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, 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 November 3, 2004, there were 36,495,580 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 - September 30, 2004
(unaudited) and June 30, 2004 2
Consolidated Statements of Income -
Three Months ended September 30, 2004 and 2003 (unaudited) 3
Consolidated Statement of Stockholders' Equity -
Three months ended September 30, 2004 (unaudited) 4
Consolidated Statement of Cash Flows -
Three months ended September 30, 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 11-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Item 4. Controls and Procedures 15
Part II Other Information
Items 1 through 5 are not applicable
Item 6 - Exhibits 15
Signatures 16
1
PART I - ITEM 1 - FINANCIAL INFORMATION
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share and share amounts)
September 30, June 30,
2004 2004
--------------------- --------------------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 9,765 $ 27,489
Accounts receivable, less allowance for doubtful
accounts of $2,225 and $2,185 70,922 69,392
Inventories 93,109 86,873
Deferred income taxes 3,111 3,111
Other current assets 14,459 11,449
--------------------- --------------------
Total current assets 191,366 198,314
Property, plant and equipment, net of accumulated
depreciation and amortization of $43,970 and $40,799 87,836 87,002
Goodwill 338,730 333,218
Trademarks and other intangible assets, net of
accumulated amortization of $8,558 and $8,349 55,712 55,793
Other assets 11,651 9,904
--------------------- --------------------
Total assets $ 685,295 $ 684,231
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 53,065 $ 59,031
Current portion of long-term debt 4,784 6,845
Income taxes payable 4,966 2,489
--------------------- --------------------
Total current liabilities 62,815 68,365
Long-term debt, less current portion 99,906 104,294
Deferred income taxes 14,807 14,807
--------------------- --------------------
Total liabilities 177,528 187,466
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 37,120,469 and 37,064,648 shares 371 371
Additional paid-in capital 395,557 394,740
Deferred compensation (2,575) (2,809)
Retained earnings 112,279 106,097
Foreign currency translation adjustment 11,420 7,651
--------------------- --------------------
517,052 506,050
Less: 671,556 shares of treasury stock, at cost (9,285) (9,285)
--------------------- --------------------
Total stockholders' equity 507,767 496,765
--------------------- --------------------
Total liabilities and stockholders' equity $ 685,295 $ 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 and share amounts)
Three Months Ended
September 30,
-------------------------------------------
2004 2003
------------------- --------------------
(Unaudited)
Net sales $ 137,604 $ 127,053
Cost of sales 98,629 89,891
------------------- --------------------
Gross profit 38,975 37,162
Selling, general and administrative expenses 28,185 25,819
------------------- --------------------
Operating income 10,790 11,343
Interest expense and other expenses, net 655 791
------------------- --------------------
Income before income taxes 10,135 10,552
Provision for income taxes 3,953 4,010
------------------- --------------------
Net income $ 6,182 $ 6,542
=================== ====================
Net income per share:
Basic $ 0.17 $ 0.19
=================== ====================
Diluted $ 0.17 $ 0.19
=================== ====================
Weighted average common shares outstanding:
Basic 36,273 34,221
=================== ====================
Diluted 36,855 35,356
=================== ====================
See notes to consolidated financial statements.
3
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
(In thousands, except per share and share amounts)
Foreign
Cur-
Unamor- rency
Addi- tized Re- Trans-
Common Stock tional Non-Cash tained lation Compre-
Amount Paid-in Compen- Earn- Treasury 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 55,821 805 805
Non-cash
compensation
charge 12 234 246
Comprehensive
income:
Net income for
the period 6,182 6,182 $ 6,182
Translation
adjustments 3,769 3,769 3,769
-----------
Total compre-
hensive income $ 9,951
---------- ------ -------- ---------- ---------- -------- --------- --------- ---------===========
Balance at
Sept. 30, 2004 37,120,469 $ 371 $395,557 $(2,575) $ 112,279 $671,556 $ (9,285) $11,420 $ 507,767
========== ====== ======== ========== ========== ======== ========= ========= =========
See notes to consolidated financial statements.
