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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: 03/31/03 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.
34,053,134 shares of Common Stock $.01 par value, as of May 6, 2003.
THE HAIN CELESTIAL GROUP, INC.
INDEX
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2003
(unaudited) and June 30, 2002 2
Consolidated Statements of Income -
Three Months and Nine Months ended March 31, 2003
and 2002 (unaudited) 3
Consolidated Statements of Cash Flows -
Nine Months ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statement of Stockholders' Equity -
Nine months ended March 31, 2003 (unaudited) 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4. Controls and Procedures 17
Part II Other Information
Items 1 through 5 are not applicable
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)
March 31, June 30,
2003 2002
----------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 11,973 $ 7,538
Accounts receivable, less allowance for doubtful
accounts of $1,590 and $1,002 64,259 49,018
Inventories 59,518 53,624
Recoverable income taxes 470 3,677
Deferred income taxes 7,223 7,223
Other current assets 6,282 5,804
----------------------
Total current assets 149,725 126,884
Property, plant and equipment, net of accumulated
depreciation and amortization of $28,284 and $29,059 66,102 69,774
Goodwill, net 289,492 239,644
Trademarks and other intangible assets, net 38,649 38,083
Other assets 12,142 6,798
-----------------------
Total assets $ 556,110 $481,183
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 48,243 $ 46,166
Accrued restructuring and non-recurring charges 4,479 6,410
Current portion of debt instruments 3,157 1,431
Income taxes payable 9,575 1,935
-----------------------
Total current liabilities 65,454 55,942
Long-term debt instruments, less current portion 49,718 10,293
Deferred income taxes 11,100 11,100
-----------------------
Total liabilities 126,272 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 34,657,223 and 34,075,639 shares 347 341
Additional paid-in capital 362,240 354,822
Retained earnings 72,328 51,597
Foreign currency translation adjustment 3,079 963
-----------------------
437,994 407,723
Less: 606,619 and 306,917 shares of treasury stock,
at cost (8,156) (3,875)
-----------------------
Total stockholders' equity 429,838 403,848
-----------------------
Total liabilities and stockholders' equity $ 556,110 $ 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 Nine Months Ended
March 31, March 31,
--------------------- ---------------------
---------- --------- --------- ----------
2003 2002 2003 2002
---------- --------- --------- ----------
(Unaudited) (Unaudited)
Net sales $129,224 $ 105,614 $348,650 $ 300,518
Cost of sales 89,224 73,172 239,050 208,941
---------- ---------- ---------- ---------
Gross profit 40,000 32,442 109,600 91,577
Selling, general & administrative
expenses 26,196 23,911 74,297 63,951
Restructuring and other
non-recurring charges - - 440 -
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Operating income 13,804 8,531 34,863 27,626
Interest expense and other
expenses, net 1,184 300 1,560 2,221
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Income before income taxes 12,620 8,231 33,303 25,405
Provision for income taxes 4,764 3,094 12,572 9,620
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Net income $ 7,856 $ 5,137 $ 20,731 $ 15,785
========== ========= ========== =========
========== ========= ========== =========
Basic net income per common share $ 0.23 $ 0.15 $ 0.61 $ 0.47
========== ========== ========== =========
========== ========== ========== =========
Diluted net income per common share $ 0.23 $ 0.15 $ 0.60 $ 0.45
========== ========== ========== =========
========== ========== ========== =========
Weighted average common shares
outstanding:
Basic 34,081 33,868 33,853 33,741
========== ========== =========== ========
========== ========== =========== ========
Diluted 34,887 34,908 34,579 34,808
========== ========== =========== ========
========== ========== =========== ========
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
---------------------------
2003 2002
------------- -----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 20,731 $ 15,785
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,330 6,065
Provision for doubtful accounts 56 360
Increase (decrease) in cash attributable to changes in
assets and liabilities, net of amounts applicable to
acquired businesses:
Accounts receivable (9,481) (10,370)
Inventories 1,674 (5,920)
Other current assets (557) (419)
Other assets (2,115) (1,042)
Accounts payable and accrued expenses (5,948) (6,668)
Accrued restructuring and non-recurring charges (1,945) -
Recoverable taxes, net of income tax payable 10,942 15,052
------------- ------------
Net cash provided by operating activities 19,687 12,843
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (6,010) (18,121)
Acquisitions of businesses, net of cash acquired (44,660) (13,963)
------------- ------------
Net cash used in investing activities (50,670) (32,084)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Credit Facility, net 39,300 1,000
Payments on economic development revenue bonds (375) (333)
