Business context and reporting period
Hain Celestial Group, Inc. markets and manufactures organic, natural and “better-for-you” food, beverage and personal-care products in more than 80 countries. This is its Form 10-K for the fiscal year ended June 30, 2016—not a report for 2015 Q4. The report was signed June 22, 2017, after delayed filings and internal and Audit Committee reviews. Comparative prior-period figures were revised for identified immaterial errors.
Financial results and position
| Metric | FY2016 | FY2015 | Change / note |
|---|---|---|---|
| Net sales | $2.885 billion | $2.610 billion | +10.6% reported; +13.2% constant currency |
| Gross profit / margin | $614.1 million / 21.3% | $562.9 million / 21.6% | Profit +9.1%; margin down 30 basis points |
| Operating income / margin | $150.4 million / 5.2% | $233.9 million / 9.0% | Down 35.7%; FY2016 includes substantial impairment charges |
| Net income | $47.4 million | $165.0 million | Down 71.2% |
| Diluted EPS | $0.46 | $1.60 | Down from prior year |
| Adjusted EBITDA | $379.1 million | $371.7 million | Up 2.0%; non-GAAP measure |
| Cash from operations | $206.6 million | $185.5 million | Up; working capital used $54.1 million |
| Capital expenditures / operating free cash flow | $77.3 million / $129.3 million | $51.2 million / $134.3 million | Higher capex; free cash flow down $5.0 million |
| Cash and working capital | $127.9 million / $543.2 million | $166.9 million / $537.4 million | Cash declined; working capital increased |
| Debt | $862.7 million total | $843.9 million total | Includes $827.9 million under revolving facility; $168.3 million facility availability |
FY2016 income includes $84.5 million goodwill impairment and $39.7 million tradename impairment. Interest and other financing expense was $25.2 million. The effective tax rate rose to 59.9% from 22.8%, affected by nondeductible goodwill impairment and other tax items. The company reported no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Sales growth primarily reflected acquisitions, including Orchard House, Mona, Empire and Belvedere; those acquisitions contributed approximately $317.5 million of FY2016 sales. Foreign exchange reduced reported sales by $69.2 million.
- U.S. sales declined 0.3%, while U.K. sales rose 7.2%, Hain Pure Protein sales rose 46.1%, and Rest of World sales rose 32.6%; acquisitions were significant drivers of growth outside the U.S.
- Operating income fell despite higher sales, mainly due to goodwill and tradename impairments, acquisition and restructuring costs, competitive pricing, higher trade spending and other operating pressures. Adjusted EBITDA increased modestly.
- Cash used in investing activities increased to $234.3 million, including acquisitions, a Chop’t investment and $77.3 million of capital expenditure. Cash from financing activities was essentially flat; the company borrowed to fund acquisitions and repaid $150 million of senior notes.
- FY2015 and FY2014 financial statements were revised for immaterial errors, including revenue timing and trade-promotion presentation. The filing says the corrections were immaterial to those previously issued periods; the historical revenue corrections totaled $78.9 million for FY2015 and $45.8 million for FY2014, with some reclassifications not affecting operating income.
Outlook, risks, contingencies and unusual items
- Management expected to spend approximately $70 million on FY2017 capital projects and stated that cash, projected operating cash flow and available credit were expected to meet ordinary needs and other anticipated requirements for at least 12 months.
- Project Terra reorganized U.S. brands into consumer-focused platforms, launched Cultivate Ventures, identified global cost savings over the next three fiscal years (not quantified in the filing), and identified brands for divestiture. The company planned to shift some trade investment toward consumer-facing activity.
- No clear consolidated FY2017 revenue or earnings guidance is provided. The filing discusses strategy and cost savings but does not quantify expected savings.
- Controls and reporting are a major concern: management concluded disclosure controls and internal control over financial reporting were ineffective at June 30, 2016 because of material weaknesses in the control environment and revenue recognition/trade-promotion controls. Ernst & Young issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. Remediation was underway but not yet complete.
- The company delayed this 10-K and three subsequent quarterly reports while reviewing distributor concessions and revenue recognition. The Audit Committee’s independent review found no evidence of intentional wrongdoing. The company concluded its historical revenue policy for the distributor concessions was appropriate, but identified and corrected other immaterial errors.
- The SEC issued a subpoena on January 31, 2017, and the company was cooperating. Securities class actions and stockholder derivative actions were pending; outcomes and potential costs were uncertain. Delayed filings had also put Nasdaq compliance and use of Form S-3 at risk.
- Other notable risks include customer concentration (two customer groups each represented about 10% of sales), competition and retailer bargaining power, commodity and organic-ingredient availability, foreign exchange exposure, acquisition integration, product safety, and the effects of Brexit. A 10% change in primary input costs was estimated to affect cost of sales by approximately $150 million; a 5% adverse currency move would have reduced FY2016 sales by about $57 million and operating income by about $2.4 million.
- The fourth quarter recorded a net loss of $88.6 million, including the impairment charges; Q4 sales were $737.5 million. A $9.8 million gain on recovery of Tilda fire insurance was also recognized during the year.
Most important facts for investors to verify
- Progress and independent testing of remediation for the material weaknesses, especially revenue recognition, customer concessions and trade-promotion accounting.
- Status and possible financial, legal or regulatory consequences of the SEC investigation and shareholder litigation.
- Whether reported growth translates into sustained underlying growth, given acquisition contributions, currency effects and weakness in U.S. sales.
- Whether margins and earnings recover after the impairments and amid competitive pricing, input-cost volatility and trade spending.
- Debt covenant compliance, revolving-facility availability, cash generation and the company’s ability to fund planned investment while managing its debt load.
- Assumptions behind goodwill and tradename valuations, particularly Hain Daniels, Europe and Tilda, and the possibility of further impairment.