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 December 31, 2004
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 ____
As of February 3, 2005, there were 36,539,642 shares outstanding of the
Registrant's Common Stock, par value $.01 per share.
THE HAIN CELESTIAL GROUP, INC.
INDEX
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 2004
(unaudited) and June 30, 2004 2
Consolidated Statements of Income -
Three months and six months ended December 31, 2004
and 2003 (unaudited) 3
Consolidated Statement of Stockholders' Equity -
Six months ended December 31, 2004 (unaudited) 4
Consolidated Statements of Cash Flows -
Six months ended December 31, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
Part II Other Information
Items 1 through 3 and item 5 are not applicable
Item 4 - Submission of matters to a vote of
security holders 16
Item 6 - Exhibits 17
Signatures 18
1
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)
December 31, June 30,
2004 2004
--------------------- --------------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 12,304 $ 27,489
Accounts receivable, less allowance for doubtful
accounts of $2,026 and $2,185 75,699 69,392
Inventories 88,261 86,873
Deferred income taxes 3,111 3,111
Other current assets 16,872 11,449
--------------------- --------------------
Total current assets 196,247 198,314
Property, plant and equipment, net of accumulated
depreciation and amortization of $47,147 and $40,799 89,386 87,002
Goodwill 345,235 333,218
Trademarks and other intangible assets, net of
accumulated amortization of $8,818 and $8,349 55,666 55,793
Other assets 11,012 9,904
--------------------- --------------------
Total assets $ 697,546 $ 684,231
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 55,317 $ 59,031
Current portion of long-term debt 3,851 6,845
Income taxes payable 6,211 2,489
--------------------- --------------------
Total current liabilities 65,379 68,365
Long-term debt, less current portion 93,782 104,294
Deferred income taxes 14,807 14,807
--------------------- --------------------
Total liabilities 173,968 187,466
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 37,206,048 and 37,064,648 shares 372 371
Additional paid-in capital 396,767 394,740
Deferred compensation (2,341) (2,809)
Retained earnings 122,957 106,097
Foreign currency translation adjustment 15,108 7,651
--------------------- --------------------
532,863 506,050
Less: 671,556 shares of treasury stock, at cost (9,285) (9,285)
--------------------- --------------------
Total stockholders' equity 523,578 496,765
--------------------- --------------------
Total liabilities and stockholders' equity $ 697,546 $ 684,231
===================== ====================
Note: The balance sheet at June 30, 2004 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
2
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------------- ---------------------------------------
2004 2003 2004 2003
----------------- ------------------ ----------------- ------------------
(Unaudited) (Unaudited)
Net sales $ 169,753 $ 142,792 $ 307,357 $ 269,845
Cost of sales 116,522 95,693 215,151 185,584
----------------- ------------------ ----------------- ------------------
Gross profit 53,231 47,099 92,206 84,261
Selling, general and
administrative expenses 35,173 30,047 63,358 55,866
----------------- ------------------ ----------------- ------------------
Operating income 18,058 17,052 28,848 28,395
Interest expense and other
expenses, net 553 350 1,208 1,141
----------------- ------------------ ----------------- ------------------
Income before income taxes 17,505 16,702 27,640 27,254
Provision for income taxes 6,827 6,330 10,780 10,340
----------------- ------------------ ----------------- ------------------
Net income $ 10,678 $ 10,372 $ 16,860 $16,914
================= ================== ================= ==================
Net income per share:
Basic $ 0.29 $ 0.30 $ 0.46 $ 0.49
================= ================== ================= ==================
Diluted $ 0.29 $ 0.29 $ 0.46 $ 0.47
================= ================== ================= ==================
Weighted average common shares outstanding:
Basic 36,390 34,913 36,332 34,567
================= ================== ================= ==================
Diluted 37,207 36,135 37,031 35,745
================= ================== ================= ==================
See notes to consolidated financial statements.