Purchase of treasury stock (4,281) (1,121)
Costs in connection with bank financing (181) (200)
Proceeds from exercise of warrants and options, net of
related expenses 389 724
Repayments of other long-term debt and other liabilities (81) (2,706)
------------- ------------
Net cash provided by/(used in) financing activities 34,771 (2,636)
------------- ------------
Effect of exchange rate changes on cash 647 (599)
------------- ------------
Net increase (decrease) in cash and cash equivalents 4,435 (22,476)
Cash and cash equivalents at beginning of period 7,538 26,643
------------- ------------
Cash and cash equivalents at end of period $ 11,973 $ 4,167
============= ============
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2003 (In thousands, except per share and
share data)
Foreign
Common Stock Additional Currency
---------------------
Amount Paid-in Retained Treasury Stock 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 48,819 1 388 389
Purchase of treasury shares 299,702 (4,281) (4,281)
Issuance of common stock 532,765 5 6,995 7,000
Non-cash compensation charge 35 35
Net income for the period 20,731 20,731 $ 20,731
Translation adjustments 2,116 2,116 2,116
-------------
Total comprehensive income $ 22,847
---------------------------------------------------------------------------------------- =============
Balance at March 31, 2003 34,657,223 $ 347 $362,240 $ 72,328 606,619 $(8,156) $ 3,079 $429,838
========================================================================================
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), Nile Spice(R) and in
Europe, Lima(R) and Biomarche(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 were manufactured within our own
facilities with 46% produced by various co-packers. Had the 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 nine months ended March 31, 2003
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. 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 Nine Months Ended
March 31, March 31,
---------------------------------------------
2003 2002 2003 2002
---------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per common share -
Net income $ 7,856 $ 5,137 $ 20,731 $ 15,785
---------------------------------------------
Denominator:
Denominator for basic earnings per
common share -
weighted average shares
outstanding during the period
34,081 33,868 33,853 33,741
---------------------------------------------
Effect of dilutive securities:
Stock options 650 856 569 882
Warrants 156 184 157 185
---------------------------------------------
806 1,040 726 1,067
---------------------------------------------
Denominator for diluted earnings
per common share -
adjusted weighted average
shares and assumed
conversions 34,887 34,908 34,579 34,808
=============================================
Basic net income per common
share $ 0.23 $ 0.15 $0.61 $0.47
=============================================
Diluted net income per common
share $ 0.23 $ 0.15 $0.60 $0.45
=============================================
4. INVENTORIES
Inventories consist of the following:
March 31, June 30,
2003 2002
------------ ------------
------------ ------------
Finished goods $ 38,329 $ 35,158
Raw materials and packaging 21,189 18,466
------------ ------------
$ 59,518 $ 53,624
============ ============
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31, June 30,
2003 2002
-------------- ---------------
Land $ 6,863 $ 6,852
Building and improvements 24,026 25,537
Machinery and equipment 57,160 49,797
Furniture and fixtures 2,470 2,648
Leasehold improvements 1,379 3,218
Construction in progress 2,488 6,012
Health Valley plant assets held
for sale (see Note 9) - 4,769
-------------- ---------------
94,386 98,833
Less: Accumulated depreciation
and amortization 28,284 29,059
-------------- ---------------
$ 66,102 $ 69,774
============== ===============
6. 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 March 31, 2003, 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 nine-month periods ended March
31, 2003 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 Nine Months Ended
March 31, March 31,
------------------------ -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net Sales $129,224 $125,609 $ 383,750 $ 359,217
=========== =========== =========== ===========
Net Income $7,856 $5,354 $21,999 $15,136
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.23 $ 0.16 $ 0.64 $ 0.44
=========== =========== =========== ===========
Diluted $ 0.23 $ 0.15 $ 0.63 $ 0.43
=========== =========== =========== ===========
Weighted average shares:
Basic 34,081 34,401 34,149 34,274
=========== =========== =========== ===========
Diluted 34,887 35,441 34,875 35,341
=========== =========== =========== ===========
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 nine-month periods ended March
31, 2003 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 nine-months ended March 31, 2002 include less
than four months of results for Lima. Had the acquisition of Lima occurred at
the beginning of the nine-month period ended March 31, 2002, our consolidated
results of operations for that period would not be materially different than the
actual results as presented.
