Hain Celestial Group, Inc. — Form 10-Q
Reporting period: Three months ended September 30, 2017 (first quarter of fiscal 2018); comparisons are with the three months ended September 30, 2016. The company sells organic and natural food, beverage and personal-care products in more than 80 countries. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $708.3 million | $681.5 million | +3.9% reported; +3.3% constant currency |
| Gross profit / margin | $131.6 million / 18.6% | $109.9 million / 16.1% | Margin +2.5 percentage points |
| Operating income / margin | $31.5 million / 4.4% | $13.8 million / 2.0% | +129.0% |
| Net income | $19.8 million | $8.6 million | +130.7% |
| Diluted EPS | $0.19 | $0.08 | +$0.11 |
| Adjusted EBITDA | $59.5 million | $45.6 million | +30.5% |
| Operating cash flow | $(19.4) million | $12.8 million | Down $32.3 million |
| Operating free cash flow | $(34.4) million | $(1.7) million | Down $32.6 million |
- Gross-margin improvement reflected more efficient U.S. trade spending, U.K. pricing and operating efficiencies, lower Hain Pure Protein conversion costs, and higher sales in Canada and Europe. SG&A increased 6.8% to $90.7 million, faster than sales, with higher U.S. marketing and personnel costs.
- Rest of World sales grew 14.1% to $103.1 million; U.S. sales rose 3.7% to $263.7 million, U.K. sales 1.0% to $222.4 million, and Hain Pure Protein sales 2.0% to $119.1 million. Hain Pure Protein returned to operating profit, at $2.2 million versus a $1.0 million loss.
- Cash use from operations was driven chiefly by working capital: accounts receivable used $19.4 million and inventory used $51.8 million, partly offset by higher accounts payable and accrued expenses. Management attributed the year-over-year cash-flow decline primarily to $46.1 million of additional cash use in working capital.
Financial position and liquidity
- At September 30, 2017, cash and cash equivalents were $126.8 million, total assets $3.03 billion, and working capital $567.6 million. Cash declined $20.2 million from June 30, 2017.
- Total debt was $764.6 million, including $739.7 million under the revolving credit agreement. The $1.0 billion facility had $254.1 million available (with $6.2 million of letters of credit outstanding); its weighted-average borrowing rate was 2.88%. The company reported compliance with credit covenants.
- Approximately 85.7% of cash ($108.6 million) was held outside the United States. The company said it intended to indefinitely reinvest foreign earnings and might incur significant U.S. income taxes if funds were repatriated.
- Management said cash on hand, projected operating cash flows and credit availability should fund ordinary working capital, expected fiscal 2018 capital expenditures of approximately $75 million, and other expected cash needs for at least the next 12 months.
Changes, outlook and notable items
- Reported sales growth was 3.9%; management cited plant-based beverage growth in Europe and gains in Canada, partly offset by declines in certain U.S. product platforms. U.S. sales growth was also affected by customer inventory realignment.
- Acquisition, restructuring and integration charges rose to $5.8 million from $0.5 million, including higher severance and consulting costs associated with Project Terra. Adjusted EBITDA is a non-GAAP measure; the filing cautions it should not be considered in isolation or as a substitute for GAAP results.
- Accounting-review costs were $3.6 million gross, offset by $5.0 million of insurance proceeds, producing a net $1.4 million benefit in the quarter; the prior-year quarter had $6.0 million of net costs. These amounts affected the operating-income comparison.
- Other income was $3.1 million, mainly reflecting unrealized foreign-currency gains on remeasurement of foreign-currency-denominated loans. The effective tax rate was 29.9%, versus 8.3% a year earlier; the prior-year rate benefited from a U.K. tax-rate reduction.
- No full-year earnings or sales guidance was provided in the supplied filing text. Management noted that fiscal first-quarter results are typically the lowest of the four quarters and that seasonality means quarterly results may not indicate full-year performance.
- The company was responding to an SEC subpoena in an investigation related to its delayed periodic filings, Audit Committee review, and internal accounting review, including revenue recognition. Securities class actions and stockholder derivative matters were pending. Management stated ordinary-course claims were not expected to have a material adverse effect; the filing does not quantify potential exposure from the described shareholder matters.
- Disclosure controls related to previously identified material weaknesses were deemed ineffective at September 30, 2017. Remediation was ongoing, including work on organizational, IT, revenue-practice and training controls. Management reported no material change in internal control over financial reporting during the quarter.
- Effective July 1, 2017, U.K. Ella’s Kitchen operations were shifted from the U.S. reporting segment to the U.K. segment; prior-period segment information was recast. No goodwill impairment was recorded in the quarter.
Important facts for investors to verify
- Whether the working-capital outflow, especially inventory growth, reverses or continues in subsequent quarters.
- Whether improved gross margin and operating income persist after accounting for one-time items, insurance proceeds, foreign-currency gains and excluded costs in Adjusted EBITDA.
- Progress and effectiveness of remediation of material weaknesses, and developments in the SEC investigation and shareholder litigation, including any quantified financial exposure.
- Debt levels, revolving-facility availability, covenant compliance and the effect of variable rates and foreign-currency movements.
- Fiscal 2018 capital spending versus the approximately $75 million plan, and any additional Project Terra costs. The filing also says no shares had been repurchased under the $250 million authorization; shares withheld for employee payroll taxes are reported separately.