3
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
(In thousands, except per share and share amounts)
Foreign
Cur-
Unamor- rency
Common Addi- tized Re- Trans-
Stock tional Non-Cash tained Treasury lation Compre-
Amount Paid-in Compen- Earn- Stock Adjust- hensive
Shares at $.01 Capital sation ings Shares Amount ment Total Income
---------- --------- --------- -------- --------- --------- --------- -------- ---------- --------
Balance at
June 30, 2004 37,064,648 $371 $ 394,740 $ (2,809) $ 106,097 671,556 $ (9,285) $ 7,651 $ 496,765
Exercise of
stock
options 141,400 1 2,004 2,005
Non-cash
compensation
charge 23 468 491
Comprehensive
income:
Net income for
the period 16,860 16,860 $ 16,860
Translation
adjustments 7,457 7,457 7,457
---------
Total compre-
hensive
income $ 24,317
---------------------------------------------------------------------------------------------------- =========
Balance at
December 31,
2004 37,206,048 $372 $ 396,767 $ (2,341) $ 122,957 671,556 $ (9,285) $ 15,108 $ 523,578
====================================================================================================
See notes to consolidated financial statements.
4
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended
December 31,
------------------------------------------
2004 2003
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net income $ 16,860 $ 16,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,817 5,331
Provision for doubtful accounts 22 (115)
Increase (decrease) in cash attributable to changes in
operating assets and liabilities, net of amounts
applicable to acquired businesses:
Accounts receivable (4,570) (12,641)
Inventories (1,215) (7,126)
Other current assets (4,563) (1,364)
Other assets (1,234) 1,868
Accounts payable and accrued expenses (7,469) 1,837
Income taxes, net 3,455 7,912
------------------ -------------------
Net cash provided by operating activities 8,103 12,616
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,340) (2,293)
Acquisitions of businesses, net of cash acquired (5,418) -
------------------ -------------------
Net cash used in investing activities (10,758) (2,293)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of bank revolving
credit facility, net (8,500) (1,650)
Payments on economic development revenue bonds (3,550) (258)
Purchase of treasury stock - (279)
Proceeds from exercise of warrants and options, net of
related expenses 2,005 9,788
Repayments of other long-term debt, net (871) (2,352)
------------------ -------------------
Net cash (used in) provided by financing activities (10,916) 5,249
------------------ -------------------
Effect of exchange rate changes on cash (1,614) (2,785)
------------------ -------------------
Net (decrease) increase in cash and cash equivalents (15,185) 12,787
Cash and cash equivalents at beginning of period 27,489 10,984
------------------ -------------------
Cash and cash equivalents at end of period $ 12,304 $ 23,771
================== ===================
See notes to consolidated financial statements.
5
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
The Hain Celestial Group, Inc., a Delaware corporation, and its
subsidiaries (collectively, the "Company", and herein referred to as "we", "us",
and "our") manufacture, market, distribute and sell natural, organic, specialty
and snack food products and natural and organic personal care products under
brand names which are sold as "better-for-you" products. We are a leader in many
of the top natural food categories, with such well-known food brands as
Celestial Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R), Rice
Dream(R), Soy Dream(R), Imagine(R), Walnut Acres Organic(R), Ethnic Gourmet(R),
Rosetto(R), Little Bear Organic Foods(R), Bearitos(R), Arrowhead Mills(R),
Health Valley(R), Breadshop's(R), Casbah(R), Garden of Eatin'(R), Terra
Chips(R), Harry's Premium Snacks(R), Boston's(R), Lima(R), Biomarche(R), Grains
Noirs(R), Natumi(R), Milkfree, Yves Veggie Cuisine(R), DeBoles(R), Earth's
Best(R), and Nile Spice(R). The Company's 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 natural and
organic personal care product line is marketed under the JASON(R), Orjene(R),
Shaman Earthly Organics(TM), and Heather's(R) brands.
We operate in one business segment: the sale of natural, organic and other
food and beverage and personal care products. In our 2004 fiscal year,
approximately 39% of our revenues were derived from products that were
manufactured within our own facilities with 61% produced by various co-packers.
All dollar amounts in our consolidated financial statements and notes have
been rounded to the nearest thousand dollars, except per share amounts. Share
amounts in the notes to consolidated financial statements are presented in
thousands.
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 six months ended December
31, 2004 are not necessarily indicative of the results that may be expected for
the year ending June 30, 2005. Please refer to the footnotes to our consolidated
financial statements as of June 30, 2004 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.
