Hain Celestial Group, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2019; comparative periods ended March 31, 2018. Although the request metadata says “2018 Q3,” this filing reports fiscal 2019 Q3.
Business context
Hain Celestial markets and sells organic and natural “better-for-you” food and personal-care products in more than 80 countries. Results exclude Hain Pure Protein (HPPC), which is presented as discontinued operations. The company said its planned divestitures are intended to simplify its portfolio and focus resources on core businesses.
Key financial metrics
| Metric | Three months ended March 31, 2019 | Nine months ended March 31, 2019 |
|---|---|---|
| Net sales | $599.8 million; down 5.2% reported and 1.8% constant currency | $1,744.8 million; down 5.1% reported and 3.1% constant currency |
| Gross profit / margin | $125.3 million / 20.9% (21.0% prior year) | $339.1 million / 19.4% (21.2% prior year) |
| Operating income (loss) | $23.9 million (4.0% margin), versus $29.3 million | $(15.6) million, versus $89.5 million income |
| Continuing operations net income (loss) | $10.1 million; diluted EPS $0.10 | $(42.3) million; diluted EPS $(0.41) |
| Discontinued operations net loss | $(75.9) million | $(127.5) million |
| Total net income (loss) | $(65.8) million; diluted EPS $(0.63) | $(169.8) million; diluted EPS $(1.63) |
| Adjusted EBITDA | $55.5 million, versus $73.4 million | $134.4 million, versus $194.6 million |
For the nine months, continuing-operations operating cash flow was $12.0 million, versus $67.4 million; capital expenditures were $55.9 million, resulting in negative operating free cash flow of $43.8 million. Cash and cash equivalents were $27.6 million at March 31, with an additional $34.5 million of restricted cash associated with the CEO separation payment. Working capital from continuing operations was $364.9 million.
Total debt was approximately $751.7 million, including $455.2 million drawn on the revolving facility and a $285.0 million term loan. The weighted-average interest rate was 4.30%; reported availability under the credit facility was $528.6 million. The company reported compliance with covenants as amended. Total assets were $2.78 billion and stockholders’ equity was $1.55 billion.
Changes and management commentary
- Nine-month sales declined across the United States, United Kingdom and Rest of World. U.S. sales weakness included Pantry and Better-for-You-Baby; management also cited SKU rationalization. Foreign exchange reduced reported sales growth.
- Nine-month gross margin fell 1.8 percentage points. Management cited higher trade and promotional spending, freight and commodity costs, partly offset by Project Terra savings.
- Continuing-operations results included $30.2 million of CEO succession expense, $29.6 million of Project Terra costs and other, and $23.7 million of long-lived asset and intangible impairment. Higher interest expense also weighed on earnings.
- Project Terra targets $350 million of global savings by fiscal 2020, with some savings intended for reinvestment in brands. No specific full-year sales or earnings guidance is provided in the supplied filing text. Fiscal 2019 capital spending was expected to be approximately $70–$80 million.
Discontinued operations, transactions and financing
- HPPC discontinued-operations losses were driven by $109.3 million of asset impairments and a $40.2 million loss on the Plainville Farms asset sale. The Plainville transaction closed February 15, 2019; the company received a nominal purchase price, transferred $25 million cash to the buyer, and provided a $10 million standby letter of credit with contingent earnout provisions. No earnout asset was recorded at March 31.
- On May 8, 2019, after quarter-end, Hain agreed to sell the remaining HPPC businesses, including FreeBird and Empire Kosher, for $80 million subject to adjustments; closing was expected before June 30, 2019.
- Also on May 8, the company amended its credit agreement, increasing permitted leverage limits, reducing interest-coverage requirements for specified periods, and securing obligations with liens on specified company and domestic-subsidiary assets. The leverage allowance is scheduled to step down following the remaining HPPC sale.
Risks, controls and contingencies
- Management said disclosure controls related to the previously identified material weakness in internal control over financial reporting were not effective as of March 31, 2019. Remediation efforts were ongoing.
- Stockholder and securities litigation remained active. A securities class-action complaint was dismissed without prejudice on March 29, 2019; plaintiffs filed a second amended complaint on May 6. The company stated that ordinary-course claims were not expected to have a material adverse effect, but litigation outcomes remain uncertain.
- Other cited risks include competition and changing consumer preferences, customer and distributor concentration, supply-chain and input-cost exposure, international and foreign-exchange risks, execution of cost savings, impairment risk, product liability, cybersecurity, and the ability to remediate control weaknesses.
- Results are seasonal and interim performance may not indicate full-year results. The company adopted the new revenue standard in fiscal 2019 without material effect; it expected to adopt the new lease standard on July 1, 2019, with operating lease assets and liabilities expected to be recognized on the balance sheet.
Important facts for investors to verify
- Whether the remaining HPPC sale closed as expected, and its final proceeds and adjustments.
- How the amended credit covenants, collateral requirements and leverage step-down after the HPPC sale affect financial flexibility and covenant headroom.
- Progress in remediating the material weakness and whether controls are subsequently determined effective.
- Whether sales trends, gross margins and operating cash flow improve, and whether Project Terra delivers its stated savings target.
- The final financial and legal effects of HPPC impairments, the Plainville earnout/letter of credit, and pending litigation.