-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QpnIBgp/ZVzh9ZxXKYIhudHEj57Sznwvf0xNsgMO8oQVAPHOaSlgGj+x0SQIr3ZD Pl3A5vX+NaoEmiaTKYd7Dg== 0000950162-05-001067.txt : 20051109 0000950162-05-001067.hdr.sgml : 20051109 20051109165804 ACCESSION NUMBER: 0000950162-05-001067 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAIN CELESTIAL GROUP INC CENTRAL INDEX KEY: 0000910406 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 223240619 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22818 FILM NUMBER: 051190794 BUSINESS ADDRESS: STREET 1: 58 SOUTH SERVICE ROAD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 6317302200 MAIL ADDRESS: STREET 1: 58 SOUTH SERVICE ROAD CITY: MELVILLE STATE: NY ZIP: 11747 FORMER COMPANY: FORMER CONFORMED NAME: HAIN FOOD GROUP INC DATE OF NAME CHANGE: 19941219 FORMER COMPANY: FORMER CONFORMED NAME: KINERET ACQUISITION CORP DATE OF NAME CHANGE: 19931021 FORMER COMPANY: FORMER CONFORMED NAME: 21ST CENTURY FOOD PRODUCTS CORP DATE OF NAME CHANGE: 19930830 10-Q 1 hain10q-110905.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2005 Or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to _______. Commission file number: 0-22818 THE HAIN CELESTIAL GROUP, INC. ------------------------------ (Exact name of registrant as specified in its charter) Delaware 22-3240619 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 58 South Service Road, Melville, New York 11747 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 730-2200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No ______ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ______ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _______ No X As of November 1, 2005, there were 36,935,424 shares outstanding of the Registrant's Common Stock, par value $.01 per share. THE HAIN CELESTIAL GROUP, INC. INDEX Part I Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2005 (unaudited) and June 30, 2005 .....................................2 Condensed Consolidated Statements of Income - Three Months ended September 30, 2005 and 2004 (unaudited) ........3 Condensed Consolidated Statement of Stockholders' Equity - Three months ended September 30, 2005 (unaudited) .................4 Condensed Consolidated Statement of Cash Flows - Three months ended September 30, 2005 and 2004 (unaudited) ........5 Notes to Condensed Consolidated Financial Statements ............6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .....................10-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................................14 Item 4. Controls and Procedures ..........................................14 Part II Other Information Items 1, 3, 4 and 5 are not applicable. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......14 Item 6. Exhibits ..........................................................14 Signatures ................................................................15 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share and share amounts)
September 30, June 30, 2005 2005 --------------------- -------------------- ASSETS (Unaudited) (Note) Current assets: Cash and cash equivalents $ 20,021 $ 24,139 Accounts receivable, less allowance for doubtful accounts of $2,080 and $2,074 73,478 67,148 Inventories 83,567 76,497 Recoverable income taxes 2,590 2,575 Deferred income taxes 5,671 5,671 Other current assets 18,623 18,164 --------------------- -------------------- Total current assets 203,950 194,194 Property, plant and equipment, net of accumulated depreciation and amortization of $51,842 and $49,035 93,120 88,204 Goodwill 358,261 350,833 Trademarks and other intangible assets, net of accumulated amortization of $8,941 and $9,142 60,875 61,010 Other assets 12,635 12,895 --------------------- -------------------- Total assets $ 728,841 $ 707,136 ===================== ==================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 62,675 $ 65,922 Income taxes payable 5,833 1,139 Current portion of long-term debt 4,148 2,791 --------------------- -------------------- Total current liabilities 72,656 69,852 Long-term debt, less current portion 90,785 92,271 Deferred income taxes 16,723 16,723 Minority interest 4,772 - --------------------- -------------------- Total liabilities 184,936 178,846 Stockholders' equity: Preferred stock - $.01 par value, authorized 5,000,000 shares, no shares issued - - Common stock - $.01 par value, authorized 100,000,000 shares, issued 37,784,930 and 37,475,998 shares 378 375 Additional paid-in capital 407,862 402,645 Retained earnings 135,330 127,967 Foreign currency translation adjustment 13,080 10,048 --------------------- -------------------- 556,650 541,035 Less: 861,256 shares of treasury stock, at cost (12,745) (12,745) --------------------- -------------------- Total stockholders' equity 543,905 528, 290 --------------------- -------------------- Total liabilities and stockholders' equity $ 728,841 $ 707,136 ===================== ==================== Note: The balance sheet at June 30, 2005 has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements.
