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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: 03/31/04
or
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______.
Commission file number: 0-22818
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
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 730-2200
-----------------
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
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
36,439,082 shares of Common Stock $.01 par value, as of May 7, 2004.
THE HAIN CELESTIAL GROUP, INC.
INDEX
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2004
(unaudited) and June 30, 2003 2
Consolidated Statements of Income -
Three months and nine months ended March 31, 2004
and 2003 (unaudited) 3
Consolidated Statement of Stockholders' Equity -
Nine months ended March 31, 2004 (unaudited) 4
Consolidated Statement of Cash Flows -
Nine months ended March 31, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Item 4. Controls and Procedures 19
Part II Other Information
Items 1 through 5 are not applicable
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
March 31, June 30,
2004 2003
----------------- ---------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 21,101 $ 10,984
Accounts receivable, less allowance for doubtful
accounts of $1,810 and $1,748 70,731 61,215
Inventories 76,597 66,444
Recoverable income taxes, net 1,018 223
Deferred income taxes 3,171 3,171
Other current assets 10,422 7,671
----------------- ---------------
Total current assets 183,040 149,708
Property, plant and equipment, net of accumulated
depreciation and amortization of $41,128 and $31,555 73,992 68,665
Goodwill 309,288 296,508
Trademarks and other intangible assets, net of
accumulated amortization of $8,037 and $7,377 55,909 55,975
Other assets 9,022 10,692
----------------- ---------------
Total assets $ 631,251 $ 581,548
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 53,921 $ 55,710
Current portion of long-term debt 8,648 8,807
Income taxes payable 12,072 1,867
----------------- ---------------
Total current liabilities 74,641 66,384
Long-term debt, less current portion 56,871 59,455
Deferred income taxes 14,912 14,912
----------------- ---------------
Total liabilities 146,424 140,751
Stockholders' equity:
Preferred stock - $.01 par value, authorized 5,000,000
shares, no shares issued - -
Common stock - $.01 par value, authorized 100,000,000
shares, issued 36,875,648 and 34,810,722 shares 369 348
Additional paid-in capital 385,632 364,877
Deferred compensation (3,043) -
Retained earnings 101,017 79,089
Foreign currency translation adjustment 9,287 4,639
----------------- ---------------
493,262 448,953
Less: 622,516 and 606,619 shares of
treasury stock, at cost (8,435) (8,156)
----------------- ---------------
Total stockholders' equity 484,827 440,797
----------------- ---------------
Total liabilities and stockholders' equity $ 631,251 $ 581,548
================= ===============
Note: The balance sheet at June 30, 2003 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,
--------------------------------------- ---------------------------------------
2004 2003 2004 2003
----------------- ------------------ ----------------- ------------------
(Unaudited) (Unaudited)
Net sales $136,862 $ 129,224 $406,707 $ 348,650
Cost of sales 98,316 89,519 283,900 240,376
----------------- ------------------ ----------------- ------------------
Gross profit 38,546 39,705 122,807 108,274
Selling, general and
administrative expenses 29,527 25,901 85,393 72,971
Restructuring and other
non-recurring charges - - - 440
----------------- ------------------ ----------------- ------------------
Operating income 9,019 13,804 37,414 34,863
Interest expense and other
expenses, net 932 1,184 2,073 1,560
----------------- ------------------ ----------------- ------------------
Income before income taxes 8,087 12,620 35,341 33,303
Provision for income taxes 3,073 4,764 13,413 12,572
----------------- ------------------ ----------------- ------------------
Net income $ 5,014 $ 7,856 $ 21,928 $ 20,731
================= ================== ================= ==================
Net income per share:
Basic $ 0.14 $ 0.23 $ 0.63 $ 0.61
================= ================== ================= ==================
Diluted $ 0.14 $ 0.23 $ 0.61 $ 0.60
================= ================== ================= ==================
Weighted average common
shares outstanding:
Basic 35,694 34,081 34,943 33,853
================= ================== ================= ==================
Diluted 36,804 34,887 36,098 34,579