4
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
September 30,
------------------------------------------
2004 2003
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net income $ 6,182 $ 6,542
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,105 2,580
Provision for doubtful accounts (10) 92
Non-cash compensation 246 12
Increase (decrease) in cash attributable to changes in
operating assets and liabilities, net of amounts
applicable to acquired businesses:
Accounts receivable (973) (13,588)
Inventories (7,083) (2,639)
Other current assets (3,159) 50
Other assets (1,789) 736
Accounts payable and accrued expenses (5,775) (2,937)
Income taxes, net 2,477 2,445
------------------ -------------------
Net cash (used in) operating activities (6,779) (6,707)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,781) (998)
Acquisitions of businesses (1,570) -
------------------ -------------------
Net cash (used in) investing activities (4,351) (998)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments) proceeds from bank revolving
credit facility, net (5,500) 10,750
Payments on economic development revenue bonds (150) (125)
Purchase of treasury stock - (279)
Proceeds from exercise of options, net of related expenses 805 576
Repayments of other long-term debt, net (1,277) (428)
------------------ -------------------
Net cash (used in) provided by financing activities (6,122) 10,494
------------------ -------------------
Effect of exchange rate changes on cash (472) (894)
------------------ -------------------
Net (decrease) increase in cash and cash equivalents (17,724) 1,895
Cash and cash equivalents at beginning of period 27,489 10,984
------------------ -------------------
Cash and cash equivalents at end of period $ 9,765 $ 12,879
================== ===================
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 Certified 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 ended September 30, 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
September 30,
------------------------------
2004 2003
--------------- --------------
Numerator:
Net income $6,182 $6,542
=============== ==============
Denominator (in thousands):
Denominator for basic earnings per
share - weighted average shares
outstanding during the period 36,273 34,221
--------------- --------------
Effect of dilutive securities:
Stock options 576 965
Warrants 6 170
--------------- --------------
582 1,135
--------------- --------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 36,855 35,356
=============== ==============
Basic net income per share $ 0.17 $ 0.19
=============== ==============
Diluted net income per share $ 0.17 $ 0.19
=============== ==============
4. INVENTORIES
Inventories consisted of the following:
September 30, June 30,
2004 2004
---------------------- ----------------------
Finished goods $61,913 $56,132
Raw materials,
work-in-progress
and packaging 31,196 30,741
---------------------- ----------------------
$93,109 $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:
September 30, June 30,
2004 2004
-------------------- -----------------
Land $ 8,160 8,113
Buildings and improvements 30,106 29,867
Machinery and equipment 80,646 79,275
Furniture and fixtures 2,537 2,527
Leasehold improvements 3,610 3,478
Construction in progress 6,747 4,541
-------------------- -----------------
131,806 127,801
Less: Accumulated depreciation
and amortization 43,970 40,799
-------------------- -----------------
$ 87,836 $ 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 September
30, 2004, goodwill (not deductible for tax purposes) from this transaction was
estimated to be $22.9 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 September 30, 2004, goodwill (deductible for tax purposes) from this
transaction was estimated to be $7.9 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 $12,358
Property and equipment 12,871
Other assets 102
---------
Total assets 25,331
Liabilities assumed 4,321
---------
Net assets acquired $21,010
=========
The balance sheet at September 30, 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 ended September 30, 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 period 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
September 30, 2003
------------------
Net sales $ 140,064
Net income 5,921
Earnings per share:
Basic $ 0.17
Diluted 0.17
Weighted average shares:
Basic 34,221
Diluted 35,356
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 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 September 30, 2004, $93.7 million was borrowed under the Credit
Facility at an interest rate of 2.8%.
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.
9
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the grant dates consistent with the
method prescribed by SFAS No. 123, "Accounting For Stock-Based Compensation,"
net earnings and earnings per share for the three months ended September 30,
2004 and 2003 would have been the pro forma amounts that follow:
Three Months Ended
September 30,
----------------------------------
2004 2003
----------------- -------------
Net income, as reported $ 6,182 $6,542
Non-cash compensation charge, net
of related tax effects 150 7
Stock-based employee compensation
expense determined under fair value
method, net of related tax effects (3,462) (1,221)
----------------- -------------
Pro forma net income $2,870 $5,328
================= =============
Basic net income per share:
As reported $ 0.17 $ 0.19
====== ======
Pro forma $ 0.08 $ 0.16
====== ======
Diluted net income per share:
As reported $ 0.17 $ 0.19
====== ======
Pro forma $ 0.08 $ 0.15
====== ======
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 Certified 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 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, 2004
Net sales for the three months ended September 30, 2004 were $137.6
million, an increase of $10.5 million or 8.3% over net sales of $127.1 million
in the September 30, 2003 quarter. The increase came from volume increases
principally in our snacks brands, which were up 12.6%, our Celestial Seasonings
tea brand, which was up 4.6%, and our European business, which was up 20.5%.
