Hain Celestial Group, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2020 (fiscal 2020 third quarter), not 2019 Q3. Financial statement amounts below are in U.S. dollars; millions are used for readability.
Business context and reporting period
Hain Celestial markets and sells natural and organic food, beverage, and personal care products in more than 70 countries. The company reported two segments: North America and International. Following divestitures, Tilda and Hain Pure Protein results are presented as discontinued operations. The filing compares the three and nine months ended March 31, 2020 with the same periods in 2019.
Financial performance and liquidity
- Third-quarter sales: $553.3 million, up 1.1% reported and 2.1% at constant currency. Gross profit was $132.4 million; gross margin rose to 23.9% from 20.7%.
- Third-quarter earnings: Operating income was $19.1 million, nearly flat year over year. Continuing-operations net income was $25.0 million, or $0.24 diluted EPS, versus $8.8 million, or $0.08. Consolidated net income was $24.3 million, or $0.23 per diluted share, compared with a $65.8 million loss a year earlier, when discontinued operations included substantial impairments.
- Nine-month results: Sales were $1.542 billion, down 3.6% reported and 2.4% at constant currency. Gross margin improved to 21.8% from 19.0%; operating income was $30.8 million versus an operating loss of $29.9 million. Continuing-operations net income was $21.9 million versus a $46.1 million loss. Consolidated net loss was $83.6 million, or $0.80 per diluted share, compared with a $169.8 million loss, or $1.63.
- Cash flow: Nine-month cash from continuing operations was $64.1 million, versus $18.3 million. Capital expenditures were $47.0 million, leaving company-defined operating free cash flow of $17.1 million, compared with negative $36.7 million. Cash and cash equivalents were $41.5 million at March 31, 2020.
- Debt and liquidity: Debt was $365.6 million, down from $630.8 million at June 30, 2019, primarily after using Tilda sale proceeds to repay the term loan and reduce revolver borrowings. Revolver borrowings were $362.2 million; $628.1 million was available under the credit agreement. The company reported compliance with its covenants. Continuing-operations working capital was $301.8 million.
- Other metrics: Third-quarter Adjusted EBITDA was $60.7 million, up from $49.1 million; nine-month Adjusted EBITDA was $137.8 million, up from $115.7 million. This is a non-GAAP measure.
Material changes versus the prior comparable period
- Quarterly sales growth reflected increased pandemic-related consumer demand, particularly pantry loading, while nine-month sales declined amid SKU rationalization, divestitures, and currency effects.
- Gross margin improved in both comparisons, primarily due to favorable product mix and supply-chain efficiencies, partly offset by foreign currency impacts. SG&A as a share of sales increased to 15.4% in the quarter and 15.9% year to date.
- North America third-quarter sales rose 1.9% and operating income increased to $28.9 million from $21.4 million. International sales were essentially flat reported, while operating income declined to $18.7 million from $19.9 million.
- Nine-month operating results improved partly because the prior year included $30.2 million in CEO succession costs and $4.3 million in accounting review/remediation costs. Current-period transformation costs increased to $37.9 million from $29.6 million.
- Discontinued operations recorded a nine-month net loss of $105.6 million, including a $95.1 million reclassification of accumulated Tilda currency translation losses and taxes related to the sale. The Tilda sale closed for a final price of $341.8 million.
Outlook, management commentary, risks, and unusual items
- Management provided no specific numerical full-year guidance in the supplied filing. It said the portfolio-simplification and profitable-growth strategy remained in place, while some planned innovation and productivity initiatives were delayed because of COVID-19.
- Management reported higher overall demand during the early pandemic period and said the company had experienced only limited operational disruption to date. It also cautioned that future demand is uncertain; sun care and some European food-service sales were adversely affected. Supply-chain constraints, temporary facility disruptions, ingredient and logistics costs, and third-party viability remain risks.
- The CARES Act generated a $12.5 million income-tax benefit from a net operating loss carryback and a $48.4 million tax refund receivable. The company said it was continuing to assess the law’s effects.
- Third-quarter impairment charges totaled $13.5 million, including tradename and machinery/equipment impairments. The company also recorded $37.9 million of nine-month productivity and transformation costs and repurchased $57.4 million of shares during the nine months.
- A securities class action was dismissed with prejudice on April 6, 2020, but plaintiffs filed a notice of appeal. A separate stockholder derivative action remained pending; the company said ordinary-course claims were not expected to have a material adverse effect.
- Management stated that disclosure controls were effective as of March 31, 2020 and that there were no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether pandemic-driven demand persists or reverses, and how supply interruptions, costs, and delayed initiatives affect margins and cash generation.
- Progress on SKU rationalization, transformation costs, and the company’s ability to sustain improved gross margins while rebuilding sales.
- Debt levels, covenant headroom, and liquidity under the credit agreement, including how management deploys cash and any further share repurchases.
- Final realization of the CARES Act refund and any changes to tax estimates or the reported discontinued-operations losses.
- Remaining litigation developments, including the securities-case appeal and pending derivative claims.