FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended: 03/31/02 Commission file number: 0-22818
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 730-2200
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
33,888,922 shares of Common Stock $.01 par value, as of May 7, 2002.
THE HAIN CELESTIAL GROUP, INC.
INDEX
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2002
(unaudited) and June 30, 2001 2
Consolidated Statements of Income - Three months and Nine
Months ended March 31, 2002 and 2001 (unaudited) 3
Consolidated Statements of Cash Flows -
Nine Months ended March 31, 2002 and 2001 (unaudited) 4
Consolidated Statement of Stockholders' Equity -
Nine months ended March 31, 2002 (unaudited) 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Part II Other Information
Items 1 through 5 are not applicable
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18
PART I - ITEM 1 - FINANCIAL INFORMATION
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March 31, 2002 June 30, 2001
-------------- -----------
ASSETS (Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 4,167 $ 26,643
Accounts receivable, less allowance for doubtful
accounts of $1,353 and $815 55,593 42,668
Inventories 56,992 49,593
Recoverable income taxes 1,968 8,232
Deferred income taxes 3,740 3,740
Other current assets 9,959 7,904
---------- ----------
Total current assets 132,419 138,780
Property, plant and equipment, net of accumulated
depreciation and amortization of $27,239 and $25,551 71,798 55,780
Goodwill, net 237,330 219,826
Trademarks and other intangible assets, net 38,421 38,230
Other assets 9,641 9,077
---------- ----------
Total assets $ 489,609 $461,693
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 45,105 $ 43,587
Income taxes payable 8,804 -
Current portion of debt instruments 2,594 2,881
---------- ----------
Total current liabilities 56,503 46,468
Long-term debt instruments, less current portion 10,481 10,718
Deferred income taxes 7,854 7,854
---------- ----------
Total liabilities 74,838 65,040
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value, authorized 5,000,000
shares, none issued - -
Common stock - $.01 par value, authorized 100,000,000
shares, issued 34,027,906 and 33,771,124 shares 340 338
Additional paid-in capital 354,129 348,942
Retained earnings 64,411 48,626
Foreign currency translation adjustment (2,713) (978)
---------- ----------
416,167 396,928
Less: 156,917 and 100,000 shares of treasury stock,
at cost (1,396) (275)
---------- ----------
Total stockholders' equity 414,771 396,653
---------- ----------
Total liabilities and stockholders' equity $ 489,609 $ 461,693
========== ==========
Note: The balance sheet at June 30, 2001 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- -------------------
2002 2001 2002 2001
---------------------- -------------------
(Unaudited) (Unaudited)
Net sales $105,614 $ 87,092 $300,518 $269,082
Cost of sales 73,172 61,129 209,131 176,671
--------- --------- --------- --------
Gross profit 32,442 25,963 91,387 92,411
Selling, general and administrative
expenses 23,911 19,402 63,788 57,273
Merger costs - - - 1,032
--------- --------- --------- --------
Operating income 8,531 6,561 27,599 34,106
Interest expense (income)- net and
other expenses 300 (752) 2,194 (1,949
--------- --------- --------- --------
Income before income taxes 8,231 7,313 25,405 36,055
Provision for income taxes 3,094 3,072 9,620 15,143
--------- --------- --------- --------
Net income $ 5,137 $ 4,241 $ 15,785 $ 20,912
========= ========= ========= ========
Basic earnings per common share:
Net income $ 0.15 $ 0.13 $ 0.47 $ 0.64
========= ========= ========= ========
Diluted earnings per common share:
Net income $ 0.15 $ 0.12 $ 0.45 $ 0.61
========= ========= ========= ========
Weighted average common shares outstanding:
Basic 33,868 33,368 33,741 32,833
========= ========= ========= ========
Diluted 34,908 34,845 34,808 34,508
========= ========= ========= ========
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
March 31,
------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited)
Net income $ 15,785 $ 20,912
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 5,583 4,645
Amortization of goodwill and other intangible assets 168 4,770
Amortization of deferred financing costs 279 15
Provision for doubtful accounts 360 398
Other 35 36
Increase (decrease) in cash attributable to changes in
assets and liabilities, net of amounts applicable to
acquired businesses:
Accounts receivable (10,370) (14,860)
Inventories (5,920) 1,827
Other current assets (419) (480)
Other assets (1,042) 41
Accounts payable and accrued expenses (6,668) (12,710)
Recoverable income taxes, net of income taxes payable 15,052 15,706
---------- ------------
Net cash provided by operating activities 12,843 20,300
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired (13,963) (5,687)
Purchases of property, plant and equipment (18,121) (10,063)
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Net cash used in investing activities (32,084) (15,750)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from Credit Facility 1,000 4,400
Payments on economic development revenue bonds (333) (266)
Purchase of treasury stock (1,121) -
Costs in connection with bank financing (200) (1,185)
Proceeds from exercise of warrants and options, net of
related expenses 724 12,954
Payment of other long-term debt and other liabilities (2,706) (206)
---------- ------------
Net cash (used in)/provided by financing activities (2,636) 15,697
---------- ------------
Effect of exchange rate changes on cash (599) -
---------- ------------
Net (decrease)increase in cash and cash equivalents (22,476) 20,247
Cash and cash equivalents at beginning of period 26,643 38,308
---------- ------------
Cash and cash equivalents at end of period $ 4,167 $ 58,555
========== ============
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2002 (In thousands, except per share and
share data)
Common Stock Foregin
-------------------- Additional Treasury Stock Currency
Amount Paid-in Retained --------------- Translation Comprehensive
Shares at $.01 Capital Earnings Shares Amount Adjustment Total Income
---------- -------- ---------- ---------- -------- -------- ----------- --------- ------------
Balance at June 30, 2001 33,771,124 $ 338 $ 348,942 $ 48,626 100,000 $(275) $ (978) $396,653
Exercise of stock options 46,608 645 645
Purchase of treasury shares 56,917 (1,121) (1,121)
Issuance of common stock 210,174 2 4,507 4,509
Non-cash compensation
charge 35 35
Net income for the period 15,785 15,785
Comprehensive income:
Net income
$ 15,785
Translation adjustments (1,735) (1,735) (1,735)
----------
Total comprehensive income $ 14,050
---------- --------- ----------- ---------- --------- --------- ---------- ---------- ==========
Balance at March 31, 2002 34,027,906 $ 340 $ 354,129 $ 64,411 156,917 $(1,396) $(2,713) $414,771
========== ========= =========== ========== ========= ========= ========== ==========
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
The Hain Celestial Group (herein referred to as "we","us" and "our") is
a natural, specialty and snack food company. We are a leader in many of the top
natural food categories, with such well-known natural food brands as Celestial
Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R), Arrowhead
Mills(R), Health Valley(R), Breadshop's(R), Casbah(R), Garden of Eatin'(R),
Terra Chips(R), Yves Veggie Cuisine(R), Gaston's(R), Lima(R) and Biomarche(R) in
Europe, DeBoles(R), Earth's Best(R), and Nile Spice(R). Our principal specialty
product lines include Hollywood(R) cooking oils, Estee(R) sugar-free products,
Weight Watchers(R) dry and refrigerated products, Kineret(R) kosher foods,
Boston Better Snacks(R), and Alba Foods(R).
We operate in one business segment: the sale of natural, organic and
other food and beverage products. In our most recent fiscal year, approximately
51% of our revenues were derived from products that are manufactured within our
own facilities with 49% produced by various co-packers. There are no co-packers
who manufactured 10% or more of our products.
Certain reclassifications have been made to our previous year's
consolidated financial statements to conform them to the current year's
presentation.
All amounts in our consolidated financial statements have been rounded
to the nearest thousand dollars, except share and per share amounts.
2. BASIS OF PRESENTATION
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States. In the opinion of management, all adjustments (including normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine months ended March 31, 2002
are not necessarily indicative of the results that may be expected for the year
ending June 30, 2002. Please refer to the footnotes to our consolidated
financial statements as of June 30, 2001 and for the year then ended included in
our Annual Report on Form 10-K for information not included in these condensed
footnotes.
3. ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
Our results for the three and nine months ended March 31, 2002, include
the effect of adopting Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", which resulted in a $1.6 and $4.8 million reduction in expenses ($1.1
and $3.3 million, net of tax) and a $.03 and $.08 increase in basic and diluted
earnings per share, respectively, for the three and nine month periods ended
March 31, 2002. SFAS No. 141 provides that all business combinations initiated
after June 30, 2001 shall be accounted for using the purchase method. In
addition, it provides that the cost of an acquired entity must be allocated to
the assets acquired, including identifiable intangible assets and liabilities
assumed based on their estimated fair values at the date of acquisition. The
excess cost over the fair value of the net assets acquired must be recognized as
goodwill. SFAS No. 142 provides that goodwill is no longer amortized and the
value of an identifiable intangible asset must be amortized over its useful life
unless the asset is determined to have an indefinite useful life. At March 31,
2002, included in trademarks and other intangible assets on the balance sheet,
is approximately $.7 million of intangible assets deemed to have a finite life
being amortized over their estimated useful lives. Goodwill must be tested for
impairment at the beginning of the fiscal year in which SFAS No. 142 is adopted.
In accordance with SFAS No. 142, we have evaluated the fair value of our
reporting units and compared those values to the carrying values of their
related goodwill and indefinite-life intangible assets, and based on such
evaluation, no impairment existed at July 1, 2001. The $4.8 million pre-tax
reduction of intangible amortization expense recognized during the nine-month
period ended March 31, 2002 represents the amount of amortization of goodwill
and indefinite-life intangible assets that arose from acquisitions prior to July
1, 2001 and are no longer amortized. Amounts assigned to indefinite-life
intangible assets primarily represent the values of trademarks.
The following table reflects consolidated results of operations (net of
tax effect) adjusted as though the adoption of SFAS No. 141 and 142 occurred as
of the beginning of the nine-month period ended March 31, 2001.
Three Months Nine Months
Ended Ended
March 31, 2001 March 31, 2001
------------ ------------
Net Earnings:
As reported $ 4,241 $ 20,912
Goodwill and indefinite-life
intangibles amortization, net 902 2,767
------------ ------------
As adjusted $ 5,143 $ 23,679
============ ============
Basic earnings per common share:
As reported $ 0.13 $ 0.64
============ ============
As adjusted $ 0.15 $ 0.72
============ ============
Diluted earnings per common share:
As reported $ 0.12 $ 0.61
============ ============
As adjusted $ 0.15 $ 0.69
============ ============
The following table reflects the components of trademarks and other
intangible assets as of March 31, 2002:
Gross Carrying Accumulated
Amount Amortization
------------- -----------
Amortized intangible assets:
Licensing costs and other intangibles $ 1,110 $ 375
Non-amortized intangible assets:
Trademarks $ 37,696 $ -
4. ADOPTION OF EITF CONSENSUS REGARDING SALES INCENTIVES
In May 2000, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 00-14, "Accounting for Certain Sales Incentives". Under the
consensus, certain sales incentives must be recognized as a reduction of sales
rather than as an expense (we included such sales incentives within selling,
general and administrative expenses). In April 2001, the EITF reached a
consensus on Issue 00-25, "Vendor Statement Characterization of Consideration
from a Vendor to a Retailer", which expanded upon the types of consideration
paid by vendors to retailers which are to be considered sales incentives and,
accordingly, should be classified as a reduction of sales rather than as a
component of selling, general and administrative expenses. In November 2001, the
EITF reached a consensus on Issue 01-9, "Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of A Vendor's Product", which provides
interpretative guidance to Issues 00-14 and 00-25. The results of operations
reflect the adoption of these EITF consensuses related to the classification of
certain vendor promotional allowances and other sales incentives as reductions
of sales rather than as a selling expense as has been the predominant industry
and company practice in the past. The sales amounts for the 2002 periods are in
conformity with those EITF consensuses, which were adopted effective January 1,
2002. In order to provide comparable information from period to period, prior
year periods have been restated by reclassifying promotional allowances and
other sales incentives of $16.8 million in the third quarter of 2001, and $44.4
million for the nine months ended March 31, 2001, from selling expense to net
sales.
