Hain Celestial Group, Inc. — Form 10-Q
Reporting period: Fiscal second quarter and six months ended December 31, 2019. Hain sells organic and natural food, beverage, and personal care products in more than 70 countries. Results are presented for continuing operations unless otherwise noted; Tilda and Hain Pure Protein are classified as discontinued operations.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2019 |
|---|---|---|
| Net sales | $506.8 million, down 5.0% | $988.9 million, down 6.0% |
| Gross profit / margin | $105.6 million / 20.8% | $203.4 million / 20.6% |
| Operating income | $9.2 million | $11.6 million |
| Continuing-operations net income (loss) | $1.9 million | $(3.1) million |
| Net income (loss), including discontinued operations | $(1.0) million | $(108.0) million |
| Adjusted EBITDA (non-GAAP) | $45.0 million | $77.1 million |
- Quarterly sales fell 4.6% on a constant-currency basis; six-month sales fell 4.7% on that basis. Gross margin improved from 19.0% to 20.8% for the quarter and from 18.1% to 20.6% for the six months.
- Continuing-operations operating cash flow was $17.1 million for the six months, versus approximately breakeven a year earlier. Capital spending was $29.3 million, leaving operating free cash flow of negative $12.2 million (non-GAAP), improved from negative $41.0 million.
- Cash was $37.0 million at December 31, 2019, versus $31.0 million at June 30, 2019. Working capital from continuing operations was $264.7 million, up from $240.3 million.
- Total debt was $326.3 million, down from $630.8 million at June 30, 2019, primarily after Tilda sale proceeds repaid the $206.3 million term loan and reduced revolving borrowings. Revolver borrowings were $321.7 million; $668.6 million remained available under the credit agreement. The company reported compliance with its covenants.
- The company reported total assets of $2.285 billion and stockholders’ equity of $1.521 billion at December 31, 2019.
Material changes versus the prior comparable period
- Quarterly continuing-operations income improved from a $31.8 million loss to $1.9 million income; operating results benefited from lower prior-year succession, impairment, and accounting-remediation charges, as well as improved gross margin.
- For the six-month period, continuing-operations loss narrowed from $54.9 million to $3.1 million. However, total net loss increased from $103.9 million to $108.0 million, principally because discontinued operations included a $95.1 million reclassification of cumulative Tilda currency translation losses and related sale effects.
- Revenue declined in both reportable segments for the six months: North America down 7.4% and International down 4.1%. Management attributed much of the North America decline to discontinuing lower-margin SKUs. International constant-currency sales fell 1.2% for the six months.
Outlook, management commentary, risks, and unusual items
- Management is simplifying the portfolio, reallocating resources toward stronger “Get Bigger” brands, and rationalizing low-velocity products. It eliminated approximately 350 SKUs; management expects this to weigh on current-year sales growth while supporting profitability over time.
- Fiscal 2020 capital spending was expected to be approximately $60–$70 million. The filing provides no numerical full-year revenue or earnings guidance.
- Productivity and transformation costs were $26.4 million for the six months, up from $20.2 million. Inventory write-downs related to SKU rationalization were $3.9 million.
- Tilda was sold in August 2019 for a final aggregate price of $341.8 million. The sale and other divestitures are reflected in discontinued operations. The six-month discontinued-operations loss includes the $95.1 million currency-translation reclassification; the quarter also included a $3.8 million Tilda sale adjustment.
- Other notable items included a $1.9 million tradename impairment and a $1.8 million loss on the Arrowhead Mills and SunSpire sale. A $2.6 million insurance recovery was recorded in the six-month period.
- Risks highlighted include competition and changing consumer preferences, customer concentration or loss, distributor and supply-chain dependence, commodity and freight cost volatility, execution of cost-saving initiatives, debt and covenant requirements, litigation and regulatory matters, product liability, and impairment risk. Management reported no material changes to the risk factors in its prior Form 10-K.
- Several securities and shareholder derivative actions remained pending; motions to dismiss were fully briefed and awaiting decisions. Management said ordinary-course claims were not expected to materially affect results, financial position, cash flows, or liquidity.
- After quarter-end, a director resigned effective February 6, 2020, and the President of North America was scheduled to depart February 7, 2020, with $832,500 severance. The filing reports disclosure controls were effective at December 31, 2019.
Important facts for investors to verify
- Whether sales declines from SKU rationalization and divestitures are offset by growth in retained brands and continued margin gains.
- Whether operating cash generation improves enough to fund expected $60–$70 million fiscal 2020 capital spending and ongoing transformation costs.
- Revolver balances, covenant headroom, and the effect of future covenant thresholds under the credit agreement.
- Final accounting and cash/tax consequences of the Tilda sale, including the translation-loss reclassification and post-closing adjustments.
- Developments and potential financial exposure from pending securities and derivative litigation.