2 THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share and share amounts)
Three Months Ended September 30, ------------------------------------------- 2005 2004 ------------------- -------------------- (Unaudited) Net sales $ 161,097 $ 137,604 Cost of sales 115,248 98,629 ------------------- -------------------- Gross profit 45,849 38,975 Selling, general and administrative expenses 33,095 28,185 ------------------- -------------------- Operating income 12,754 10,790 Interest expense and other expenses, net 868 655 ------------------- -------------------- Income before income taxes 11,886 10,135 Provision for income taxes 4,523 3,953 ------------------- -------------------- Net income $ 7,363 $ 6,182 =================== ==================== Net income per share: Basic $ 0.20 $ 0.17 =================== ==================== Diluted $ 0.20 $ 0.17 =================== ==================== Weighted average common shares outstanding: Basic 36,636 36,273 =================== ==================== Diluted 37,560 36,855 =================== ====================
See notes to condensed consolidated financial statements. 3 THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 (In thousands, except per share and share amounts)
Foreign Common Stock Additional Currency Compre- Amount Paid-in Retained Treasury Stock Translation hensive Shares at $.01 Capital Earnings Shares Amount Adjustment Total Income ----------- ------------ ------------ ------------ ---------- ---------- ------------ --------------------- Balance at June 30, 2005 37,475,998 $375 $ 402,645 $ 127,967 861,256 $ (12,745) $ 10,048 $528,290 Exercise of stock options 208,450 2 3,268 3,270 Issuance of common stock 100,482 1 1,703 1,704 Non-cash compensation charge 246 246 Comprehensive income: Net income 7,363 7,363 $ 7,363 Translation adjustments 3,032 3,032 3,032 --------- Total compre- hensive income $ 10,395 ----------- -------- ------------ ----------- --------- ---------- ---------- --------- ========= Balance at September 30, 2005 37,784,930 $ 378 $407,862 $ 135,330 861,256 $ (12,745) $ 13,080 $ 543,905 =========== ======== ============ =========== ========= ========== ========== =========
See notes to condensed consolidated financial statements. 4 THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Three Months Ended September 30, ------------------------------------------ 2005 2004 ------------------ ------------------- CASH FLOWS FROM OPERATING ACTIVITIES (Unaudited) Net income $ 7,363 $ 6,182 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,207 3,105 Provision for doubtful accounts 6 (10) Non-cash compensation 246 246 Other non-cash items 84 - Increase (decrease) in cash attributable to changes in operating assets and liabilities, net of amounts applicable to acquired businesses: Accounts receivable (4,340) (973) Inventories (6,594) (7,083) Other current assets (439) (3,159) Other assets 1,711 (1,789) Accounts payable and accrued expenses (5,409) (5,775) Income taxes, net 4,694 2,477 ------------------ ------------------- Net cash provided by (used in) operating activities 529 (6,779) ------------------ ------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (3,108) (2,781) Acquisitions of businesses, net of cash acquired (4,257) (1,570) ------------------ ------------------- Net cash used in investing activities (7,365) (4,351) ------------------ ------------------- CASH FLOWS FROM FINANCING ACTIVITIES Payments on bank revolving credit facility, net - (5,500) Proceeds from issuance of common stock, net of related expenses 2,974 805 Repayments of other long-term debt, net (401) (1,427) ------------------ ------------------- Net cash provided by (used in) financing activities 2,573 (6,122) ------------------ ------------------- Effect of exchange rate changes on cash 145 (472) ------------------ ------------------- Net decrease in cash and cash equivalents (4,118) (17,724) Cash and cash equivalents at beginning of period 24,139 27,489 ------------------ ------------------- Cash and cash equivalents at end of period $ 20,021 $ 9,765 ================== =================== See notes to condensed consolidated financial statements.
