Business context and reporting period
Hain Celestial Group, Inc. markets and sells organic and natural “better-for-you” products in more than 80 countries through its North America and International segments. This unaudited Form 10-Q covers the three months ended September 30, 2021, the first quarter of fiscal 2022. Comparisons are with the three months ended September 30, 2020. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 FY2022 | Prior-year quarter |
|---|---|---|
| Net sales | $454.9 million | $498.6 million |
| Gross profit / margin | $105.4 million / 23.2% | $119.2 million / 23.9% |
| Operating income / margin | $25.5 million / 5.6% | $3.3 million / 0.7% |
| Net income (loss) from continuing operations | $19.4 million; $0.20 diluted EPS | $(10.8) million; $(0.11) diluted EPS |
| Adjusted EBITDA | $47.3 million; 10.4% of sales | $54.9 million; 11.0% of sales |
| Cash from continuing operations | $37.6 million | $40.7 million |
| Operating free cash flow | $19.8 million | $28.5 million |
At September 30, 2021, cash and cash equivalents were $29.0 million, working capital was $232.3 million, and total debt was $345.7 million, including $345.0 million outstanding on the revolver. Revolver availability was $648.6 million; the company reported compliance with credit agreement covenants. Cash was down $46.9 million from June 30, 2021. Total assets were $2.14 billion and stockholders’ equity was $1.35 billion.
Material changes versus the prior comparable period
- Reported sales fell 8.8%. Excluding foreign-exchange impacts, divestitures and discontinued brands, sales declined 0.1% overall: North America declined 1.3% and International grew 1.6%.
- North America sales decreased 5.4% and segment operating income fell 49.4% to $16.8 million. Management cited normalized demand after pandemic-related purchasing, lower Canadian hand-sanitizer sales, and higher delivery and warehouse costs.
- International sales decreased 13.1% as reported, but increased 1.6% on the adjusted constant-currency basis. Segment operating income was $24.1 million versus a $15.9 million loss, reflecting productivity savings and the absence of the prior-year $32.5 million UK fruit-business impairment.
- Gross margin declined 0.7 percentage point. Adjusted EBITDA decreased 13.8%, despite higher reported GAAP operating income; the comparison benefited from the prior-year impairment not recurring.
- Capital expenditures rose to $17.8 million from $12.2 million. Share repurchases were $175.6 million, versus $42.0 million a year earlier; the company borrowed $120.0 million under its revolver during the quarter to support repurchases.
Outlook, management commentary, risks and unusual items
Management said its Hain 2.0 strategy was on schedule to finish ahead of plan and described Hain 3.0 as focused on global growth in selected categories, portfolio simplification, margin and cash-flow expansion, and potentially targeted acquisitions. The filing provides no quantified revenue, earnings or cash-flow guidance. Management believes operating cash flow and borrowing capacity will meet anticipated needs for the foreseeable future.
- Management said pandemic-driven demand had subsided and consumer purchasing was normalizing. It cited continuing uncertainty around demand, labor availability, manufacturing and logistics, and higher operating and supply-chain costs.
- Productivity and transformation costs were $4.0 million, up $2.6 million, including higher supply-chain consulting costs. The company expects workforce-reduction charges during fiscal 2022.
- Q1 2021 results included a $32.5 million impairment associated with the UK fruit business. Q1 2022 included a $0.2 million insurance-claim recovery. The prior-year quarter also included $11.3 million of discontinued-operations income, principally a Tilda-related tax benefit.
- The company reported 29 active consumer class actions alleging Earth’s Best baby food contained unsafe or undisclosed naturally occurring heavy metals, four personal-injury lawsuits, and a New Mexico government enforcement action. Hain denies the allegations and intends to defend the cases; governmental authorities have also requested information. The filing does not provide a clear estimate of potential losses for these matters.
- Other disclosed risks include competition, input-cost inflation, supply-chain and facility disruption, changing consumer preferences, international exposure, regulatory and product-liability risks, cybersecurity, and potential impairment of goodwill or intangible assets. The company said there were no material changes to the risk factors in its latest Form 10-K.
- Disclosure controls were assessed as effective at quarter-end; the company reported no material changes in internal control over financial reporting and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether underlying sales trends and segment margins improve as pandemic comparisons normalize, and whether higher logistics, labor and input costs persist.
- The status and possible financial consequences of the baby-food lawsuits, government inquiries and enforcement action; no clear loss estimate is provided.
- Whether cash generation and liquidity remain adequate after substantial repurchases, increased revolver borrowings and higher capital spending; verify covenant headroom and debt terms.
- Progress and costs of productivity initiatives, workforce actions and portfolio simplification, and whether management’s Hain 3.0 growth strategy produces measurable results.
- The effects of foreign exchange, international operations and seasonality; management cautions that first-quarter results are not necessarily indicative of full-year performance.