HAIN CELESTIAL GROUP INC quarterly report, Q1 FY2016

Business context and reporting period

Hain Celestial markets organic and natural food, beverage, and personal-care products in more than 80 countries. The filing is a Form 10-Q for the quarter ended March 31, 2017—fiscal 2017 third quarter—and the nine months then ended. This conflicts with the request metadata of “2015 Q1”; the filing itself clearly reports 2017 results.

The report was filed June 22, 2017, after delays while the company completed internal and Audit Committee reviews. The Audit Committee review found no evidence of intentional wrongdoing. Management concluded the financial statements were fairly stated in all material respects under U.S. GAAP, while disclosing material weaknesses in internal control.

Financial results and liquidity

Amounts below are in millions of dollars, except per-share data and percentages.

At March 31, cash was $162.6 million, working capital was $558.4 million, total debt was approximately $789.3 million, and current liabilities were $346.7 million. The $1.0 billion revolving facility had $774.4 million drawn, $6.2 million of letters of credit, and $219.4 million available. The company reported covenant compliance under limited waivers and extensions related to delayed financial reporting. Approximately 63% of cash was held outside the United States; repatriation could result in significant U.S. taxes.

For the nine months, operating cash flow of $148.0 million was partly offset by $44.1 million in capital expenditures; investing cash outflow was $37.6 million and financing cash outflow was $70.7 million. Cash increased $34.7 million from June 30, 2016.

Material changes and management commentary

• Reported sales reflected adverse foreign exchange effects of $29.9 million in the quarter and $96.2 million year to date. Constant-currency sales were essentially flat for the quarter and grew 3.6% for the nine-month period.
• Margin and earnings deterioration reflected U.S. price adjustments, trade spending and customer mix; Orchard House margin dilution and UK production costs; non-functional-currency purchase costs; and FreeBird facility start-up costs and production inefficiencies. The prior-year protein results also benefited from poultry supply shortages and related pricing.
• Quarterly segment sales declined in the United States (5.2%) and United Kingdom (11.7%), while Hain Pure Protein grew 4.9% and Rest of World grew 5.8%. Hain Pure Protein recorded a $2.6 million operating loss versus $2.4 million of income a year earlier.
• Project Terra reorganized the company’s U.S. platforms, created Cultivate Ventures for smaller brands and innovation, and targeted global cost savings over three fiscal years, with some savings intended for reinvestment in brands. Management also described plans to shift U.S. trade investment toward consumer-facing activities.
• Management said cash, operating cash generation, and credit availability were sufficient for ordinary working capital, expected fiscal 2017 capital spending of approximately $70 million, and other expected cash needs for at least 12 months. No full-year revenue or earnings guidance is provided in the supplied filing text.

Risks, contingencies, and unusual items

• Disclosure controls were deemed ineffective at March 31, 2017 because of material weaknesses in the control environment and revenue recognition, including controls over distributor concessions, side agreements, documentation, and trade-promotion timing and classification. Remediation steps include new finance roles, contract review and training, an internal audit function, and a planned global contract-management system.
• The company identified immaterial errors in previously issued statements and revised comparative figures. It said a cumulative correction would have materially affected results for the three and twelve months ended June 30, 2016. The 2016 comparative figures in this filing are revised.
• The company was responding to an SEC subpoena issued January 31, 2017 and said it intended to cooperate. Securities class actions and shareholder derivative suits were pending; the filing did not provide a clear estimate of potential losses for these matters.
• Quarterly and nine-month earnings included $7.1 million and $20.1 million, respectively, of accounting-review costs. Fiscal 2017 effective tax rates benefited from geographic earnings mix, a UK tax-rate change, and a $3.5 million release of uncertain tax positions.
• On June 21, 2017, the board authorized repurchases of up to $250 million of common stock, subject to market conditions and other corporate considerations. This authorization occurred after the March 31 reporting date.

Important facts for investors to verify

• Confirm the reporting period: the filing covers fiscal 2017 Q3 and nine months ended March 31, 2017, not 2015 Q1.
• Review the revised prior-period financial statements and the nature and period effects of the immaterial corrections.
• Track remediation of the material weaknesses and whether subsequent filings establish that controls became effective.
• Assess the SEC investigation and shareholder litigation, including any subsequent developments or loss estimates.
• Monitor margins, customer inventory normalization, trade spending, Orchard House operating performance, and FreeBird production efficiency.
• Verify covenant status, waiver terms, available credit, and the company’s ability to meet debt and liquidity needs.
• Evaluate the assumptions and exclusions behind Adjusted EBITDA and operating free cash flow, which are non-GAAP measures.