7. 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 25,
2004. 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 March
31, 2003, we had borrowed approximately $43.7 million under the revolving
facility with interest at 3.19% (classified within long-term debt instruments).
8. STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the
intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations. Under APB 25, when the
exercise price of our employee stock options at least equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the grant dates consistent with the
method prescribed by Statement of Financial Accounting Standard No. 123,
"Accounting For Stock-Based Compensation", net earnings and earnings per share
for the three months and nine months ended March 31, 2003 and 2002 would have
been the proforma amounts that follow:
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
-------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
-------------------- ---------- --------
Net income, as reported $7,856 $ 5,137 $ 20,731 $ 15,785
Stock-based employee
compensation expense
determined under fair value
method, net of
related tax effects (2,357) (4,242) (7,172) (12,526)
-------- ------- -------- --------
Proforma net income $5,499 $ 895 $ 13,559 $ 3,259
======= ======= ======== ========
Basic net income per common share:
As reported
Proforma $ 0.23 $0.15 $ 0.61 $ 0.47
====== ===== ====== ======
$ 0.16 $0.03 $ 0.40 $ 0.10
====== ===== ====== ======
Diluted net income per common share:
As reported
Proforma $ 0.23 $0.15 $ 0.60 $ 0.45
====== ===== ====== ======
$ 0.16 $0.03 $ 0.39 $ 0.09
====== ===== ====== ======
9. 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 of $11.3 million during the fourth
quarter of Fiscal 2002 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. Additional
restructuring charges of approximately $.4 million were incurred in the
nine-month period ended March 31, 2003 for severance liabilities and related
employee costs and trade items that could not be accrued at June 30, 2002.
Through March 31, 2003, approximately $.7 million was charged against the Health
Valley facility charge accrual in the aggregate.
During the fourth quarter of Fiscal 2002, 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 March 31, 2003, approximately $1.2 million
has been charged against these accruals in the aggregate.
At March 31, 2003, our balance sheet includes the above-described
aggregate of $4.5 million of accrued restructuring and non-recurring charges, a
substantial portion of which is expected to be paid within one year.
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), DeBoles(R), Earth's Best(R), Nile Spice(R) and Lima(R) and
Biomarche(R) in Europe. 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 March 31, 2003
Net sales for the three months ended March 31, 2003 were $129.2 million, an
increase of $23.6 million or 22.4% over net sales of $105.6 million in the March
31, 2002 quarter. Our Canadian business grew 32.5%, our European business grew
37.5%, and our U.S. business grew 20.2%. These increases came principally from
volume increases, including the volume added to each geographic area by the
addition of Imagine Foods brands to our portfolio, as well as from the benefit
of foreign currencies against the U.S. dollar.
Gross profit for the three months ended March 31, 2003 was 31.0% of net
sales as compared to 30.7% of net sales in the March 31, 2002 quarter. The
increase was a result of lower promotional spending and reduced distribution
costs, partially offset by increased ingredient costs.
Selling, general and administrative expenses as a percentage of sales was
20.3% for the three months ended March 31, 2003 compared with 22.6% in the March
31, 2002 quarter. The decrease as a percentage of sales came about as we were
able to spread our general and administrative expenses over our increased sales
base. The dollars we spent during the third quarter this year were higher than
in the third quarter last year by $2.3 million, principally due to the increased
number of personnel we now have for the increased size of our business,
increases in expenses that are variable with sales levels, such as broker
commissions, and the increase in bad debt expense of $.2 million caused by the
Fleming bankruptcy.
Operating income was $13.8 million in the three months ended March 31, 2003
compared to $8.5 million in the March 31, 2002 quarter. Operating income as a
percentage of net sales amounted to 10.7% in the March 2003 quarter, compared
with 8.1% in the March 2002 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 $1.2 million for the three months
ended March 31, 2003 compared to $0.3 million in the comparable period of the
prior year. In the 2003 period, we incurred an increase of $0.4 million in
interest expense related to our increased borrowings resulting from the
acquisition of Imagine Foods and foreign exchange losses of $0.4 million.
Income before income taxes for the three months ended March 31, 2003
amounted to $12.6 million compared to $8.2 million in the comparable period.
This increase was attributable to the increase in operating income, partially
offset by the increase in interest expense and other expenses, net.
Our effective income tax rate approximated 38% of pre-tax income for both
the three months ended March 31, 2003 and 2002. We expect our tax rate to
approximate this rate during the remainder of Fiscal 2003.