================= ================== ================= ==================
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 2004
(In thousands, except per share and share data)
Common Stock Additional Unamortized
----------------------------
Amount Paid-in Non-cash Retained
Shares at $.01 Capital Compensation Earnings
------------- -------------- ------------- ---------------- -----------
Balance at June 30, 2003 34,810,722 $348 $ 364,877 $ - $ 79,089
Exercise of stock options 1,914,926 19 17,587
and warrants
Purchase of treasury shares
Restricted stock grant 150,000 2 3,133 (3,135)
Non-cash compensation charge 35 92
Comprehensive income:
Net income for the period 21,928
Translation adjustments
Total comprehensive income
------------- -------------- ------------- ---------------- -----------
Balance at March 31, 2004 36,875,648 $369 $ 385,632 $(3,043) $ 101,017
============= ============== ============= ================ ===========
Foreign
Currency
Translation Comprehensive
Adjustment Total Income
--------------- ------------- -------------------
Balance at June 30, 2003 $ 4,639 $440,797
Exercise of stock options 17,606
and warrants
Purchase of treasury shares (279)
Restricted stock grant -
Non-cash compensation charge 127
Comprehensive income:
Net income for the period 21,928 $ 21,928
Translation adjustments 4,648 4,648 4,648
-------------------
Total comprehensive income $ 26,576
--------------- ------------- ===================
Balance at March 31, 2004 $ 9,287 $484,827
=============== =============
See notes to consolidated financial statement
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
----------------------------------
2004 2003
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net income $ 21,928 $ 20,731
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,773 6,295
Provision for doubtful accounts 57 56
Non-cash compensation 127 35
Increase (decrease) in cash attributable to changes in
operating assets and liabilities, net of amounts applicable
acquired businesses:
Accounts receivable (7,999) (9,481)
Inventories (8,405) 1,674
Other current assets (2,589) (557)
Other assets 1,828 (2,115)
Accounts payable and accrued expenses (6,577) (7,893)
Income taxes, net 10,205 10,942
-------------- ---------------
Net cash provided by operating activities 16,348 19,687
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (6,145) (6,010)
Acquisitions of businesses, net of cash acquired (4,480) (44,660)
-------------- ---------------
Net cash used in investing activities (10,625) (50,670)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments) proceeds from bank revolving
credit facility, net (7,650) 39,300
Payments on economic development revenue bonds (408) (375)
Purchase of treasury stock (279) (4,281)
Costs in connection with bank financing (25) (181)
Proceeds from exercise of warrants and options, net of
related expenses 17,606 389
Repayments of other long-term debt, net (2,891) (81)
-------------- ---------------
Net cash provided by financing activities 6,353 34,771
-------------- ---------------
Effect of exchange rate changes on cash (1,959) 647
-------------- ---------------
Net increase in cash and cash equivalents 10,117 4,435
Cash and cash equivalents at beginning of period 10,984 7,538
-------------- ---------------
Cash and cash equivalents at end of period $ 21,101 $ 11,973
============== ===============
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, Inc. (herein referred to as "we", "us" and "our") is a
natural, organic, specialty and snack food company. 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), Rice
Dream(R), Soy Dream(R), Imagine(R), Little Bear Organic Foods(R), Bearitos(R),
Arrowhead Mills(R), Health Valley(R), Carb Fit(R), Breadshop(R), Casbah(R),
Garden of Eatin'(R), Walnut Acres Certified Organic(R), Terra Chips(R), Harry's
Premium Snacks(R), Boston's(R), Yves Veggie Cuisine(R), DeBoles(R), Earth's
Best(R), Nile Spice(R), Lima(R), Biomarche(R), Natumi(R), Milk Free(R) and
Grains Noirs(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 2003 fiscal year, approximately 42% of our
revenues were derived from products that were manufactured within our own
facilities with 58% produced by 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 months and nine months ended March 31,
2004 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2004. Please refer to the footnotes to our consolidated
financial statements as of June 30, 2003 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 Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS No.
