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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended: 12/31/02 Commission file number: 0-22818
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THE HAIN CELESTIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3240619
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
58 South Service Road, Melville, New York 11747
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 730-2200
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
34,058,693 shares of Common Stock $.01 par value, as of February 5, 2003.
THE HAIN CELESTIAL GROUP, INC.
INDEX
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2002
(unaudited) and June 30, 2002 2
Consolidated Statements of Income -
Three Months and six months ended December 31, 2002
and 2001 (unaudited) 3
Consolidated Statements of Cash Flows -
Six Months ended December 31, 2002 and 2001 (unaudited) 4
Consolidated Statement of Stockholders' Equity -
Six months ended December 31, 2002 (unaudited) 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Item 4. Controls and Procedures 16
Part II Other Information
Items 1, 3 and 5 are not applicable
Item 2 - Changes in Securities and use of proceeds 17
Item 4 - Submission of matters to vote of Security Holders 17
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
PART I - ITEM 1 - FINANCIAL INFORMATION
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, 2002 June 30, 2002
------------------ ------------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 12,673 $ 7,538
Accounts receivable, less allowance for doubtful
accounts of $1,365 and $1,002 63,390 49,018
Inventories 57,667 53,624
Recoverable income taxes 315 3,677
Deferred income taxes 7,223 7,223
Other current assets 7,168 5,804
------------------ -----------------
Total current assets 148,436 126,884
Property, plant and equipment, net of accumulated
depreciation and amortization of $26,469 and $29,059 66,741 69,774
Goodwill, net 286,441 239,644
Trademarks and other intangible assets, net 38,117 38,083
Other assets 11,602 6,798
------------------ -----------------
Total assets $ 551,337 $ 481,183
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 49,262 $ 46,166
Accrued restructuring and non-recurring charges 5,378 6,410
Current portion of debt instruments 3,140 1,431
Income taxes payable 7,328 1,935
------------------ -----------------
Total current liabilities 65,108 55,942
Long-term debt instruments, less current portion 55,591 10,293
Deferred income taxes 11,100 11,100
------------------ -----------------
Total liabilities 131,799 77,335
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value, authorized 5,000,000
shares, none issued - -
Common stock - $.01 par value, authorized 100,000,000
shares, issued 34,608,910 and 34,075,639 shares 346 341
Additional paid-in capital 361,844 354,822
Retained earnings 64,472 51,597
Foreign currency translation adjustment (670) 963
------------------ -----------------
425,992 407,723
Less: 485,217 and 306,917 shares of treasury stock,
at cost (6,454) (3,875)
------------------ -----------------
Total stockholders' equity 419,538 403,848
------------------ -----------------
Total liabilities and stockholders' equity $ 551,337 $ 481,183
================== =================
Note: The balance sheet at June 30, 2002 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------------ -----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ---------------
(Unaudited) (Unaudited)
Net sales $ 123,006 $ 105,169 $ 219,426 $ 194,904
Cost of sales 82,660 72,696 149,826 135,769
---------------- ---------------- ---------------- ---------------
Gross profit 40,346 32,473 69,600 59,135
Selling, general & administrative
expenses 26,550 22,513 48,101 40,040
Restructuring and other
non-recurring charges 440 - 440 -
---------------- ---------------- ---------------- ---------------
Operating income 13,356 9,960 21,059 19,095
Interest expense (income) and other
expenses, net 206 1,564 376 1,921
---------------- ---------------- ---------------- ---------------
Income before income taxes 13,150 8,396 20,683 17,174
Provision for income taxes 4,964 3,191 7,808 6,526
---------------- ---------------- ---------------- ---------------
Net income $ 8,186 $ 5,205 $ 12,875 $ 10,648
================ ================ ================ ===============
Basic net income per common share $ 0.24 $ 0.15 $ 0.38 $ 0.32
================ ================ ================ ===============
Diluted net income per common share $ 0.24 $ 0.15 $ 0.37 $ 0.31
================ ================ ================ ===============