5. ACQUISITIONS
On December 10, 2001, we acquired the outstanding common
shares of Lima NV, a leading Belgian manufacturer and marketer of natural and
organic foods, for cash and stock. The results of Lima's operations have been
included in our consolidated financial statements since that date. The
acquisition builds upon our growing European distribution and manufacturing
capabilities and provides us with a strong platform for the expansion of our
European operations.
On June 8, 2001, we acquired privately-held Yves Veggie Cuisine, Inc.
("Yves") a Vancouver, British Columbia based company. Yves is a leading North
American manufacturer, distributor and marketer of soy protein meat alternative
products.
On January 18, 2001, we acquired privately-held Fruit Chips B.V. a
Netherlands based company, which we subsequently renamed Terra Chips B.V. Terra
Chips B.V. is a manufacturer and distributor of low-fat fruit, vegetable and
potato chips selling to European markets.
Details about the Yves and Fruit Chips acquisitions are included in our
annual report for the year ended June 30, 2001.
Unaudited pro forma results of operations for the periods ended March
31, 2002 and 2001 reflecting the above acquisitions as if they occurred at the
beginning of the respective periods would not be materially different than the
actual results as presented.
6. INVENTORIES
Inventories consist of the following:
March 31, 2002 June 30, 2001
---------- ------------
Finished goods $ 38,084 $ 29,933
Raw materials and packaging 18,908 19,660
---------- ---------
$ 56,992 $ 49,593
========== =========
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
March 31, 2002 June 30, 2001
----------- -----------
Land $ 6,963 $ 6,673
Building and improvements 24,698 13,611
Machinery and equipment 53,091 42,861
Furniture and fixtures 2,734 2,505
Leasehold improvements 6,565 6,818
Construction in progress 4,986 8,863
----------- -----------
99,037 81,331
Less: Accumulated depreciation
and amortization 27,239 25,551
----------- -----------
$ 71,798 $ 55,780
=========== ===========
8. CREDIT FACILITY
We have available to us a $240 million Credit Facility (the "Credit
Facility") which provides us with a four-year, $145 million revolving credit
facility through March 29, 2005 and a $95 million 364-day facility through March
27, 2003. The Credit Facility is unsecured, but 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.
Revolving credit loans under this facility bear interest at a base rate (greater
of the applicable prime rate or Federal Funds Rate plus applicable margin) or,
at our option, the reserve adjusted LIBOR rate plus an applicable margin. As of
March 31, 2002, we had borrowed approximately $4.4 million under the revolving
facility with interest at 3.0625% (classified within long-term debt
instruments). We also borrowed $1.0 million as of March 31, 2002 under the
Credit Facility with interest at 4.75% (classified as current portion of debt
instruments as all of such amount has been subsequently repaid).
9. EARNINGS PER SHARE
We report basic and diluted earnings per share in accordance with SFAS
Statement No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per
share exclude any dilutive effects of options and warrants. Diluted earnings per
share include all dilutive common stock equivalents such as stock options and
warrants.
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- -----------------
2002 2001 2002 2001
---------- --------- --------- --------
Numerator:
Numerator for basic and diluted
earnings per common share -
Net income $ 5,137 $4,241 $ 15,785 $ 20,912
Denominator:
Denominator for basic earnings per
common share - weighted average
shares outstanding during the period
33,868 33,368 33,741 32,833
Effect of dilutive securities:
Stock options 856 1,277 882 1,438
Warrants 184 200 185 237
---------- --------- --------- --------
1,040 1,477 1,067 1,675
---------- --------- --------- --------
Denominator for diluted earnings
per common share - adjusted
weighted average shares and
assumed conversions 34,908 34,845 34,808 34,508
========== ========= ========= ========
Basic net income per common share $ 0.15 $0.13 $ 0.47 $0.64
========== ========= ========= ========
Diluted net income per common share $ 0.15 $0.12 $ 0.45 $0.61
========== ========= ========= ========
10. SUBSEQUENT EVENTS
In May 2002, we entered into a letter of intent to form a joint venture
with Shin-Shin, a Japanese food manufacturer and distributor, to distribute and
sell our Yves Veggie Cuisine products, as well as other brands, in Japan.