5 THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The Hain Celestial Group, Inc., a Delaware corporation, and its subsidiaries (collectively, the "Company", and herein referred to as "we", "us", and "our") manufacture, market, distribute and sell natural and organic food products and natural personal care products under brand names which are sold as "better-for-you" products. We are a leader in many of the top natural food categories, with such well-known food brands as Celestial Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R), Rice Dream(R), Soy Dream(R), Imagine(R), Walnut Acres Organic(TM), Ethnic Gourmet(R), Rosetto(R), Little Bear Organic Foods(R), Bearitos(R), Arrowhead Mills(R), Health Valley(R), Breadshop's(R), Casbah(R), Garden of Eatin'(R), Terra Chips(R), Harry's Premium Snacks(R), Boston's(R), Lima(R), Biomarche(R), Grains Noirs(R), Natumi(R), Milkfree, Raised Right(TM), Yves Veggie Cuisine(R), DeBoles(R), Earth's Best(R), and Nile Spice(R). The Company's principal specialty product lines include Hollywood(R) cooking oils, Estee(R) sugar-free products, Boston Better Snacks(R), and Alba Foods(R). Our natural and organic personal care product line is marketed under the JASON(R), Zia(R), Orjene(R), Shaman Earthly Organics(TM), and Heather's(R) brands. We operate in one business segment: the sale of natural and organic food and personal care products. In our 2005 fiscal year, approximately 47% of our revenues were derived from products that were manufactured within our own facilities with 53% produced by various co-packers. All dollar amounts in our consolidated financial statements and tables have been rounded to the nearest thousand dollars, except per share amounts. Share amounts in the notes to consolidated financial statements are presented in thousands. 2. BASIS OF PRESENTATION Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States. The consolidated financial statements reflect all normal recurring adjustments which, in management's opinion, are necessary for a fair presentation for interim periods. Operating results for the three months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending June 30, 2006. Please refer to the footnotes to our consolidated financial statements as of June 30, 2005 and for the year then ended included in our Annual Report on Form 10-K, as amended, for information not included in these condensed footnotes. 3. EARNINGS PER SHARE We report basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings per share excludes the dilutive effects of options and warrants. Diluted earnings per share includes only the dilutive effects of common stock equivalents such as stock options and warrants. 6 THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued The following table sets forth the computation of basic and diluted earnings per share pursuant to SFAS No. 128: Three Months Ended September 30, ------------------------ 2005 2004 ------------ ------------ Numerator: Net income $ 7,363 $ 6,182 ============ ============ Denominator (in thousands): Denominator for basic earnings per share - weighted average shares outstanding during the period 36,636 36,273 ------------ ------------ Effect of dilutive securities: Stock options 924 576 Warrants - 6 ------------ ------------ 924 582 ------------ ------------ Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 37,560 36,855 ============ ============ Basic net income per share $ 0.20 $ 0.17 ============ ============ Diluted net income per share $ 0.20 $ 0.17 ============ ============ 4. INVENTORIES Inventories consisted of the following: September 30, June 30, 2005 2005 ------------------- ------------------- Finished goods $52,154 $48,240 Raw materials, work-in-progress and packaging 31,413 28,257 ------------------- ------------------- $83,567 $76,497 =================== =================== 7 THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following: September 30, June 30, 2005 2005 ---------------- -------------------- Land $ 7,512 $ 7,481 Buildings and improvements 34,575 31,766 Machinery and equipment 89,767 89,331 Furniture and fixtures 5,127 2,542 Leasehold improvements 2,576 2,955 Construction in progress 5,405 3,164 ---------------- -------------------- 144,962 137,239 Less: Accumulated depreciation and amortization 51,842 49,035 ---------------- -------------------- $ 93,120 $ 88,204 ================ ==================== 6. ACQUISITIONS On July 1, 2005, we acquired the assets of College Hill Poultry of Fredericksburg, PA through Hain Pure Protein Corporation, which is a joint venture with Pegasus Capital Advisors, LP, a private equity firm. We control 50.1% of the joint venture. College Hill Poultry's Raised Right (TM) brand of natural and organic, free-range chicken are raised on family farms and grain-fed without antibiotics or animal by-products. Raised Right (TM) customers include supernaturals and conventional supermarkets, natural food stores and foodservice outlets. The purchase price consisted of approximately $4.7 million in cash as well as the assumption of certain liabilities. The net assets acquired, as well as the sales and operations of Hain Pure Protein Corporation, are not material to the Company's consolidated