Hain Celestial Group, Inc. — Form 10-Q summary
Business context and period: Unaudited results for the three months ended September 30, 2012 (fiscal 2013 first quarter), compared with the same quarter of 2011. Hain manufactures and sells natural and organic food and personal-care products. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Quarter ended Sep. 30, 2012 | Quarter ended Sep. 30, 2011 |
|---|---|---|
| Net sales | $359.8 | $286.8 |
| Gross profit / gross margin | $95.2 / 26.5% | $79.8 / 27.8% |
| Operating income / operating margin | $32.3 / 9.0% | $23.8 / 8.3% |
| Income from continuing operations | $19.8 | $12.6 |
| Net income | $16.4 | $11.7 |
| Diluted EPS: continuing operations / total | $0.42 / $0.35 | $0.28 / $0.26 |
| Operating cash flow | $27.2 | $23.3 |
| Capital expenditures | $8.3 | $2.5 |
Sales rose 25.4%, reflecting U.S. growth and the prior-year acquisition of Daniels in the U.K. Gross margin declined 1.3 percentage points, which management attributed to sales mix, Daniels’ lower relative margins and higher input costs, partly offset by productivity improvements. SG&A was $62.3 million, or 17.3% of sales, versus $54.4 million, or 19.0%; operating margin improved through expense leverage and lower acquisition-related charges.
Net income included a $3.4 million after-tax loss from discontinued operations, including a $3.1 million loss on the sale of the U.K. chilled ready meals business. Continuing-operations effective tax rate was 27.7%, down from 38.0%, principally due to a $1.8 million discrete tax benefit, including the U.K. statutory tax-rate reduction.
At September 30, cash was $36.2 million and working capital was $245.2 million. Total debt was approximately $360.5 million, comprising $150 million of 5.98% senior notes and $210 million drawn on the revolving facility; net debt was approximately $324.3 million. The amended credit facility provides $850 million of revolving capacity, expires in August 2017, and includes financial covenants. Quarterly cash increased $6.3 million: operating cash flow and $13.6 million of net proceeds from the ready-meals sale were partly offset by capital spending and $30 million of revolver repayments.
Material changes and segment results
- U.S. sales increased 8.1% to $252.6 million; operating income rose 15.1% to $36.5 million, with margin improving to 14.5%.
- U.K. sales increased to $57.9 million from $11.2 million, largely due to Daniels; the segment still recorded a $1.0 million operating loss.
- Rest of World sales grew 17.3% to $49.2 million, with operating income increasing to $4.4 million. Management cited the Europe’s Best acquisition and improved cost leverage; foreign exchange reduced sales by $3.3 million.
- Operating cash flow increased, while capital expenditures were higher year over year. Management reported working-capital increases in receivables and inventory.
Outlook, risks and unusual items
Management provided no specific fiscal 2013 revenue or earnings forecast in the supplied filing text. It expected fiscal 2013 capital spending of approximately $50 million, including European production equipment and U.K. facility expansion, and stated that cash, expected operating cash flow and credit availability should cover anticipated needs for at least 12 months. Management cited economic uncertainty, higher input costs, and plans to mitigate cost pressures through efficiency, savings and pricing actions. Results are seasonal and quarterly performance may vary.
After quarter-end, Hain completed the acquisition of Premier Foods’ U.K. packaged-grocery brands on October 27, 2012, for £170 million cash (about $273.9 million) plus 836,426 shares valued at $48.1 million, subject to a working-capital adjustment. The cash consideration was funded with credit-facility borrowings. The acquired business reported approximately £165 million of sales for its year ended December 31, 2011. On November 1, Hain completed an exchange involving its U.K. sandwich business and Adelie Foods’ fresh prepared fruit business, plus a £1 million cash payment by Hain.
Risks highlighted include consumer demand and economic conditions, commodity and other input costs, foreign exchange, acquisition integration, competition, product and supply risks, regulation, seasonality, and litigation. A shareholder class action filed October 15, 2012 alleges proxy-disclosure and fiduciary-duty issues; the company disputes the claim and intends to defend it. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of reported sales growth reflects organic demand versus acquisitions, particularly Daniels, and how U.K. profitability develops.
- Whether gross-margin pressure from product mix and input costs persists, and whether pricing and productivity offset it.
- The financing, integration costs and leverage impact of the post-quarter Premier acquisition; verify subsequent debt and covenant disclosures.
- Final sale proceeds and any working-capital adjustments, along with the continuing impact of discontinued businesses and disposal losses.
- Whether planned capital spending, working-capital needs and foreign-cash availability affect liquidity and cash generation.