| HAIN CELESTIAL GROUP INC Item 1A Risk Factors |
| Our business, operations and financial condition are subject to various risks and uncertainties |
| The most significant of these risks include those described below; however, there may be additional risks and uncertainties not presently known to us or that we currently consider immaterial |
| If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected |
| In such case, the trading price of our common stock could decline, and you may lose all or part of your investment |
| These risk factors should be read in conjunction with the other information in this Annual Report on Form 10-K and in the other documents that we file from time to time with the SEC -7- _________________________________________________________________ Our Markets Are Highly Competitive We operate in highly competitive geographic and product markets, and some of our markets are dominated by competitors with greater resources |
| We cannot be certain that we could successfully compete for sales to distributors or stores that purchase from larger, more established companies that have greater financial, managerial, sales and technical resources |
| In addition, we compete for limited retailer shelf space for our products |
| Larger competitors, such as mainstream food companies including but not limited to Dean Foods Company, General Mills, Inc, Nestle SA, Kraft Foods Inc, Groupe Danone, Kellogg Company, PepsiCo, Inc |
| and Sara Lee Corporation, also may be able to benefit from economies of scale, pricing advantages or the introduction of new products that compete with our products |
| Retailers also market competitive products under their own private labels |
| One example of the competitiveness of the markets in which we participate is in the tea portion of the beverage market |
| Competitive factors in the tea industry include product quality and taste, brand awareness among consumers, variety of specialty tea flavors, interesting or unique product names, product packaging and package design, supermarket and grocery store shelf space, alternative distribution channels, reputation, price, advertising and promotion |
| Our principal competitors on a national basis in the specialty tea market are Thomas J Lipton Company, a division of Unilever PLC, and RC Bigelow, Inc |
| Unilever has substantially greater financial resources than we do |
| In addition, in April 2004, Tazo Tea Company (a subsidiary of Starbucks Corporation) and Kraft Foods Global, Inc |
| ) announced a licensing agreement whereby Tazo products may gain additional access to grocery channels through placement by Kraft, which has substantially greater financial resources than we do |
| Additional competitors include a number of regional specialty tea companies |
| There may be potential entrants which are not currently in the specialty tea market who may have substantially greater resources than we do |
| Private label competition in the specialty tea category is currently minimal, but growing |
| In the future, competitors may introduce other products that compete with our products and these competitive products may have an adverse effect on our business, results of operations and financial condition |
| We also compete with other manufacturers in the procurement of natural and organic product ingredients, which may be less plentiful in the open market than conventional product ingredients |
| This competition may increase in the future along with increasing public demand for natural and organic products |
| This could cause our expenses to increase or could limit the amount of product that we can manufacture and sell |
| Consumer Preferences for Our Products Are Difficult to Predict and May Change A significant shift in consumer demand away from our products or our failure to maintain our current market position could reduce our sales or the prestige of our brands in our markets, which could harm our business |
| While we continue to diversify our product offerings, we cannot be certain that demand for our products will continue at current levels or increase in the future |
| Our business is primarily focused on sales of natural and organic products in markets geared to consumers of natural foods, specialty teas, non-dairy beverages, cereals, breakfast bars, canned soups and vegetables, snacks and cooking oils, which, if consumer demand for such categories were to decrease, could harm our business |
| Consumer trends change based on a number of possible factors, including: · nutritional values, such as a change in preference from fat free to reduced fat to no reduction in fat; and · a shift in preference from organic to non-organic and from natural products to non-natural products |
| In addition, we have other product categories, such as medically-directed food products and other specialty food items, as well as natural health and beauty care products |
| We are subject to evolving consumer preferences for these products |
| -8- _________________________________________________________________ Our Acquisition Strategy Exposes Us to Risk We intend to continue to grow our business in part through the acquisition of new brands, both in the United States and internationally |
| Our acquisition strategy is based on identifying and acquiring brands with products that complement our existing product mix |
| We cannot be certain that we will be able to successfully: · identify suitable acquisition candidates; · negotiate identified acquisitions on terms acceptable to us; or · integrate acquisitions that we complete |
| We may encounter increased competition for acquisitions in the future, which could result in acquisition prices we do not consider acceptable |
| We are unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed |
| Our Future Success May Be Dependent on Our Ability to Integrate Brands That We Acquire Our future success may be dependent upon our ability to effectively integrate new brands that we acquire, including our ability to realize potentially available marketing opportunities and cost savings, some of which may involve operational changes |
| We cannot be certain: · as to the timing or number of marketing opportunities or amount of cost savings that may be realized as the result of our integration of an acquired brand; · that a business combination will enhance our competitive position and business prospects; · that we will not experience difficulties with customers, personnel or other parties as a result of a business combination; or · that, with respect to our acquisitions outside the United States, we will not be affected by, among other things, exchange rate risk |
| In addition, we cannot be certain that we will be successful in: · integrating an acquired brand’s distribution channels with our own; · coordinating sales force activities of an acquired brand or in selling the products of an acquired brand to our customer base; or · integrating an acquired brand into our management information systems or integrating an acquired brand’s products into our product mix |
| Additionally, integrating an acquired brand into our existing operations will require management resources and may divert our management from our day-to-day operations |
| If we are not successful in integrating the operations of acquired brands, our business could be harmed |
| We are Dependent Upon the Services of Our Chief Executive Officer We are highly dependent upon the services of Irwin D Simon, our Chairman of the Board, President and Chief Executive Officer |
| Simon’s reputation as our founder and his expertise and knowledge in the natural and organic products market are critical factors in our continuing growth |
| Simon could harm our business |
| We Rely on Independent Brokers and Distributors for a Substantial Portion of Our Sales We rely upon sales efforts made by or through non-affiliated food brokers to distributors and other customers, in addition to our own retail sales organization |
| The loss of, or business disruption at, one or more of these distributors or brokers may harm our business |
| If we were required to obtain additional or alternative distribution and food brokerage agreements or arrangements in the future, we cannot be certain that we will be able to do so on satisfactory -9- _________________________________________________________________ terms or in a timely manner |
| One of our distributors, United Natural Foods, Inc, or “UNFI,” which redistribute products to natural foods supermarkets, independent natural retailers and other retailers, accounted for approximately 21prca, 22prca and 20prca of our net sales for the fiscal years ended June 30, 2006, 2005, and 2004, respectively |
| Our inability to enter into satisfactory brokerage agreements may inhibit our ability to implement our business plan or to establish markets necessary to develop products successfully |
| Food brokers act as selling agents representing specific brands on a non-exclusive basis under oral or written agreements generally terminable at any time on 30 days’ notice, and receive a percentage of net sales as compensation |
| Distributors purchase directly for their own account for resale |
| In addition, the success of our business depends, in large part, upon the establishment and maintenance of a strong distribution network |
| Loss of One or More of Our Manufacturing Facilities or Independent Co-Packers Could Harm Our Business For the fiscal years ended June 30, 2006, 2005 and 2004, approximately 47prca, 47prca and 39prca, respectively, of our revenue was derived from products manufactured at our manufacturing facilities |
| An interruption in or the loss of operations at one or more of these facilities, or the failure to maintain our labor force at one or more of these facilities, could delay or postpone production of our products, which could have a material adverse effect on our business, results of operations and financial condition until we could secure an alternate source of supply |
| During fiscal 2006, 2005 and 2004, approximately 53prca, 53prca and 61prca, respectively, of our revenue was derived from products manufactured at independent co-packers |
| None of our co-packers manufactured products representing as much as 10prca of our revenue; however, in some cases a co-packer produces all of our requirements for a particular brand |
| The loss of one or more co-packers, or our failure to retain co-packers for newly acquired products or brands, could delay or postpone production of our products, which could have a material adverse effect on our business, results of operations and financial condition until such time as an alternate source could be secured, which may be on less favorable terms |
| Our Tea Ingredients Are Subject to Import Risk Our tea brand purchases its ingredients from numerous foreign and domestic manufacturers, importers and growers, with the majority of those purchases occurring outside of the United States |
| We maintain long-term relationships with most of our suppliers |
| Purchase arrangements with ingredient suppliers are generally made annually and in US currency |
| Purchases are made through purchase orders or contracts, and price, delivery terms and product specifications vary |
| Our botanical purchasers visit major suppliers around the world annually to procure ingredients and to assure quality by observing production methods and providing product specifications |
| Many ingredients are presently grown in countries where labor-intensive cultivation is possible, and where we often must educate the growers about product standards |