financial position or the results of its operations. On April 4, 2005, we acquired 100% of the stock of privately held Zia Cosmetics, Inc., including the Zia(R) Natural Skincare brand, a respected leader in therapeutic products for healthy, beautiful skin sold mainly through natural food retailers. The purchase price consisted of approximately $10 million in cash as well as the assumption of certain liabilities. The purchase price excludes the amount of contingency payments we may be obligated to pay. The contingency payments are based on the achievement by Zia of certain financial targets over an approximate two year period following the date of acquisition. Such payments, which could total approximately $1.3 million, will be charged to goodwill if and when paid. No such contingency payments have been made since the acquisition. The net assets acquired, as well as the sales and operations of Zia, are not material to the Company's consolidated financial position or the results of operations. 7. CREDIT FACILITY We have available to us a $300 million credit facility (the "Credit Facility") with a bank group expiring in April 2009. The Credit Facility provides for an uncommitted $50 million accordion feature, under which the facility may be increased to $350 million. The Credit Facility is secured only by a pledge of shares of certain of our foreign subsidiaries and is guaranteed by all of our current and future direct and indirect domestic subsidiaries. We are required to comply with customary affirmative and negative covenants for facilities of this nature. Revolving credit loans under this facility bear interest at a base rate (greater of the applicable prime rate or Federal Funds Rate plus an applicable margin) or, at our option, the reserve adjusted LIBOR rate plus an applicable margin. As of September 30, 2005, $89.7 million was borrowed under the Credit Facility at a weighted-average interest rate of 5.0%. 8 THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)-Continued 8. STOCK-BASED COMPENSATION Effective July 1, 2005, we adopted SFAS No. 123(R), "Share-Based Payment," which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25 and amends SFAS No. 95, "Statement of Cash Flows." SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options to be recognized in the income statement based on their fair values. On June 24, 2005, the Company's Board of Directors accelerated the vesting of all outstanding stock options held by employees. During the three months ended September 30, 2005, there were no stock options granted. As such, there was no stock option expense during the three months ended September 30, 2005. 9. STRATEGIC ALLIANCE WITH YHS On September 6, 2005, the Company and Yeo Hiap Seng Limited ("YHS"), a Singapore based natural food and beverage company listed on the Singapore Exchange, exchanged $2 million in equity investments in each other resulting in the issuance of 100,482 shares of the Company's common stock to YHS and one of its subsidiaries and the issuance of 1,326,938 ordinary shares of YHS (representing less than 1% of the outstanding shares) to the Company. These investments represent the completion of the first stage of an alliance established between the Company and YHS which is expected to result in the pursuit of joint interests in marketing and distribution of food and beverages and product development. The Company's investment in YHS shares, which is included in other assets in the accompanying balance sheet, is carried at cost since the Company is restricted from selling these shares prior to September 6, 2007. The quoted price of the YHS shares on the Singapore Exchange at September 30, 2005 was used to approximate their carrying value. 10. PENDING ACQUISITION On August 23, 2005, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Spectrum Organic Products, Inc. ("Spectrum") whereby the Company will acquire all of the issued and outstanding stock of Spectrum. Spectrum is a California-based leading manufacturer and marketer of natural and organic culinary oils, vinegars, condiments and butter substitutes under the Spectrum Naturals(R) brand and essential fatty acid nutritional supplements under the Spectrum Essentials(R) brand. Spectrum's products are sold mainly through natural food retailers. Spectrum reported sales of $49.9 million for its last fiscal year. Upon the effective time of the merger, the Company will pay approximately $0.705 per share, adjusted to reflect Spectrum's estimate of their expenses and the price adjustment provisions set forth in the Merger Agreement. The total consideration to be paid by the Company to Spectrum's shareholders is expected to be approximately $34.5 million, which shall be comprised of 50% cash and 50% of the Company's common stock. The value of the common stock portion of the consideration is subject to an adjustment based upon the closing price of the Company's common stock immediately prior to the closing of the merger, which is expected to take place in December 2005. The transaction has been approved by the boards of directors of both companies and is subject to approval by Spectrum's shareholders and other customary conditions. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We manufacture, market, distribute and sell natural and organic food products and natural personal care products under brand names which are sold as "better-for-you" products. We are a leader in many of the top natural food categories, with such well-known food brands as Celestial Seasonings(R) teas, Hain Pure Foods(R), Westbrae(R), Westsoy(R), Rice Dream(R), Soy Dream(R), Imagine(R), Walnut Acres Organic(TM), Ethnic Gourmet(R), Rosetto(R), Little Bear Organic Foods(R), Bearitos(R), Arrowhead Mills(R), Health Valley(R), Breadshop's(R), Casbah(R), Garden of Eatin'(R), Terra Chips(R), Harry's Premium Snacks(R), Boston's(R), Lima(R), Biomarche(R), Grains Noirs(R), Natumi(R), Milkfree, Raised Right(TM), Yves Veggie Cuisine(R), DeBoles(R), Earth's Best(R), and Nile Spice(R). The Company's principal specialty product lines include Hollywood(R) cooking oils, Estee(R) sugar-free products, Boston Better Snacks(R), and Alba Foods(R). Our natural and organic personal care product line is marketed under the JASON(R), Zia(R), Orjene(R), Shaman Earthly Organics(TM), and Heather's(R) brands. Our website can be found at www.hain-celestial.com. Our products are sold primarily to specialty and natural food distributors, supermarkets, natural food stores, and other retail classes of trade including mass-market stores, drug stores, food service channels and club stores. Our brand names are well recognized in the various market categories they serve. We have acquired numerous brands and we will seek future growth through internal expansion as well as the acquisition of additional complementary brands. Our overall mission is to be a leading marketer and seller of natural, organic, beverage, snack and specialty food and personal care products by integrating all of our brands under one management team and employing a uniform marketing, sales and distribution program. Our business strategy is to capitalize on the brand equity and the distribution previously achieved by each of our acquired product lines and to enhance revenues by strategic introductions of new product lines that complement existing products. Results of Operations Three months ended September 30, 2005 Net sales for the three months ended September 30, 2005 were $161.1 million, an increase of $23.5 million or 17.1% over net sales of $137.6 million in the September 30, 2004 quarter. The increase came from increased brand sales for Terra Chips(R), which was up 14%, Garden of Eatin'(R), which was up 32%, Health Valley(R), which was up 13%, Earth's Best(R), which was up 61%, Imagine(R) Soups, which was up 52%, Celestial Seasonings(R) teas, which was up 7%, and the Company's personal care brands, which were up 32%. Sales for our brands in Europe increased 10% and sales for our brands in Canada were up 5%. Sales of our Jason Natural Products, acquired in June 2004, our Rosetto(R) and Ethnic Gourmet(R) brands, acquired in May 2004, and our Natumi(R) brand, acquired in February 2004, are included in each of the quarterly periods presented, while sales of our recently acquired Zia(R) and Raised Right(TM) brands are included only in the current quarter. Gross profit for the three months ended September 30, 2005 was 28.5% of net sales as compared to 28.3% of net sales in the September 30, 2004 quarter. The increase in gross profit percentage was principally the result of operating efficiencies offset by higher input costs. Higher costs for petroleum and natural gas have impacted our overall business both directly with increased inbound and outbound delivery costs, and indirectly with the pass-through of costs from our suppliers of packaging and other major components of our finished products. In addition, our Raised Right(TM) brand of natural and antibiotic-free chicken operates at significantly lower margins than our other brands and, as a result caused a 1.1% reduction in the Company's overall gross profit percentage. Selling, general and administrative expenses increased by $4.9 million to $33.1 million for the three months ended September 30, 2005 as compared to $28.2 million in the September 30, 2004 quarter. Such expenses as a percentage of net sales amounted to 20.5% for both the three months ended September 30, 2005 and the three months ended September 30, 2004. Selling, general and administrative expenses have increased in overall dollars, primarily as a result of costs brought on by businesses acquired in 2005, increased consumer marketing expenses needed to support our increased sales as well as increases across all levels of general and administrative expenses to support our growing business. 