Weighted average common shares outstanding:
Basic 33,776 33,690 33,739 33,678
================ ================ ================ ===============
Diluted 34,467 34,881 34,425 34,758
================ ================ ================ ===============
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
December 31,
----------------------------------
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net income $ 12,875 $ 10,648
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,163 3,853
Provision for doubtful accounts (138) 402
Increase (decrease) in cash attributable to changes in
assets and liabilities, net of amounts applicable to
acquired businesses:
Accounts receivable (7,740) (10,428)
Inventories 3,100 (10,899)
Other current assets (1,536) 2,449
Other assets (1,950) (1,168)
Accounts payable and accrued expenses (4,191) (1,339)
Accrued restructuring and non-recurring charges (1,046) -
Recoverable taxes, net of income tax payable 8,695 11,960
----------------- --------------
Net cash provided by operating activities 12,232 5,478
----------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,262) (14,315)
Acquisitions of businesses, net of cash acquired (44,659) (14,219)
----------------- --------------
Net cash used in investing activities (48,921) (28,534)
----------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Credit Facility 44,300 5,200
Payments on economic development revenue bonds (250) (208)
Purchase of treasury stock (2,579) (1,121)
Proceeds from exercise of warrants and options, net of
related expenses 4 650
Proceeds (repayment) of other long-term debt and other liabilities 589 (1,081)
----------------- --------------
Net cash provided by financing activities 42,064 3,440
----------------- --------------
Effect of exchange rate changes on cash (240) (419)
----------------- --------------
Net increase (decrease) in cash and cash equivalents 5,135 (20,035)
Cash and cash equivalents at beginning of period 7,538 26,643
----------------- --------------
Cash and cash equivalents at beginning of period $ 12,673 $ 6,608
================= ==============
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(In thousands, except per share and share data)
Common Stock
--------------------------- Foreign
Additional Treasury Stock Currency
Amount Paid-in Retained ----------------- Translation Comprehensive
Shares at $.01 Capital Earnings Shares Amount Adjustment Total Income
----------- ---------- --------- ----------- --------- --------- ----------- ----------- -----------
Balance at June 30, 2002 34,075,639 $341 $354,822 $51,597 306,917 $ (3,875) $ 963 $403,848
Exercise of stock options 506 4 4
Purchase of treasury shares 178,300 (2,579) (2,579)
Issuance of common stock 532,765 5 6,995 7,000
Non-cash compensation charge 23 23
Net income for the period 12,875 12,875 $ 12,875
Translation adjustments (1,633) (1,633) (1,633)
----------
Total comprehensive income $ 11,242
------------ -------- ----------- ----------- --------- ---------- -------------- --------- ==========
Balance at December 31, 2002 34,608,910 $ 346 $ 361,844 $ 64,472 485,217 $(6,454) $ (670) $419,538
============ ======== =========== =========== ========= ========== ============== =========
See notes to consolidated financial statements.
The Hain Celestial Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. GENERAL
The Hain Celestial Group (herein referred to as "we","us" and "our") is
a natural, specialty and snack food company. We are a leader in 13 of the top 15
natural food categories, with such well-known natural food brands as Celestial
Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R), Rice Dream(R),
Soy Dream(R), Imagine(R), Arrowhead Mills(R), Health Valley(R), Breadshop's(R),
Casbah(R), Garden of Eatin'(R), Terra Chips(R), Yves Veggie Cuisine(R), The Good
Dog(R), The Good Slice(R), DeBoles(R), Earth's Best(R), and Nile Spice(R). Our
principal speciality product lines include Hollywood(R) cooking oils, Estee(R)
sugar-free products, Kineret(R) kosher foods, Boston Better Snacks(R), and Alba
Foods(R).
We operate in one business segment: the sale of natural, organic and
other food and beverage products. In our 2002 fiscal year, approximately 54% of
our revenues were derived from products that are manufactured within our own
facilities with 46% produced by various co-packers. Had the completed sale of
our Health Valley manufacturing facility to one of our co-packers (see Note 4)
occurred at the beginning of our 2002 fiscal year, approximately 56% of our
revenues in such fiscal year would have been derived from products produced at
various co-packers.