128"). Basic earnings per share excludes the dilutive effects of options and
warrants. Diluted earnings per share includes only the dilutive effects of
common stock equivalents such as stock options and warrants.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
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,
-------------------- --------------------
2004 2003 2004 2003
-------------------- --------------------
Numerator:
Net income $ 5,014 $ 7,856 $ 21,928 $ 20,731
==================== ====================
Denominator (in thousands):
Denominator for basic earnings per
share - weighted average shares
outstanding during the period 35,694 34,081 34,943 33,853
-------------------- --------------------
Effect of dilutive securities:
Stock options 1,059 650 1,031 569
Warrants 51 156 124 157
-------------------- --------------------
1,110 806 1,155 726
-------------------- --------------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 36,804 34,887 36,098 34,579
==================== ====================
Basic net income per share $ 0.14 $ 0.23 $ 0.63 $ 0.61
==================== ====================
Diluted net income per share $ 0.14 $ 0.23 $ 0.61 $ 0.60
==================== ====================
4. Restricted Stock Grant
In accordance with the terms of the employment agreement with our Chief
Executive Officer, on February 24, 2004, we granted 150,000 shares of
restricted common stock to our Chief Executive Officer. On the grant date,
the market value of our common stock was $20.90 per share and, therefore,
the total market value of the grant approximated $3.1 million. These shares
will vest ratably from the date of grant through expiration of the employment
agreement on June 30, 2007. Through March 31, 2004, 4,419 shares have vested.
For the quarter ended March 31, 2004, approximately $92,000 of non-cash
compensation has been charged togeneral and administrative expenses.
5. INVENTORIES
Inventories consisted of the following:
March 31, June 30,
2004 2003
-------------- ---------------
Finished goods $45,993 $43,022
Raw materials, work-in-progress
and packaging 30,604 23,422
-------------- ---------------
$76,597 $66,444
============== ===============
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
March 31, June 30,
2004 2003
-------------- ---------------
Land $ 7,145 $ 6,913
Buildings and improvements 26,748 24,448
Machinery and equipment 70,911 61,949
Furniture and fixtures 2,431 2,383
Leasehold improvements 1,524 1,457
Construction in progress 6,361 3,070
-------------- ---------------
115,120 100,220
Less: Accumulated depreciation
and amortization 41,128 31,555
-------------- ---------------
$ 73,992 $ 68,665
============== ===============
7. ACQUISITIONS
On June 17, 2003, we acquired 100% of the stock of privately-held Acirca, Inc.
("Acirca"), the owner of the Walnut Acres Certified Organic(R) brand of organic
fruit juices, soups, pasta sauces and salsas. Since June 2000, the financial and
investment group Acirca has expanded Walnut Acres, its premier certified organic
food and beverage brand, by integrating a series of organic brands including
Mountain Sun(R), ShariAnn's(R), Millina's Finest(R), and Frutti di Bosco(R) into
its Walnut Acres flagship. With the acquisition of these product lines, we added
natural and organic juices and sauces to our product offerings and enhanced our
offerings of soups and salsas. The purchase price consisted of approximately $9
million in cash, 134,797 shares of our common stock valued at $2.2 million, plus
the assumption of certain liabilities. At March 31, 2004, goodwill from this
transaction was estimated to be $16.7 million.
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 has enhanced 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. At March 31, 2004, goodwill from
this transaction was valued at $37.3 million, trademarks and other
non-amortizable intangibles were $15.7 million, and patents and other
amortizable intangibles were valued at $1.1 million.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
The following table summarizes the estimated fair values of assets acquired and
liabilities assumed of Acirca and Imagine at the dates of the acquisitions:
Current assets $17,714
Property and equipment 2,409
----------------
Total assets 20,123
Liabilities assumed 14,937
----------------
Net assets acquired $ 5,186
================
The balance sheet at March 31, 2004 includes the assets acquired and liabilities
assumed valued at fair market value on the date of purchase. We have completed
all of the procedures required to finalize the purchase price allocation for
Imagine, while such procedures required for Acirca are expected to be completed
by June 2004.
Our results of operations for the three and nine months ended March 31, 2004
include the results of the above described acquisitions for the complete period.
