Hain Celestial(US:HAIN)2021-08-26 20:08Part I Business Hain Celestial Group markets organic and natural products, strategically simplifying its portfolio and expanding margins - The company's strategy is built on four key pillars: (1) simplifying its portfolio, (2) strengthening capabilities, (3) expanding profit margins and cash flow, and (4) reinvigorating profitable topline growth, including classifying brands into "Get Bigger" and "Get Better" categories212223 - As part of its portfolio simplification, the company has actively divested several businesses and brands in recent fiscal years, including Hain Pure Protein (FY2019), Tilda (FY2020), and Danival, UK fruit businesses, WestSoy, Dream, and GG UniqueFiber brands (FY2021)24 Net Sales by Product Category (FY2019-2021) | Product Category | FY2021 % of Net Sales | FY2020 % of Net Sales | FY2019 % of Net Sales | | :--- | :--- | :--- | :--- | | Grocery | 67% | 69% | 72% | | Snacks | 16% | 15% | 14% | | Personal Care | 10% | 10% | 10% | | Tea | 7% | 6% | 5% | Net Sales by Reportable Segment (FY2019-2021) | Segment | 2021 Net Sales ($M) | 2021 % of Total | 2020 Net Sales ($M) | 2020 % of Total | 2019 Net Sales ($M) | 2019 % of Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | North America | $1,104.1 | 56% | $1,171.5 | 57% | $1,196.0 | 57% | | International | $866.2 | 44% | $882.4 | 43% | $908.6 | 43% | | Total | $1,970.3 | 100% | $2,053.9 | 100% | $2,104.6 | 100% | - The company has significant customer concentration, with Walmart Inc. and its affiliates accounting for approximately 11% of consolidated sales in fiscal 2021, and United Natural Foods, Inc. accounting for approximately 8%6667 - In fiscal 2021, approximately 61% of revenue was derived from products manufactured at the company's own facilities, with the remaining 39% from independent third-party contract manufacturers (co-packers)7376 Risk Factors The company faces significant risks from competition, supply chain, customer concentration, international markets, and goodwill impairment - The company operates in a highly competitive market, facing pressure from large multinational corporations with greater resources and smaller, innovative organic and natural brands101102 - A significant percentage of sales is concentrated with a small number of customers, with Walmart accounting for 11% of sales and United Natural Foods, Inc. for 8% in FY2021, making the loss of a major customer a potential negative impact112114115 - Approximately 52% of consolidated sales in FY2021 were generated outside the United States, exposing the company to risks such as foreign currency fluctuations, tariffs, and complex foreign laws like GDPR120 - The company is exposed to continued uncertainty following Brexit, as approximately 31% of FY2021 consolidated sales were generated in the U.K., potentially disrupting relationships and adding administrative costs139 - The company faces pending litigation, including securities class actions related to a prior internal accounting review and consumer class actions alleging unsafe levels of heavy metals in its Earth's Best baby food products148152 - As of June 30, 2021, goodwill and other intangible assets represented 54% of total consolidated assets, meaning an impairment could materially and adversely affect financial results and net worth162163 Properties The company operates numerous owned and leased facilities across North America and internationally for manufacturing and distribution Principal Facilities | Primary Use | Location | Ownership | Approximate Square Feet | | :--- | :--- | :--- | :--- | | Headquarters | Lake Success, NY | Leased | 86,000 | | Manufacturing (Tea) | Boulder, CO | Owned | 158,000 | | Manufacturing (Snacks) | Mountville, PA | Leased | 160,000 | | Manufacturing (Personal Care) | Bell, CA | Leased | 125,000 | | Manufacturing (Ambient Grocery) | Histon, England | Owned | 303,000 | | Manufacturing (Plant-based) | Schwerin, Germany | Owned | 527,000 | Legal Proceedings The company is involved in securities class actions and consumer lawsuits alleging unsafe heavy metals in baby food products - Information regarding legal proceedings is incorporated by reference from Note 19 of the financial statements169 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on Nasdaq, no cash dividends, with active share repurchases under authorized programs - The company has not paid any cash dividends on its common stock to date, and future payments are at the discretion of the Board of Directors175 Share Repurchases (Q4 FY2021) | Period | Total Shares Purchased | Average Price Paid | Value ($M) | | :--- | :--- | :--- | :--- | | April 2021 | 242,040 | $41.39 | ~$10.0 | | May 2021 | 178,061 | $39.86 | ~$7.1 | | June 2021 | 252,317 | $39.88 | ~$10.1 | | Total Q4 | 672,418 | $40.41 | $27.2 | - As of June 30, 2021, $82.4 million remained under the 2017 share repurchase authorization, and an additional $300 million authorization was approved in August 2021180 Management's Discussion and Analysis of Financial Condition and Results of Operations FY2021 net sales decreased, but gross margin improved to 25.0% and operating income surged 91.6% due to productivity Results of Operations FY2021 net sales decreased 4.1% to $1.97 billion, while gross profit increased 5.5% and operating income surged 91.6% Consolidated Results of Operations (FY2021 vs. FY2020) | Metric | FY 2021 ($M) | FY 2020 ($M) | Change ($M) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 1,970.3 | 2,053.9 | (83.6) | (4.1)% | | Gross Profit | 491.6 | 465.8 | 25.8 | 5.5% | | Gross Margin | 25.0% | 22.7% | N/A | +230 bps | | Operating Income | 107.4 | 56.0 | 51.3 | 91.6% | | Net Income from Continuing Ops | 66.1 | 25.6 | 40.5 | 157.9% | | Adjusted EBITDA | 258.9 | 200.0 | 58.9 | 29.5% | - On a constant currency basis, adjusted for divestitures and discontinued brands, net sales decreased approximately 0.6% in FY2021 compared to FY2020198 - The increase in gross profit margin in FY2021 was driven by lower costs from the Fruit business divestiture, reduced trade spend, supply chain efficiencies, and benefits from productivity initiatives in North America199 - SG&A expenses decreased by 7.8% in FY2021 due to lower broker trade expense, reduced salaries and benefits from reorganization and divestitures, and lower marketing and bonus expenses200 Consolidated Results of Operations (FY2020 vs. FY2019) | Metric | FY 2020 ($M) | FY 2019 ($M) | Change ($M) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 2,053.9 | 2,104.6 | (50.7) | (2.4)% | | Gross Profit | 465.8 | 398.5 | 67.3 | 16.9% | | Gross Margin | 22.7% | 18.9% | N/A | +380 bps | | Operating Income (Loss) | 56.0 | (32.5) | 88.5 | (272.5)% | | Net Income (Loss) from Continuing Ops | 25.6 | (53.4) | 79.1 | (148.0)% | | Adjusted EBITDA | 200.0 | 165.1 | 34.9 | 21.1% | Liquidity and Capital Resources FY2021 cash and equivalents increased to $75.9 million, with $196.8 million from operations, funding debt and share repurchases Summary of Cash Flows (FY2019-2021) | (in thousands) | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Cash from Operating Activities | $196,759 | $156,914 | $39,333 | | Cash from Investing Activities | $(2,364) | $(45,128) | $(68,647) | | Cash from Financing Activities | $(162,443) | $(104,466) | $(22,846) | | Net Change in Cash | $38,100 | $(1,755) | $(73,491) | - The increase in cash from operating activities in FY2021 was primarily due to a $32.8 million improvement in net income adjusted for non-cash charges and a $7.0 million increase in cash provided by working capital270 - Cash used in financing activities in FY2021 included $50.0 million of net repayments on the revolving credit facility and $106.1 million of share repurchases272 - During FY2021, the company repurchased 3.1 million shares for $107.4 million at an average price of $34.87 per share276 Critical Accounting Estimates Critical accounting estimates include revenue recognition, goodwill impairment testing, and valuation allowances for deferred tax assets - Revenue recognition requires significant estimates for variable consideration, including trade promotions and sales incentives, based on historical performance, redemption rates, and current trends301 - Goodwill and indefinite-lived intangible assets are tested for impairment annually, with fair values estimated using discounted cash flows and market valuation approaches, requiring significant management judgment on growth rates, profitability, and discount rates307 - In the FY2021 annual goodwill impairment analysis, the estimated fair value of the Hain U.S. reporting unit exceeded its carrying value by 110%, and the Hain Canada reporting unit's fair value exceeded its carrying value by 230%, indicating no impairment310 - The company must assess the realizability of its deferred tax assets, recording a valuation allowance if it is "more likely than not" that the assets will not be realized, with a valuation allowance of $37.5 million as of June 30, 2021315469 Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, foreign currency, and ingredient prices, managed through swaps and cost adjustments - As of June 30, 2021, the company had $230 million of variable rate debt, with the interest rate risk hedged via interest rate swaps for the same notional amount320 - In fiscal 2021, 52% of consolidated net sales were from outside the U.S., and a hypothetical 5% weakening of foreign exchange rates against the U.S. Dollar would have decreased net sales by