| We perform laboratory analysis on incoming ingredient shipments for the purpose of assuring that they meet our quality standards and those of the FDA Our ability to ensure a continuing supply of ingredients at competitive prices depends on many factors beyond our control, such as foreign political situations, embargoes, changes in national and world economic conditions, currency fluctuations, forecasting adequate need of seasonal raw material ingredients and climate conditions |
| We take steps and will continue to take steps intended to lessen the risk of an interruption of botanical supplies, including identification of alternative sources and maintenance of appropriate inventory levels |
| We have, in the past, maintained sufficient supplies for our ongoing operations |
| Our failure to maintain relationships with our existing suppliers or to find new suppliers, observe production standards for our foreign-procured products or continue our supply of botanicals from foreign sources could harm our business |
| -10- _________________________________________________________________ Our Future Results of Operations May be Adversely Affected by Escalating Fuel Costs Many aspects of our business have been, and continue to be, directly affected by the continuously rising cost of fuel |
| Increased fuel costs have translated into increased costs for the products and services we receive from our third party providers including, but not limited to, increased production and distribution costs for our products |
| As the cost of doing business increases, we may not be able to pass these higher costs on to our customers and, therefore, any such increase may adversely affect our earnings |
| We are Subject to Risks Associated with Our International Sales and Operations, Including Foreign Currency Risks Operating in international markets involves exposure to movements in currency exchange rates, which are volatile at times |
| The economic impact of currency exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors |
| Consequently, isolating the effect of changes in currency does not incorporate these other important economic factors |
| These changes, if material, could cause adjustments to our financing and operating strategies |
| During fiscal 2006, approximately 19dtta3prca of our net sales were generated outside the United States, while such sales outside the United States were 21dtta1prca of net sales in 2005 and 20dtta3prca in 2004 |
| Sales from outside our US markets may represent an increasing portion of our total net sales in the future |
| Our non-US sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including: · periodic economic downturns and unstable political environments; · price and currency exchange controls; · fluctuations in the relative values of currencies; · unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; · compliance with applicable foreign laws; and · difficulties in managing a global enterprise, including staffing, collecting accounts receivable and managing distributors |
| Our Inability to Use Our Trademarks Could Have a Material Adverse Effect on Our Business We believe that brand awareness is a significant component in a consumer’s decision to purchase one product over another in the highly competitive food, beverage and personal care industry |
| Although we endeavor to protect our trademarks and trade names, there can be no assurance that these efforts will be successful, or that third parties will not challenge our right to use one or more of our trademarks or trade names |
| We believe that our trademarks and trade names are significant to the marketing and sale of our products and that the inability to utilize certain of these names could have a material adverse effect on our business, results of operations and financial condition |
| Our Products Must Comply with Government Regulation The USDA has adopted regulations with respect to a national organic labeling and certification program which became effective February 20, 2001, and fully implemented on October 21, 2002 |
| We currently manufacture approximately 900 organic products which are covered by these regulations |
| Future developments in the regulation of labeling of organic foods could require us to further modify the labeling of our products, which could affect the sales of our products and thus harm our business |
| In addition, on January 18, 2001, the FDA proposed new policy guidelines regarding the labeling of genetically engineered foods |
| The FDA is currently considering the comments it received before issuing final guidance |
| These guidelines, if adopted, could require us to modify the labeling of our products, which could affect the sales of our products and thus harm our business |
| -11- _________________________________________________________________ The FDA published the final rule amending the Nutritional Labeling regulations to require declaration of “Trans Fatty Acids” in the nutritional label of conventional foods and dietary supplements on July 11, 2003 |
| The final rule became effective on January 1, 2006 |
| Additionally, an allergen labeling law was passed and signed on August 3, 2004 |
| This law requires that eight major allergens to be clearly labeled by January 1, 2006 |
| We have revised our labels in order to be in compliance with the final rules |
| Additionally, Canada adopted new food labeling regulations that required implementation by December 12, 2005 |
| These regulations require a Nutritional Facts panel to be on the packages |
| Our Yves products are subject to these regulations, as are all of our other products sold into Canada |
| Any change in labeling requirements for our products may lead to an increase in packaging costs or interruptions or delays in packaging deliveries |
| Similar labeling regulations exist throughout the rest of the world |