6
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 Six Months Ended
December 31, December 31,
--------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- ----------------- ---------------- -----------------
Numerator:
Net income $ 10,678 $10,372 $ 16,860 $16,914
=============== ================= ================ =================
Denominator (in thousands):
Denominator for basic earnings per
share - weighted average shares
outstanding during the period 36,390 34,913 36,332 34,567
--------------- ----------------- ---------------- -----------------
Effect of dilutive securities:
Stock options 817 1,072 696 1,018
Warrants - 150 3 160
--------------- ----------------- ---------------- -----------------
817 1,222 699 1,178
--------------- ----------------- ---------------- -----------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 37,207 36,135 37,031 35,745
=============== ================= ================ =================
Basic net income per share $ 0.29 $ 0.30 $ 0.46 $ 0.49
=============== ================= ================ =================
Diluted net income per share $ 0.29 $ 0.29 $ 0.46 $ 0.47
=============== ================= ================ =================
4. INVENTORIES
Inventories consisted of the following:
December 31, June 30,
2004 2004
------------------- --------------------
Finished goods $56,146 $56,132
Raw materials,
work-in-progress
and packaging 32,115 30,741
------------------- --------------------
$88,261 $86,873
=================== ====================
7
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
December 31, June 30,
2004 2004
-------------------- ---------------
Land $ 8,212 $ 8,113
Buildings and improvements 30,819 29,867
Machinery and equipment 85,581 79,275
Furniture and fixtures 2,607 2,527
Leasehold improvements 3,872 3,478
Construction in progress 5,442 4,541
-------------------- ---------------
136,533 127,801
Less: Accumulated depreciation
and amortization 47,147 40,799
-------------------- ---------------
$ 89,386 $ 87,002
==================== ===============
6. ACQUISITIONS
On June 3, 2004, we acquired 100% of the stock of privately-held Jason
Natural Products, Inc., a California-based manufacturer and marketer of natural
and organic personal care products. In recent years, Jason Natural Products has
expanded its lines of natural and organic personal care products by integrating
a series of brands including Orjene(R), Shaman Earthly Organics(TM), and
Heather's(R) into its portfolio. The purchase price consisted of approximately
$23.9 million in cash, plus the assumption of certain liabilities. At December
31, 2004, goodwill (not deductible for tax purposes) from this transaction was
estimated to be $24.7 million.
On May 27, 2004, we acquired substantially all of the assets and assumed
certain liabilities of the Rosetto(R) and Ethnic Gourmet(R) businesses of H.J.
Heinz Company, LP, which owned approximately 16.7% of our common stock at the
time of the transaction. These businesses produce and market frozen pasta and
natural ethnic frozen meals, respectively. The purchase price consisted of
approximately $22.8 million in cash, plus the assumption of certain liabilities.
At December 31, 2004, goodwill (deductible for tax purposes) from this
transaction was estimated to be $8.4 million.
The following table summarizes the estimated fair values of assets acquired
and liabilities assumed of Jason Natural Products, Rosetto, and Ethnic Gourmet
at the dates of the acquisitions:
Current assets $ 12,369
Property and equipment 12,871
Other assets 102
---------
Total assets 25,342
Liabilities assumed 4,364
---------
Net assets acquired $ 20,978
=========
The balance sheet at December 31, 2004, includes the assets acquired and
liabilities assumed valued at fair market value at the date of purchase. We are
in the process of performing the procedures required to finalize the purchase
price allocation for the above fiscal 2004 acquisitions; however, these
procedures are in the early stages and are expected to be completed during the
later half of fiscal 2005.
The results of operations for the three months and six months ended
December 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 the periods shown. This information has not been
adjusted to reflect any changes in the operations of these businesses subsequent
to their
8
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
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, and discontinuation of sales of
private label 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 Six Months Ended
December 31, 2003 December 31, 2003
------------------------ ------------------------
Net sales $ 156,778 $ 296,842
======================== ========================
Net income $ 10,940 $ 16,861
======================== ========================
Earnings per share:
Basic $ 0.31 $ 0.49
======================== ========================
Diluted $ 0.30 $ 0.47
======================== ========================
Weighted average shares:
Basic 34,913 34,567
======================== ========================
Diluted 36,135 35,745
======================== ========================
In management's opinion, the unaudited pro forma results of operations is
not indicative of the actual results that would have occurred had the JASON(R),
Rosetto(R) and Ethnic Gourmet(R) 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 channels in Europe. The purchase price consisted of approximately $1.75
million in cash as well as the assumption of certain liabilities. The purchase
price excludes the amount of contingency payments we are obligated to pay the
former owner of Natumi. The contingency payments are based on the achievement by
Natumi of certain financial targets over an approximate 3.5 year period
following the date of acquisition. Such payments, which could total
approximately 9.0 million euros, will be charged to goodwill if and when paid.
