Hain Celestial Group, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2010 (the first quarter of fiscal 2011). Financial statements are unaudited; amounts below are in millions except per-share data.
Business context and key financial metrics
The company manufactures, markets and sells natural and organic food, beverage, personal care and household products in one reportable segment. Sales are made in the United States, Canada and Europe. The quarter included the July 2 acquisition of The Greek Gods yogurt business.
| Metric | Q1 FY2011 | Prior-year quarter |
|---|---|---|
| Net sales | $258.0 | $230.5 |
| Gross profit / gross margin | $70.1 / 27.2% | $61.8 / 26.8% |
| Operating income / operating margin | $18.5 / 7.2% | $17.5 / 7.6% |
| Net income | $9.1 | $8.1 |
| Diluted earnings per share | $0.21 | $0.20 |
| Effective income tax rate | 44.5% | 37.0% |
| Cash used in operating activities | $12.0 | $8.1 |
| Cash used in investing activities | $17.4 | $1.0 |
| Cash provided by financing activities | $33.2 | Cash used: $16.1 |
- Sales rose 11.9% year over year. Management attributed North American growth to acquisitions and growth in Earth’s Best, MaraNatha, Terra and Avalon brands. European sales fell 12.1%, partly because the company phased out fresh-sandwich supply to Marks and Spencer.
- Gross margin improved 0.4 percentage points, reflecting product mix, including acquired brands, and cost savings that more than offset input-cost increases. Operating margin declined 0.4 percentage points as SG&A rose faster than sales.
- At September 30, cash was $20.9; current assets were $349.9 and current liabilities $170.1. Working capital was approximately $179.9. Total debt was approximately $257.7, including $150.0 of senior notes and $107.6 outstanding under the revolving credit facility. The $400.0 facility expires in July 2015.
- Total assets were $1,280.9 and stockholders’ equity was $786.4 at September 30. The company reported $52.0 of contingent consideration liabilities, measured using Level 3 fair-value inputs.
Material changes and unusual items
- The Greek Gods acquisition consideration included $16.3 cash, 242,185 shares valued at $4.8, and contingent consideration recorded at a $22.9 fair value; additional payments of up to $25.8 depend on operating results. The acquisition added $23.7 to goodwill and expanded refrigerated products.
- Cash used for the acquisition and seasonal working-capital needs contributed to negative operating and investing cash flow. Accounts receivable and inventory uses of cash were $13.7 and $10.6, respectively. Financing included $32.7 of net revolving-credit borrowings.
- Net interest and other expense was $2.5, versus $3.0 a year earlier. Management cited higher borrowing and contingent-consideration accretion, partly offset by $1.1 of foreign-exchange gains; the prior-year period included $0.4 of exchange losses.
- The higher tax rate primarily reflected UK losses for which no tax benefit was recorded and changes in the geographic mix of income. The company expects to maintain a valuation allowance on UK deferred tax assets until sufficient profitability is achieved.
- Hain Pure Protein contributed $0.2 of equity-method income, compared with a $1.0 loss in the prior-year quarter. The company holds a 48.7% interest and had $20.3 of advances to the venture, due no later than December 31, 2012.
Outlook, commentary and risks
- Management said it expects challenging economic conditions and continued uncertainty and high unemployment to affect consumer confidence and spending. It emphasized efficiency, cost containment, cash flow and investment in brands.
- Management stated that recent acquisitions, including Greek Gods and Sensible Portions, had increased sales compared with their pre-acquisition results. It also reported improving consumption trends at certain retailers.
- The company expects current cash, projected operating cash flow and available credit to fund anticipated needs for at least the next 12 months. It expected approximately $15 of capital spending for fiscal 2011.
- The filing refers to fiscal 2011 sales and EPS guidance as a risk factor but provides no clear numerical guidance values in the text supplied.
- Risks highlighted include acquisition integration and contingent payments, UK operating performance, competition, consumer demand, commodity and fuel costs, reliance on third-party manufacturers and distributors, foreign exchange, seasonality, and possible goodwill or intangible-asset impairment. Management did not expect pending ordinary-course litigation to materially affect the company.
- Management cautioned that quarterly results are affected by seasonality and other factors and are not necessarily indicative of full-year results. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Obtain the company’s actual fiscal 2011 sales and EPS guidance and compare it with subsequent results.
- Track organic sales growth separately from acquisition contributions, particularly in North America, and monitor the UK business after the Marks and Spencer supply phase-out and Churchill integration.
- Assess whether gross-margin gains can persist while SG&A and acquisition-related costs increase.
- Monitor operating cash flow, seasonal inventory and receivables, revolver borrowings, covenant headroom and total contingent acquisition consideration.
- Review the assumptions underlying UK deferred-tax valuation allowances, acquisition fair values and goodwill, and the repayment outlook for Hain Pure Protein advances.