10 General and administrative expenses for the three months ended September 30, 2005 includes approximately $1 million of professional fees related to our Sarbanes-Oxley implementation. In addition, we have added two new corporate office positions in response to these expanded requirements. Operating income was $12.8 million in the three months ended September 30, 2005 compared to $10.8 million in the September 30, 2004 quarter. Operating income as a percentage of net sales was 7.9% in the September 30, 2005 quarter, compared with 7.8% in the September 30, 2004 quarter. The dollar and percentage increase is a result of the aforementioned higher gross profit offset by higher selling, general and administrative expenses. Interest and other expenses amounted to $.9 million for the three months ended September 30, 2005 compared to $.7 million for the three months ended September 30, 2004. The increase in interest expense this quarter as compared to the prior year quarter was the result of the higher interest rates despite lower levels of borrowings. We had $.1 million in net currency exchange gains this quarter as compared to $.2 million in net currency exchange gains in the prior year quarter. Income before income taxes for the three months ended September 30, 2005 amounted to $11.9 million compared to $10.1 million in the comparable period of the prior year. This increase was attributable to the increase in operating income. Our effective income tax rate approximated 38.1% of pre-tax income for the three months ended September 30, 2005 compared to 39% for the three months ended September 30, 2004. Our effective tax rate for the full fiscal year ended June 30, 2005 was 36.7%. Net income for the three months ended September 30, 2005 was $7.4 million compared to $6.2 million in the September 30, 2004 quarter. The increase of $1.2 million in earnings was primarily attributable to the increase in sales and the resultant increase in gross profit dollars. Liquidity and Capital Resources We finance our operations and growth primarily with the cash flows we generate from our operations and from borrowings under our Credit Facility. We have available to us a $300 million Credit Facility through April 22, 2009. The Credit Facility is secured only by a pledge of shares of certain of our foreign subsidiaries and is guaranteed by all of our direct and indirect domestic subsidiaries. We are required to comply with customary affirmative and negative covenants for facilities of this nature. As of September 30, 2005, we had $89.7 million outstanding under the Credit Facility. This access to capital provides us with flexible working capital in the ordinary course of business, the opportunity to grow our business through acquisitions and the ability to develop our existing infrastructure through capital investment. Net cash provided by (used in) operating activities was $0.5 million and $(6.8) million for the three months ended September 30, 2005 and 2004, respectively. Our working capital and current ratio was $131.3 million and 2.8 to 1, respectively, at September 30, 2005 compared with $124.3 million and 2.8 to 1 respectively, at June 30, 2005. The improvement in cash provided by operating activities is the result of higher sales and the resultant increase in gross profit dollars, as well as improved working capital management. Net cash provided by (used in) financing activities was $4.6 million and $(6.1) million for the three months ended September 30, 2005 and 2004, respectively. The change was due principally to our pay down of approximately $0.4 million of debt offset by proceeds from the exercise of options of approximately $5.0 million during the first three months of fiscal 2006, as compared to our pay down of approximately $6.9 million of debt offset by proceeds from the exercise of options of approximately $0.8 million during the first three months of fiscal 2005. We believe that cash on hand of $20.0 million at September 30, 2005, projected remaining fiscal 2006 cash flows from operations, and availability under our Credit Facility are sufficient to fund our working capital needs, anticipated capital expenditures of approximately $12 million, and scheduled debt and lease payments of approximately $9.5 million over the next twelve months. We currently invest our cash on hand in highly liquid short-term investments yielding approximately 3.8% interest. 11 Critical Accounting Policies Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The accounting principles we use require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting periods presented. We believe in the quality and reasonableness of our critical accounting policies; however, it is likely that materially different amounts would be reported under different conditions or using assumptions different from those that we have consistently applied. We believe our critical accounting policies are as follows, including our methodology for estimates made and assumptions used: Revenue Recognition and Sales Incentives Sales are recognized when the earnings process is complete, which occurs when products are shipped in accordance with terms of agreements, title and risk of loss transfer to customers, collection is probable and pricing is fixed or determinable. Sales are reported net of sales incentives, which include trade discounts and promotions and certain coupon costs. Shipping and handling costs billed to customers are included in reported sales. Allowances for cash discounts are recorded in the period in which the related sale is recognized. Valuation of Accounts and Chargebacks Receivables We perform ongoing credit evaluations on existing and new customers daily. We apply reserves for delinquent or uncollectible trade receivables based on a specific identification methodology and also apply an additional reserve