No such contingency payments have been made since the acquisition. The net
assets acquired, as well as the sales and operations of Natumi, are not material
to the Company's consolidated financial position or results of operations and,
therefore, have not been included in the detailed information about our
acquisitions.
7. 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 December 31, 2004, $90.7 million was borrowed under the Credit
Facility at an interest rate of 3.7%. On February 7, 2005, the outstanding
borrowings under the Credit Facility were reduced to $82.7 million by an $8
million repayment.
9
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
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 SFAS No. 123, "Accounting For Stock-Based Compensation,"
net earnings and earnings per share for the three months and six months ended
December 31, 2004 and 2003 would have been the pro forma amounts that follow:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------- --------------------------------
2004 2003 2004 2003
-------------- ------------- ------------- ---------------
Net income, as reported $ 10,678 $ 10,372 $ 16,860 $ 16,914
Non-cash compensation charge, net of
related tax effects 150 7 300 14
Stock-based employee compensation
expense determined under fair value
method, net of related tax effects (1,393) (716) (4,855) (1,937)
-------------- ------------- ------------- ---------------
Pro forma net income $ 9,435 $ 9,663 $ 12,305 $ 14,991
============== ============= ============= ===============
Basic net income per share:
As reported $ 0.29 $ 0.30 $ 0.46 $ 0.49
============== ============= ============= ===============
Pro forma $ 0.26 $ 0.28 $ 0.34 $ 0.43
============== ============= ============= ===============
Diluted net income per share:
As reported $ 0.29 $ 0.29 $ 0.46 $ 0.47
============== ============= ============= ===============
Pro forma $ 0.25 $ 0.27 $ 0.33 $ 0.42
============== ============= ============= ===============
On December 16, 2004, the Financial Accounting Standards Board issued
Statement No. 123 (revised 2004), "Share-Based Payment," which is a revision of
SFAS No. 123. SFAS No. 123(R) supersedes APB 25 and amends SFAS No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS No. 123 (R) is
similar to the approach described in SFAS No. 123. However, SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair
values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must
be adopted no later than July 1, 2005. Early adoption will be permitted in
periods in which financial statements have not yet been issued. We expect to
adopt SFAS No. 123(R) on July 1, 2005.
10
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 and natural and organic personal care products under brand
names which are sold as "better-for-you" products. We are a leader in many of
the top natural food categories, with such well-known food brands as Celestial
Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R), Rice Dream(R),
Soy Dream(R), Imagine(R), Walnut Acres Organic(R), Ethnic Gourmet(R),
Rosetto(R), Little Bear Organic Foods(R), Bearitos(R), Arrowhead Mills(R),
Health Valley(R), Breadshop's(R), Casbah(R), Garden of Eatin'(R), Terra
Chips(R), Harry's Premium Snacks(R), Boston's(R), Lima(R), Biomarche(R), Grains
Noirs(R), Natumi(R), Milkfree, Yves Veggie Cuisine(R), DeBoles(R), Earth's
Best(R), and Nile Spice(R). The Company's 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 natural and
organic personal care product line is marketed under the JASON(R), Orjene(R),
Shaman Earthly Organics(TM), and Heather's(R) brands. 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 and personal care products by
integrating all of our brands under one management team and employing a uniform
marketing, sales and distribution program. Our business strategy is to
capitalize on the brand equity and the distribution previously achieved by each
of our acquired product lines and to enhance revenues by strategic introductions
of new product lines that complement existing products.
