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 September 30, 2005
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 by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes _______ No X
As of November 1, 2005, there were 36,935,424 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
Condensed Consolidated Balance Sheets - September 30, 2005
(unaudited) and June 30, 2005 .....................................2
Condensed Consolidated Statements of Income -
Three Months ended September 30, 2005 and 2004 (unaudited) ........3
Condensed Consolidated Statement of Stockholders' Equity -
Three months ended September 30, 2005 (unaudited) .................4
Condensed Consolidated Statement of Cash Flows -
Three months ended September 30, 2005 and 2004 (unaudited) ........5
Notes to Condensed Consolidated Financial Statements ............6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .....................10-13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .......................................14
Item 4. Controls and Procedures ..........................................14
Part II Other Information
Items 1, 3, 4 and 5 are not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......14
Item 6. Exhibits ..........................................................14
Signatures ................................................................15
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
September 30, June 30,
2005 2005
--------------------- --------------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 20,021 $ 24,139
Accounts receivable, less allowance for doubtful
accounts of $2,080 and $2,074 73,478 67,148
Inventories 83,567 76,497
Recoverable income taxes 2,590 2,575
Deferred income taxes 5,671 5,671
Other current assets 18,623 18,164
--------------------- --------------------
Total current assets 203,950 194,194
Property, plant and equipment, net of accumulated
depreciation and amortization of $51,842 and $49,035 93,120 88,204
Goodwill 358,261 350,833
Trademarks and other intangible assets, net of
accumulated amortization of $8,941 and $9,142 60,875 61,010
Other assets 12,635 12,895
--------------------- --------------------
Total assets $ 728,841 $ 707,136
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 62,675 $ 65,922
Income taxes payable 5,833 1,139
Current portion of long-term debt 4,148 2,791
--------------------- --------------------
Total current liabilities 72,656 69,852
Long-term debt, less current portion 90,785 92,271
Deferred income taxes 16,723 16,723
Minority interest 4,772 -
--------------------- --------------------
Total liabilities 184,936 178,846
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 37,784,930 and 37,475,998 shares 378 375
Additional paid-in capital 407,862 402,645
Retained earnings 135,330 127,967
Foreign currency translation adjustment 13,080 10,048
--------------------- --------------------
556,650 541,035
Less: 861,256 shares of treasury stock, at cost (12,745) (12,745)
--------------------- --------------------
Total stockholders' equity 543,905 528, 290
--------------------- --------------------
Total liabilities and stockholders' equity $ 728,841 $ 707,136
===================== ====================
Note: The balance sheet at June 30, 2005 has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
2
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share and share amounts)
Three Months Ended
September 30,
-------------------------------------------
2005 2004
------------------- --------------------
(Unaudited)
Net sales $ 161,097 $ 137,604
Cost of sales 115,248 98,629
------------------- --------------------
Gross profit 45,849 38,975
Selling, general and administrative expenses 33,095 28,185
------------------- --------------------
Operating income 12,754 10,790
Interest expense and other expenses, net 868 655
------------------- --------------------
Income before income taxes 11,886 10,135
Provision for income taxes 4,523 3,953
------------------- --------------------
Net income $ 7,363 $ 6,182
=================== ====================
Net income per share:
Basic $ 0.20 $ 0.17
=================== ====================
Diluted $ 0.20 $ 0.17
=================== ====================
Weighted average common shares outstanding:
Basic 36,636 36,273
=================== ====================
Diluted 37,560 36,855
=================== ====================
See notes to condensed consolidated financial statements.
3
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
(In thousands, except per share and share amounts)
Foreign
Common Stock Additional Currency Compre-
Amount Paid-in Retained Treasury Stock Translation hensive
Shares at $.01 Capital Earnings Shares Amount Adjustment Total Income
----------- ------------ ------------ ------------ ---------- ---------- ------------ ---------------------
Balance at
June 30, 2005 37,475,998 $375 $ 402,645 $ 127,967 861,256 $ (12,745) $ 10,048 $528,290
Exercise of
stock options 208,450 2 3,268 3,270
Issuance of
common stock 100,482 1 1,703 1,704
Non-cash compensation
charge 246 246
Comprehensive income:
Net income 7,363 7,363 $ 7,363
Translation
adjustments 3,032 3,032 3,032
---------
Total compre-
hensive
income $ 10,395
----------- -------- ------------ ----------- --------- ---------- ---------- --------- =========
Balance at
September
30, 2005 37,784,930 $ 378 $407,862 $ 135,330 861,256 $ (12,745) $ 13,080 $ 543,905
=========== ======== ============ =========== ========= ========== ========== =========
See notes to condensed consolidated financial statements.