based on the experience we have with our trade receivables aging categories. Credit losses have been within our expectations over the last few years. While one of our customers represents approximately 20% of our trade receivable balance on an ongoing basis, we believe there is no credit exposure at this time. Based on cash collection history and other statistical analysis, we estimate the amount of unauthorized deductions that our customers have taken to be repaid and collectible in the near future in the form of a chargeback receivable. While our estimate of this receivable balance could be different had we used different assumptions and judgments, historically our cash collections of this type of receivable have generally been within our expectations. There can be no assurance that we would have the same experience with our receivables during different economic conditions, or with changes in business conditions, such as consolidation within the food industry and/or a change in the way we market and sell our products. Inventory Our inventory is valued at the lower of actual cost or market, utilizing the first-in, first-out method. We provide write-downs for finished goods expected to become non-saleable due to age and specifically identify and provide for slow moving or obsolete raw ingredients and packaging. Property, Plant and Equipment Our property, plant and equipment is carried at cost and depreciated or amortized on a straight-line basis over the lesser of the estimated useful lives or lease life, whichever is shorter. We believe the asset lives assigned to our property, plant and equipment are within ranges generally used in food manufacturing and distribution businesses. Our manufacturing plants and distribution centers, and their related assets, are periodically reviewed to determine if any impairment exists by analyzing underlying cash flow projections. At this time, we believe no impairment exists on the carrying value of such assets. Ordinary repairs and maintenance are expensed as incurred. 12 Intangibles Goodwill is no longer amortized and the value of an identifiable intangible asset is amortized over its useful life unless the asset is determined to have an indefinite useful life. The carrying value of goodwill, which is allocated to the Company's five reporting units, and other intangible assets with indefinite useful lives are tested annually for impairment. Segments SFAS No. 131 defines an operating segment as that component of an enterprise (i) that engages in business activities from which it may earn revenues and incur expenses, (ii) whose operating results are regularly reviewed by the enterprise's chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance, and (iii) for which discrete financial information is available. SFAS No. 142 defines a reporting unit as an operating segment or one level below an operating segment if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. The Company has determined that it operates in one segment, the sale of natural and organic products, including food, beverage and personal care products, and further that such single segment includes five reporting units in the annual test of Goodwill for impairment. Characteristics of the Company's operations which are relied on in making these determinations include the similarities apparent in the Company's products in the natural and organic consumer markets, the commonality of the Company's customers across brands, the Company's unified marketing strategy, and the nature of the financial information used by the CODM, described below, other than information on sales and direct product costs, by brand. The Company's five reporting units are Grocery (including snacks); Tea; Personal Care; Canada; and Europe. The Company has further determined that its Chairman of the Board and Chief Executive Officer is the Company's CODM as defined in SFAS No. 131, and is also the manager of the Company's single segment. In making decisions about resource allocation and performance assessment, the Company's CODM focuses on sales performance by brand using internally generated sales data as well as externally developed market consumption data acquired from independent sources, and further reviews certain data regarding standard costs and standard gross margins by brand. In making these decisions, the CODM receives and reviews certain Company consolidated quarterly and year-to-date information; however, the CODM does not receive or review any discrete financial information by geographic location, business unit, subsidiary, division or brand. The CODM reviews and approves capital spending on a Company consolidated basis rather than at any lower unit level. The Company's Board of Directors receives the same quarterly and year-to-date information as the Company's CODM. Seasonality Our tea brand manufactures and markets hot tea products and, as a result, its quarterly results of operations reflect seasonal trends resulting from increased demand for its hot tea products in the cooler months of the year. In addition, some of our other products (e.g., baking and cereal products and soups) also show stronger sales in the cooler months while our snack food product lines are