Results of Operations
Three months ended December 31, 2004
Net sales for the three months ended December 31, 2004 were $169.8 million,
an increase of $27.0 million or 18.9% over net sales of $142.8 million for the
three months ended December 31, 2003. The increase came from increases in sales
across our Company, including an 8.3% increase in our Celestial Seasonings tea
brand and an increase of 17.8% in our Canadian business. Sales of our
low-carbohydrate products declined parallel with trends in the consumer markets;
however, these sales were replaced by strong sales gains in our DeBoles pasta
and our Arrowhead Mills brands. During the December 31, 2004 quarter, we
benefited by approximately 2% from the phasing in of price increases we began to
implement in July 2004. Sales also benefited from sales generated by businesses
acquired that we did not own during the comparable quarter of the prior year.
Gross profit for the three months ended December 31, 2004 was 31.4% of net
sales as compared to 33.0% of net sales for the three months ended December 31,
2003. The decline in gross profit percentage was principally the result of a
change in the mix of products sold. This change in mix comes from acquired
businesses increasing our consolidated sales and thereby reducing the
proportionate contribution of our higher margin tea products. We also continued
to incur higher costs of ingredients, increased transportation costs which began
in the third quarter of fiscal 2004 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. These higher costs
increased the costs of our products by approximately 2.2%, which amount offset
the benefit of our price increase.
Selling, general and administrative expenses increased by $5.2 million to
$35.2 million for the three months ended December 31, 2004 as compared to $30.0
million for the three months ended December 31, 2003. Such expenses amounted to
20.7% of net sales for the three months ended December 31, 2004 compared with
21.0% in the December 31, 2003 quarter. Selling, general and administrative
expenses have increased in overall dollars, primarily as a result of costs
brought on by businesses acquired in 2004, increased consumer marketing expenses
needed to support our increased sales as well as increases across all levels of
general and administrative expenses to support our growing business. General and
administrative expenses for the three months ended December 31, 2004 includes
approximately $1.2 million for the cost of terminated employees, for non-cash
compensation charges, and for Sarbanes-Oxley compliance costs.
11
Operating income was $18.1 million for the three months ended December 31,
2004 compared to $17.1 million for the three months ended December 31, 2003.
Operating income as a percentage of net sales was 10.6% in the December 31, 2004
quarter, compared with 11.9% in the December 31, 2003 quarter. The dollar
increase resulted principally from higher sales, while the percentage decrease
resulted principally from lower gross profit as a percentage of sales.
Interest and other expenses, net amounted to $.6 million for the three
months ended December 31, 2004 compared to $.4 million for the three months
ended December 31, 2003. Our interest expense was $.4 million higher this
quarter as compared to the prior year quarter, principally as a result of the
higher average borrowings we carry this year after our recent acquisitions. We
had $.6 million in net currency exchange gains this quarter as compared to $.4
million in the prior year quarter, which partially offset the additional
interest costs.
Income before income taxes for the three months ended December 31, 2004
amounted to $17.5 million compared to $16.7 million in the comparable period of
the prior year. This increase was attributable to the increase in operating
income.
Our effective income tax rate approximated 39% of pre-tax income for the
three months ended December 31, 2004 compared to 38% for the three months ended
December 31, 2003. We expect our effective tax rate to approximate 39% during
the remainder of fiscal 2005.
Net income for the three months ended December 31, 2004 was $10.7 million
compared to $10.4 million for the three months ended December 31, 2003. The
increase of $.3 million in earnings was primarily attributable to the
aforementioned increase in income before income taxes offset by the increase in
our effective tax rate.
Six Months Ended December 31, 2004
Net sales for the six months ended December 31, 2004 were $307.4 million,
an increase of $37.6 million or 13.9% over net sales of $269.8 million for the
six months ended December 31, 2003. The increase came from volume increases and
from the phasing in of price increases and from sales generated by businesses
acquired in 2004. During the second quarter ended December 31, 2004, sales of
our low-carbohydrate products declined parallel with trends in the consumer
markets; however, these sales were replaced by strong sales gains in our DeBoles
pasta and our Arrowhead Mills brands. During the first quarter ended September
30, 2004, sales were negatively impacted by reductions in inventories estimated
at $12.0 million at two major distributors.
