Business context and reporting period
The Hain Celestial Group, Inc. manufactures and sells organic and natural food, beverage, and personal-care products. This unaudited Form 10-Q covers the three months ended September 30, 2015, the first quarter of fiscal 2016, and compares results with the same quarter of fiscal 2015. The company operates in the United States, United Kingdom, Hain Pure Protein, Canada, and Europe.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $687.2 million | $631.3 million |
| Gross profit / margin | $152.0 million / 22.1% | $125.8 million / 19.9% |
| Operating income / margin | $57.5 million / 8.4% | $28.8 million / 4.6% |
| Net income | $31.3 million | $18.9 million |
| Diluted EPS | $0.30 | $0.18 |
| Operating cash flow | $5.8 million | $2.6 million |
| Capital expenditures | $19.5 million | $13.3 million |
| Operating free cash flow | $(13.7) million | $(10.6) million |
At September 30, 2015, cash was $147.7 million, working capital was $588.6 million, and total debt was $888.5 million, including $45.2 million classified as current. The company had $680.4 million outstanding under its $1 billion revolving credit facility and reported compliance with its covenants. The $150 million senior notes mature May 2, 2016; management intended to refinance them and was reviewing financing alternatives.
Material changes and performance drivers
- Sales increased 8.9%. Acquisitions of Mona, Empire, and Belvedere contributed approximately $52 million of quarterly sales; unfavorable foreign exchange reduced sales by $24.4 million. Prior-year sales were also affected by the nut butter recall and a European beverage withdrawal.
- Gross margin rose 2.2 percentage points, reflecting the prior-year nut butter recall’s effects, acquisition contributions, and volume growth, partly offset by product mix and higher product costs.
- Operating income nearly doubled. SG&A declined 5.1% to $86.3 million, while acquisition, restructuring, and integration charges increased to $3.7 million from $1.6 million.
- Interest and other expenses rose to $11.9 million from $3.9 million. The current quarter included higher net foreign-currency losses; the prior-year quarter included a $5.3 million noncash gain on the previously held HPPC interest.
- Sales declined 1.7% in the United States and 4.0% in the United Kingdom, with currency pressure in the latter; UK sales increased 3.2% in local currency. Hain Pure Protein sales rose 75.4%, and Rest of World sales rose 29.7%, substantially reflecting acquisitions.
- Operating cash flow remained modest relative to net income, with cash use from higher inventories and other working-capital movements. Cash declined $19.2 million during the quarter.
Outlook, risks, contingencies, and unusual items
- Management expected fiscal 2016 capital spending of approximately $50 million and said cash, projected operating cash flows, and credit availability were expected to cover ordinary working capital, capital spending, and other expected needs for at least 12 months.
- Management cited foreign-exchange volatility, higher input costs, global economic and political uncertainty, competition, changing consumer demand, and acquisition integration as ongoing challenges. It said it was pursuing efficiencies, cost savings, pricing actions, and currency hedging to mitigate impacts.
- Results are seasonal and management cautioned that quarterly performance is not necessarily indicative of full-year results. It anticipated the second fiscal quarter would have the highest sales for the remainder of fiscal 2016, with the third and fourth quarters generally similar.
- The company acquired Mona in July 2015 for approximately $25.2 million cash and $16.3 million of stock, and assumed approximately €16.0 million of net debt. The purchase-price allocation was preliminary; Mona’s contribution to current-quarter results was not material.
- A California personal-care labeling class action had an agreement in principle to settle for $7.5 million plus consumer coupons up to $2.0 million. A $5.7 million charge had been recorded in fiscal 2015, and settlement finalization was ongoing.
- The filing reported no material changes to previously disclosed risk factors and no material updates to other legal proceedings. It identified Hain Daniels as particularly sensitive in impairment testing: at the April 2015 test, fair value exceeded carrying value by approximately 10%, and a one-percentage-point increase in the discount rate would reduce estimated fair values to approximately carrying value.
- On October 27, 2015, after quarter-end, the company acquired an approximately 15% interest in Chop’t for $18 million; the stake could be diluted to 12%.
Important facts for investors to verify
- How much of sales growth reflects sustainable organic growth versus acquisitions, prior-year comparisons, and foreign-exchange movements.
- Whether inventory and working-capital needs improve, given negative operating free cash flow and planned capital spending.
- Progress and terms of refinancing the $150 million notes due in May 2016, and continued compliance with credit-facility covenants.
- Performance in the U.S. grocery channel and the effect of competition, pricing pressure, input costs, and currency movements on margins.
- Final Mona purchase accounting and integration results, the status of the personal-care settlement, and developments in impairment-sensitive Hain Daniels assets.