During the period May 8, 2002 to May 10, 2002, we acquired 150,000
shares of our common stock in open market purchases at a cost of approximately
$2.4 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We manufacture, market, distribute and sell natural, specialty, organic
and snack food products under brand names which are sold as "better-for-you"
products. We are a leader in many of the top natural food categories, with such
well-known natural food brands as Celestial Seasonings(R) teas, Hain Pure
Foods(R), Westbrae(R), Westsoy(R), Arrowhead Mills(R), Health Valley(R),
Breadshop's(R), Casbah(R), Garden of Eatin'(R), Terra Chips(R), Gaston's(R),
Yves Veggie Cuisine(R), Lima(R) and Biomarche(R) in Europe, DeBoles(R), Earth's
Best(R), and Nile Spice(R). Our principal specialty product lines include
Hollywood(R) cooking oils, Estee(R) sugar-free products, Weight Watchers(R) dry
and refrigerated products, Kineret(R) kosher foods, Boston Better Snacks(R), and
Alba Foods(R). Our website can be found at www.hain-celestial.com.
Our products are sold primarily to specialty and natural food
distributors, supermarkets, natural food stores, and other retail classes of
trade including mass-market stores, food service channels and club stores.
Since our formation in 1993, we have completed a number of acquisitions
of companies and brands. Since January 2001, we acquired the following companies
and brands:
On January 18, 2001, we acquired Fruit Chips B.V.,
(subsequently renamed Terra Chips B.V.) a Netherlands based company,
which manufactures, distributes and markets low fat fruit, vegetable
and potato chips.
On June 8, 2001, we acquired Yves Veggie Cuisine, Inc. and its
subsidiaries ("Yves"), a Vancouver, British Columbia based company.
Yves is a manufacturer, distributor and marketer of premium soy protein
meat alternative products.
On December 10, 2001, we acquired Lima NV, the leading Belgian
natural and organic foods manufacturer and marketer.
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 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
Adoption of EITF Consensus Regarding Sales Incentives
The results of operations reflect the adoption of EITF consensuses
related to the classification of certain vendor promotional allowances and other
sales incentives as reductions of sales rather than as a selling expense as has
been the predominant industry and company practice in the past. The sales
amounts for the 2002 periods are in conformity with those EITF consensuses,
which were adopted effective January 1, 2002. In order to provide comparable
information from period to period, prior year periods have been restated by
reclassifying promotional allowances and other sales incentives of $16.8 million
in the third quarter of 2001, and $44.4 million for the nine months ended March
31, 2001, from selling expense to net sales.
Three months ended March 31, 2002
Net sales for the three months ended March 31, 2002 were $105.6
million, an increase of $18.5 million or 21.3% over net sales of $87.1 million
in the same quarter of the prior year. Net sales increased by 23% on a
comparable basis when adjusted for our reduced focus on supplements and certain
non-core product categories. Approximately 16% of the overall 23% increase in
net sales was derived from sales of businesses acquired subsequent to March 31,
2001. The remaining internal growth was derived principally from our Terra and
Garden of Eatin' snack brands and from our refrigerated Westsoy and Health
Valley brands.
Gross profit for the three months ended March 31, 2002 was 30.7% of net
sales as compared to 29.8% of net sales in the same quarter of the prior year.
Gross profit in the March 2001 period was negatively affected by approximately 2
percentage points due to an inventory charge when we consolidated certain
warehouses and implemented a new corporate information system at that time. On a
comparable basis, gross profit last year was 32.1%, or 1.4% higher than in the
current period. The decrease in this year's period is a result of lower gross
profits earned by certain businesses recently acquired and the added cost from
the warehousing and distribution network. In addition, we incurred higher
distribution costs associated with certain strategic initiatives to increase
inventory levels to reduce stock-outs, and thereby increase customer
satisfaction.
