Business context and reporting period
Hain Celestial Group, Inc. manufactures, markets and sells natural and organic food, beverage, personal-care and household products, primarily in the United States, Canada and Europe. This unaudited Form 10-Q covers the quarter and six months ended December 31, 2010, the second quarter and first half of fiscal 2011. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Dec. 31, 2010 | Three months ended Dec. 31, 2009 | Six months ended Dec. 31, 2010 | Six months ended Dec. 31, 2009 |
|---|---|---|---|---|
| Net sales | $291.9 | $242.0 | $549.8 | $472.5 |
| Gross profit | $85.4 | $69.9 | $155.5 | $131.7 |
| Gross margin | 29.3% | 28.9% | 28.3% | 27.9% |
| Operating income | $29.7 | $21.6 | $48.3 | $39.0 |
| Operating margin | 10.2% | 8.9% | 8.8% | 8.3% |
| Net income | $16.3 | $11.2 | $25.4 | $19.3 |
| Diluted EPS | $0.37 | $0.27 | $0.57 | $0.47 |
Second-quarter sales increased 20.6%; first-half sales rose 16.4%. Management attributed growth to existing-brand gains and the Greek Gods yogurt and Sensible Portions snack acquisitions. North America led growth. European sales rose 3.5% in the quarter but declined 4.4% for the half, including unfavorable foreign-exchange effects; continent-based European sales grew in local currency in both periods.
Higher-margin acquired products and cost savings supported gross-margin improvement, more than offsetting input-cost increases and, in the quarter, increased promotional spending. SG&A was $55.0 million in the quarter and $105.2 million in the half; as a share of sales it was 18.8% and 19.1%, respectively. Operating income grew on higher sales and gross profit. First-half net income also benefited from improved equity-method investee results and exchange gains.
Cash flow, balance sheet and debt
- First-half operating cash flow was $10.7 million, versus $10.8 million a year earlier, despite higher net income. Receivables and inventory growth, primarily related to acquisitions, absorbed cash.
- Investing activities used $18.2 million, including $16.3 million for Greek Gods and $4.8 million of capital expenditures, partly offset by asset-sale proceeds and repayments from Hain Pure Protein. Financing activities provided $17.0 million, including $15.1 million of revolving-credit borrowings.
- Cash was $26.3 million at December 31, 2010, up $9.0 million from June 30. Current assets were $353.3 million and current liabilities $181.9 million. Inventory was $170.0 million, up from $157.0 million.
- Total debt was approximately $240.1 million: $150 million of 5.98% senior notes due 2016 and $90 million drawn on a $400 million revolving facility due 2015. The filing reports no covenant breach. Management said cash, expected operating cash flow and credit availability were sufficient for anticipated needs.
- Trailing-12-month operating free cash flow, a non-GAAP measure defined as operating cash flow less capital expenditures, was $59.6 million versus $37.7 million. Management expected fiscal 2011 capital spending of approximately $15 million.
Material changes and notable items
- Greek Gods was acquired in July 2010 for $16.3 million cash, 242,185 shares and contingent consideration. Its acquisition-date fair value was $44.0 million, including $22.9 million of contingent consideration; the company recorded a further $0.4 million expense for remeasurement during the half.
- Fair value of contingent consideration for acquisitions totaled $53.0 million at December 31, 2010, measured using significant unobservable inputs. Goodwill rose to $551.5 million from $516.5 million, mainly reflecting Greek Gods, acquisition-accounting adjustments and currency translation.
- Accrued expenses and other current liabilities increased to $83.4 million from $37.8 million. The filing text does not clearly reconcile this balance-sheet movement; investors should review its components and classification alongside acquisition-related liabilities.
- The effective tax rate was 41.5% for the first half, up from 37.2%, primarily because UK losses generated no recognized tax benefit. The company maintained a valuation allowance on related UK deferred tax assets.
- On January 28, 2011, the company acquired GG UniqueFiber for approximately $3.3 million cash plus contingent consideration. On February 4, 2011, it acquired Danival for approximately $26 million cash, funded with revolving-credit borrowings.
- Restructuring and acquisition-related charges were $2.1 million for the half, compared with $2.9 million in the prior-year period. Litigation is described as incidental to ordinary business; management did not expect pending matters to have a material adverse effect.
Outlook, commentary and risks
Management cited continued improvement in consumption trends at certain retailers and increased sales from the Greek Gods and Sensible Portions brands. It also cautioned that economic uncertainty and high unemployment could affect consumer spending, and expected higher input costs. Its mitigation measures include operating efficiencies, cost savings and price increases where competitive conditions permit. The filing refers to fiscal 2011 sales and EPS guidance as a risk factor but provides no clear numerical guidance values in the supplied text.
Key risks include acquisition integration and contingent-payment estimates; competition and consumer demand; ingredient, fuel and labor costs; foreign-exchange movements; reliance on third-party suppliers, manufacturers and distributors; seasonality; and execution of the UK business improvement plan. The company noted that quarterly results can fluctuate with weather, promotions and seasonal demand. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported sales and earnings growth came from acquired businesses versus comparable existing operations.
- Whether working-capital demands, particularly receivables and inventory, continue to constrain operating cash conversion.
- The components of the increase in accrued expenses and the timing and assumptions behind the $53.0 million contingent-consideration liability.
- How the recent European acquisitions affect debt, integration costs, goodwill and the company’s UK profitability and tax position.
- Whether management’s expected capital spending, liquidity and any fiscal 2011 guidance remain consistent with subsequent results and the disclosed risk factors.