During the current year quarter, we benefited from the phasing in of price
increases, the full effect of which is expected in future quarters, and from
sales of businesses acquired in 2004. Sales of our Imagine Foods brands,
acquired in December 2002, and Walnut Acres brands, acquired in June 2003, are
included in each of the quarterly periods presented, while sales of our Jason
Natural Products, Rosetto, Ethnic Gourmet and Natumi brands are included only in
the current year quarter. Sales in the current year quarter were negatively
impacted by reductions in inventories estimated at $12 million at two major
distributors.
Gross profit for the three months ended September 30, 2004 was 28.3% of net
sales as compared to 29.2% of net sales in the September 30, 2003 quarter. The
decline in gross profit percentage was principally the result of 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 phased in
beginning July 1, 2004.
Selling, general and administrative expenses increased by $2.4 million to
$28.2 million for the three months ended September 30, 2004 as compared to $25.8
million in the September 30, 2003 quarter. Such expenses amounted to 20.5% of
net sales for the three months ended September 30, 2004 compared with 20.3% in
the September 30, 2003 quarter. Selling, general and administrative expenses
have increased in overall dollars, primarily as a result of costs
11
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 September 30, 2004 includes
approximately $ .6 million for the cost of terminated employees and for non-cash
compensation charges.
Operating income was $10.8 million in the three months ended September 30,
2004 compared to $11.3 million in the September 30, 2003 quarter. Operating
income as a percentage of net sales was 7.8% in the September 30, 2004 quarter,
compared with 8.9% in the September 30, 2003 quarter. The dollar and percentage
decrease is a result of the aforementioned lower gross profit and higher
selling, general and administrative expenses.
Interest and other expenses amounted to $.7 million for the three months
ended September 30, 2004 compared to $.8 million for the three months ended
September 30, 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 $.2
million in net currency exchange gains this quarter as compared to $.1 million
in net currency exchange losses in the prior year quarter, which partially
offset the additional interest costs.
Income before income taxes for the three months ended September 30, 2004
amounted to $10.1 million compared to $10.6 million in the comparable period of
the prior year. This decrease was attributable to the decrease in operating
income.
Our effective income tax rate approximated 39% of pre-tax income for the
three months ended September 30, 2004 compared to 38% for the three months ended
September 30, 2003. We expect our effective tax rate to approximate 39% during
the remainder of fiscal 2005.
Net income for the three months ended September 30, 2004 was $6.2 million
compared to $6.5 million in the September 30, 2003 quarter. The decrease of $.3
million in earnings was primarily attributable to the aforementioned decrease in
income before income taxes and the increase in our effective tax rate.
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, 2004, we
had $93.7 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.
Effective July 2004, we adjusted prices upward by 4% to 5% across certain
of our U.S. businesses. We expect the increases will offset increased costs we
have absorbed in fuel, freight and commodities, and should help offset future
increased costs into the next production year as we renew procurement contracts.
Net cash (used in) operations was $(6.8) million and $(6.7) million for the
three months ended September 30, 2004 and 2003, respectively. Our working
capital and current ratio was $128.6 million and 3.0 to 1, respectively, at
September 30, 2004 compared with $130.0 million and 2.9 to 1 respectively, at
June 30, 2004. The decrease in working capital resulted principally from the
decrease in cash used to reduce debt during the three months ended September 30,
2004.
Net cash (used in) provided by financing activities was $(6.1) million and
$10.5 million for the three months ended September 30, 2004 and 2003,
respectively. The change between the quarters of each year was due principally
to our pay down of approximately $6.8 million of debt under our U. S. and
European credit lines during the Fiscal 2005 quarter, as compared to our
borrowing approximately $10.8 million under our U. S. credit line in the Fiscal
2004 quarter.