The following table presents information about sales and net income had the
operations of the acquired businesses been combined with our business as of the
first day of each of the periods shown. This information has not been adjusted
to reflect any changes in the operations of these businesses subsequent to their
acquisition by us. Changes in operations of these acquired businesses include,
but are not limited to, integration of systems and personnel, discontinuation of
products (including discontinuation resulting from the integration of acquired
and existing brands with similar products), changes in trade practices,
application of our credit policies, changes in manufacturing processes or
locations, and changes in marketing and advertising programs. Had any of these
changes been implemented by the former management of the businesses acquired
prior to acquisition by us, the sales and net income information might have been
materially different than the actual results achieved and from the pro forma
information provided below.
Three Months Ended Nine Months Ended
March 31, 2003 March 31, 2003
==================== =================
Net sales $ 133,899 $ 401,039
==================== =================
Net income $ 5,751 $ 14,860
==================== =================
Income per share:
Basic $ 0.17 $ 0.44
==================== =================
Diluted $ 0.16 $ 0.43
==================== =================
Weighted average shares:
Basic $ 34,216 $ 33,988
==================== =================
Diluted $ 35,022 $ 34,714
==================== =================
In management's opinion, the unaudited pro forma results of operations are not
indicative of the actual results that would have occurred had the Acirca and
Imagine acquisitions been consummated at the beginning of the periods
presented or of future operations of the combined companies under our
management.
On February 25, 2004, our subsidiary in Belgium acquired Natumi AG, a German
producer of non-dairy beverages and desserts marketed principally in retail
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
channels in Europe. The purchase price consisted of $1.4 million in cash as well
as the assumption of certain liabilities. The net assets acquired, as well as
the sales and results of operations of Natumi, are not material to the Company's
financial position or results of operations and, therefore, have not been
included in the detailed information about our acquisitions.
On May 14, 2003, our subsidiary in Belgium acquired Grains Noirs, N.V., a
Belgian producer and marketer of fresh prepared organic appetizers, salads,
sandwiches and other full-plated dishes. The purchase price paid was
approximately $2.2 million in cash. The net assets acquired, as well as the
sales and results of operations of Grains Noirs, are not material to the
Company's financial position or results of operations and, therefore, have not
been included in the detailed information about our acquisitions.
8. CREDIT FACILITY
On April 22, 2004, we entered into a new $300 million credit facility (the
"Credit Facility") with a bank group led by our existing bank agents for a
five-year term expiring in April 2009. The Credit Facility provides for an
uncommitted $50 million accordion feature, under which the facility may be
increased to $350 million. The Credit Facility is secured only by a pledge of
shares of certain of our foreign subsidiaries and is guaranteed by all of our
current and future 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 and applicable
margin) or, at our option, the reserve adjusted LIBOR rate plus an applicable
margin. As of March 31, 2004, $46.2 million was borrowed under the Credit
Facility at an interest rate of 2.3%.
9. 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.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
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 SFAS No. 123, "Accounting For Stock-Based Compensation," net
earnings and earnings per share for the three months and nine months ended March
31, 2004 and 2003 would have been the pro forma amounts that follow:
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ -------------- -----------
Net income, as reported $5,014 $ 7,856 $21,928 $ 20,731
Non-cash compensation charge, net of related tax
effects 65 7 79 22
Stock-based employee compensation expense
determined under fair value method, net of related
tax effects (2,413) (2,357) (4,350) (7,172)
------------ ------------ -------------- -----------
Pro forma net income $ 2,666 $ 5,506 $ 17,657 $ 13,581
============ ============ ============== ===========
Basic net income per share:
As reported $ 0.14 $ 0.23 $ 0.63 $ 0.61
=========== ========== ============ ========
Pro forma $ 0.07 $ 0.16 $ 0.51 $ 0.40
=========== ========== ============ ========
Diluted net income per share:
As reported $ 0.14 $ 0.23 $ 0.61 $ 0.60
=========== =========== ============ ========
Pro forma $ 0.07 $ 0.16 $ 0.49 $ 0.39
=========== =========== ============ ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We manufacture, market, distribute and sell natural, organic, specialty 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), Carb
Fit(R), Breadshop(R), Casbah(R), Garden of Eatin'(R), Rice Dream(R), Soy
Dream(R), Imagine(R), Walnut Acres Certified Organic(R), Little Bear Organic
Foods(R), Bearitos(R), Terra Chips(R), Harry's Premium Snacks(R), Boston's(R),
Gaston's(R), Yves Veggie Cuisine(R), DeBoles(R), Earth's Best(R), Nile Spice(R),
Lima(R), Biomarche(R), Natumi(R), Milk Free(R) and Grains Noirs(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, drug stores, food service channels and club stores.