Certain reclassifications have been made to our previous year's
consolidated financial statements to conform them to the current year's
presentation.
All amounts in our consolidated financial statements have been rounded
to the nearest thousand dollars, except share and per share amounts.
2. BASIS OF PRESENTATION
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States. In the opinion of management, all adjustments (including normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six months ended December 31, 2002
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2003. Please refer to the footnotes to our consolidated
financial statements as of June 30, 2002 and for the year then ended included in
our Annual Report on Form 10-K for information not included in these condensed
footnotes.
3. ADOPTION OF EITF CONSENSUS REGARDING SALES INCENTIVES
Effective January 1, 2002, we adopted various Emerging Issues Task
Force (EITF) consensuses related to the accounting for and classification of
certain sales incentives. In accordance with these consensuses, we have
classified certain sales incentives as a reduction of sales rather than as
selling expenses. In order to provide comparable information from period to
period, promotional allowances and other sales incentives of $19.6 million and
$34.7 million, respectively, in the three-month and six-month periods ended
December 31, 2001 have been reclassified from selling expense to net sales.
4. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
During the fourth quarter of fiscal 2002, we recorded charges
aggregating $21.3 million, before taxes, related to the sale (consummated on
September 30, 2002) of our Health Valley facility in Irwindale, California and
the discontinuation of our supplements business and Weight Watchers licenses.
The Health Valley facility charge, which totaled $11.3 million,
included $7.6 million of restructuring and non-recurring charges associated with
reduced values of inventories of raw ingredients and packaging, certain lease
obligations and other items, and $3.7 million of impairment charges to reduce
the Health Valley plant's manufacturing assets to their net realizable value. At
June 30, 2002, we accrued $2.1 million of future costs associated with this
charge primarily relating to lease exit costs relating to incremental costs and
contractual obligations and other facility exit costs expected to be incurred as
part of this sale. We anticipate that there may be additional charges of
approximately $2 million in fiscal 2003 (approximately $.4 million was incurred
in the three and six-month periods ended December 31, 2002) for potential
severance liabilities and related employee costs and trade items. At December
31, 2002, approximately $.2 million was charged against this accrual in the
aggregate.
We also discontinued our supplements business at Celestial Seasonings,
and did not renew our license to sell certain Weight Watchers products. In
connection with these discontinuations, we recorded charges of $7.9 million
related to supplements principally for inventories, packaging and trade items.
The charge for the non-renewal of the Weight Watchers license amounted to $2.1
million. At June 30, 2002, we accrued $3.1 and $1.2 million for future costs
associated with the Celestial Seasonings supplements and Weight Watchers license
discontinuations, respectively. These future costs primarily relate to sales
returns resulting from the discontinuation notification, other trade incentives,
employee severance costs and other items. At December 31, 2002, approximately
$.8 million has been charged against these accruals in the aggregate.
At December 31, 2002, our balance sheet includes the above-described
aggregate of $5.4 million of accrued restructuring and non-recurring charges,
substantially all of which are expected to be paid during fiscal 2003.
5. ACQUISITIONS
On December 2, 2002, we acquired substantially all of the assets and
assumed certain liabilities of privately-held Imagine Foods, Inc. ("Imagine") in
the United States and the United Kingdom. Imagine is a non-dairy beverage
company specializing in aseptic and refrigerated rice and soy milks, organic
aseptic soups and broths, and organic frozen desserts in the U.S., Canada, and
Europe. The acquisition of these product lines is expected to enhance our
existing market positions in non-dairy beverages and soups while adding frozen
dessert products to our offerings to customers. The purchase price consisted of
approximately $44.2 million in cash, 532,765 shares of our common stock valued
at $7 million, plus the assumption of certain liabilities.