approximately $53.2 million and operating income by $3.0 million322 - The company is exposed to price volatility for ingredient inputs like almonds, oils, and grains, and a hypothetical 10% increase in the cost of primary inputs would have increased cost of sales by approximately $103 million in fiscal 2021324 Financial Statements and Supplementary Data This section presents audited consolidated financial statements and notes, with an unqualified auditor's opinion on financials and internal controls Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the financial statements and internal controls, identifying revenue recognition as a critical audit matter - The independent auditor, Ernst & Young LLP, issued an unqualified (clean) opinion on the company's consolidated financial statements and its internal control over financial reporting328329 - The audit identified Revenue Recognition as a Critical Audit Matter, specifically highlighting the complexity and significant management estimates involved in accounting for trade promotions and sales incentives332334335 Consolidated Financial Statements FY2021 total assets were $2.21 billion, with net income of $77.4 million, reversing a prior year loss, and goodwill at $871.1 million Consolidated Balance Sheet Data (in thousands) | | June 30, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Total Current Assets | $577,055 | $560,934 | | Goodwill | $871,067 | $861,958 | | Total Assets | $2,205,908 | $2,188,452 | | Total Current Liabilities | $290,434 | $300,277 | | Long-Term Debt | $230,492 | $281,118 | | Total Liabilities | $683,025 | $744,898 | | Total Stockholders' Equity | $1,522,883 | $1,443,554 | Consolidated Statement of Operations Data (in thousands) | | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Net Sales | $1,970,302 | $2,053,903 | $2,104,606 | | Gross Profit | $491,615 | $465,770 | $398,497 | | Operating Income (Loss) | $107,380 | $56,042 | $(32,493) | | Net Income (Loss) | $77,364 | $(80,407) | $(183,314) | | Diluted EPS | $0.76 | $(0.77) | $(1.76) | Notes to Consolidated Financial Statements Notes detail FY2021 dispositions, $871.1 million goodwill, $231.0 million debt, tax rate impacts, and ongoing baby food litigation - In FY2021, the company completed the divestiture of its GG UniqueFiber, Dream and WestSoy, and Fruit businesses, recognizing a pre-tax gain on the Dream/WestSoy sale and pre-tax losses on the GG and Fruit sales408409411 - The disposition of the Tilda operating segment in FY2020 and the Hain Pure Protein reportable segment in FY2019 were accounted for as discontinued operations due to their significant strategic impact417421 - The annual goodwill impairment test for FY2021 concluded that no impairment existed at any reporting units, with the goodwill balance as of June 30, 2021, being $871.1 million438 - As of June 30, 2021, the company had $230.0 million outstanding under its revolving credit facility and was in compliance with all debt covenants451454 - The company is facing 29 active consumer class action lawsuits and four personal injury lawsuits alleging its Earth's Best baby food products contain unsafe levels of heavy metals, stemming from a February 2021 U.S. House Subcommittee report532534 Controls and Procedures Management and the CEO/CFO concluded disclosure controls and internal control over financial reporting were effective as of June 30, 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2021551 - Management concluded that the company's internal control over financial reporting was effective as of June 30, 2021, based on the criteria established in the COSO framework555 - Ernst & Young LLP, the independent auditor, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of June 30, 2021556560 Part III Directors, Executive Compensation, and Corporate Governance Information on directors, executive compensation, and corporate governance is incorporated by reference from the upcoming Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships and Related Transactions, and Principal Accountant Fees and Services is incorporated by reference from the company's upcoming Proxy Statement571572573 Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits, including credit agreements and executive employment contracts - This section contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K, including credit agreements, stock plans, and executive contracts577581 Schedule II - Valuation and Qualifying Accounts (FY2021, in thousands) | Description | Beginning Balance | Additions | Deductions | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | Allowance for doubtful accounts | $638 | $348 | $328 | $1,314 | | Valuation allowance for deferred tax assets | $41,941 | $5,601 | $(10,089) | $37,453 |