Business context and reporting period
Hain Celestial Group, Inc. filed this Form 10-K for the fiscal year ended June 30, 2012. The request metadata labels the period “2011 Q4,” but the filing covers fiscal 2012; its unaudited fourth-quarter results are also summarized below. The company manufactures and sells natural and organic food, snacks, tea, personal care and fresh products. It reported geographically, with the United States and United Kingdom as reportable segments and Canada and continental Europe combined as Rest of World.
Financial performance and liquidity
Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
| Metric | FY2012 | FY2011 | Change or context |
|---|---|---|---|
| Net sales | $1,378.2 | $1,108.5 | Up 24.3% |
| Gross profit / margin | $382.5 / 27.8% | $319.8 / 28.9% | Profit up 19.6%; margin down 1.1 percentage points |
| Operating income / margin | $151.5 / 11.0% | $111.2 / 10.0% | Up 36.3%; FY2012 included a net acquisition-related credit |
| Continuing-operations income | $94.2 | $59.0 | Diluted EPS: $2.05 vs. $1.32 |
| Net income | $79.2 | $55.0 | Diluted EPS: $1.73 vs. $1.23; includes discontinued-operation losses |
| Operating cash flow | $122.0 | $58.7 | Operating free cash flow, a company-defined non-GAAP measure, was $101.5 vs. $47.2 |
| Cash and working capital | $29.9 cash; $246.0 working capital | $27.5 cash; $200.4 working capital | At June 30, 2012 |
| Debt | $390.3 long-term debt, net of current portion | $229.5 | Includes $240.0 revolver borrowings and $150.0 senior notes |
Fourth-quarter FY2012 net sales were $350.8 million, compared with $286.9 million a year earlier. Quarterly net income was $23.4 million versus $12.8 million; fourth-quarter continuing-operations diluted EPS was $0.77 versus $0.30.
- U.S. sales increased 9.0% to $991.6 million, supported by improved consumption and expanded distribution; segment operating margin rose to 15.1% from 14.3%.
- U.K. sales rose to $192.4 million from $39.3 million, primarily due to the Daniels acquisition. The segment reported $9.7 million operating income versus a $4.8 million loss.
- Rest of World sales increased 22.1% to $194.3 million, including the impact of the Europe’s Best acquisition; operating margin was 6.9% versus 6.1%.
- Gross margin fell amid product mix, Daniels’ relatively lower margins and higher input costs, partly offset by productivity and pricing. SG&A fell to 17.2% of sales from 18.8%.
- Operating cash flow improved substantially. Investing activities used $270.7 million, principally for $257.3 million of acquisitions and $20.4 million of capital spending; financing activities provided $147.4 million, including net revolver borrowings.
Material changes, outlook and unusual items
- FY2012 acquisitions included Daniels in the U.K. for approximately $233.8 million cash, Europe’s Best in Canada for $9.5 million, and Cully & Sully in Ireland for approximately $13.8 million cash, plus contingent consideration where applicable. Daniels contributed $144.3 million of sales after acquisition.
- The company decided to exit Daniels’ private-label chilled ready-meals business and its U.K. sandwich operations. FY2012 discontinued operations recorded a $15.0 million net loss, including $14.9 million of impairment charges; the chilled-meals sale closed August 20, 2012, and the sandwich disposal was expected in FY2013.
- FY2012 acquisition-related expense and restructuring line included a net credit of $6.7 million, primarily reflecting a $15.5 million reduction in estimated Daniels contingent consideration, partly offset by acquisition and integration expenses. This credit contributed to reported operating-income growth.
- After year-end, the company agreed to acquire Premier Foods’ U.K. packaged-grocery brands for £170 million cash and £30 million in Hain shares, subject to shareholder and lender approvals; it expected closing by the end of October 2012.
- Management said economic conditions remained challenging and expected higher input costs to continue. It cited operating efficiencies, cost savings and customer price increases as mitigation, and planned to support U.S. consumption through distribution, promotions and new products. Expected FY2013 capital spending was approximately $50 million, including European non-dairy capacity and expansion of the Fakenham facility. The filing references FY2013 sales and diluted-EPS guidance but does not provide clear guidance figures in the supplied text.
- The company said cash, operating cash flow and available credit were expected to fund ordinary working capital, approximately $50 million of FY2013 capital spending and near-term debt and lease obligations. The revolver was increased from $400 million to $600 million on August 20, 2012; $240 million was drawn at year-end. The company reported compliance with customary financial covenants; no covenant headroom figures are provided here.
- Key risks include commodity and organic-ingredient cost and availability, competition and private labels, reliance on distributors and co-packers, seasonality, foreign exchange, acquisition integration, product safety and labeling regulation, and potential impairment of goodwill and brands. One distributor/customer, United Natural Foods, accounted for 18% of FY2012 sales.
- Goodwill and other intangible assets totaled approximately $1.01 billion. The Europe reporting unit’s estimated fair value exceeded carrying value by less than 10%; a one-percentage-point increase in its discount rate would have reduced estimated fair value below carrying value. No impairment was recorded for continuing operations in FY2012.
- Ernst & Young issued unqualified opinions on the financial statements and internal control. Management and the auditor excluded Daniels and Cully & Sully from the internal-control assessment; those acquired businesses represented 20.4% of year-end assets.
Important facts for investors to verify
- Whether sales and earnings growth persist after separating organic growth from acquisitions, and whether integration delivers expected synergies.
- The quality and sustainability of reported earnings, particularly the effect of the contingent-consideration credit and discontinued-operation impairments.
- Gross-margin recovery amid input-cost pressure, product mix changes and pricing actions.
- Debt, covenant capacity and cash needs following the acquisitions and announced Premier Foods transaction; verify post-year-end funding and closing terms.
- Execution and financial consequences of the U.K. business exits, including final sale proceeds, liabilities and any further charges.
- Exposure to UNFI and co-packers, and sensitivity to commodity prices, foreign exchange and goodwill valuation assumptions.