Selling, general and administrative expenses (excluding amortization)
increased by $6.1 million to $23.9 million for the three months ended March 31,
2002 as compared to $17.8 million in the March 31, 2001 quarter. Such expenses
as a percentage of net sales amounted to 22.6% for the three months ended March
31, 2002 compared with 20.5% in the March 31, 2001 quarter. The overall increase
in dollars and percentage is a result of the added selling, general and
administrative costs of $3.2 million brought on by the aforementioned
acquisitions and additional consumer spending through television advertising and
other media of approximately $3.5 million.
Amortization of goodwill and other intangible assets was $1.6 million
for the March 2001 period compared to less than $.1 million in the 2002 period.
The results for the quarter ended March 31, 2002, include the effect of adopting
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets", which
resulted in a $1.5 million reduction in overall expenses ($1.1 million net of
tax) and a $.03 increase in basic and diluted earnings per share. The $1.5
million pre-tax reduction of amortization expense recognized this quarter
represents the amount of amortization of goodwill and indefinite-life intangible
assets that arose from acquisitions prior to July 1, 2001 and is no longer being
amortized.
Operating income was $8.5 million in the 2002 period compared to $6.6
million in the 2001 period. Operating income as a percentage of net sales
amounted to 8.1%, compared with 7.5% in the March 2001 quarter. The dollar and
percentage increases resulted principally from higher gross profits, offset by
higher selling, general and administrative costs, all as described above.
Interest expense (income) - net and other expenses amounted to $.3
million of expense for the three months ended March 31, 2002 compared to $.8
million of income in the comparable period. The decrease of $1.1 million was
caused entirely by the interest expense we incurred this year while using our
credit facility as compared to the interest we earned on the investible cash we
had during the March 2001 period. Since that time, we have used that cash to
fund the Yves and Lima acquisitions and to fund the construction of our new
Terra Chip manufacturing facility in Moonachie, New Jersey. In addition, in the
2002 period we have added carrying costs associated with our Credit Facility,
which we entered into on March 28, 2001.
Income before income taxes for the three months ended March 31, 2002
amounted to $8.2 million compared to $7.3 million in the corresponding 2001
period. This increase was attributable to the aforementioned increase in
operating income, offset by the swing in interest expense (income) - net and
other expenses.
Income taxes remained flat at $3.1 million for both the three months
ended March 31, 2002 and 2001. The effective tax rate was approximately 38% in
the 2002 period compared to 42% in the corresponding 2001 period. The lower tax
rate was a result of the elimination of non-deductible goodwill amortization
from our income statement as a result of the aforementioned adoption of the new
accounting for goodwill and other intangible assets at the beginning the current
fiscal year.
Net income for the three months ended March 31, 2002 was $5.1 million
compared to $4.2 million in the corresponding 2001 period. The increase of $.9
million in earnings was primarily attributable to the aforementioned increase in
income before income taxes.
Nine months ended March 31, 2002
Net sales for the nine months ended March 31, 2002 were $300.5 million,
an increase of $31.4 million or 12% over net sales of $269.1 million in the same
period of the prior year. Net sales increased by 12.7% on a comparable basis
when adjusted for our reduced focus on supplements and certain non-core product
categories. Our increase in sales is primarily the result of strong increases in
unit volume from our Terra, Garden of Eatin' and refrigerated Westsoy brands, as
well as sales contributed by companies we acquired in the second half of fiscal
2001 and in the second quarter of fiscal 2002. Our sales during this period were
impacted by the events of September 11, 2001, and the impact from the unusually
warm winter months of October 2001 to February 2002 on our teas, soups and hot
cereal products.