12
We believe that cash on hand of $9.8 million at September 30, 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 $9 million, and scheduled debt
payments of approximately $9.5 million for the remainder of fiscal 2005. We
currently invest our cash on hand in highly liquid short-term investments
yielding approximately 1% interest.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The accounting principles we
use require us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting periods presented. We
believe in the quality and reasonableness of our critical accounting policies;
however, it is likely that materially different amounts would be reported under
different conditions or using assumptions different from those that we have
consistently applied. We believe our critical accounting policies are as
follows, including our methodology for estimates made and assumptions used:
Valuation of Accounts and Chargebacks Receivables
We perform ongoing credit evaluations on existing and new customers daily.
We apply reserves for delinquent or uncollectible trade receivables based on a
specific identification methodology and also apply an additional reserve based
on the experience we have with our trade receivables aging categories. Credit
losses have been within our expectations over the last few years. While two of
our customers represent approximately 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 September 30, 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 cost or market. Cost has been
derived principally using standard costs utilizing the first-in, first-out
method. We provide write-downs for finished goods expected to become
non-saleable due to age and specifically identify and reserve for slow moving or
obsolete raw ingredients and packaging.
Property, Plant and Equipment
Our property, plant and equipment is carried at cost and depreciated or
amortized on a straight-line basis over the lesser of the estimated useful lives
or lease life, whichever is shorter. We believe the asset lives assigned to our
property, plant and equipment are within ranges/guidelines generally used in
food manufacturing and distribution businesses. Our manufacturing plants and
distribution centers, and their related assets, are periodically reviewed to
determine if any impairment exists by analyzing underlying cash flow
projections. At this time, we believe no impairment exists on the carrying value
of such assets. Ordinary repairs and maintenance are expensed as incurred.
Intangibles
Goodwill is no longer amortized and the value of an identifiable intangible
asset is amortized over its useful life unless the asset is determined to have
an indefinite useful life. The carrying values of goodwill and other intangible
assets with indefinite useful lives are tested annually for impairment.
13
Revenue Recognition and Sales Incentives
Sales are recognized upon the shipment of finished goods to customers and
are reported net of sales incentives. Allowances for cash discounts and returns
are recorded in the period in which the related sale is recognized. Shipping and
handling costs are included as a component of cost of sales.
Seasonality
Our tea business consists primarily of manufacturing and marketing hot tea
products and, as a result, its quarterly results of operations reflect seasonal
trends resulting from increased demand for its hot tea products in the cooler
months of the year. This is also true for our soups and hot cereals businesses,
but to a lesser extent. Quarterly fluctuations in our sales volume and operating
results are due to a number of factors relating to our business, including the
timing of trade promotions, advertising and consumer promotions and other
factors, such as seasonality, abnormal and inclement weather patterns and
unanticipated increases in labor, commodity, energy, insurance or other
operating costs. The impact on sales volume and operating results, due to the
timing and extent of these factors, can significantly impact our business. For
these reasons, you should not rely on our quarterly operating results as
indications of future performance. In some future periods, our operating results
may fall below the expectations of securities analysts and investors, which
could harm our business.
Inflation
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented.
Note Regarding Forward Looking Information
Certain statements contained in this Quarterly Report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1934 and Sections 21E of the Securities Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, levels of activity, performance
or achievements of the Company, or industry results, to be materially different
from any future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; 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 30m 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.
14
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 6. EXHIBITS
Exhibit Number Description
- -------------- -----------
The cross-reference for Exhibit 10.5 of the Company's Form
10-K for the fiscal year ended June 30, 2004, inadvertently
was incorrect. It should have read:
10.5 Employment Agreement between the Registrant and Irwin D.
Simon, dated July 1, 2003 (incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 2003, filed
with the Commission on November 14, 2003).
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.
15
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 8, 2004 /s/ Irwin D. Simon
----------------------------------
Irwin D. Simon,
Chairman, President and Chief
Executive Officer
Date: November 8, 2004 /s/ Ira J. Lamel
----------------------------------
Ira J. Lamel,
Executive Vice President and
Chief Financial Officer
16
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)) 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) 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
(c) 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 (the registrant's fourth fiscal quarter in
the case of an annual report) 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 8, 2004
/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)) 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) 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
(c) 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 (the registrant's fourth fiscal quarter in
the case of an annual report) 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 8, 2004
/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, 2004 (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 8, 2004
/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, 2004 (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 8, 2004
/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.
