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| HAIN > SEC Filings for HAIN > Form 10-Q on 31-Jan-2008 | All Recent SEC Filings |
31-Jan-2008
Quarterly Report
Overview
The Hain Celestial Group, Inc., a Delaware corporation, and its subsidiaries
(collectively, the "Company", and herein referred to as "we", "us", and "our")
manufacture, market, distribute and sell natural and organic food products and
natural personal care products under brand names which are sold as
"better-for-you" products. We are a leader in many of the top natural food
categories, with such well-known food brands as Celestial Seasonings ®, Hain
Pure Foods®, Westbrae Natural®, WestSoy ®, Rice Dream®, Soy Dream®, Imagine®,
Walnut Acres Organic™, Ethnic Gourmet®, Rosetto®, Little Bear Organic Foods®,
Bearitos®, Arrowhead Mills®, Health Valley ®, Breadshop's®, Casbah®, Spectrum
Naturals ®, Spectrum Essentials®, Hollywood® cooking oils, Garden of Eatin'®,
Terra®, Harry's Premium Snacks®, Boston's™, Lima®, Grains Noirs™, Natumi ®,
Milkfree, Yves Veggie Cuisine®, DeBoles®, Earth's Best ®, Nile Spice®, Linda
McCartney® (under license) and Realeat ®. The Company's principal specialty
product lines include Estee® sugar-free products and Alba ®. Our natural
personal care product line is marketed under the JASON®, Zia®, Orjene ®, Shaman
Earthly Organics®, Heather's®, Queen Helene ®, Batherapy®, Shower Therapy®,
Footherapy ®, Avalon Organics®, Alba Botanica®, Tushies® and TenderCare® brands.
Our natural and organic antibiotic-free chicken is marketed under the FreeBird™
brand and our antibiotic-free turkey and turkey products are marketed under the
Plainville Farms® brand.
Our corporate website is www.hain-celestial.com.
Our products are sold primarily to specialty and natural food distributors, supermarkets, natural food stores, and other retail classes of trade including mass-market stores, drug stores, food service channels and club stores.
Our brand names are well recognized in the various market categories they serve. We have acquired numerous brands and we will seek future growth through internal expansion as well as the acquisition of additional complementary brands.
Our overall mission is to be a leading marketer and seller of natural, organic, beverage, snack, specialty food and personal care products by integrating all of our brands under one management team and employing a uniform marketing, sales and distribution program. Our business strategy is to capitalize on the brand equity and the distribution previously achieved by each of our acquired product lines and to enhance revenues by strategic introductions of new product lines that complement existing products.
Results of Operations
Three months ended September 30, 2007
Net sales for the three months ended September 30, 2007 were $237.2 million, an increase of $27.3 million, or 13.0%, over net sales of $209.9 million in the September 30, 2006 quarter. Sales in North America increased $25.2 million from the year ago quarter, reflecting strong performance by our grocery and snacks brands and the addition of sales from our Avalon and Alba personal care products and Plainville Turkey Farm acquisitions. Sales in Europe increased $2.1 million, primarily as a result of strong results in the United Kingdom. The European sales comparison was impacted by the disposal of Biomarché during last year's first quarter.
Gross profit for the three months ended September 30, 2007 was $68.9 million, an increase of $10.0 million from last year's quarter. Gross profit as a percentage of net sales was 29.0% for the three months ended September 30, 2007 as compared to 28.1% of net sales for the September 30, 2006 quarter. The increase in gross profit percentage was principally the result of improved operating efficiencies. Higher input costs continued to impact our overall business, both directly, as a result of increased commodity costs, such as corn, wheat and fuel, and indirectly, with the pass-through of costs from our suppliers of packaging and other major components of our finished products. Included in this year's first quarter is approximately $1.1 million of start-up costs incurred in connection with the integration of the Haldane product lines into our Fakenham frozen foods facility. We anticipate that this integration will continue to impact our gross margin during the remainder of this fiscal year. Last year's first quarter included approximately $1.1 million of start-up costs associated with a new production line at our West Chester frozen foods facility.
Selling, general and administrative expenses increased by $8.6 million, or 20.5%, to $50.5 million for the three months ended September 30, 2007 as compared to $42.0 million in the September 30, 2006 quarter. Selling, general and
administrative expenses have increased primarily as a result of costs brought on by the businesses we acquired since the first quarter of 2007 and increased salary and related costs. We also incurred approximately $2.3 million of professional fees in the first quarter of this year in connection with the previously disclosed investigation of our stock option practices. We anticipate that we will continue to incur additional costs in future periods for ongoing activity related to this matter. Selling, general and administrative expenses as a percentage of net sales increased to 21.3% in the first quarter of fiscal 2008 as compared to 20.0% in the first quarter of last year.
