HAIN

Business Context and Reporting Period

Company: The Hain Celestial Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009 (Third Quarter of Fiscal Year 2009)
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: Net sales increased 1.2% ($3.1M) for the quarter and 12.1% ($94.5M) for the nine months compared to the prior year. Growth was driven by North American grocery brands and the Hain Pure Protein unit, partially offset by a 4.8% negative impact from foreign currency translation.
• Profitability: The Company reported a net loss of $41.2M for the quarter and $26.0M for the nine months, compared to net income of $8.3M and $34.7M in the prior year periods, respectively.
• Impairment Charges: A significant non-cash impairment charge of $52.6M was recorded in the third quarter. This included $49.6M for goodwill (Protein and Europe reporting units) and $3.0M for other intangibles (UK customer relationship).
• Margins: Gross margin decreased to 23.5% from 26.0% in the prior year quarter due to unfavorable sales mix at Hain Pure Protein, higher feed costs, and under-absorbed overhead at the Fakenham facility.
• Cash Flow: Net cash used in operating activities was $9.4M for the nine months ended March 31, 2009, compared to $21.2M provided in the prior year period. This shift was driven by lower net income and increased inventory levels.

Guidance, Outlook, and Risks

• Outlook: Management expects moderated sales growth to continue due to adverse global economic conditions. The Company is implementing cost reduction initiatives and workforce reductions to offset rising input costs and lower demand.
• Impairment Finalization: The $52.6M impairment charge is based on a preliminary assessment. Management expects to finalize the analysis in the fourth fiscal quarter, noting that material adjustments could occur.
• Strategic Actions:
  • UK Operations: Addressing under-utilization at the Fakenham facility and recovering volume from a phased reduction in a key UK customer's orders.
  • Hain Pure Protein: Converting the Plainville facility to focus on kosher, antibiotic-free poultry to improve sales mix and margins.
  • New Products: Launching a Martha Stewart Clean trademark license agreement (issued 125,636 shares) expected to launch in fiscal 2010.
• Risks:
  • Economic Conditions: Deteriorating economic conditions may cause consumers to shift to lower-priced offerings and retailers to reduce inventories.
  • Foreign Exchange: Significant strengthening of the U.S. dollar continues to adversely impact reported results from international operations.
  • Goodwill: Continued decline in market capitalization or business downturns could trigger additional impairment charges.

Investor Verification Checklist

• Impairment Finality: Verify if the $52.6M goodwill and intangible impairment charge is adjusted in the final fiscal year-end reporting.
• UK Customer Impact: Monitor the phased reduction of the exclusive UK customer's orders and the success of new product introductions (Pick-Me, Daily Bread) to offset volume loss.
• Hain Pure Protein Margins: Track the shift in sales mix from conventional to antibiotic-free poultry and the impact of feed costs on gross margins.
• Liquidity Position: Review the utilization of the $250M credit facility (currently $138.5M drawn) and cash burn rate given the operating losses.
• Inventory Levels: Assess the $204.6M inventory balance against sales trends to ensure no further write-downs are required.