The following table summarizes the estimated fair values of assets
acquired and liabilities assumed at the date of acquisition:
Current assets $ 13,797
Property and equipment 2,308
--------------
Total assets 16,105
Liabilities assumed 11,460
--------------
Net assets acquired $ 4,645
==============
The balance sheet at December 31, 2002, includes the assets acquired
and liabilities assumed based upon a preliminary allocation of the purchase
price. We are in the process of accumulating the data necessary to complete the
purchase price allocation, and have estimated that most of the excess cost over
net assets acquired will be goodwill and trademarks, which will not amortize
under SFAS No. 142. The remaining valuation analysis requiring completion is
appraisal of property and equipment and various intangibles. We expect this
analysis to be completed by the fourth quarter of fiscal 2003.
Our results of operations for the three and six-month periods ended
December 31, 2002 include the results of Imagine from the date of acquisition.
Unaudited pro forma results of operations reflecting the above acquisition as if
it occurred at the beginning of the periods presented would have been as
follows:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- ------------------------
2002 2001 2002 2001
----------- ------------ ----------- ------------
Net Sales $137,477 $124,521 $ 254,526 $ 233,608
============ ============ =========== ===========
Net Income $8,630 $4,772 $14,143 $ 9,782
============ ============ =========== ===========
Earnings per share:
Basic $ 0.25 $ 0.14 $ 0.41 $ 0.29
============ ============ =========== ===========
Diluted $ 0.25 $ 0.13 $ 0.41 $ 0.28
============ ============ =========== ===========
Weighted average shares:
Basic 34,131 34,223 34,183 34,211
============ ============ =========== ===========
Diluted 34,822 35,414 34,869 35,291
============ ============ =========== ===========
In management's opinion, the unaudited pro forma results of operations
are not indicative of the actual results that would have occurred had the
Imagine acquisition been consummated at the beginning of the periods presented
or of future operations of the combined companies under our management.
Our results of operations for the three and six-month periods ended
December 31, 2002 include the operations of Lima, N.V., a leading manufacturer
and marketer of natural and organic foods located in Belgium, which we acquired
in December 2001. Results for the three-months and six-months ended December 31,
2001 include less than one month of results for Lima. Had the acquisition of
Lima occurred at the beginning of the six-month period ended December 31, 2001,
our consolidated results of operations for that period would not be materially
different than the actual results as presented.
6. INVENTORIES
Inventories consist of the following:
December 31, 2002 June 30, 2002
------------------- -------------------
Finished goods $39,198 $35,158
Raw materials and packaging 18,469 18,466
------------------- -------------------
$57,667 $53,624
=================== ===================
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31, June 30,
2002 2002
------------------- -----------------
Land $ 6,826 $ 6,852
Building and improvements 24,928 25,537
Machinery and equipment 54,747 49,797
Furniture and fixtures 2,421 2,648
Leasehold improvements 1,082 3,218
Construction in progress 3,206 6,012
Health Valley plant assets held
for sale (see Note 4) - 4,769
------------------- -----------------
93,210 98,833
Less: Accumulated depreciation
and amortization 26,469 29,059
------------------- -----------------
$ 66,741 $ 69,774
=================== =================
8. CREDIT FACILITY
We have available to us a $240 million Credit Facility (the "Credit
Facility") which provides us with a $145 million revolving credit facility
through March 29, 2005 and a $95 million 364-day facility through March 27,
2003. The Credit Facility is unsecured, but is guaranteed by all of our direct
and indirect domestic subsidiaries. We are required to comply with customary
affirmative and negative covenants for facilities of this nature. Revolving
credit loans under this facility bear interest at a base rate (greater of the
applicable prime rate or Federal Funds Rate plus applicable margin) or, at our
option, the reserve adjusted LIBOR rate plus an applicable margin. As of
December 31, 2002, we had borrowed approximately $48.7 million under the
revolving facility with interest at 2.44% (classified within long-term debt
instruments).
9. EARNINGS PER SHARE
We report basic and diluted earnings per share in accordance with SFAS
Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per
share exclude any dilutive effects of options and warrants. Diluted earnings per
share include all dilutive common stock equivalents such as stock options and
warrants.