Gross profit for the nine months ended March 31, 2002 decreased to
30.4% of net sales as compared to 34.3% of net sales in the same period of the
prior year. Including the effects of the aforementioned March 2001 inventory
write-off of $2 million, the gross profit decrease as a percentage of net sales
was 4.5%. Approximately 1% of this decrease is a result of higher than
anticipated start-up production costs at our new Terra Chip manufacturing
facility in Moonachie, New Jersey, including the cost of training employees on
new technology, production downtime during start-up, and the additional costs of
the transition of production from the original Terra Chips facility in Brooklyn,
NY, while we operated both our Brooklyn and Moonachie facilities; approximately
2.2% of lower gross profits caused by changes in the mix of sales driven
principally by the warm winter weather; and approximately 1.5% due to additional
freight and warehousing costs associated with certain strategic initiatives to
increase inventory levels to reduce stock-outs, thereby increasing customer
satisfaction, and an increase in additional warehousing and distribution costs
from our newly acquired businesses.
Selling, general and administrative expenses (excluding amortization
expense) increased by $10.3 million to $63.8 million for the nine months ended
March 31, 2002 as compared to $53.5 million in the March 31, 2001 period. As a
percentage of net sales, these expenses amounted to 21.2% for the nine months
ended March 31, 2002 compared with 20.0% in the March 31, 2001 period. The
increase is a result of $3.3 million of costs brought on by the second half
fiscal 2001 and second quarter fiscal 2002 acquisitions, with the remainder of
the increase principally attributable to higher advertising and marketing costs
(media and print) over the comparable 2001 period.
Amortization of goodwill and other intangible assets was $4.8 million
for the March 2001 period compared to $.2 million in the 2002 period. The
decrease is a result of the aforementioned adoption of SFAS No. 142.
Merger related charges, which related to certain employee costs
associated with our May 2000 merger with Celestial Seasonings, amounted to $1
million for the nine months ended March 31, 2001. There were no merger related
charges in the current 2002 period.
Operating income decreased by $6.5 million compared to the 2001 period.
Operating income as a percentage of net sales amounted to 9.2% compared with
12.7% in the March 2001 period. The dollar and percentage decreases resulted
principally from higher cost of goods sold, higher selling, general and
administrative expenses, offset by the lack of merger related costs and lower
amortization expense in the 2002 period.
Interest expense (income) - net and other expenses amounted to $2.2
million for the nine months ended March 31, 2002 compared with income of $1.9
million in the same period of the prior year. The change of $4.1 million is
primarily a result of the items discussed above in the three month period ended
March 31, 2002 and other costs and expenses totaling $1.5 million resulting from
the closure of our Terra Chips Brooklyn, NY manufacturing facility in December
2001 and the return of the leased premises to the owner. We disposed of
machinery and equipment and leasehold improvements deemed unusable which totaled
$1 million, and we were required to retrofit the leased Brooklyn facility to its
original condition at a cost of approximately $.5 million.
Income before income taxes for the nine months ended March 31, 2002
amounted to $25.4 million compared to $36.1 million in the same period of the
prior year. The $10.7 million decrease was attributable to the aforementioned
decrease in operating income, as well as the swing in interest expense and other
expenses, net.
Income taxes decreased to $9.6 million for the nine months ended March
31, 2002 compared to a $15.1 million in the corresponding 2001 period. The
effective tax rate was 38% in the 2001 period compared to 42.0% in the
corresponding 2001 period. The reason for our lower tax rate was described above
in the three month section on income taxes.
Net income for the nine months ended March 31, 2002 amounted to $15.8
million compared to $20.9 million in the corresponding 2001 period. This $5.1
million decrease in earnings was primarily attributable to the aforementioned
decrease in income before income taxes offset by the reduction in income tax
expense.
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 $240 million Credit Facility which provides
us with a four-year, $145 million revolving credit facility through March 29,
2005 and a $95 million 364-day facility through March 27, 2003. The Credit
Facility is unsecured, but is guaranteed by all direct and indirect domestic
subsidiaries. We are required to comply with customary affirmative and negative
covenants for facilities of this nature.
This access to capital provides us with flexible working capital needs
in the normal course of business and the opportunity to grow our business
through acquisitions or develop our existing infrastructure through capital
investment.
