Business context and reporting period
The Hain Celestial Group, Inc. manufactures and sells natural and organic food and personal care products. This Form 10-Q covers the quarter and six months ended December 31, 2012, the second quarter of fiscal 2013. Results are unaudited; amounts below are in U.S. dollars.
Growth included significant acquisitions: UK Ambient Grocery Brands, acquired October 27, 2012, and BluePrint Cleanse, acquired December 21, 2012. The UK chilled ready meals business and sandwich business were classified as discontinued operations following their sale or disposal.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2012 |
|---|---|---|
| Net sales | $455.3 million, up 24.8% | $815.1 million, up 25.1% |
| Gross profit / margin | $130.8 million / 28.7% | $226.0 million / 27.7% |
| Operating income / margin | $51.2 million / 11.3% | $83.5 million / 10.2% |
| Income from continuing operations | $32.2 million | $52.0 million |
| Net income | $31.6 million | $48.0 million |
| Diluted EPS from continuing operations | $0.68 | $1.11 |
| Total diluted EPS | $0.67 | $1.02 |
| Operating cash flow | — | $61.2 million |
| Capital expenditures | — | $24.9 million |
For the six months, net sales increased $163.5 million and operating income rose 39.1% year over year. Quarterly gross margin was unchanged year over year; six-month gross margin declined from 28.3% to 27.7%, reflecting acquired businesses’ lower relative margins and higher input costs, partly offset by productivity gains. Net income included a $4.0 million loss from discontinued operations for the six-month period, including a $3.1 million after-tax disposal loss.
At December 31, cash was $42.6 million; working capital was $279.4 million. Total debt was $640.5 million ($635.1 million long-term, including current portion); cash less total debt was approximately $597.9 million. The revolving facility provided $850 million of capacity, with $484.9 million drawn. The company reported compliance with its financial covenants and said cash, operating cash flows and facility availability should fund expected needs for at least 12 months.
Material changes and segment results
- United States sales increased 8.2% in both the quarter and six-month period, attributed to improved consumption and expanded distribution.
- United Kingdom sales rose 113.0% in the quarter and 163.3% for six months, primarily reflecting acquisitions, including $48.2 million of sales from UK Ambient Grocery Brands after acquisition. Acquired operations also drove much of the reported growth; comparable organic growth is not clearly quantified.
- Rest of World sales increased 11.1% for the quarter and 13.9% for six months.
- Operating margins improved overall, helped by expense leverage and lower acquisition-related charges. In the UK, integration continued and the acquired brands’ initial reported results did not include all future support and infrastructure costs.
- Six-month investing cash outflow was $301.1 million, principally for acquisitions; financing cash inflow was $253.1 million, including $244.9 million of net revolving-credit borrowings.
Outlook, risks and unusual items
- Management expected fiscal 2013 capital spending of approximately $50 million, including production-facility projects. The filing does not provide a clear numerical sales or EPS outlook in the supplied text.
- Management cited economic uncertainty, volatile energy and commodity prices, and higher input costs; mitigation measures include pricing, productivity improvements and cost savings. Seasonality can make quarterly results fluctuate.
- Acquisition integration, foreign exchange, competition, customer and consumer demand, supply availability, regulation, product liability, litigation and goodwill or intangible-asset valuation were identified as risks.
- BluePrint consideration included $15.5 million cash, $9.5 million in shares and contingent payments of up to approximately $83.7 million; the acquisition-date fair value of the contingent liability was $6.1 million.
- A putative shareholder class action concerning proxy disclosures and an equity-plan amendment remained pending. The court denied plaintiffs’ request for a temporary restraining order; defendants moved to dismiss, with a hearing scheduled for March 7, 2013. Management did not expect pending litigation to have a material adverse effect.
- Management stated disclosure controls were effective; the assessment excluded the newly acquired UK Ambient Grocery Brands business, which represented 18.1% of consolidated assets at period-end.
Important facts for investors to verify
- How much reported growth came from acquisitions versus comparable or organic growth, particularly in the UK.
- Whether acquired-business integration, infrastructure build-out and lower acquired margins affect future profitability.
- Debt levels, facility availability, covenant headroom and the cost of financing acquisitions.
- Progress on the approximately $50 million fiscal 2013 capital-spending plan and resulting cash generation.
- Exposure to input-cost inflation, foreign exchange, and the BluePrint contingent consideration and other acquisition estimates.
- Developments in the shareholder litigation and completion of the acquired UK business’s inclusion in control assessments.