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128:
Three Months Ended Six Months Ended
December 31 December 31
--------------------------------------------------
2002 2001 2002 2001
------------ ------------ ----------- ---------
Numerator:
Numerator for basic and diluted
earnings per common share -
Net income $ 8,186 $ 5,205 $ 12,875 $ 10,648
----------- ------------ ----------- ----------
Denominator:
Denominator for basic earnings per common share -
weighted average shares
outstanding during the period 33,776 33,690 33,739 33,678
----------- ------------ ----------- ----------
Effect of dilutive securities:
Stock options 535 1,003 529 894
Warrants 156 188 157 186
----------- ------------ ----------- ----------
691 1,191 686 1,080
----------- ------------ ----------- ----------
Denominator for diluted earnings per common share -
adjusted weighted average
shares and assumed conversions 34,467 34,881 34,425 34,758
=========== ============ =========== ==========
Basic net income per common
share $ 0.24 $ 0.15 $0.38 $0.32
=========== ============ =========== ==========
Diluted net income per common
share $ 0.24 $ 0.15 $0.37 $0.31
=========== ============ =========== ==========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We manufacture, market, distribute and sell natural, specialty, organic
and snack food 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 natural food brands as Celestial Seasonings(R) teas, Hain Pure
Foods(R), Westbrae(R), Westsoy(R), Arrowhead Mills(R), Health Valley(R),
Breadshop's(R), Casbah(R), Garden of Eatin'(R), Rice Dream(R), Soy Dream(R),
Imagine(R), Terra Chips(R), Yves Veggie Cuisine(R), The Good Dog(R), The Good
Slice(R), Gaston's(R), Lima(R) and Biomarche(R) in Europe, DeBoles(R), Earth's
Best(R), and Nile Spice(R). Our principal specialty product lines include
Hollywood(R) cooking oils, Estee(R) sugar-free products, Kineret(R) kosher
foods, Boston Better Snacks(R), and Alba Foods(R). Our website can be found at
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, 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 and specialty food 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 December 31, 2002
Net sales for the three months ended December 31, 2002 were $123.0
million, an increase of $17.8 million or 17.0% over net sales of $105.2 million
in the December 31, 2001 quarter. Approximately 9% of the increase in sales came
from organic growth. Approximately 8% of the overall 17% increase in net sales
was derived from the net sales of businesses which we acquired subsequent to
September 30, 2001.
Gross profit for the three months ended December 31, 2002 was 32.8% of
net sales as compared to 30.9% of net sales in the December 31, 2001 quarter.
The increase was a result of a more favorable mix of products sold, and reduced
distribution costs, partially offset by the lower gross profits earned by our
businesses in Europe.
Selling, general and administrative expenses increased by $4.0 million
to $26.5 million for the three months ended December 31, 2002 as compared to
$22.5 million in the December 31, 2001 quarter. Such expenses as a percentage of
net sales amounted to 21.6% for the three months ended December 31, 2002
compared with 21.4% in the December 31, 2001 quarter. While as a percent of
sales, selling, general and administrative expenses are flat, we increased
consumer advertising and spending in the quarter ended December 31, 2002 verses
the quarter ended December 31, 2001 by approximately $3 million. The remaining
increases are from our additional infrastructure in Europe and the added costs
of the Imagine Foods business.
During the quarter ended December 31, 2002, we recorded approximately
$0.4 million of additional restructuring and other non-recurring charges related
to our sale of the Health Valley Facility.
Operating income was $13.4 million in the three months ended December
31, 2002 compared to $10.0 million in the December 31, 2001 quarter. Operating
income as a percentage of net sales amounted to 10.9% in the December 2002
quarter, compared with 9.5% in the December 2001 quarter. The dollar and
percentage increase resulted principally from the higher gross profit as
described above offset by the aforementioned increase in selling, general and
administrative expenses.
Interest and other expenses amounted to $.2 million for the three
months ended December 31, 2002 compared to $1.6 million in the comparable period
of the prior year. During the quarter ended December 31, 2001, we incurred a
loss of approximately $1.5 million when we closed our Terra Chips manufacturing
facility in Brooklyn, NY in connection with the opening of a replacement
facility in Moonachie, NJ.