Operating income was $18.3 million in the three months ended September 30, 2007 compared to $16.9 million in the September 30, 2006 quarter. Operating income as a percentage of net sales was 7.7% in the September 30, 2007 quarter compared with 8.0% in the September 30, 2006 quarter. The increase in operating income resulted from the increase in our net sales and gross profit. The decrease in operating income as a percentage of net sales resulted from the additional professional fees we incurred in connection with the review of our stock options practices, which are included in our selling, general and administrative expenses.
Interest and other expenses, net were $1.0 million for the three months ended September 30, 2007 compared to $1.8 million for the three months ended September 30, 2006. Interest expense totaled $3.3 million in this year's first quarter, which was primarily related to interest on the $150 million of 5.98% senior notes outstanding and interest related to borrowings under our revolving credit facility made to fund acquisitions. This was partially offset by $0.6 million of interest income earned in the current year's quarter. Net interest expense in last year's first quarter was approximately $1.9 million. We recognized a gain of approximately $2.0 million in the first quarter of fiscal 2008 on the sale of an equity interest in a joint venture which manufactured rice cakes in Belgium. At the end of August 2006 we sold Biomarché, our Belgium-based provider of fresh organic fruits and vegetables and recognized a gain on the disposal of approximately $2.5 million, net of a $3.3 million charge for goodwill allocated to that component of the reporting unit. In the quarter ended September 30, 2006, we also recorded a $2.2 million charge for a value added tax assessment resulting from an unfavorable decision by the German government in connection with our sales of non-dairy beverages in Germany.
Income before income taxes for the three months ended September 30, 2007 amounted to $17.3 million compared to $15.1 million in the comparable period of the prior year. This increase was primarily attributable to the increase in operating income.
Our effective income tax rate was 37.6% of pre-tax income for the three months ended September 30, 2007 compared to 42.0% for the three months ended September 30, 2006. The effective tax rate for the first quarter of fiscal 2007 was higher than the comparable period in the current year as a result of the unfavorable impact of the nondeductible goodwill expensed in connection with the sale of Biomarché.
Net income for the three months ended September 30, 2007 was $10.8 million compared to $8.7 million in the September 30, 2006 quarter. The increase of $2.1 million in earnings was primarily attributable to the increase in sales and the resultant increase in gross profit.
Liquidity and Capital Resources
We finance our operations and growth primarily with the cash flows we generate from our operations and from both long-term fixed-rate borrowings and borrowings available to us under our Credit Facility.
Our cash balance decreased $9.1 million from the end of fiscal 2007 to $51.5 million during the three months ended September 30, 2007. Net cash provided by operating activities was $3.1 million for the first three months of fiscal 2008, compared to net cash provided by operating activities of $19.9 million in the three months ended September 30, 2006. The decrease in cash provided by operations in fiscal 2008 resulted from a decrease in cash provided by the changes in operating assets and liabilities of approximately $21.9 million in the current period as compared to the prior year comparable period, primarily resulting from increased inventories. This was partially offset by a $5.1 million increase in net income and non-cash items, such as depreciation and amortization expense. Our working capital increased to $208.1 million at September 30, 2007 compared with $198.5 million at June 30, 2007.
We used $11.9 million of cash in investing activities in the three months ended September 30, 2007. This included $11.6 million of cash used in the acquisition of the assets and business of Plainville Turkey Farm Inc., and $5.0 million of capital expenditures. These uses were offset by $2.4 million of proceeds from the sale of a joint venture interest in a rice cake
business in Belgium and the repayment of a $2.0 million loan that we had made to that joint venture. In the three months ended September 30, 2006, we had $5.4 million of cash provided by investing activities. This consisted of $8.2 million of proceeds from the sale of Biomarché, our Belgium-based provider of fresh organic fruits and vegetables, and $2.7 million of proceeds from the disposals of fixed assets, offset by the previously mentioned loan to the rice cake joint venture and $3.6 million of capital expenditures.
Net cash of $1.3 million was used in financing activities for the three months ended September 30, 2007 compared to $4.0 million provided by financing activities for the three months ended September 30, 2006. The decrease was due principally to a decrease in the proceeds from exercises of stock options to $0.2 million in the first quarter of fiscal 2008 from $4.3 million in fiscal 2007 and $1.5 million of borrowings repaid for the three months ended September 30, 2007 compared to $0.2 million for the September 30, 2006 quarter.
