HAIN CELESTIAL GROUP INC annual report, FY2020

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Hain Celestial Group, Inc. — FY2020 Form 10-K

Reporting period: Fiscal year ended June 30, 2020. The request metadata refers to “2019 Q4,” but this filing is the FY2020 annual report; it also reports the quarter ended June 30, 2020. Unless stated otherwise, amounts below are in U.S. dollars.

Business context

Hain markets and manufactures organic, natural and “better-for-you” food, beverage and personal-care products in more than 75 countries. Its two reportable segments are North America and International. The company’s strategy focuses on simplifying its portfolio, strengthening capabilities, improving margins and cash flow, and returning to profitable sales growth.

Financial performance and liquidity

  • Revenue: FY2020 net sales were $2.054 billion, down 2.4% from $2.105 billion in FY2019; excluding foreign-exchange effects, sales declined 1.1%. Both segments declined.
  • Profit and margins: Gross profit was $465.8 million and gross margin was 22.7%, up from 18.9%. Operating income was $56.0 million, versus an operating loss of $32.5 million. Continuing-operations net income was $25.6 million, versus a $53.4 million loss. Consolidated net loss was $80.4 million, or $0.77 per diluted share, largely reflecting discontinued operations.
  • Non-GAAP measure: Adjusted EBITDA was $200.0 million, up from $165.1 million. This management-defined measure excludes specified expenses and should be considered alongside GAAP results.
  • Cash flow: Cash from continuing operating activities was $156.9 million, compared with $39.3 million. Capital expenditures were $60.9 million; operating free cash flow, a non-GAAP measure, was $96.0 million, versus negative $36.5 million. Operating cash flow included a $52.5 million tax-refund receivable under the CARES Act.
  • Liquidity and debt: Cash was $37.8 million and working capital was $260.7 million at year-end. Debt and other borrowings totaled $282.8 million, down from $630.8 million; $710.3 million remained available under the credit agreement. The company reported covenant compliance.
  • Other balance-sheet items: Total assets were $2.188 billion and stockholders’ equity was $1.444 billion. Goodwill of $862.0 million and trademarks and other intangible assets of $346.5 million together represented 55% of total assets.
  • FY2020 fourth quarter: Net sales were $511.7 million, operating income $25.3 million, continuing-operations net income $3.7 million and consolidated net income $3.2 million.

Material changes versus FY2019

  • Sales fell by $50.7 million. Management attributed the decline to foreign exchange, discontinued lower-margin or unprofitable SKUs, divested brands and COVID-related weakness in parts of the fruit business.
  • Gross margin improved by 380 basis points, reflecting product mix and productivity savings, and the non-recurrence of FY2019’s $12.4 million inventory write-down. SG&A rose 3.3%, increasing to 15.8% of sales from 14.9%.
  • Productivity and transformation costs increased to $48.8 million from $40.1 million. FY2020 also included $27.5 million of long-lived asset and intangible impairments and $0.4 million of goodwill impairment. FY2019 included $30.2 million of CEO succession expense and $4.3 million of accounting-review costs, neither repeated in FY2020.
  • Continuing operating cash flow increased substantially, while year-end debt declined after proceeds from the Tilda sale were used to repay the term loan and reduce revolving borrowings.
  • FY2020’s discontinued-operations loss was $106.0 million, including a $95.1 million reclassification of Tilda cumulative currency translation losses. FY2019’s $129.9 million discontinued-operations loss included significant impairments and disposal losses.

Outlook, commentary and risks

  • Management said the pandemic had increased overall demand early on, particularly for grocery, snacks, tea and some personal-care products, while sun care and U.K. food-service demand were adversely affected. Future demand, costs and operating conditions remained uncertain; some innovation, capital spending and productivity initiatives were delayed.
  • The company planned additional productivity initiatives in FY2021 and expected capital expenditures of approximately $80 million to $85 million. It provided no specific FY2021 revenue or earnings guidance in the supplied filing text.
  • Hain sold Tilda for a final aggregate price of $341.8 million in August 2019 and divested several other brands during FY2020. The Danival sale closed July 21, 2020, after year-end.
  • Key disclosed risks include COVID-related supply-chain and demand disruption, competition and changing consumer preferences, customer and distributor concentration, Brexit and foreign-exchange exposure, commodity costs, execution of cost-saving plans, debt covenants and LIBOR transition, food safety and certification, and possible goodwill or intangible impairments.
  • Stockholder litigation remained pending: a securities class action dismissed with prejudice was on appeal, and a separate consolidated stockholder action and a new litigation demand were unresolved. The company said other routine claims were not expected to have a material effect. The financial-statement audit opinion was unqualified, and management and the auditor reported effective internal control over financial reporting at June 30, 2020.

Important facts for investors to verify

  • Whether sales and margin trends persist after portfolio pruning and the COVID-related demand surge, especially by segment and product category.
  • How much FY2020 operating cash flow depended on the $52.5 million CARES Act tax-refund receivable and $108.9 million of receivables factored during the year.
  • Debt repayment, borrowing availability and covenant headroom, including the credit agreement’s leverage and interest-coverage requirements.
  • Whether planned FY2021 productivity savings and $80–$85 million of capital expenditures are achieved despite pandemic-related delays and costs.
  • Potential further impairment exposure given the significant goodwill and intangible-asset balances, and the status and possible costs of pending litigation.