Income before income taxes for the three months ended December 31, 2002
amounted to $13.2 million compared to $8.4 million in the comparable period.
This increase was attributable to the increase in operating income as well as
the swing in interest expense and other expenses, net.
Income taxes remained relatively flat at 38% of pre-tax income for both
the three months ended December 31, 2002 and 2001. We expect our tax rate to
approximate this rate during the remainder of Fiscal 2003.
Net income for the three months ended December 31, 2002 was $8.2
million compared to $5.2 million in the December 31, 2001 quarter. The increase
of $3 million in earnings was primarily attributable to the aforementioned
increase in income before income taxes.
Six months ended December 31, 2002
Net sales for the six months ended December 31, 2002 were $219.4
million, an increase of $24.5 million or 12.6% over net sales of $194.9 million
in the December 31, 2001 quarter. Our increase in sales is primarily the result
of strong increases in sales on our Yves, Celestial, and Garden of Eatin'
brands, as well as sales contributed by companies we acquired in December 2002
and 2001.
Gross profit for the six months ended December 31, 2002 was 31.7% of
net sales as compared to 30.3% of net sales in the December 31, 2001 quarter.
The increase was a result of a more favorable mix of products sold and reduced
distribution costs, partially offset by the lower gross profits earned by our
businesses in Europe.
Selling, general and administrative expenses increased by $8.1 million
to $48.1 million for the six months ended December 31, 2002 as compared to $40.0
million in the December 31, 2001 quarter. Such expenses as a percentage of net
sales amounted to 21.9% for the six months ended December 31, 2002 compared with
20.5% in the December 31, 2001 quarter. The overall increase in dollars and
percentage is a result of the increased consumer advertising and spending in the
six months ended December 31, 2002 verses the six months ended December 31, 2001
by approximately $5 million. The remaining increases are as a result of the
aforementioned acquisitions of Imagine and Lima/Biomarche.
During the six months ended December 31, 2002 we recorded approximately
$0.4 million of additional restructuring and other non-recurring charges related
to our sale of the Health Valley Facility.
Operating income was $21.1 million in the six months ended December 31,
2002 compared to $19.1 million for the six months ended December 31, 2001.
Operating income as a percentage of net sales amounted to 9.6% for the six
months ended December 2002, compared with 9.8% for the six months ended December
31, 2001. While as a percent of sales operating income has remained flat, the
dollar increases resulted principally form the higher gross profit as described
above offset by the aforementioned increase in selling, general, and
administrative costs.
Interest and other expenses amounted to $.4 million for the six months
ended December 31, 2002 compared to $1.9 million in the comparable period. The
prior year period included a loss of approximately $1.5 million incurred when we
closed our Terra Chips manufacturing facility in Brooklyn, NY in connection with
the opening of a replacement facility in Moonachie, NJ.
Income before income taxes for the six months ended December 31, 2002
amounted to $20.7 million compared to $17.2 million in the comparable period.
This increase was attributable to the increase in operating income as well as
the swing in interest expense and other expenses, net.
Income taxes remained relatively flat at 38% of pre-tax income for both
the six months ended December 31, 2002 and 2001. We expect our tax rate to
approximate this rate during the remainder of fiscal 2003.
Net income for the six months ended December 31, 2002, was $12.9
million compared to $10.6 million for the six months ended December 31, 2001.
The increase of $2.3 million in earnings was primarily attributable to the
aforementioned increase in income before income taxes.
Liquidity and Capital Resources
We finance our operations and growth primarily with the cash flows we
generate from our operations and from borrowings under our Credit Facility.
We have available to us a $240 million Credit Facility which provides
us with a $145 million revolving credit facility through March 29, 2005 and a
$95 million 364-day facility through March 27, 2003. The Credit Facility is
unsecured, but is guaranteed by all direct and indirect domestic subsidiaries.
We are required to comply with customary affirmative and negative covenants for
facilities of this nature. As of December 31, 2002, we had $48.7 million
outstanding under these facilities.