Net income for the three months ended March 31, 2003 was $7.9 million
compared to $5.1 million in the March 31, 2002 quarter. The increase of $2.8
million in earnings was primarily attributable to the aforementioned increase in
income before income taxes.
Nine months ended March 31, 2003
Net sales for the nine months ended March 31, 2003 were $348.7 million, an
increase of $48.2 million or 16.0% over net sales of $300.5 million for the nine
months ended March 31, 2002. Our Canadian business grew 17.4%, our European
business grew 8.6% and our U.S. business grew 12.0%. These increases came
principally from volume increases including the volume added to each geographic
area by the Imagine Foods and Lima acquisitions.
Gross profit for the nine months ended March 31, 2003 was 31.4% of net
sales as compared to 30.5% of net sales for the nine months ended March 31,
2002. The increase was a result of reduced promotional spending and lower
distribution costs, partially offset by increased ingredient costs and lower
gross profits earned by our businesses in Europe.
Selling, general and administrative expenses increased by $10.3 million to
$74.3 million for the nine months ended March 31, 2003 as compared to $64.0
million for the nine months ended March 31, 2002. Such expenses as a percentage
of net sales amounted to 21.3% for both the nine months ended March 31, 2003 and
2002. While as a percentage of sales selling, general and administrative
expenses are flat, we increased consumer advertising and spending in the nine
months ended March 31, 2003 versus the nine months ended March 31, 2002 by
approximately $4 million. The remaining increases are principally due to the
increased number of personnel we now have for the increased size of our
business, increases in expenses that are variable with sales levels, such as
broker commissions, and the increase in bad debt expense of $.2 million caused
by the Fleming bankruptcy.
During the nine months ended March 31, 2003 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 $34.9 million in the nine months ended March 31, 2003
compared to $27.6 million for the nine months ended March 31, 2002. Operating
income as a percentage of net sales amounted to 10.0% for the nine months ended
March 31, 2003, compared with 9.2% for the nine months ended March 31, 2002. The
dollar and percentage increases resulted principally from the higher gross
profit as described above offset by the aforementioned increase in selling,
general, and administrative costs.
Interest and other expenses amounted to $1.6 million for the nine months
ended March 31, 2003 compared to $2.2 million in the comparable period. The
current year period included interest expense related to our increased
borrowings resulting from the acquisition of Imagine Foods. The prior year
period included a loss of approximately $1.5 incurred in December 2001 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 nine months ended March 31, 2003
amounted to $33.3 million compared to $25.4 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.
Our effective income tax rate approximated 38% of pre-tax income for both
the nine months ended March 31, 2003 and 2002. We expect our tax rate to
approximate this rate during the remainder of fiscal 2003.
Net income for the nine months ended March 31, 2003, was $20.7 million
compared to $15.8 million for the nine months ended March 31, 2002. The increase
of $4.9 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 25, 2004. 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 March 31, 2003, we had $43.7 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 $19.7 and $12.8 million for the nine
months ended March 31, 2003 and 2002, respectively. Our working capital and
current ratio was $84.3 million and 2.3 to 1, respectively, at March 31, 2003
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 nine months ended March 31, 2003.
Net cash provided by/(used in) financing activities was $34.8 million and
($2.6) million for the nine months ended March 31, 2003 and 2002, respectively.
During December 2002, we borrowed $44.3 million to fund the cash portion of our
purchase of the Imagine Foods business. We have subsequently paid down $5
million of this debt. 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 - 3
Total 1 year years Thereafter
----------------------------------------------------
Debt instruments $ 50,701 $ 2,229 $ 45,943 $ 2,529
Capital lease obligations 2,174 928 1,242 4
Operating leases 20,784 3,393 8,387 9,004
---------------------------------------------------
Total contractual cash $ 73,659 $ 6,550 $ 55,572 $11,537
obligations
====================================================
We believe that cash on hand of $12.0 million at March 31, 2003, 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 $4.0 million for the remainder of fiscal 2003, $4.5
million in costs associated with restructuring and non-recurring charges and the
$6.6 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 March 31, 2003 was $7.4 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 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
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: May 15, 2003 /s/ Irwin D. Simon
----------------------------------
Irwin D. Simon,
Chairman, President and Chief
Executive Officer
Date: May 15, 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: May 15, 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: May 15, 2003
/s/ Ira J. Lamel
-------------------------------------
Ira J. Lamel
Executive Vice President,
Chief Financial Officer and Treasurer