HAIN CELESTIAL GROUP INC annual report, FY2018

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Hain Celestial Group, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended June 30, 2018, filed August 29, 2018. The request metadata says “2017 Q4,” but this filing covers FY2018; its fourth-quarter results are for the three months ended June 30, 2018. Dollar amounts below are in millions unless noted.

Business context

Hain Celestial manufactures and sells organic, natural and “better-for-you” food, beverage and personal-care products across more than 80 countries. Grocery generated about 75% of continuing-operations sales. The filing reports the Hain Pure Protein business as discontinued operations following the March 2018 decision to sell it; therefore, continuing-operations sales exclude that business.

Financial performance and liquidity

  • Revenue: Continuing-operations net sales were $2,457.8, up 4.9% reported and 1.5% at constant currency. Foreign exchange added approximately $80.0. The United States declined 2.1% to $1,084.9; the United Kingdom rose 10.1% to $938.0; Rest of World rose 13.3% to $434.9. Hain Pure Protein, presented separately, generated $509.5 in FY2018 sales.
  • Profitability: Gross profit was $515.4, down 0.8%; gross margin fell 120 basis points to 21.0%. Operating income declined 3.1% to $106.0, with a 4.3% operating margin versus 4.7% the prior year. Continuing-operations net income rose to $82.4 from $65.5, or $0.79 diluted EPS versus $0.63. This included a significant tax benefit. Including discontinued operations, net income fell to $9.7 from $67.4, or $0.09 diluted EPS versus $0.65.
  • Adjusted EBITDA: $255.9, down 3.4% from $265.0; this is a company-defined non-GAAP measure.
  • Cash flow: Cash from continuing operating activities was $121.3, down from $232.7. Operating free cash flow, a non-GAAP measure, was $50.4 versus $185.4. The company attributed the decline principally to $97.5 more cash used in working capital, especially inventory and receivables, higher capital spending and lower income adjusted for non-cash items. Continuing-operations capital expenditures were $70.9.
  • Liquidity and debt: Cash and equivalents were $106.6 at year-end, down from $137.1; working capital was $629.1, up from $534.3. Total debt was approximately $714.1, including current maturities. The company reported $589.2 available under its $1.0 billion revolving facility and compliance with its covenants. It stated cash, operating cash flow and credit availability should cover ordinary working capital, expected FY2019 capital spending and other needs for at least 12 months.
  • Balance sheet: Total assets were $2,946.7 and equity was $1,737.0. Goodwill of $1,024.1 and net trademarks and other intangibles of $510.4 together represented about 52% of total assets.

Material changes and unusual items

  • In March 2018, Hain classified Hain Pure Protein (including HPPC and Empire) as discontinued operations and began marketing the business for sale, anticipating a sale within 12 months of approval. A $78.5 impairment of assets held for sale drove a $72.7 after-tax discontinued-operations loss.
  • FY2018 continuing results included a $7.7 goodwill impairment in Cultivate, $14.0 of long-lived-asset and intangible impairments, $20.7 of acquisition, restructuring, integration and other charges, and $9.3 of accounting-review and remediation costs net of insurance proceeds. Higher commodities, freight and logistics costs, trade investment and marketing weighed on margins. Interest expense increased 27.5% to $26.9.
  • The U.S. Tax Cuts and Jobs Act contributed a provisional $25.0 tax benefit and $7.1 transition-tax expense; the company said the final tax impact could differ and expected further measurement adjustments in FY2019.
  • Project Terra targets $350 million in global savings by FY2020. Hain identified more than 1,100 SKUs for elimination to date, including over 400 during FY2018. Management expects to reinvest part of the savings in brands.

Outlook, risks and contingencies

  • No specific revenue or earnings guidance is provided. Hain expects FY2019 capital spending of approximately $80–$100 million, with possible additional Project Terra costs.
  • Management cited competition, changing consumer preferences, customer and distributor concentration, commodity and freight inflation, supply-chain and co-packer disruptions, foreign exchange, Brexit uncertainty, and execution of cost savings and product rationalization as risks. Two customers each represented about 11% of FY2018 sales; international sales were 53%.
  • A material weakness remained in internal controls over North American physical inventory counts and documentation of certain inventory reserves. Management deemed disclosure controls ineffective, and the independent auditor issued an adverse opinion on internal control over financial reporting, while issuing an unqualified opinion on the financial statements. Remediation was underway; the weakness was not yet considered remediated.
  • Pending matters include securities class actions and shareholder derivative litigation related to the accounting review, plus a California Proposition 65 case alleging acrylamide-related warning violations. The SEC settlement agreement described by the company was subject to Commission approval and involved no monetary penalty or finding of intentional wrongdoing.
  • CEO Irwin Simon announced a succession plan. The filing includes approximately $34.5 million in CEO separation and benefit-continuation obligations in its contractual-obligations disclosure.

Most important facts for investors to verify

  • Progress and timing of the Hain Pure Protein sale, including proceeds versus the carrying value and any further impairment.
  • Whether inventory-control weaknesses are fully remediated and whether control deficiencies affect future reporting reliability.
  • Underlying organic sales and margin trends, particularly in the U.S., separated from currency effects, acquisitions, SKU exits and promotional spending.
  • Cash conversion and working-capital normalization, alongside leverage, interest costs and planned capital expenditures.
  • Realized Project Terra savings versus the $350 million FY2020 target, and potential effects on sales, brands and operating capacity.
  • Final Tax Act accounting and outcomes of the securities, derivative and Proposition 65 matters.