Hain Celestial Group, Inc. — Form 10-Q Summary
Business context and period: The filing covers the quarter and six months ended December 31, 2018, the second quarter and first half of fiscal 2019. Hain sells organic and natural food, beverage, and personal-care products in more than 80 countries. Hain Pure Protein is presented as discontinued operations following the planned sale approved in March 2018; continuing operations comprise the remaining business. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Quarter ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 |
|---|---|---|
| Net sales, continuing operations | $584.2; down 5.2% year over year (down 3.6% at constant currency) | $1,145.0; down 5.0% (down 3.9% at constant currency) |
| Gross profit and margin | $114.3; 19.6%, versus 21.7% | $213.9; 18.7%, versus 21.3% |
| Operating income (loss) | $(15.4), versus $31.0 | $(39.5), versus $60.2 |
| Net income (loss), continuing operations | $(29.3), or $(0.28) diluted per share | $(52.4), or $(0.50) diluted per share |
| Net income (loss), discontinued operations | $(37.2) | $(51.5) |
| Consolidated net income (loss) | $(66.5), or $(0.64) diluted per share | $(103.9), or $(1.00) diluted per share |
| Adjusted EBITDA, non-GAAP | $44.9, versus $67.7 | $78.9, versus $121.1 |
Quarterly gross margin declined mainly due to higher trade and promotional spending and U.S. freight and commodity costs; Project Terra savings partly offset these pressures. Sales declined in all three reportable segments. U.S. operating income fell to $7.2 million from $21.9 million; U.K. operating income increased to $14.7 million from $13.6 million; Rest of World operating income declined to $8.4 million from $10.5 million.
Cash flow, balance sheet, debt, and liquidity
- For the first six months, continuing-operations operating cash flow was negative $1.0 million, versus positive $28.4 million a year earlier. Capital expenditures were $41.5 million, compared with $24.7 million; operating free cash flow, a non-GAAP measure, was negative $42.6 million, versus positive $3.7 million.
- Cash and cash equivalents were $38.2 million at December 31, 2018, down from $106.6 million at June 30. Restricted cash was $34.3 million, held for the former CEO’s separation payment. Cash and restricted cash of continuing operations totaled $72.5 million.
- Working capital from continuing operations was $367.1 million, down from $438.1 million at fiscal year-end. Approximately 90.7% of continuing-operations cash was held outside the United States.
- Total debt was $727.7 million, including $414.3 million drawn on a $1.0 billion revolving facility and a $288.8 million term loan. The weighted-average credit-facility rate was 4.10%; $576.0 million was available under the facility at December 31. The company reported covenant compliance as amended.
- On February 6, 2019, after quarter-end, the credit agreement was amended to temporarily raise the maximum leverage ratio to 4.0x at December 31, 2018 and 3.75x at March 31 and June 30, 2019, before returning to 3.5x for the period ending September 30, 2019.
Material changes, outlook, and risks
- Discontinued business and impairment: Hain Pure Protein recorded $54.9 million of additional impairment in the quarter, primarily associated with Plainville Farms and continuing adverse market conditions; first-half impairment totaled $57.9 million. The sale process was ongoing, with management anticipating a sale within 12 months of the March 2018 approval.
- Continuing-operations impairment and restructuring: The company recorded $17.9 million of tradename impairment and $5.3 million of first-half noncash impairment charges, primarily related to U.K. manufacturing consolidation. Management’s interim goodwill review concluded reporting-unit fair values exceeded carrying values, while noting lower forecast revenue growth and profitability, particularly in the United States.
- CEO transition and cost program: Mark Schiller became CEO in November 2018, succeeding Irwin Simon. CEO succession expense was $10.1 million for the quarter and $29.7 million for the first half. Project Terra expenses were $9.9 million and $20.2 million, respectively; the company aims for $350 million in global savings by fiscal 2020, with some savings intended for reinvestment in brands.
- Spending outlook: Management expected fiscal 2019 capital spending of approximately $70–$80 million and said additional Project Terra costs may occur. The filing provides no specific revenue or earnings guidance.
- Controls and reporting: Management concluded disclosure controls related to a previously identified material weakness in internal control over financial reporting were not effective at December 31, 2018. Remediation efforts were ongoing.
- Legal matters: The SEC settlement announced in December 2018 resolved the investigation without a finding of intentional wrongdoing or monetary penalty. A California Proposition 65 consent judgment was approved, requiring $0.6 million in non-contingent payments and providing for certain contingent payments. Securities and shareholder derivative litigation remained pending.
- Other risks: Management cited competitive pressures, consumer preference shifts, supply-chain execution, commodity and freight costs, international exposure, realization of cost savings, litigation, impairment risk, and control remediation. The filing reported no material changes to the risk factors in the prior Form 10-K.
Most important facts for investors to verify
- Progress and expected timing of the Hain Pure Protein sale, and whether further impairment or operating losses arise before disposal.
- Whether sales stabilize and margins recover, particularly in the U.S.; assess the effects of promotions, freight, commodities, and SKU rationalization.
- Cash generation against planned $70–$80 million fiscal 2019 capital expenditures, debt levels, interest costs, and compliance with the temporarily amended leverage covenants.
- Execution and realized savings from Project Terra relative to its $350 million fiscal 2020 target and continuing restructuring costs.
- Remediation of the material weakness in internal controls and developments in the pending securities and derivative litigation.