Gross profit for the six months ended December 31, 2004 was 30.0% of net
sales as compared to 31.2% of net sales for the six months ended December 31,
2003. The decline in gross profit percentage was the result of a change in the
mix of products sold whereby our higher margin tea sales became a lower
proportion of our consolidated sales; increases in transportation costs which
began in the third quarter of fiscal 2004 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. Also, we incurred
higher cost of ingredients and higher personnel and benefits costs this period
as compared to the prior year period. These higher costs were offset in part by
the effect of the price increase that we phased in beginning July 1, 2004.
Selling, general and administrative expenses increased by $7.5 million to
$63.4 million for the six months ended December 31, 2004 as compared to $55.9
million for the six months ended December 31, 2003. Such expenses amounted to
20.6% of net sales for the six months ended December 31, 2004 compared with
20.7% for the six months ended December 31, 2003. Selling, general and
administrative expenses have increased in overall dollars, primarily as a result
of costs brought on by businesses acquired in 2004, increased consumer marketing
expenses needed to support our increased sales as well as increases across all
levels of general and administrative expenses to support our growing business.
General and administrative expenses for the six months ended December 31, 2004
includes approximately $1.8 million for the cost of terminated employees, for
non-cash compensation charges and for Sarbanes-Oxley compliance costs.
12
Operating income was $28.8 million for the six months ended December 31,
2004 compared to $28.4 million for the six months ended December 31, 2003.
Operating income as a percentage of net sales was 9.4% for the current year
period, compared with 10.5% for the prior year period. The dollar increase
resulted principally from higher sales, while the percentage decrease resulted
principally from lower gross profit as a percentage of sales.
Interest and other expenses, net amounted to $1.2 million for the six
months ended December 31, 2004 compared to $1.1 million for the six months ended
December 31, 2003. Our interest expense was $.7 million higher the current year
period as compared to the prior year period, principally as a result of the
higher average borrowings we carry this year after our recent acquisitions. We
had $.8 million in net currency exchange gains in the current year period as
compared to $.3 million in net currency exchange losses in the prior year
period, which partially offset the additional interest costs.
Income before income taxes for the six months ended December 31, 2004
amounted to $27.6 million compared to $27.3 million in the comparable period of
the prior year. This increase was attributable to the increase in operating
income.
Our effective income tax rate approximated 39% of pre-tax income for the
six months ended December 31, 2004 compared to 38% for the six months ended
December 31, 2003. We expect our effective tax rate to approximate 39% during
the remainder of fiscal 2005.
Net income for the six months ended December 31, 2004 and 2003 was $16.9
million. Although overall dollars were flat period over period, the percentage
decrease from 6.3% for the prior year period to 5.5% for the current year period
was primarily attributable to the aforementioned decrease in income before
income taxes as a percentage of sales offset by the increase in our effective
tax rate as a percentage of sales.
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 December 31, 2004, we
had $90.7 million outstanding under the Credit Facility. On February 7, 2005,
the outstanding borrowings under the Credit Facility were reduced to $82.7
million by an $8 million repayment.
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 the ability to develop our existing infrastructure through
capital investment.
Net cash provided by operations was $8.1 million and $12.6 million for the
six months ended December 31, 2004 and 2003, respectively. Our working capital
and current ratio was $130.9 million and 3.0 to 1, respectively, at December 31,
2004 compared with $129.9 million and 2.9 to 1 respectively, at June 30, 2004.
The increase in working capital resulted principally from a decrease in our
current liabilities offset by a decrease in current assets. The decrease in
current assets was driven by a decrease in cash which was used to reduce both
current liabilities and debt during the six months ended December 31, 2004.
Net cash (used in) provided by financing activities was $(10.9) million and
$5.2 million for the six months ended December 31, 2004 and 2003, respectively.
The change was due principally to our pay down of approximately $12.9 million of
debt offset by proceeds from the exercise of warrants and options of
approximately $2.0 million during the first six months of fiscal 2005, as
compared to our pay down of approximately $4.3 million offset by proceeds from
the exercise of warrants and options of approximately $9.8 million during the
first six months of fiscal 2004.
13
We believe that cash on hand of $12.3 million at December 31, 2004,
projected remaining fiscal 2005 cash flows from operations, and availability
under our Credit Facility are sufficient to fund our working capital needs,
anticipated capital expenditures of approximately $6 million, and scheduled debt
and lease payments of approximately $8.6 million for the remainder of fiscal
2005. We currently invest our cash on hand in highly liquid short-term
investments yielding approximately 2% 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 28% 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 approximated $6 million at December 31, 2004 and
June 30, 2004.