4
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
September 30,
------------------------------------------
2005 2004
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net income $ 7,363 $ 6,182
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,207 3,105
Provision for doubtful accounts 6 (10)
Non-cash compensation 246 246
Other non-cash items 84 -
Increase (decrease) in cash attributable to changes in
operating assets and liabilities, net of amounts
applicable to acquired businesses:
Accounts receivable (4,340) (973)
Inventories (6,594) (7,083)
Other current assets (439) (3,159)
Other assets 1,711 (1,789)
Accounts payable and accrued expenses (5,409) (5,775)
Income taxes, net 4,694 2,477
------------------ -------------------
Net cash provided by (used in) operating activities 529 (6,779)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,108) (2,781)
Acquisitions of businesses, net of cash acquired (4,257) (1,570)
------------------ -------------------
Net cash used in investing activities (7,365) (4,351)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on bank revolving credit facility, net - (5,500)
Proceeds from issuance of common stock, net of related expenses 2,974 805
Repayments of other long-term debt, net (401) (1,427)
------------------ -------------------
Net cash provided by (used in) financing activities 2,573 (6,122)
------------------ -------------------
Effect of exchange rate changes on cash 145 (472)
------------------ -------------------
Net decrease in cash and cash equivalents (4,118) (17,724)
Cash and cash equivalents at beginning of period 24,139 27,489
------------------ -------------------
Cash and cash equivalents at end of period $ 20,021 $ 9,765
================== ===================
See notes to condensed consolidated financial statements.
5
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 and organic food products and
natural 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(TM), 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, Raised Right(TM), 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, Boston Better
Snacks(R), and Alba Foods(R). Our natural and organic personal care product line
is marketed under the JASON(R), Zia(R), Orjene(R), Shaman Earthly Organics(TM),
and Heather's(R) brands.
We operate in one business segment: the sale of natural and organic food and
personal care products. In our 2005 fiscal year, approximately 47% of our
revenues were derived from products that were manufactured within our own
facilities with 53% produced by various co-packers.
All dollar amounts in our consolidated financial statements and tables 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. The consolidated financial statements reflect all normal recurring
adjustments which, in management's opinion, are necessary for a fair
presentation for interim periods. Operating results for the three months ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2006. Please refer to the footnotes to our
consolidated financial statements as of June 30, 2005 and for the year then
ended included in our Annual Report on Form 10-K, as amended, 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 CONDENSED 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
September 30,
------------------------
2005 2004
------------ ------------
Numerator:
Net income $ 7,363 $ 6,182
============ ============
Denominator (in thousands):
Denominator for basic earnings per
share - weighted average shares
outstanding during the period 36,636 36,273
------------ ------------
Effect of dilutive securities:
Stock options 924 576
Warrants - 6
------------ ------------
924 582
------------ ------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 37,560 36,855
============ ============
Basic net income per share $ 0.20 $ 0.17
============ ============
Diluted net income per share $ 0.20 $ 0.17
============ ============
4. INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2005 2005
------------------- -------------------
Finished goods $52,154 $48,240
Raw materials, work-in-progress
and packaging 31,413 28,257
------------------- -------------------
$83,567 $76,497
=================== ===================
7
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
September 30, June 30,
2005 2005
---------------- --------------------
Land $ 7,512 $ 7,481
Buildings and improvements 34,575 31,766
Machinery and equipment 89,767 89,331
Furniture and fixtures 5,127 2,542
Leasehold improvements 2,576 2,955
Construction in progress 5,405 3,164
---------------- --------------------
144,962 137,239
Less: Accumulated depreciation
and amortization 51,842 49,035
---------------- --------------------
$ 93,120 $ 88,204
================ ====================
6. ACQUISITIONS
On July 1, 2005, we acquired the assets of College Hill Poultry of
Fredericksburg, PA through Hain Pure Protein Corporation, which is a joint
venture with Pegasus Capital Advisors, LP, a private equity firm. We control
50.1% of the joint venture. College Hill Poultry's Raised Right (TM) brand of
natural and organic, free-range chicken are raised on family farms and grain-fed
without antibiotics or animal by-products. Raised Right (TM) customers include
supernaturals and conventional supermarkets, natural food stores and foodservice
outlets. The purchase price consisted of approximately $4.7 million in cash as
well as the assumption of certain liabilities. The net assets acquired, as well
as the sales and operations of Hain Pure Protein Corporation, are not material
to the Company's consolidated financial position or the results of its
operations.