stronger in the warmer months. Quarterly fluctuations in our sales volume and operating results are due to a number of factors relating to our business, including the timing of trade promotions, advertising and consumer promotions and other factors, such as seasonality, inclement weather and unanticipated increases in labor, commodity, energy, insurance or other operating costs. The impact on sales volume and operating results due to the timing and extent of these factors can significantly impact our business. For these reasons, you should not rely on our quarterly operating results as indications of future performance. Inflation The Company does not believe that inflation had a significant impact on the Company's results of operations for the periods presented. Note Regarding Forward Looking Information Certain statements contained in this Quarterly Report constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1934 and Sections 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of the Company, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; our ability to implement our business and acquisition strategy; the ability to effectively integrate our acquisitions; our ability to obtain financing for general corporate purposes; competition; availability of key personnel; changes in, or the failure to comply with, government regulations; and other risks detailed from time-to-time in the Company's reports filed with the Securities and Exchange Commission, including the report on Form 10-K, and any amendments thereto, for the fiscal year ended June 30, 2005. As a result of the foregoing and other factors, no assurance can be given as to future results, levels of activity and achievements and neither the Company nor any person assumes responsibility for the accuracy and completeness of these statements. 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the reported market risks since the end of the most recent fiscal year. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have reviewed our disclosure controls and procedures as of the end of the period covered by this report. Based upon this review, these officers concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. (b) Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Part II - OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On August 3, 2005, the Company and Yeo Hiap Seng Limited ("YHS"), a Singapore based natural food and beverage company listed on the Singapore Exchange, entered into an agreement to exchange, and on September 6, 2005, did exchange, $2 million in equity investments in each other resulting in the issuance of an aggregate of 100,482 shares of the Company's common stock to YHS and one of its subsidiaries and the issuance of 1,326,938 ordinary shares of YHS (representing less than 1% of the outstanding shares) to the Company. This issuance of the Company's common stock was effected in reliance upon an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended, as the issuance did not involve a public offering. ITEM 6. EXHIBITS Exhibit Number Description - -------------- ----------- 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. 32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE HAIN CELESTIAL GROUP, INC. Date: November 9, 2005 /s/ Irwin D Simon ------------------------------- Irwin D. Simon, Chairman, President and Chief Executive Officer Date: November 9, 2005 /s/ Ira J. Lamel ------------------------------- Ira J. Lamel, Executive Vice President and Chief Financial Officer 15 EXHIBIT 31.1 CERTIFICATION I, Irwin D. Simon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Hain Celestial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2005 /s/ Irwin D. Simon - ------------------------------------- Irwin D. Simon President and Chief Executive Officer EXHIBIT 31.2 CERTIFICATION I, Ira J. Lamel, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Hain Celestial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2005 /s/ Ira J. Lamel - --------------------------------- Ira J. Lamel Executive Vice President and Chief Financial Officer EXHIBIT 32.1 CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q for the period ended September 30, 2005 (the "Report") filed by The Hain Celestial Group, Inc. (the "Company") with the Securities and Exchange Commission, I, Irwin D. Simon, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 9, 2005 /s/ Irwin D. Simon - ------------------------------------- Irwin D. Simon President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to The Hain Celestial Group, Inc. and will be retained by The Hain Celestial Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EXHIBIT 32.2 CERTIFICATION FURNISHED PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q for the period ended September 30, 2005 (the "Report") filed by The Hain Celestial Group, Inc. (the "Company") with the Securities and Exchange Commission, I, Ira J. Lamel, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 9, 2005 /s/ Ira J. Lamel - ----------------------------- Ira J. Lamel Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to The Hain Celestial Group, Inc. and will be retained by The Hain Celestial Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----