HAIN

Business Context and Reporting Period

Company: The Hain Celestial Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010 (Third Quarter of Fiscal Year 2010)
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 Decline: Net sales decreased 16.2% for the quarter and 19.6% for the nine-month period compared to the prior year. A significant portion of this decline ($30.3 million for the quarter; $130.2 million for nine months) is due to the deconsolidation of Hain Pure Protein (HPP) effective July 1, 2009. Excluding HPP, North American sales decreased due to distributor destocking and SKU rationalization.
• Profitability Improvement: The Company reported a net income of $2.7 million for the quarter, a significant turnaround from a net loss of $41.2 million in the same period last year. The prior year loss was heavily impacted by a $52.6 million non-cash impairment charge for goodwill and intangibles, which did not recur in the current period.
• Margin Expansion: Gross margin improved to 27.7% (quarter) and 27.8% (nine months) from 22.6% and 23.1% respectively in the prior year, driven by the deconsolidation of HPP, favorable sales mix, and lower input costs.
• Debt Reduction: The Company repaid $33.3 million of borrowings under its revolving credit facility during the nine-month period, reducing total debt outstanding.

Guidance, Outlook, and Risks

Management Commentary: Management notes that while global economic challenges and recessionary conditions have impacted consumer demand and led to distributor destocking, consumption trends at certain retailers are improving. The Company is focusing on cost containment, productivity, and cash flow generation.

Outlook and Subsequent Events:

• On May 6, 2010, the Company entered into an agreement to acquire World Gourmet Marketing, LLC (Sensible Portions brand).
• Hain Pure Protein announced a transaction to divest its Kosher Valley brand in exchange for an equity interest in Empire Kosher Poultry.

Risks and Contingencies:

• Tax Valuation Allowance: The effective tax rate for the nine months was 52.4%, impacted by a $7.1 million valuation allowance recorded against deferred tax assets in the United Kingdom due to recent losses.
• Legal Proceedings: A shareholder derivative action regarding stock option practices was settled and dismissed in March 2010. A Canadian distributor lawsuit was settled in the third quarter, resulting in a recorded charge.
• Investment Impairment: A $1.2 million non-cash impairment charge was recorded for an investment in Yeo Hiap Seng Limited.

Investor Verification Checklist

• Deconsolidation Impact: Verify the extent to which year-over-year comparisons are skewed by the removal of Hain Pure Protein (HPP) from consolidated results.
• UK Operations: Review the sustainability of the UK turnaround strategy following the phase-out of Marks & Spencer sales and the recording of significant tax valuation allowances.
• Inventory Levels: Confirm that distributor destocking has stabilized and that inventory levels are aligned with current sales velocity.
• Debt Covenants: Assess compliance with covenants under the $150 million senior notes and $250 million credit facility, particularly given the recent debt repayments.
• Acquisition Integration: Monitor the progress and financial impact of the pending acquisition of World Gourmet Marketing.