organic-ingredient availability, product safety and reputation, foreign exchange, commodity costs, acquisition integration, and seasonality. A 10% change in weighted-average primary input costs was estimated to affect cost of sales by about $95 million; a 5% adverse currency movement would have reduced FY2014 sales by about $47 million and operating income by about $4 million.
- Auditors issued unqualified opinions on the financial statements and internal control. Management and the auditor excluded Tilda and Rudi’s from the internal-control assessment; together those businesses represented 17.8% of assets, 5.4% of sales and 8.6% of continuing-operations income.
Most important facts for investors to verify
- How much of reported growth and future performance reflects acquired businesses versus comparable, underlying sales and volume trends.
- Whether gross-margin pressure from promotions, recall costs, start-ups and input inflation persists, and whether productivity or pricing offsets it.
- The final nut-butter recall cost, insurance recoveries and any related operational or reputational effects.
- Debt maturities, revolver covenant headroom and the impact of integrating HPP and other acquisitions on leverage and cash generation.
- Valuation assumptions and impairment sensitivity for goodwill, the Europe reporting unit and the New Covent Garden Soup Co. trademark.
- Developments in the personal-care labeling litigation and the financial implications, if any, of other contingencies.