This access to capital provides us with flexible working capital needs
in the normal course of business and the opportunity to grow our business
through acquisitions or develop our existing infrastructure through capital
investment.
Net cash provided by operations was $12.2 and $5.5 million for the six
months ended December 31, 2002 and 2001, respectively. Our working capital and
current ratio was $83.3 million and 2.3 to 1, respectively, at December 31, 2002
compared with $70.9 million and 2.3 to 1 respectively, at June 30, 2002. The
improvement in working capital was derived principally from the net income
earned during the six months ended December 31, 2002.
Net cash provided by financing activities was $42.1 million and $3.4
million for the six months ended December 31, 2002 and 2001, respectively.
During December 2002, we borrowed $44.3 million to fund the cash portion of our
purchase of the Imagine Foods business. We also continued to acquire shares of
our common stock in open market purchases as part of our stock buy back program.
Obligations for all debt instruments, capital and operating leases and
other contractual obligations are as follows:
Payments Due by Period
----------------------------------------------------
Less than 1 1 - 3
Total year Years Thereafter
------------- --------------- ----------- -----------
Debt instruments $ 56,363 $ 2,343 $ 51,308 $ 2,712
Capital lease obligations 2,368 797 1,546 25
Operating leases 21,755 3,565 8,483 9,707
------------- ------------ ------------ -------------
Total contractual cash $ 80,486 $6,705 $ 61,337 $ 12,444
obligations ============= ============ ============ =============
We believe that cash on hand of $12.7 million at December 31, 2002,
projected remaining fiscal 2003 cash flows from operations, and availability
under our Credit Facility are sufficient to fund our working capital needs,
anticipated capital expenditures of $6.0 million for the remainder of fiscal
2003, $5.4 million in costs associated with restructuring and non-recurring
charges and the $6.7 million of debt and lease obligations described in the
table above. We currently invest our cash on hand in highly liquid short-term
investments yielding approximately 1.5% interest.
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. We believe our critical accounting policies are as
follows, including our methodology for estimates made and assumptions used.
Valuation of Accounts and Chargeback Receivables
We perform ongoing credit evaluations on existing and new customers
daily. We apply reserves for delinquent or uncollectible trade receivables based
on a specific identification methodology and also apply a general reserve based
on the experience we have with our trade receivables aging categories. Credit
losses have been within our expectations over the last few years. While two of
our customers represent approximately 30% of our trade receivable balance on an
ongoing basis, we believe there is no credit exposure at this time.
Based on cash collection history and other statistical analysis, we
estimate the amount of unauthorized deductions that our customers have taken to
be repaid and collectible in the near future in the form of a chargeback
receivable. While our estimate of this receivable balance could be different had
we used different assumptions and judgments, historically our cash collections
of this type of receivable has been within our expectations and no significant
write-offs and/or impairment has occurred. Our chargebacks receivable (included
in trade receivables) balance at December 31, 2002 was $6.6 million as compared
to $5 million at June 30, 2002.
There can be no assurance that we would have the same experience with
our receivables during different economic conditions, or with changes in
business conditions, such as consolidation within the food industry and/or a
change the way we market and sell our products.
Inventory
Our inventory is valued at the lower of cost or market. Cost has been
derived principally using standard costs utilizing the first-in, first-out
method. We provide write-downs for finished goods expected to become
non-saleable due to age and specifically identify and reserve for slow moving or
obsolete raw ingredients and packaging.
Property, Plant and Equipment
Our property, plant and equipment is carried at cost and depreciated
and or amortized on a straight-line basis over the lesser of the estimated
useful lives or lease life, whichever is shorter. We believe the asset lives
assigned to our property, plant and equipment are within ranges/guidelines
generally used in food manufacturing and distribution businesses. Our
manufacturing plants and distribution centers, and their related assets, are
periodically reviewed to determine if any impairment exists by analyzing
underlying cash flow projections. At this time, we believe no impairment exists
on the carrying value of such assets.
Revenue Recognition
Sales are recognized upon the shipment of finished goods to customers.