On April 4, 2005, we acquired 100% of the stock of privately held Zia Cosmetics,
Inc., including the Zia(R) Natural Skincare brand, a respected leader in
therapeutic products for healthy, beautiful skin sold mainly through natural
food retailers. The purchase price consisted of approximately $10 million in
cash as well as the assumption of certain liabilities. The purchase price
excludes the amount of contingency payments we may be obligated to pay. The
contingency payments are based on the achievement by Zia of certain financial
targets over an approximate two year period following the date of acquisition.
Such payments, which could total approximately $1.3 million, 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
Zia, are not material to the Company's consolidated financial position or the
results of operations.
7. CREDIT FACILITY
We have available to us a $300 million credit facility (the "Credit Facility")
with a bank group 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 an applicable
margin) or, at our option, the reserve adjusted LIBOR rate plus an applicable
margin. As of September 30, 2005, $89.7 million was borrowed under the Credit
Facility at a weighted-average interest rate of 5.0%.
8
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
8. STOCK-BASED COMPENSATION
Effective July 1, 2005, we adopted SFAS No. 123(R), "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." 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.
On June 24, 2005, the Company's Board of Directors accelerated the vesting of
all outstanding stock options held by employees. During the three months ended
September 30, 2005, there were no stock options granted. As such, there was no
stock option expense during the three months ended September 30, 2005.
9. STRATEGIC ALLIANCE WITH YHS
On September 6, 2005, the Company and Yeo Hiap Seng Limited ("YHS"), a Singapore
based natural food and beverage company listed on the Singapore Exchange,
exchanged $2 million in equity investments in each other resulting in the
issuance of 100,482 shares of the Company's common stock to YHS and one of its
subsidiaries and the issuance of 1,326,938 ordinary shares of YHS (representing
less than 1% of the outstanding shares) to the Company. These investments
represent the completion of the first stage of an alliance established between
the Company and YHS which is expected to result in the pursuit of joint
interests in marketing and distribution of food and beverages and product
development.
The Company's investment in YHS shares, which is included in other assets in the
accompanying balance sheet, is carried at cost since the Company is restricted
from selling these shares prior to September 6, 2007. The quoted price of the
YHS shares on the Singapore Exchange at September 30, 2005 was used to
approximate their carrying value.
10. PENDING ACQUISITION
On August 23, 2005, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Spectrum Organic Products, Inc. ("Spectrum")
whereby the Company will acquire all of the issued and outstanding stock of
Spectrum.
Spectrum is a California-based leading manufacturer and marketer of natural and
organic culinary oils, vinegars, condiments and butter substitutes under the
Spectrum Naturals(R) brand and essential fatty acid nutritional supplements
under the Spectrum Essentials(R) brand. Spectrum's products are sold mainly
through natural food retailers. Spectrum reported sales of $49.9 million for its
last fiscal year.
Upon the effective time of the merger, the Company will pay approximately $0.705
per share, adjusted to reflect Spectrum's estimate of their expenses and the
price adjustment provisions set forth in the Merger Agreement. The total
consideration to be paid by the Company to Spectrum's shareholders is expected
to be approximately $34.5 million, which shall be comprised of 50% cash and 50%
of the Company's common stock. The value of the common stock portion of the
consideration is subject to an adjustment based upon the closing price of the
Company's common stock immediately prior to the closing of the merger, which is
expected to take place in December 2005. The transaction has been approved by
the boards of directors of both companies and is subject to approval by
Spectrum's shareholders and other customary conditions.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We manufacture, market, distribute and sell natural and organic food products
and natural 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(TM), 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, Raised Right(TM), 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, Boston Better
Snacks(R), and Alba Foods(R). Our natural and organic personal care product line
is marketed under the JASON(R), Zia(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 September 30, 2005
Net sales for the three months ended September 30, 2005 were $161.1 million, an
increase of $23.5 million or 17.1% over net sales of $137.6 million in the
September 30, 2004 quarter. The increase came from increased brand sales for
Terra Chips(R), which was up 14%, Garden of Eatin'(R), which was up 32%, Health
Valley(R), which was up 13%, Earth's Best(R), which was up 61%, Imagine(R)
Soups, which was up 52%, Celestial Seasonings(R) teas, which was up 7%, and the
Company's personal care brands, which were up 32%. Sales for our brands in
Europe increased 10% and sales for our brands in Canada were up 5%. Sales of our
Jason Natural Products, acquired in June 2004, our Rosetto(R) and Ethnic
Gourmet(R) brands, acquired in May 2004, and our Natumi(R) brand, acquired in
February 2004, are included in each of the quarterly periods presented, while
sales of our recently acquired Zia(R) and Raised Right(TM) brands are included
only in the current quarter.