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 actual cost or market, 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 provide
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.
14
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 when the earnings process is complete, which occurs
when products are shipped in accordance with terms of agreements, title and risk
of loss transfer to customers, collection is probable and pricing is fixed or
determinable. Sales are reported net of sales incentives, which include trade
discounts and promotions and certain coupon costs. Shipping and handling costs
billed to customers are included in reported sales. Allowances for cash
discounts 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 of 1934 and Sections 21E of the Securities Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, levels of activity, performance
or achievements of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; our
ability to implement our business and acquisition strategy; the ability to
effectively integrate our acquisitions; our ability to obtain financing for
general corporate purposes; competition; availability of key personnel; changes
in, or the failure to comply with government regulations; and other risks
detailed from time-to-time in the Company's reports filed with the Securities
and Exchange Commission, including the report on Form 10-K for the fiscal year
ended June 30, 2004. As a result of the foregoing and other factors, no
assurance can be given as to future results, levels of activity and achievements
and neither the Company nor any person assumes responsibility for the accuracy
and completeness of these statements.
15
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 over financial
reporting during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, those controls.
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on December 2, 2004. The Company
submitted the following matters to a vote of security holders:
1. To elect a board of directors to serve until the next Annual Meeting
of Stockholders and until their successors are duly elected and
qualified; and
2. To amend our 2002 Long Term Incentive and Stock Award Plan to increase
the number of shares issuable over the term of the plan by 1,800,000
shares to 4,900,000 shares in the aggregate; and
3. To ratify the appointment of Ernst & Young LLP as our registered
independent accountants for fiscal 2005.
The stockholders elected the persons named below, the Company's nominees for
directors, as directors for the Company, casting votes as shown below:
- ------------------------------------------------------ ------------------
ELECTION OF DIRECTORS FOR WITHHELD
- ------------------------------------------------------ ------------------
Irwin D. Simon 32,024,449 2,541,537
- ------------------------------------------------------ ------------------
Beth L. Bronner 31,157,998 3,407,988
- ------------------------------------------------------ ------------------
Jack Futterman 32,067,389 2,498,597
- ------------------------------------------------------ ------------------
Daniel R. Glickman 32,358,627 2,207,359
- ------------------------------------------------------ ------------------
Barry J. Alperin 32,289,772 2,276,214
- ------------------------------------------------------ ------------------
Marina Hahn 31,693,382 2,872,604
- ------------------------------------------------------ ------------------
Mitchell A. Ring 32,095,716 2,470,270
- ------------------------------------------------------ ------------------
Andrew R. Heyer 31,410,959 3,155,027
- ------------------------------------------------------ ------------------
Lewis D. Schiliro 32,261,889 2,304,097
- ------------------------------------------------------ ------------------
D. Edward I. Smyth 32,120,481 2,445,505
- ------------------------------------------------------ ------------------
Roger Meltzer 31,751,225 2,814,761
- ------------------------------------------------------ ------------------
Larry S. Zilavy 32,292,297 2,273,689
- ------------------------------------------------------ ------------------
The stockholders did not approve the proposal to amend our 2002 Long Term
Incentive and Stock Award Plan casting 13,635,165 votes in favor, 16,094,136
votes against, 118,365 abstaining and 4,718,320 not voted.
The stockholders ratified the appointment of Ernst & Young LLP, casting
34,263,151 votes in favor, 266,536 votes against, and 36,299 abstaining.
16
ITEM 6. EXHIBITS
EXHIBTS
Exhibit Number Description
- -------------- -----------
10.1 Form of Indemnification Agreement.
10.2 Form of Change in Control Agreement.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange 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.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HAIN CELESTIAL GROUP, INC.
Date: February 9, 2005 /s/ Irwin D. Simon
--------------------------------
Irwin D. Simon,
Chairman, President and Chief
Executive Officer
Date: February 9, 2005 /s/ Ira J. Lamel
--------------------------------
Ira J. Lamel,
Executive Vice President and
Chief Financial Officer
18