Business context and reporting period
Hain Celestial manufactures and sells organic, natural and “better-for-you” food, beverage, personal-care and poultry products. This Form 10-K covers the fiscal year ended June 30, 2015—not fiscal 2014 Q4. It also reports the quarter ended June 30, 2015. Amounts below are in U.S. dollars unless stated otherwise.
Fiscal 2015 growth included the full-year impact of prior acquisitions and consolidation of Hain Pure Protein and Empire, plus Belvedere. A subsequent acquisition, Mona, closed July 24, 2015.
Key financial metrics
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Net sales | $2,688.5 million | $2,153.6 million | Up 24.8%; acquisitions were a major contributor |
| Gross profit / margin | $618.6 million / 23.0% | $567.2 million / 26.3% | Margin down 3.3 percentage points |
| Operating income / margin | $237.7 million / 8.8% | $227.7 million / 10.6% | Income up 4.4%; margin down 1.8 percentage points |
| Net income | $167.9 million | $139.9 million | Up 20.0%; FY2015 benefited from a $20.7 million tax restructuring benefit |
| Diluted EPS | $1.62 | $1.40 | Prior-year figures reflect the two-for-one stock split |
| Operating cash flow | $185.5 million | $184.8 million | Nearly unchanged |
| Capital expenditures | $51.2 million | $41.6 million | Operating free cash flow was $134.3 million, versus $143.2 million |
At June 30, 2015, cash was $166.9 million and working capital was $570.6 million. Debt totaled $843.9 million, including $660.2 million outstanding under the revolving credit facility, $150 million of senior notes due May 2016, and $29.6 million of Tilda short-term borrowings. The company reported $812.6 million of long-term debt excluding current maturities. Its $1 billion unsecured revolver expires in December 2019; the filing does not state undrawn availability. Management said cash, operating cash flow and credit availability were expected to cover ordinary needs and fiscal 2016 capital spending.
For the quarter ended June 30, 2015, sales were $698.1 million, gross profit $167.7 million, operating income $74.7 million and net income $71.1 million; diluted EPS was $0.68. The comparable June 2014 quarter reported sales of $583.8 million, operating income of $60.0 million, net income of $35.7 million and diluted EPS of $0.35.
Material changes versus the prior comparable period
- Annual sales rose 24.8%, principally reflecting acquisitions and additional volume and distribution. Acquisitions of HPPC, Empire and Belvedere contributed about $369 million of FY2015 sales; prior-year acquisitions Tilda and Rudi’s added about $144.9 million compared with their partial-year inclusion in FY2014.
- Gross margin contracted as the lower-margin Hain Pure Protein business entered consolidation, the nut-butter recall generated charges, and U.K. chilled-dessert start-up costs increased. Recall-related charges of $29.3 million affected FY2015 gross profit and reduced gross margin by about 100 basis points.
- Operating margin fell despite higher operating income. The company cited the recall, factory start-up costs, acquisition mix and other costs. U.S. operating income declined 2.9% and U.K. operating income declined 12.2%; Hain Pure Protein generated $358.6 million in sales and $26.5 million in operating income.
- The effective tax rate fell to 22.2% from 33.8%, substantially due to the $20.7 million tax benefit from a change in the U.S. tax status of a Canadian subsidiary. The benefit is not a recurring operating gain.
- Foreign exchange reduced FY2015 sales by about $55.2 million. Operating free cash flow declined despite stable operating cash flow, reflecting recall costs, working-capital needs and higher capital expenditures.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2016 capital expenditures of approximately $50 million. It anticipated sales to be highest in the second fiscal quarter and lowest in the first, subject to acquisition timing. No specific fiscal 2016 revenue or earnings guidance is provided.
- Management said elevated input costs were expected to continue, and that a stronger U.S. dollar had adversely affected reported international results. Mitigation efforts include efficiencies, cost savings, price increases and foreign-exchange hedging.
- The August 2014 voluntary nut-butter recall generated $34.3 million of FY2015 pre-tax charges, in addition to $6.0 million recorded in FY2014. The FDA considered the recall concluded; the company did not expect further material charges.
- A July 2015 agreement in principle would settle a personal-care product labeling class action for $7.5 million plus consumer coupons worth up to $2.0 million. A $5.7 million charge was recorded in FY2015; the matter was not yet finalized in the filing.
- A fire at the Tilda rice milling facility in October 2014 required temporary co-packing and affected product timing and availability. The company said it was insured for related costs and expected remaining milling lines to be functional by the end of calendar 2015.
- The company recorded a $5.5 million non-cash partial impairment of the New Covent Garden Soup Co. trademark. The Hain Daniels reporting unit had only about a 10% fair-value cushion in its annual test; a one-percentage-point increase in its discount rate would reduce estimated fair value to approximately carrying value.
- Goodwill and other intangible assets totaled approximately $1.78 billion. Key risks include acquisition integration, customer and distributor concentration, commodity and organic-ingredient costs, product safety, competition, foreign currency, and possible further impairment. United Natural Foods represented 12% of annual sales and Walmart, Sam’s Club and ASDA together represented 10%.
- The company reported $150 million of 5.98% senior notes due May 2016 and intended to refinance them. The credit facility requires a minimum interest coverage ratio of 4.0 and generally a maximum leverage ratio of 3.5, with a temporary acquisition-related step-up permitted under specified terms.
- The independent auditor gave unqualified opinions on the financial statements and internal controls. Management and the auditor excluded Belvedere and Empire from the internal-control assessment; those acquired businesses represented 2.2% of FY2015 revenue and net income.
Most important facts for investors to verify
- How much of the 24.8% sales increase reflects sustainable organic growth versus acquisitions, and whether acquired businesses meet expected profitability and integration targets.
- Whether gross and operating margins recover as recall effects and factory start-up costs fade, particularly given the lower-margin poultry segment.
- The final cash and coupon cost, release timing and any remaining exposure from the personal-care labeling settlement; confirm that recall-related costs are complete.
- Refinancing terms and covenant headroom for the $150 million notes due in May 2016, alongside revolving borrowings and Tilda’s seasonal debt needs.
- Progress restoring the Tilda milling facility, and the effect of currency, commodity prices and working capital on cash generation.
- Assumptions underlying goodwill and trademark valuations, especially the limited Hain Daniels valuation cushion and sensitivity to discount rates and business performance.