Hain Celestial Group, Inc. — Fiscal 2016 Q2 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2015. Financial statements are unaudited. Hain manufactures and sells organic and natural food, beverage, and personal-care products across five operating segments.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended Dec. 31, 2015 | Year-over-year change | Six months ended Dec. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $752.6 | +$56.2; +8.1% reported, +11% constant currency | $1,439.8 | +$112.1; +8.4% reported, +11% constant currency |
| Gross profit / margin | $177.6 / 23.6% | +$10.2; margin down 0.4 percentage points | $329.6 / 22.9% | +$36.4; margin up 0.8 percentage points |
| Operating income / margin | $87.7 / 11.7% | +$13.7; margin up 1.1 percentage points | $145.2 / 10.1% | +$42.4; margin up 2.4 percentage points |
| Net income | $56.9 | +$12.4 | $88.2 | +$24.8 |
| Diluted EPS | $0.55 | Compared with $0.43 | $0.85 | Compared with $0.62 |
| Operating cash flow | Six-month figure: $99.6, versus $54.3 | Capital expenditures: $41.2; operating free cash flow, a company-defined non-GAAP measure: $58.5, versus $28.5 |
Quarterly sales growth was more than accounted for by recent acquisitions in aggregate: management attributed about $59.0 million of Q2 sales to Mona, Empire, and Belvedere, while foreign exchange reduced sales by $18.3 million. For the six-month period, acquisitions contributed about $111.0 million and foreign exchange reduced sales by $42.7 million. Prior-year comparisons also included sales returns and charges related to the voluntary nut-butter recall.
Liquidity, debt, and balance sheet
- At December 31, cash and cash equivalents were $177.1 million, versus $166.9 million at June 30, 2015. Working capital was $589.8 million, up $19.2 million.
- Total debt was $982.0 million, including $780.9 million outstanding under the $1.0 billion revolving credit facility, $150.0 million of senior notes, and other borrowings. The notes bear 5.98% interest and mature May 2, 2016; the company said it intends to refinance them.
- The revolving facility expires in December 2019. The company reported compliance with its covenants at December 31, including interest-coverage and leverage requirements. It stated that cash, operating cash flows, and facility availability should cover ordinary working-capital needs, expected fiscal 2016 capital spending, and other cash requirements for at least 12 months.
- Cash from operations was $99.6 million; investing activities used $199.0 million, mainly for acquisitions and capital spending; financing activities provided $114.3 million, including $122.0 million of net revolving-credit borrowings. Cash flow was also affected by a $4.8 million adverse exchange-rate impact.
- Fiscal 2016 capital expenditures were expected to be approximately $55 million. About 45% of cash, or $80.3 million, was held outside the United States; management said it did not anticipate needing to repatriate it, which could trigger significant U.S. taxes.
Changes, management commentary, and outlook
- Profitability improved year over year, particularly for the six-month period, supported by lower SG&A, acquisition contributions, improved Tilda raw-material procurement, and reduced U.K. chilled-dessert factory start-up costs. In the prior-year six-month period, nut-butter recall costs included $9.4 million of inventory write-offs.
- Q2 gross margin declined despite higher sales. Management cited increased U.S. trade promotions and product-mix effects, higher costs in Canada for U.S.-dollar-denominated purchases, and a seven-day chiller breakdown at a Hain Pure Protein facility. The interruption contributed $0.8 million of charges in the six-month period.
- U.S. segment sales declined 3.3% in Q2 and 2.5% for six months, with management citing customer merchandising changes, inventory reductions, distributor and retailer disruptions, competition, pricing pressure, and exits from unprofitable club-store programs. Hain Pure Protein sales rose sharply, partly reflecting the Empire acquisition and stronger poultry demand.
- Acquisitions during the period included Mona, a European plant-based food and beverage business; Orchard House, a U.K. prepared-fruit business; and a 15.2% investment in Chop’t. The Orchard House and Mona purchase-price allocations were preliminary and included $114.1 million of goodwill in aggregate. Orchard House consideration may include additional payment tied to a U.K. regulatory review.
- Management expected fiscal 2016 Q3 net sales and earnings to be lower than Q4, while cautioning that acquisition timing could affect results. No full-year revenue or earnings guidance was provided in the filing.
- Key risks discussed include foreign-exchange and commodity-cost volatility, economic and political uncertainty in international markets, competition and customer concentration, acquisition integration, product recalls and litigation, supply-chain or facility interruptions, and potential goodwill or intangible-asset impairment. The Hain Daniels reporting unit’s estimated fair value exceeded carrying value by about 10% at the April 2015 impairment test; management noted sensitivity to discount-rate assumptions.
- A proposed $7.5 million settlement, plus consumer coupons with a maximum value of $2.0 million, in a California personal-care product labeling class action received preliminary court approval in October 2015; final approval was scheduled for mid-February 2016. The $7.5 million settlement charge had been recorded in fiscal 2015. Management said other ordinary-course matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How much sales and earnings growth is organic versus attributable to acquisitions, and whether U.S. sales declines and retail-channel disruptions persist.
- Progress and terms of refinancing the $150 million notes due May 2016, revolving-facility usage, and covenant headroom.
- Whether currency movements, commodity and input costs, promotions, and the poultry-facility interruption continue to pressure margins and cash flow.
- Integration performance and final valuation of Mona and Orchard House, including the regulatory-review contingency and goodwill impairment exposure.
- Final approval and payment of the personal-care labeling settlement, and developments in product-quality, recall, or other legal matters.
- Whether expected fiscal 2016 capital spending remains near $55 million and whether management’s Q3-versus-Q4 seasonal outlook is borne out.