Our brand names are well recognized in the various market categories they serve.
We have acquired numerous brands and we will seek future growth through internal
expansion as well as the acquisition of additional complementary brands.
Our overall mission is to be a leading marketer and seller of natural, organic,
beverage, snack 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, 2004
Net sales for the three months ended March 31, 2004 were $136.9 million, an
increase of $7.7 million or 6.0% over net sales of $129.2 million in the March
31, 2003 quarter. Gross sales (before deducting discounts and other sales
incentives in accordance with Emerging Issues Task Force Consensus("EITF")
01-09) increased 9.2% in the 2004 quarter over the prior year period. The
increases came from volume increases principally in our snacks brands, which
were up 20.9%, our Earth's Best baby food brand, which was up 24%, our Celestial
Seasonings tea brand, which was up 6.2%, our Canadian business, which was up
23.7%, and from the introduction of our new Carb Fit brand of low-carbohydrate
products. Sales of our Imagine Foods brands, acquired in December 2002, are
included in each of the quarterly periods, while sales of our Walnut Acres
brands are included only in the current year quarter. The difference between
gross sales growth of 9.2% and net sales growth of 6.0% is the result of more
aggressive spending in the trade and on consumers, including spending on the
launch of our new Carb Fit brand, during the 2004 quarter as compared to the
2003 quarter. In the 2004 quarter, we spent approximately $.5 million more in
this area than in the prior year's quarter. The Company believes that sales
growth during the current year quarter was negatively impacted by our inability
to fill orders for soup due to non-recurring manufacturing issues encountered
at our independent soup co-packer, thereby causing out of stock positions on
soup, and to a lesser extent, by the strike of grocery workers in Southern
California where the Company has a very strong market presence.
Gross profit for the three months ended March 31, 2004 was 28.2% of net sales as
compared to 30.7% of net sales in the March 31, 2003 quarter. Approximately 2.1
percentage points of the decline in gross profit percentage was principally the
result of aggressive spending in the trade and with consumers, including
spending on the launch of Carb Fit, as described earlier. Increases in
transportation costs resulting from higher fuel costs, the cost effects of new
regulations on the U.S. trucking industry, and an increase in the percentage of
our shipments that are delivered by us, caused an additional one percentage
point reduction in gross profit as a percent of sales. We also saw increases in
the cost of ingredients.
Selling, general and administrative expenses increased by $3.6 million to $29.5
million for the three months ended March 31, 2004 as compared to $25.9 million
in the March 31, 2003 quarter. Such expenses as a percentage of net sales
amounted to 21.5% for the three months ended March 31, 2004 compared with 20.0%
in the March 31, 2003 quarter. Selling, general and administrative expenses have
increased as a percentage of sales and in overall dollars, primarily as a result
of increased advertising and marketing expenses needed to support our increased
sales including the introduction of our Carb Fit brand of low carbohydrate
products.
There were no restructuring and other non-recurring charges for the quarter
ended March 31, 2004 or for the quarter ended March 31, 2003.
Operating income was $9.0 million in the three months ended March 31, 2004
compared to $13.8 million in the March 31, 2003 quarter. Operating income as a
percentage of net sales was 6.6% in the March 31, 2004 quarter, compared with
10.7% in the March 31, 2003 quarter. The dollar and percentage decrease is a
result of the aforementioned lower gross profit and higher selling, general and
administrative expenses.
Interest and other expenses amounted to $0.9 million for the three months ended
March 31, 2004 compared to $1.2 million for the three months ended March 31,
2003. We incurred lower interest expense in the 2004 quarter resulting from
lower interest rates from our credit facility.
