Hain Celestial Group, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended March 31, 2013 (fiscal 2013 Q3). The filing’s financial statements are unaudited. Although the request metadata says “2012 Q3,” the filing itself covers 2013 Q3.
Business context and results
Hain manufactures and sells natural and organic food and personal-care products. Its geographic segments are the United States, United Kingdom, Canada and Europe; the United States and United Kingdom are reported separately. Growth reflects both underlying U.S. sales gains and acquisitions, particularly the UK Ambient Grocery Brands.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $456.1 million; up 21.4% | $1,271.2 million; up 23.7% |
| Gross profit / margin | $126.2 million / 27.7% (prior year 27.9%) | $352.1 million / 27.7% (prior year 28.1%) |
| Operating income / margin | $51.1 million / 11.2% (prior year 11.1%) | $134.6 million / 10.6% (prior year 9.9%) |
| Income from continuing operations | $41.8 million; diluted EPS $0.87 | $93.9 million; diluted EPS $1.99 |
| Net income / diluted EPS | $40.7 million / $0.85 | $88.7 million / $1.88 |
| Operating cash flow | Not presented as a quarterly figure | $67.9 million (prior year $77.7 million) |
Quarterly sales growth was led by the U.K., up 78.2% to $121.2 million, including $53.6 million from the acquired UK Ambient Grocery Brands. U.S. sales rose 8.3% to $277.6 million. For the nine-month period, U.K. sales increased 120.6% to $299.3 million, while U.S. sales rose 8.2% to $810.6 million. Acquisition contributions were substantial, so reported growth is not solely organic.
Gross margin declined year over year, attributed to acquired businesses’ lower relative margins, product mix and higher input costs, partly offset by productivity. SG&A rose 17.1% in both the quarter and nine-month period, but declined as a share of sales to 16.1% and 16.6%, respectively. Nine-month operating income improved partly because acquisition-related expenses were lower than in the prior-year period.
Cash, debt and liquidity
- Cash was $27.2 million at March 31, 2013, down $2.7 million from June 30, 2012. Working capital was $297.1 million, up $51.1 million.
- Nine-month investing cash outflow was $323.4 million, including $290.5 million for acquisitions and $49.1 million in capital expenditures. Financing cash inflow was $251.1 million, including $230.2 million of net revolver borrowings.
- Operating cash flow fell to $67.9 million from $77.7 million, primarily reflecting working-capital investment in receivables and inventory. Twelve-month operating free cash flow, a company-defined non-GAAP measure, was $55.6 million versus $79.3 million, mainly due to higher capital spending.
- Total debt was approximately $634.7 million: $150.0 million of 5.98% senior notes due May 2016, $470.2 million drawn on the revolving facility, and $14.2 million of U.K. short-term borrowings. The $850 million revolving facility expires in August 2017; financial covenants include minimum interest coverage of 4.00:1 and maximum leverage of 3.50:1, with a specified temporary acquisition-related step-up to 4.00:1.
- Management stated cash, projected operating cash flows and available credit were sufficient for expected needs for at least 12 months. Fiscal 2013 capital expenditures were estimated at approximately $60 million.
Material changes, outlook and risks
- Acquisitions and portfolio actions: The company acquired the UK Ambient Grocery Brands in October 2012 and BluePrint Cleanse in December 2012. BluePrint consideration includes contingent payments of up to approximately $83.4 million, subject to operating results. The company sold its U.K. chilled ready-meals business and disposed of its U.K. sandwich business; discontinued operations included a $4.2 million after-tax loss on disposal for the nine months.
- Subsequent event: On May 2, 2013, Hain acquired Ella’s Kitchen for approximately $61.1 million in cash and $45.1 million in stock. Ella’s generated approximately $70 million in calendar 2012 sales.
- Tax and unusual items: A $13.2 million tax benefit from a U.S. worthless-stock deduction related to a U.K. subsidiary contributed to unusually low effective tax rates: 3.7% for the quarter and 21.6% for nine months. The nine-month rate was 35.4% in the prior year. The quarter also included approximately $2.0 million of expense related to pending litigation and $1.9 million of net unrealized foreign-currency losses on intercompany balances.
- Management commentary and risks: Management cited volatile energy and commodity costs, expected continued input-cost pressure, uncertain economic conditions, foreign exchange exposure, seasonal sales patterns, acquisition integration, and customer and consumer demand risks. In the U.K., a major retailer product-listing loss reduced Daniels sales; the company also discontinued certain sales it considered insufficiently profitable while preparing for a long-term program with a major retailer.
- The filing refers to the company’s fiscal 2013 net-sales and diluted-EPS guidance as a risk factor, but the supplied filing text does not provide clear numerical guidance. Management said it was pursuing price increases, productivity and cost savings to mitigate cost pressures.
- Management did not expect pending litigation to have a material adverse effect. No off-balance-sheet arrangements were reported. Disclosure controls were deemed effective; the assessment excluded the UK Ambient Grocery Brands, which represented 16.9% of consolidated assets at March 31, 2013.
Most important facts for investors to verify
- How much of sales and earnings growth is organic versus acquisition-driven, and whether the acquired U.K. businesses’ margins improve as integration proceeds.
- Whether operating cash flow recovers as receivables and inventory normalize, given higher capital spending and acquisition-related debt.
- Compliance with credit-facility covenants and the company’s ability to service debt while funding the Ella’s Kitchen acquisition and planned capital expenditures.
- The sustainability of reported earnings after the $13.2 million tax benefit and the effect of U.K. retailer distribution changes, input-cost inflation and foreign exchange.
- Final working-capital settlements and disposal proceeds, BluePrint contingent consideration, and the final purchase-price allocation and integration costs for recent acquisitions.