Net cash provided by operations was $12.8 and $20.3 million for the
nine months ended March 31, 2002 and 2001, respectively. The decrease in
operating cash flows is primarily due to the decrease in net income. Our working
capital and current ratio was $75.9 million and 2.3 to 1, respectively, at March
31, 2002 compared with $92.3 million and 2.99 to 1 respectively, at June 30,
2001. The decrease in working capital and current ratio is due to the use of
approximately $18 million for capital expenditures and $14.3 million of cash to
fund our recent acquisitions. This $32.3 million of investments compares with
only $15.8 million of cash used in investing activities in the comparable March
2001 period.
Net cash used in financing activities was $2.6 million for the nine
months ended March 31, 2002. During the nine months ended March 2002, we
borrowed, net of repayments, approximately $1 million under our Credit Facility
to fund working capital needs and we used $1.1 million of cash for a stock
buyback program. Net cash provided by financing activities of $15.7 million in
the March 2001 period was derived principally from proceeds received from
exercises of warrants and stock options. During the period May 8, 2002 to May
10, 2002, we acquired 150,000 shares of our common stock in open market
purchases at a cost of approximately $2.4 million.
We believe that cash on hand of $4.2 million at March 31, 2002, as well
as projected remaining fiscal 2002 and 2003 cash flows from operations, and
availability under our Credit Facility are sufficient to fund our working
capital needs, anticipated capital expenditures and scheduled debt payments for
the remainder of fiscal 2002 and 2003. We currently invest our cash on hand in
highly liquid short-term investments yielding approximately 1.5% 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 Chargeback 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 a general 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 30% 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 has been within our expectations and no significant
write-offs and/or impairment has occurred.
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 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 allowances 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
and 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.
Revenue Recognition
Sales are recognized upon the shipment of finished goods to customers.
Allowances for cash discounts and returns are recorded in the period in which
the related sale is recognized.
Seasonality
Our tea business consists primarily of manufacturing and marketing hot
tea products and, as a result, its quarterly results of operations reflect
seasonal trends resulting from increased demand for its hot tea products in the
cooler months of the year. This is also true for our soups and hot cereals
businesses, but to a lesser extent. Quarterly fluctuations in our sales volume
and operating results are due to a number of factors relating to our business,
including the timing of trade promotions, advertising and consumer promotions
and other factors, such as seasonality, abnormal and inclement weather patterns
and unanticipated increases in labor, commodity, energy, insurance or other
operating costs. The impact on sales volume and operating results, due to the
timing and extent of these factors, can significantly impact our business. For
these reasons, you should not rely on our quarterly operating results as
indications of future performance. In some future periods, our operating results
may fall below the expectations of securities analysts and investors, which
could harm our business.
Inflation
The Company does not believe that inflation had a significant impact on
the Company's results of operations for the periods presented.
Note Regarding Forward Looking Information
Certain statements contained in this Quarterly Report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Sections 21E of the Exchange Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, levels of activity, performance or achievements of the
Company, or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, the ability of the Company
to implement its business and acquisition strategy; the ability to effectively
integrate its acquisitions; the ability of the Company to obtain financing for
general corporate purposes; competition; availability of key personnel, and
changes in, or the failure to comply with governments regulations. As a result
of the foregoing and other factors, no assurance can be given as to the future
results, levels of activity and achievements and neither the Company nor any
person assumes responsibility for the accuracy and completeness of these
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the reported market risks since
the end of the most recent fiscal year.
Part II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
Reports on Form 8-K
On January 28, 2002, we announced our second quarter of fiscal 2002 net sales
and the increase in net sales over the comparable period in 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HAIN CELESTIAL GROUP, INC.
Date: May 14, 2002 /s/ Irwin D. Simon
------------------------------------
Irwin D. Simon,
President and Chief
Executive Officer
Date: May 14, 2002 /s/ Ira J. Lamel
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Ira J. Lamel,
Executive Vice President,
Chief Financial Officer and Treasurer