Income before income taxes for the three months ended March 31, 2004 amounted to
$8.1 million compared to $12.6 million in the comparable period of the prior
year. This decrease was attributable to the decrease in operating income.
Our effective income tax rate approximated 38% of pre-tax income for both the
three months ended March 31, 2004 and 2003. We expect our effective tax rate to
approximate this rate during the remainder of fiscal 2004.
Net income for the three months ended March 31, 2004 was $5.0 million compared
to $7.9 million in the March 31, 2003 quarter. The decrease of $2.9 million in
earnings was primarily attributable to the aforementioned decrease in income
before income taxes.
Nine Months Ended March 31, 2004
Net sales for the nine months ended March 31, 2004 were $406.7 million, an
increase of $58.0 million or 16.6% over net sales of $348.7 million for the nine
months ended March 31, 2003. Gross sales (before deducting discounts and other
sales incentives in accordance with EITF 01-09) increased 18.4% in the first
nine months of 2004 over the prior year period. The increases came from volume
increases principally in the Company's snacks brands, which were up 14.4%, the
Company's Earth's Best baby food brand, which was up 22.5%, the Company's
Celestial Seasonings tea brand, which was up 6.9%, the Company's Canadian
business, which was up 23.8%, and from the introduction of the Company's new
Carb Fit brand of low-carbohydrate products, as well as sales of businesses
acquired. The difference between gross sales growth of 18.4% and net sales
growth of 16.6% is the result of more aggressive spending in the trade and on
consumers, including spending on the launch of the Carb Fit brand, during 2004
as compared to 2003. In 2004, the Company spent approximately $1 million more in
this area than in the prior year. The Company believes that sales growth during
the current year period was negatively impacted by our inability to fill orders
for soup due to non-recurring manufacturing issues encountered at our
independent soup co-packer, thereby causing out of stock positions on soup, and
to a lesser extent, by the strike of grocery workers in Southern California
where the Company has a very strong market presence.
Gross profit for the nine months ended March 31, 2004 was 30.2% of net sales as
compared to 31.1% of net sales for the nine months ended March 31, 2003. The
decline in gross profit percentage was principally the result of the aggressive
spending in the trade and with consumers, including spending on the launch of
Carb Fit, as described earlier, as well as increases in transportation costs
resulting from higher fuel costs, the cost effects of new regulations on the
U.S. trucking industry, and an increase in the percentage of our shipments that
are delivered by us. We also saw increases in the cost of ingredients.
Selling, general and administrative expenses increased by $12.4 million to $85.4
as compared to $73.0 million for the nine months ended March 31, 2003. Such
expenses as a percentage of net sales amounted to 21.0% for the nine months
ended March 31, 2004 compared with 20.9% for the nine months ended March 31,
2003. Selling, general and administrative expenses increased in overall dollars
and as a percentage of sales, primarily as a result of increased advertising and
marketing spending needed to support our increased sales, including our new Carb
Fit line of products.
There were no restructuring and other non-recurring charges for the nine months
ended March 31, 2004. During the nine months ended March 31, 2003, we recorded
approximately $0.4 million of additional restructuring and other non-recurring
charges related to the sale of our Health Valley facility.
Operating income was $37.4 million in the nine months ended March 31, 2004
compared to $34.9 million for the nine months ended March 31, 2003. Operating
income as a percentage of net sales was 9.2% for the nine months ended March 31,
2004, compared with 10.0% for the nine months ended March 31, 2003. While
overall dollars increased, as a percentage of sales operating income decreased.
These changes are a result of higher sales offset by the aforementioned decrease
in gross profit and increase in selling, general and administrative expenses.
Interest and other expenses amounted to $2.1 million for the nine months ended
March 31, 2004 compared to $1.6 million for the nine months ended March 31,
2003. 14 We incurred higher interest expense for the nine months ended March 31,
2004 resulting from borrowings for acquisitions which were outstanding for the
full nine months this year.