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of September 30, 2007, all of our investments mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.
On May 2, 2006, we issued $150 million in aggregate principal amount of senior notes due May 2, 2016 in a private placement. The notes bear interest at 5.98%, payable semi-annually on November 2nd and May 2nd. We also have a credit agreement which provides us with a $250 million revolving credit facility (the "Credit Facility") expiring in May 2011. The Credit Facility provides for an uncommitted $100 million accordion feature, under which the facility may be increased to $350 million. The Credit Facility and the senior notes are guaranteed by substantially all of our current and future direct and indirect domestic subsidiaries. Loans under the Credit Facility bear interest at a base rate (greater of the applicable prime rate or Federal Funds Rate plus an applicable margin) or, at our option, the reserve adjusted LIBOR rate plus an applicable margin. As of September 30, 2007, $150.0 million was outstanding under the senior notes at an interest rate of 5.98%. There were $64.0 million of borrowings outstanding under the Credit Facility at September 30, 2007. We are required by the terms of the Credit Facility and the senior notes to comply with customary affirmative and negative covenants for facilities and notes of this nature. We were not in compliance with the financial reporting requirements regarding timely delivery of our financial statements under the credit agreement and the senior notes for the periods ended June 30, 2007 and September 30, 2007. The lenders under the Credit Facility and the holders of our senior notes have agreed to extend the due dates for delivery of the financial statements for the periods noted above until January 31, 2008.
This access to capital provides us with the flexibility to address our working capital needs in the ordinary course of business, the opportunity to grow our business through acquisitions and the ability to develop our existing infrastructure through capital investment.
We believe that our cash on hand of $51.5 million at September 30, 2007, projected remaining fiscal 2008 cash flows from operations, and availability under our Credit Facility are sufficient to fund our working capital needs, anticipated capital expenditures of approximately $18.0 million for the current fiscal year, and scheduled debt and lease payments of approximately $8.0 million over the next twelve months.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The accounting principles we use require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting periods presented. We believe in the quality and reasonableness of our critical accounting policies; however, it is likely that materially different amounts would be reported under different conditions or using assumptions different from those that we have consistently applied. The accounting policies that have been identified as critical to our business operations and understanding the results of our operations pertain to revenue recognition and sales incentives, valuation of accounts and chargebacks receivable, inventories, property, plant and equipment, goodwill and intangibles and segments. The application of each of these critical accounting policies and estimates was discussed in Item 7 of our Annual Report on Form 10-K for the year ended June 30, 2007. There have been no significant changes in the application of these critical accounting policies or estimates during fiscal 2008.
Seasonality
Our tea brand primarily manufactures and markets hot tea products and, as a result, its quarterly results of operations reflect
seasonal trends resulting from increased demand for its hot tea products in the cooler months of the year. In addition, some of our other products (e.g., baking and cereal products and soups) also show stronger sales in the cooler months while our snack food product lines are stronger in the warmer months. In years where there are warm winter seasons, such as the winter of 2006-2007, our sales of cooler weather products, which typically increase in our second and third fiscal quarters, may be negatively impacted.
Quarterly fluctuations in our sales volume and operating results are due to a number of factors relating to our business, including the timing of trade promotions, advertising and consumer promotions and other factors, such as seasonality, inclement weather and unanticipated increases in labor, commodity, energy, insurance or other operating costs. The impact on sales volume and operating results due to the timing and extent of these factors can significantly impact our business. For these reasons, you should not rely on our quarterly operating results as indications of future performance.
Inflation
The Company does not believe that inflation had a significant impact on the Company's results of operations for the periods presented.
Note Regarding Forward Looking Information
Certain statements contained in this Quarterly Report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1934 and Sections 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of the Company, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: general economic and business conditions; our ability to implement our business and acquisition strategy; our ability to effectively integrate our acquisitions; competition; availability and retention of key personnel; our reliance on third party distributors, manufacturers and suppliers; changes in customer preferences; international sales and operations; the results of our stock option investigation and the SEC's inquiry; changes in, or the failure to comply with, government regulations; and other risks detailed from time-to-time in the Company's reports filed with the Securities and Exchange Commission, including the report on Form 10-K, for the fiscal year ended June 30, 2007. As a result of the foregoing and other factors, no assurance can be given as to future results, levels of activity and achievements and neither the Company nor any person assumes responsibility for the accuracy and completeness of these statements.
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