Hain Celestial Group, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2013 Q3, but the supplied filing is for the quarter ended March 31, 2014—the third quarter of fiscal 2014. Unless otherwise stated, financial amounts below are in millions of dollars.
Business context and reporting period
Hain manufactures, markets, distributes and sells organic and natural food and personal care products. It reports by geography: United States, United Kingdom, and Rest of World (Canada and Europe). The filing presents unaudited results for the three and nine months ended March 31, 2014, compared with the corresponding 2013 periods.
On January 13, 2014, Hain acquired premium rice company Tilda for cash, shares and deferred consideration. Tilda contributed $44.5 million of sales and $5.6 million of pretax continuing income after acquisition. On April 28, 2014, after quarter-end, Hain acquired Rudi’s Organic Bakery for approximately $62.1 million; Rudi’s had approximately $60 million of 2013 sales.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $557.4; up 22.2% from $456.1 | $1,569.8; up 23.5% from $1,271.2 |
| Gross profit / gross margin | $152.8 / 27.4%, versus $126.2 / 27.7% | $415.0 / 26.4%, versus $352.1 / 27.7% |
| Operating income / margin | $63.6 / 11.4%, versus $51.1 / 11.2% | $167.7 / 10.7%, versus $134.6 / 10.6% |
| Income from continuing operations | $38.0, versus $41.8 | $105.8, versus $93.9 |
| Net income | $35.2, versus $40.7 | $104.1, versus $88.7 |
| Diluted EPS | $0.69, versus $0.85 | $2.10, versus $1.88 |
Quarterly diluted EPS from continuing operations was $0.75, compared with $0.87; the prior-year quarter included a $0.28-per-share tax benefit. Nine-month diluted EPS from continuing operations was $2.13, versus $1.99. The effective tax rate was 34.2% for the quarter and 31.8% for the nine months, compared with 3.7% and 21.6%, respectively, in the prior-year periods. The prior-year rates benefited from a $13.2 million tax deduction related to a UK subsidiary.
Quarterly sales growth reflected increases in the United States and United Kingdom, including Tilda’s contribution. For the nine-month period, the United States grew 18.3% and the United Kingdom grew 46.0%; acquisitions were a major factor in both geographies. The UK’s nine-month operating margin rose to 7.4% from 6.6%, while Rest of World margin declined to 6.9% from 8.6%.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $122.3 million, compared with $67.9 million. Capital expenditures were $30.7 million, yielding company-defined operating free cash flow of $91.6 million, versus $18.8 million.
- Investing activities used $144.0 million, including $121.5 million primarily for Tilda and $30.7 million for capital expenditures. Financing activities provided $80.6 million.
- Cash was $101.4 million at March 31, 2014, up from $41.3 million at June 30, 2013. Working capital was $374.8 million, up from $301.0 million.
- Total debt was $832.7 million, comprising $82.4 million current and $750.3 million long-term debt. Revolver borrowings were $596.8 million; the $850 million facility expires in August 2017. Senior notes of $150 million bear interest at 5.98% and mature May 2, 2016. Tilda also had $49.0 million of short-term borrowings and a $33.3 million vendor loan note.
- Management stated cash, projected operating cash flow and available borrowing capacity were sufficient for working capital, expected capital spending and other cash needs for at least the next 12 months. Fiscal 2014 capital spending was expected to be $35–$40 million.
Material changes, outlook and risks
Quarterly gross margin slipped 0.3 percentage points; the nine-month margin fell 1.3 points. Management attributed pressure to promotional spending classified as reductions in sales, changes in geographic sales mix, higher input costs and manufacturing start-up inefficiencies. SG&A as a share of sales improved, reflecting operating leverage and acquired businesses with lower relative expenses. Acquisition, restructuring and integration charges were $6.8 million for the quarter and $8.9 million for nine months; the nine-month total included a $1.9 million net reduction related to contingent consideration adjustments.
Management described the global economic environment as challenging and cited volatile energy and commodity prices, higher input costs, foreign-exchange exposure, seasonality, consumer demand, competition, acquisition integration and international operations as risks. It intends to address cost pressures through efficiencies, cost savings and, where feasible, price increases. The filing refers to fiscal 2014 sales and diluted-EPS guidance as a risk to achieving, but the supplied text does not provide clear numeric guidance for those measures.
Hain recorded a $2.8 million loss on the February 2014 sale of its Grains Noirs business; its operating results were not material. A California class action concerning historical Avalon Organics and JASON product labeling remained in discovery; the court denied Hain’s summary-judgment motion in February 2014. The company said it would defend the case and did not expect ordinary-course legal matters to have a material adverse effect. Management reported effective disclosure controls; its period-end assessment excluded Tilda, which represented 14.7% of consolidated assets.
Important facts for investors to verify
- Confirm the correct reporting period: this filing covers fiscal Q3 2014, not Q3 2013.
- Assess how much reported sales and profit growth came from acquisitions, foreign exchange and underlying organic growth.
- Monitor gross-margin pressures, manufacturing start-up costs, input-cost inflation and promotional spending.
- Review post-acquisition debt levels, covenant compliance, refinancing needs and integration performance, including Tilda and Rudi’s.
- Reconcile reported earnings with the sharply different tax rates across periods and the prior-year $13.2 million tax benefit.
- Track the outcome of the product-labeling litigation and any developments in contingent consideration or other legal and tax matters.