Allowances for cash discounts and returns are recorded in the period in which
the related sale is recognized.
Seasonality
Our tea business consists primarily of manufacturing and marketing 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. This is also true for our soups and hot cereals
businesses, but to a lesser extent. 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, abnormal and inclement weather patterns
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. In some future periods, our operating results
may fall below the expectations of securities analysts and investors, which
could harm our business.
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 and Sections 21E of the Exchange Act. 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, the ability of the Company
to implement its business and acquisition strategy; the ability to effectively
integrate its acquisitions; the ability of the Company to obtain financing for
general corporate purposes; competition; availability of key personnel, and
changes in, or the failure to comply with governments regulations. As a result
of the foregoing and other factors, no assurance can be given as to the future
results, levels of activity and achievements and neither the Company nor any
person assumes responsibility for the accuracy and completeness of these
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks since
the end of the most recent fiscal year.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have reviewed our
disclosure controls and procedures within 90 days prior to the filing of this
report. Based upon this review, these officers believe that our disclosure
controls and procedures are effective in ensuring that material information
related to us is made known to them by others within the company.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls during the quarter covered by
this report or from the end of the reporting period to the date of this Form
10-Q.
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On December 2, 2002, in connection with our purchase of substantially
all of the assets and the assumption of certain liabilities of privately held
Imagine Foods, Inc. ("Imagine") in the United States and United Kingdom, we
issued 532,765 shares of common stock, par value $.01 per share, and paid
approximately $44.2 million in cash to the seller. The issuance of the above
securities were deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) of Securities Act for transactions by an issuer not
involving any public offering.
Item 4. - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on November 12, 2002. The Company
submitted the following matters to a vote of security holders:
1. To elect a board of directors to serve until the next Annual
Meeting of Stockholders and until their successors are duly
elected and qualified; and
2. To approve our 2002 Long Term Incentive and Stock Award Plan,
and
3. To ratify the appointment of Ernst & Young LLP as our
independent auditors for fiscal 2003.
The stockholders elected the persons named below, the Company's nominees for
directors, as directors for the Company, casting approximately 27,305,000 (on
average) votes in favor of each nominee and withholding approximately 1,918,000
votes (on average) for each nominee:
Irwin D. Simon
Andrew R. Heyer
Beth L. Bronner
Jack Futterman
James S. Gold
Joseph Jimenez
Marina Hahn
Roger Meltzer
Michael J. Bertasso
Daniel R. Glickman
Larry Zilavy
The stockholders ratified the 2002 Long Term Incentive and Stock Award Plan
casting 17,209,973 votes in favor, 11,941,809 votes against, and 71,119
abstaining.
The stockholders ratified the appointment of Ernst & Young LLP casting
28,246,778 votes in favor, 958,423 against, and 17,700 abstaining.
Item 6. - Exhibits and Reports on Form 8-K
Exhibits
Exhibit Number Description
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
Reports on Form 8-K
On December 2, 2002, we announced that we had completed the purchase of
substantially all of the assets and the assumption of certain liabilities of
privately-held Imagine Foods, Inc. ("Imagine") in the United States and United
Kingdom.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HAIN CELESTIAL GROUP, INC.
Date: February 14, 2003 /s/ Irwin D. Simon
----------------------------------
Irwin D. Simon,
Chairman, President and Chief
Executive Officer
Date: February 14, 2003 /s/ Ira J. Lamel
----------------------------------
Ira J. Lamel,
Executive Vice President,
Chief Financial Officer and Treasurer
CERTIFICATION
I, Irwin D. Simon, President and Chief Executive Officer of The Hain
Celestial Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
Hain Celestial Group, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
(a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Irwin D. Simon
----------------------------------------
Irwin D. Simon
Chairman, President and
Chief Executive Officer
CERTIFICATION
I, Ira J. Lamel, Chief Financial Officer of The Hain Celestial Group, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
Hain Celestial Group, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
(a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Ira J. Lamel
---------------------------------------
Ira J. Lamel
Executive Vice President,
Chief Financial Officer and Treasurer