Gross profit for the three months ended September 30, 2005 was 28.5% of net
sales as compared to 28.3% of net sales in the September 30, 2004 quarter. The
increase in gross profit percentage was principally the result of operating
efficiencies offset by higher input costs. Higher costs for petroleum and
natural gas have impacted our overall business both directly with increased
inbound and outbound delivery costs, and indirectly with the pass-through of
costs from our suppliers of packaging and other major components of our finished
products. In addition, our Raised Right(TM) brand of natural and antibiotic-free
chicken operates at significantly lower margins than our other brands and, as a
result caused a 1.1% reduction in the Company's overall gross profit percentage.
Selling, general and administrative expenses increased by $4.9 million to $33.1
million for the three months ended September 30, 2005 as compared to $28.2
million in the September 30, 2004 quarter. Such expenses as a percentage of net
sales amounted to 20.5% for both the three months ended September 30, 2005 and
the three months ended September 30, 2004. Selling, general and administrative
expenses have increased in overall dollars, primarily as a result of costs
brought on by businesses acquired in 2005, 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.
10
General and administrative expenses for the three months ended September 30,
2005 includes approximately $1 million of professional fees related to our
Sarbanes-Oxley implementation. In addition, we have added two new corporate
office positions in response to these expanded requirements.
Operating income was $12.8 million in the three months ended September 30, 2005
compared to $10.8 million in the September 30, 2004 quarter. Operating income as
a percentage of net sales was 7.9% in the September 30, 2005 quarter, compared
with 7.8% in the September 30, 2004 quarter. The dollar and percentage increase
is a result of the aforementioned higher gross profit offset by higher selling,
general and administrative expenses.
Interest and other expenses amounted to $.9 million for the three months ended
September 30, 2005 compared to $.7 million for the three months ended September
30, 2004. The increase in interest expense this quarter as compared to the prior
year quarter was the result of the higher interest rates despite lower levels of
borrowings. We had $.1 million in net currency exchange gains this quarter as
compared to $.2 million in net currency exchange gains in the prior year
quarter.
Income before income taxes for the three months ended September 30, 2005
amounted to $11.9 million compared to $10.1 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 38.1% of pre-tax income for the three
months ended September 30, 2005 compared to 39% for the three months ended
September 30, 2004. Our effective tax rate for the full fiscal year ended June
30, 2005 was 36.7%.
Net income for the three months ended September 30, 2005 was $7.4 million
compared to $6.2 million in the September 30, 2004 quarter. The increase of $1.2
million in earnings was primarily attributable to the increase in sales and the
resultant increase in gross profit dollars.
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 September 30, 2005, we
had $89.7 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 the ability to develop our existing infrastructure through capital
investment.
Net cash provided by (used in) operating activities was $0.5 million and $(6.8)
million for the three months ended September 30, 2005 and 2004, respectively.
Our working capital and current ratio was $131.3 million and 2.8 to 1,
respectively, at September 30, 2005 compared with $124.3 million and 2.8 to 1
respectively, at June 30, 2005. The improvement in cash provided by operating
activities is the result of higher sales and the resultant increase in gross
profit dollars, as well as improved working capital management.
Net cash provided by (used in) financing activities was $4.6 million and $(6.1)
million for the three months ended September 30, 2005 and 2004, respectively.
The change was due principally to our pay down of approximately $0.4 million of
debt offset by proceeds from the exercise of options of approximately $5.0
million during the first three months of fiscal 2006, as compared to our pay
down of approximately $6.9 million of debt offset by proceeds from the exercise
of options of approximately $0.8 million during the first three months of fiscal
2005.
We believe that cash on hand of $20.0 million at September 30, 2005, projected
remaining fiscal 2006 cash flows from operations, and availability under our
Credit Facility are sufficient to fund our working capital needs, anticipated
capital expenditures of approximately $12 million, and scheduled debt and lease
payments of approximately $9.5 million over the next twelve months. We currently
invest our cash on hand in highly liquid short-term investments yielding
approximately 3.8% interest.
11
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:
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.
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 one of
our customers represents approximately 20% 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.
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 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.
12
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 value of goodwill, which is allocated to
the Company's five reporting units, and other intangible assets with indefinite
useful lives are tested annually for impairment.
