Business context and reporting period
Hain Celestial Group, Inc. manufactures and sells natural and organic food, beverage, personal care, and household products. This unaudited Form 10-Q covers the first quarter of fiscal 2012, the three months ended September 30, 2011; comparisons are with the three months ended September 30, 2010 unless noted. The company reports one business segment.
Key financial results
Dollar amounts are in millions except per-share data. Margins are calculated from reported results.
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $292.4 | $258.0 | +13.3% |
| Gross profit / gross margin | $79.8 / 27.3% | $70.1 / 27.2% | +13.9% |
| Operating income / operating margin | $22.9 / 7.8% | $18.5 / 7.2% | +23.3% |
| Net income / net margin | $11.7 / 4.0% | $9.1 / 3.5% | +28.5% |
| Diluted EPS | $0.26 | $0.21 | +$0.05 |
| Operating cash flow | $23.3 | $(12.0) | Improved $35.3 |
- Sales growth reflected higher consumption and expanded distribution in North America, particularly for Earth’s Best, MaraNatha, Spectrum, and The Greek Gods. European sales rose 30.5%, including contributions from Danival and GG UniqueFiber acquisitions and approximately $2.2 million of favorable foreign exchange. Geographic sales were $233.6 million in the U.S., $18.4 million in Canada, and $40.3 million in Europe.
- Gross margin edged up as product mix and productivity savings offset higher input costs. SG&A rose 10.1% to $55.2 million, but declined as a share of sales to 18.9% from 19.4%. Acquisition-related expenses and restructuring charges were $1.7 million, including $0.9 million of additional contingent-consideration expense.
- Income before taxes was $19.3 million versus $16.1 million; the effective tax rate was 39.9% versus 44.5%. Management attributed the lower rate mainly to reduced U.K. losses for which no tax benefit is recognized and changes in geographic income mix.
- Quarter-end cash was $29.4 million. Operating cash flow less $2.5 million of capital expenditures was approximately $20.8 million. The company attributed the cash-flow improvement primarily to higher earnings and a more favorable change in operating assets and liabilities.
- At September 30, total debt was approximately $231.0 million: $150 million of 5.98% senior notes due 2016, $80 million drawn on the $400 million revolving facility, and $0.5 million current debt. Current assets were $388.3 million and current liabilities $175.2 million. The current ratio was approximately 2.2.
Material changes, outlook, and risks
- On October 25, 2011, after quarter-end, Hain acquired the U.K. Daniels Group for approximately $230 million cash, net of a preliminary working-capital adjustment, plus up to approximately $21 million contingent consideration. It funded the purchase with an additional $235 million revolving-facility borrowing; reported remaining facility availability was approximately $85 million. On October 5, it also acquired the Europe’s Best brand business for approximately $9 million.
- Management expected cash, operating cash flows, and remaining facility availability to fund anticipated needs for at least 12 months. It reported leverage below 3.0-to-1.0 and expected covenant compliance over the next 12 months. The facility’s stated covenants include minimum interest coverage of 4.0-to-1.0 and maximum leverage of 3.5-to-1.0, subject to specified terms and exceptions.
- Expected fiscal 2012 capital spending was approximately $20 million, excluding Daniels. The filing refers to fiscal 2012 net sales and diluted-EPS guidance but the provided filing text does not state clear numerical guidance values.
- Management cited challenging macroeconomic conditions, uncertain consumer spending, and elevated input costs. It planned to respond with efficiency improvements, cost savings, and customer price increases. Results are subject to seasonality, commodity and other cost changes, foreign-exchange movements, competition, acquisition integration, and consumer demand; management cautioned that quarterly results may not indicate full-year performance.
- Other items to note: $22.8 million of acquisition-related contingent consideration was paid during the quarter; the company recorded $0.9 million of additional contingent-consideration expense. Europe continued to report a pretax loss ($2.8 million, versus $3.3 million a year earlier); U.K. deferred-tax assets remain subject to a valuation allowance. The company reported no material expected adverse effect from ordinary-course litigation and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Actual fiscal 2012 sales and diluted-EPS guidance, which is referenced but not quantified in the provided filing text.
- Daniels’ integration, performance, purchase accounting, and the impact of acquisition borrowings on leverage, liquidity, and covenant headroom.
- Whether pricing and productivity savings can offset higher ingredient and other input costs without weakening demand or margins.
- Cash conversion and working-capital trends, particularly inventory and receivables growth, as the business expands.
- Progress in improving U.K./European profitability and the recoverability of related deferred-tax assets.