HAIN

Business Context and Reporting Period

Company: The Hain Celestial Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009 (First Quarter of Fiscal 2010)
Business Overview: The Company manufactures, markets, and distributes natural and organic food, beverage, and personal care products under brands such as Celestial Seasonings, Earth's Best, and Avalon Organics. It operates in a single business segment.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by $56.3 million (19.6%). This decline includes the impact of deconsolidating $38.4 million in sales from the Hain Pure Protein (HPP) joint venture, which was previously consolidated. Excluding HPP, North American sales decreased 4.2% due to distributor destocking and promotional spending. European sales dropped 21.0% primarily due to weakness in the UK market.
• Margin Expansion: Gross margin improved to 26.8% from 24.0%, largely driven by the deconsolidation of HPP (which had lower margins) and partially offset by increased promotional costs.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased by $10.8 million (20.2%) to $42.6 million, attributed to cost reduction initiatives, lower professional fees, and the HPP deconsolidation.
• Restructuring Costs: The Company incurred $1.8 million in restructuring expenses related to consolidating UK production facilities, compared to $0.6 million in the prior year.
• Debt Repayment: The Company repaid $16.3 million under its revolving credit facility, reducing total borrowings under the facility to $92.0 million.

Guidance, Outlook, and Risks

Management Commentary: Management noted continued challenging industry conditions due to the global economic slowdown, leading to consumer demand weakness and retailer destocking. Despite this, results in the US and Canada were encouraging, with growth in key brands like Earth's Best and Arrowhead Mills. Europe faced headwinds in the UK but showed strength in continental operations.

Outlook: The Company expects to complete the UK production consolidation in the second quarter with an additional $1.0 million in costs. Management believes cash on hand, projected operating cash flows, and credit facility availability are sufficient to fund operations for the next 12 months.

Risks and Contingencies:

• Joint Venture Risks: The Company holds a 48.7% minority interest in Hain Pure Protein (HPP) and does not control its policies. HPP reported a net loss, resulting in a $1.0 million equity loss charge for the quarter.
• Legal Proceedings: A shareholder derivative action regarding past stock option practices has reached a settlement stipulation, with a preliminary approval order executed in November 2009. Management does not expect a material adverse effect.
• Market Risks: Exposure to foreign currency fluctuations and commodity price inflation remains a concern.

Investor Verification Checklist

• Deconsolidation Impact: Verify the specific financial impact of removing Hain Pure Protein (HPP) from consolidated results to accurately assess organic growth trends.
• UK Restructuring: Monitor the execution of the UK production consolidation and the recognition of the remaining $1.0 million in expected costs.
• Liquidity Position: Review the cash burn rate given the $24.8 million decrease in cash balances and the reliance on the $250 million credit facility.
• Legal Settlement: Track the final approval of the shareholder derivative settlement to confirm the final cost and dismissal of the action.
• Inventory Levels: Assess the $165.2 million inventory balance against sales trends to ensure destocking issues are resolving.