It's been a very long time since Hain Celestial Group Inc. (NASDAQ:HAIN) reported its financial and operating results, having last reported on May 4, 2016. Since then, the company has delayed its filings multiple times because of accounting issues tied to the timing of revenue recognition.
However, in a recent filing with the Securities and Exchange Commission, the company said that it "presently anticipates" filing the multiple quarterly and annual reports it owes the SEC and investors by the end of this month. And while that's very good news, as it provides an indication that management is satisfied that it has fully resolved the issues around improper recognition of revenue, that doesn't guarantee all is well with Hain Celestial.
There are two things investors need to make sure they understand when Hain does finally release its results for the past several quarters: How will revenue recognition be affected going forward, and how has the business performed over the past year?
How will the revised revenue recognition affect Hain's sales?
This is the first major change investors need to understand. At the heart of the delay of Hain's financial reporting is how (or more precisely, when) the company recognized revenues tied to concessions made to customers. Hain, which sells to both retailers and resellers, apparently had been recognizing revenues before it was technically allowed to. There's some good news: Management has said multiple times that the amount of revenue is not in question, just the timing, and any revenue it recognized too early will be recognized in a future quarter.
But the big question investors need to be sure they can answer, when Hain reports, is how (or whether) this will affect the company's financial results going forward. Chances are the adjusted timing of revenue recognition will more or less "wash," based on the revisions to prior reported quarters, but this isn't the sort of thing that we can simply make an assumption about.
A look at the company's prior cash flows may offer some insight:
GAAP (generally accepted accounting principles) net income and revenue can be affected by a number of non-cash items, including expenses based on capital spending that may have happened years prior (depreciation and amortization), and revenue can be recognized before a customer actually delivers payment.
However, cash flows from operations are generally more straightforward. And as the table above shows, Hain's cash flows from operations have grown steadily over the past few years, with some choppiness from quarter to quarter. In my mind, this indicates that the revenue-recognition mistakes aren't severe enough to put the company at any major financial risk.
But until the company confirms this with revised financial reporting, and management offers some guidance on how revenue growth will be affected (if at all), investors shouldn't dismiss this out of hand.
How has the business performed?
If we operate under the assumption that the revenue-recognition issues are indeed resolved, and will boil down to timing issues and not a material weakness in the business, we are still left with a major hole in our understanding of how Hain Celestial's different business units have performed over the past nearly 15 months.
After all, things weren't all roses at last check.
The company was in the midst of trying to turn its eponymous Celestial Seasonings teas business around, after a repackaging and rebranding effort failed. Hain was also working to improve sales of its coconut-oil products after having lowered prices due to stiff competition; at last report, management said it was too early to say if the price reductions were paying off.
At the same time, its snacks business was turning around after a few tough quarters, following a change in merchandising strategy at major retail partner Wal-Mart. Management said that it was seeing sales recover, but again, it was very early in the recovery of this important product category when Hain went dark. It's a similar story with Hain's nut-butter business, which was still in the process of recovering from a voluntary recall the year before which cost millions in lost sales, and lost private-label customers.
Furthermore, Hain was very early in its "Project Terra" initiative, a plan that was realigning the company's operating units into five strategic platforms. The stated goals of Project Terra were twofold: Accelerate product sales and profits, and drive down expenses by optimizing operations, procurement, and products across the company's many brands.
On the cost-reduction front, the company said that it had already identified $100 million in potential savings over the next three years. On the brand-growth side, Hain had split its product lineup into five different categories, with the idea that better aligning products would help its distribution, marketing, and manufacturing efforts yield better growth and profitability.
The good news is that we should get answers to these important questions very soon, if Hain does indeed deliver its long-overdue financial results before the end of the month.
But once we learn exactly how the business has performed -- specifically, if the company has started making progress with Project Terra on both the sales-growth and cost-reduction fronts -- and what the long-term impact of the revenue-recognition mistakes will be, it's hard to say what to expect. If things have gone well and the impact is minimal, there's huge upside. But if business hasn't been good, there's a risk that investors will pay an even bigger price.
The final outcome will probably be somewhere in the middle. Tune in when Hain reports for an in-depth look at the results.