Segments
SFAS No. 131 defines an operating segment as that component of an enterprise (i)
that engages in business activities from which it may earn revenues and incur
expenses, (ii) whose operating results are regularly reviewed by the
enterprise's chief operating decision maker (CODM) to make decisions about
resources to be allocated to the segment and assess its performance, and (iii)
for which discrete financial information is available. SFAS No. 142 defines a
reporting unit as an operating segment or one level below an operating segment
if the component constitutes a business for which discrete financial information
is available and segment management regularly reviews the operating results of
that component. The Company has determined that it operates in one segment, the
sale of natural and organic products, including food, beverage and personal care
products, and further that such single segment includes five reporting units in
the annual test of Goodwill for impairment. Characteristics of the Company's
operations which are relied on in making these determinations include the
similarities apparent in the Company's products in the natural and organic
consumer markets, the commonality of the Company's customers across brands, the
Company's unified marketing strategy, and the nature of the financial
information used by the CODM, described below, other than information on sales
and direct product costs, by brand. The Company's five reporting units are
Grocery (including snacks); Tea; Personal Care; Canada; and Europe. The Company
has further determined that its Chairman of the Board and Chief Executive
Officer is the Company's CODM as defined in SFAS No. 131, and is also the
manager of the Company's single segment. In making decisions about resource
allocation and performance assessment, the Company's CODM focuses on sales
performance by brand using internally generated sales data as well as externally
developed market consumption data acquired from independent sources, and further
reviews certain data regarding standard costs and standard gross margins by
brand. In making these decisions, the CODM receives and reviews certain Company
consolidated quarterly and year-to-date information; however, the CODM does not
receive or review any discrete financial information by geographic location,
business unit, subsidiary, division or brand. The CODM reviews and approves
capital spending on a Company consolidated basis rather than at any lower unit
level. The Company's Board of Directors receives the same quarterly and
year-to-date information as the Company's CODM.
Seasonality
Our tea brand manufactures and markets 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. In addition,
some of our other products (e.g., baking and cereal products and soups) also
show stronger sales in the cooler months while our snack food product lines are
stronger in the warmer months. 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, inclement weather 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.
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, and any amendments
thereto, for the fiscal year ended June 30, 2005. 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.
13
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, these officers concluded that, as of the end of
the period covered by this report, our disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is (1) recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms and (2) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting.
There was no change in our internal control over financial reporting during the
fiscal quarter covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Part II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 3, 2005, the Company and Yeo Hiap Seng Limited ("YHS"), a Singapore
based natural food and beverage company listed on the Singapore Exchange,
entered into an agreement to exchange, and on September 6, 2005, did exchange,
$2 million in equity investments in each other resulting in the issuance of an
aggregate of 100,482 shares of the Company's common stock to YHS and one of its
subsidiaries and the issuance of 1,326,938 ordinary shares of YHS (representing
less than 1% of the outstanding shares) to the Company. This issuance of the
Company's common stock was effected in reliance upon an exemption from
registration provided by Section 4(2) under the Securities Act of 1933, as
amended, as the issuance did not involve a public offering.
ITEM 6. EXHIBITS
Exhibit Number Description
- -------------- -----------
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.
14
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: November 9, 2005 /s/ Irwin D Simon
-------------------------------
Irwin D. Simon,
Chairman, President and Chief
Executive Officer
Date: November 9, 2005 /s/ Ira J. Lamel
-------------------------------
Ira J. Lamel,
Executive Vice President and
Chief Financial Officer
15
EXHIBIT 31.1
CERTIFICATION
I, Irwin D. Simon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Hain Celestial
Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2005
/s/ Irwin D. Simon
- -------------------------------------
Irwin D. Simon
President and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Ira J. Lamel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Hain Celestial
Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 9, 2005
/s/ Ira J. Lamel
- ---------------------------------
Ira J. Lamel
Executive Vice President and
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION FURNISHED
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended
September 30, 2005 (the "Report") filed by The Hain Celestial Group, Inc. (the
"Company") with the Securities and Exchange Commission, I, Irwin D. Simon, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 9, 2005
/s/ Irwin D. Simon
- -------------------------------------
Irwin D. Simon
President and Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to The Hain Celestial Group, Inc. and will be retained by The Hain
Celestial Group, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
EXHIBIT 32.2
CERTIFICATION FURNISHED
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q for the period ended
September 30, 2005 (the "Report") filed by The Hain Celestial Group, Inc. (the
"Company") with the Securities and Exchange Commission, I, Ira J. Lamel, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 9, 2005
/s/ Ira J. Lamel
- -----------------------------
Ira J. Lamel
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to The Hain Celestial Group, Inc. and will be retained by The Hain
Celestial Group, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.