Income before income taxes for the nine months ended March 31, 2004 amounted to
$35.3 million compared to $33.3 million for the nine months ended March 31,
2003. This increase was attributable to the aforementioned increase in operating
income, 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
nine months ended March 31, 2004 and 2003.
Net income for the nine months ended March 31, 2004 was $21.9 million compared
to $20.7 million for the nine months ended March 31, 2003. The increase of $1.2
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 $300 million Credit Facility through April 22, 2009.
The Credit Facility is secured only by a pledge of shares of certain of our
foreign subsidiaries and 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. As of March 31, 2004, we had
$46.2 million outstanding under the Credit Facility.
This access to capital provides us with flexible working capital in the ordinary
course of business, the opportunity to grow our business through acquisitions
and develop our existing infrastructure through capital investment.
We have also announced that effective July 2004 we will adjust prices upward by
4% to 5% across certain of our U.S. businesses effective July 2004. We expect
the increases will offset increased costs we have absorbed in fuel, freight and
commodities, and should help offset future increased costs into the next
production year as we renew procurement contracts.
Net cash provided by operations was $16.3 and $19.7 million for the nine months
ended March 31, 2004 and 2003, respectively. Our working capital and current
ratio was $108.4 million and 2.5 to 1, respectively, at March 31, 2004 compared
with $83.3 million and 2.3 to 1 respectively, at June 30, 2003. The increase in
working capital resulted principally from the net income earned during the nine
months ended March 31, 2004.
Net cash provided by financing activities was $6.4 million and $34.8 million for
the nine months ended March 31, 2004 and 2003, respectively. In the March 31,
2004 period, we received proceeds from the exercise of stock options and
warrants, which were offset by the payment of debt. In the March 2003 period,
borrowings were offset by acquisitions of shares of our common stock in open
market purchases as part of our buy back program.
We believe that cash on hand of $21.1 million at March 31, 2004, projected
remaining fiscal 2004 cash flows from operations, and availability under our
Credit Facility are sufficient to fund our working capital needs, anticipated
capital expenditures of approximately $4 million, and scheduled debt payments of
approximately $8.6 million for the remainder of fiscal 2004. Further, cash on
hand, anticipated cash flows from operations for fiscal 2005, and availability
under our credit Facility are believed to be sufficient to fund these needs
through fiscal 2005. We currently invest our cash on hand in highly liquid
short-term investments yielding approximately 1% 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 Chargebacks 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 an additional 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 25% 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 have generally been within our expectations. Our chargebacks
receivable balance at March 31, 2004 was $6.5 million as compared to $6 million
at June 30, 2003.
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 in
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 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. Ordinary repairs and maintenance are expensed as incurred.
Intangibles
Goodwill is no longer amortized and the value of an identifiable intangible
asset is amortized over its useful life unless the asset is determined to have
an indefinite useful life. The carrying values of goodwill and other intangible
assets with indefinite useful lives are tested annually for impairment.
Revenue Recognition and Sales Incentives
Sales are recognized upon the shipment of finished goods to customers and are
reported net of sales incentives. Allowances for cash discounts and returns are
recorded in the period in which the related sale is recognized. Shipping and
handling costs are included as a component of cost of sales.
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 of 1934 and Sections 21E of the Securities Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, levels of activity, performance
or achievements of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; 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 government
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 as of the end of the period covered by this
report. Based upon this review, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures are adequately designed to ensure
that information required to be disclosed by the Company in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time period specified in applicable rules and forms.
(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
Reports on Form 8-K
On March 8, 2004, we filed a report on Form 8-K, reporting on Item 5, the
resignation of James S. Gold as a Director.
On February 4, 2004, we filed a report on Form 8-K, reporting on Item 12,
announcing our earnings for our second quarter ended December 31, 2003.
EXHIBITS
Exhibit Number Description
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the SecuritiesExchange Act, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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 17, 2004 /s/ Irwin D. Simon
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Irwin D. Simon,
Chairman, President and Chief
Executive Officer
Date: May 17, 2004 /s/ Ira J. Lamel
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Ira J. Lamel,
Executive Vice President and
Chief Financial Officer