HAIN CELESTIAL GROUP INC quarterly report, Q1 FY2014

Business context and reporting period

The Hain Celestial Group, Inc. manufactures and sells organic and natural food and personal-care products. This Form 10-Q covers the three months ended September 30, 2013, the first quarter of fiscal 2014; comparisons are with the quarter ended September 30, 2012 unless otherwise noted. Results are unaudited. Sales growth was substantially influenced by acquisitions completed after the prior-year quarter, particularly the UK Ambient Grocery Brands, Ella’s Kitchen and BluePrint.

Financial performance and liquidity

Revenue increased 32.7%; operating income rose 23.2%. Gross margin fell 1.6 percentage points, chiefly due to product and segment mix—including a larger contribution from the lower-margin UK business—and start-up costs at the European non-dairy facility. Operating margin declined 0.7 percentage points. SG&A rose 23.3% to $73.6 million but declined as a share of sales, from 16.6% to 15.4%, reflecting operating leverage and the acquired businesses’ expense profile.

At September 30, 2013, cash was $65.1 million, working capital was $327.3 million, total assets were $2.345 billion, and total debt was $652.5 million, including $641.2 million of long-term debt and $11.3 million current. Debt was down from $665.9 million at June 30, 2013. The company repaid $13.3 million net under its revolving credit facility during the quarter. The $850 million facility had $491.2 million drawn and expires in August 2017; separate senior notes of $150 million bear 5.98% interest and mature in May 2016. Management said cash, expected operating cash flows and available credit should meet ordinary-course needs, planned FY2014 capital spending and other expected requirements for at least 12 months.

Material changes versus the prior comparable period

• US sales rose 23.5% to $312.0 million, reflecting prior-year acquisitions, increased consumption and expanded distribution. UK sales increased 96.7% to $114.0 million, primarily from the UK Ambient Grocery Brands acquisition. Rest-of-World sales grew 4.6% to $51.5 million.
• US operating income increased to $46.4 million, with margin rising to 14.9% from 14.5%. UK operating income improved to $1.9 million from a $1.0 million loss. Rest-of-World operating income decreased to $2.9 million from $4.4 million, with margin falling to 5.7% from 9.0%, largely due to European factory start-up costs.
• Income from continuing operations increased to $27.7 million from $19.8 million. The prior-year quarter included a $3.4 million after-tax loss from discontinued UK businesses; there was no discontinued-operations result in the current quarter.
• Cash from operations increased by $26.5 million. The company attributed the improvement to higher earnings and working-capital changes, including accounts receivable. Investing cash flow shifted to a use of $11.9 million from a source of $5.4 million, as the prior-year period included proceeds from a business sale.

Outlook, commentary, risks and unusual items

• Management forecast approximately $35 million of capital expenditures for fiscal 2014, including manufacturing facility improvements and expansions. The filing references fiscal 2014 net-sales and diluted-EPS guidance but does not provide the guidance figures in the supplied text.
• Management expects higher input costs to continue affecting future periods and cites volatile energy and commodity prices. Mitigation measures include operating efficiencies, cost savings and customer price increases.
• Acquisition, restructuring and integration charges were $2.3 million, versus $0.6 million in the prior-year quarter. The current-period charges included acquisition professional fees and integration activity in the US and UK.
• The effective tax rate was 24.4%, down from 27.7%. A $3.8 million reduction in net deferred tax liabilities following UK tax-rate reductions lowered the rate; this was partly offset by a $0.6 million increase in the reserve for unrecognized tax benefits related to an ongoing IRS audit.
• Quarterly results are subject to seasonality, promotional timing, input-cost inflation, consumer demand, foreign exchange and global economic and political conditions. Other stated risks include acquisition integration, competition, supply and distribution dependencies, regulation, product liability, litigation and goodwill or intangible-asset impairment. Management said ordinary-course legal matters were not expected to have a material adverse effect based on current facts.
• The company reported no off-balance-sheet arrangements and no material change in internal control over financial reporting. Management concluded disclosure controls were effective. Foreign-currency translation contributed $43.6 million to current-quarter other comprehensive income.

Important facts for investors to verify

• How much of sales and earnings growth reflects acquired businesses versus organic demand, and whether acquired operations sustain expected performance.
• Whether gross-margin pressure from segment mix, facility start-up costs and input inflation persists, and whether pricing and efficiency actions offset it.
• The exact fiscal 2014 sales and diluted-EPS guidance referenced by the filing, which is not stated in the supplied text, and the basis for management’s expectations.
• Revolver availability, covenant compliance and debt reduction capacity, particularly alongside planned capital spending and acquisition-related obligations.
• Final acquisition purchase-price allocations and contingent consideration, including the BluePrint-related liability; the filing reports $23.3 million of total contingent consideration at quarter-end.
• Developments in the IRS audit and the effect of tax-rate changes, foreign earnings and any future need to repatriate overseas cash.