| We continually monitor and modify packaging to be in compliance with the rules of the various countries where we sell our products |
| Our ability to meet local packaging regulations impact our ability to sell products in these regions |
| Furthermore, new government laws and regulations may be introduced in the future that could result in additional compliance costs, seizures, confiscations, recalls or monetary fines, any of which could prevent or inhibit the development, distribution and sale of our products |
| If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could have a material adverse effect on our business, results of operations and financial condition |
| Product Recalls Could Have a Material Adverse Effect on Our Business Manufacturers and distributors of products in our industry are sometimes subject to the recall of their products for a variety of reasons, including for product defects, such as ingredient contamination, packaging safety and inadequate labeling disclosure |
| If any of our products are recalled due to a product defect or for any other reason, we could be required to incur the expense of the recall or the expense of any resulting legal proceeding |
| Additionally, if one of our significant brands were subject to recall, the image of that brand and our image could be harmed, which could have a material adverse effect on our business |
| Product Liability Suits, If Brought, Could Have a Material Adverse Effect on Our Business If a product liability claim exceeding our insurance coverage were to be successfully asserted against us, it could harm our business |
| We cannot assure you that such coverage will be sufficient to insure against claims which may be brought against us, or that we will be able to maintain such insurance or obtain additional insurance covering existing or new products |
| As a marketer of food, beverage and personal care products, we are subject to the risk of claims for product liability |
| We maintain product liability insurance and generally require that our co-packers maintain product liability insurance naming us as a co-insured |
| We Rely on Independent Certification for a Number of Our Food Products We rely on independent certification, such as certifications of our products as “organic” or “kosher,” to differentiate our products from others |
| The loss of any independent certifications could adversely affect our market position as a natural and organic food company, which could harm our business |
| We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified |
| For example, we can lose our “organic” certification if a manufacturing plant becomes contaminated with non-organic materials, or if it is not properly cleaned after a production run |
| In addition, all raw materials must be certified organic |
| Similarly, we can lose our “kosher” certification if a manufacturing plant and raw materials do not meet the requirements of the appropriate kosher supervision organization |
| -12- _________________________________________________________________ Due to the Seasonality of Many of Our Products, Including Our Tea Products, and Other Factors, Our Operating Results Are Subject to Quarterly Fluctuations Our tea brand manufactures and markets hot tea products and, as a result, our quarterly results of operations reflect seasonal trends resulting from increased demand for our hot tea products in the cooler months of the year |
| In addition, some of our other products (eg, 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 our future performance |
| Our Growth is Dependent on Our Ability to Introduce New Products and Improve Existing Products Our growth depends in large part on our ability to generate and implement improvements to our existing products and to introduce new products to consumers |
| The innovation and product improvements are affected by the level of funding that can be made available, the technical capability of our Research and Development Department in developing and testing product prototypes, and the success of our management in rolling out the resulting improvements in a timely manner |
| If we are unsuccessful in implementing product improvements that satisfy the demands of consumers, our business could be harmed |
| The Profitability of Our Operations is Dependent on Our Ability to Manage Our Inventory Our profit margins depend on our ability to manage our inventory efficiently |
| As part of our effort to manage our inventory more efficiently, we carried out a SKU rationalization program which resulted in the discontinuation of numerous lower-margin or low-turnover SKUs |
| However, a number of factors, such as changes in customers’ inventory levels, access to shelf space and changes in consumer preferences, may lengthen the number of days we carry certain inventories, hence impeding our effort to manage our inventory efficiently |
| Our Officers and Directors May Be Able to Control Our Actions Our officers and directors beneficially owned (assuming the exercise of all stock options held by them) approximately 10prca of our common stock as of June 30, 2006 |
| Accordingly, our officers and directors may be in a position to influence the election of our directors and otherwise influence stockholder action |
| Our Ability to Issue Preferred Stock May Deter Takeover Attempts Our board of directors is empowered to issue, without stockholder approval, preferred stock with dividends, liquidation, conversion, voting or other rights which could decrease the amount of earnings and assets available for distribution to holders of our common stock and adversely affect the relative voting power or other rights of the holders of our common stock |
| In the event of issuance, the preferred stock could be used as a method of discouraging, delaying or preventing a change in control |
| Our amended and restated certificate of incorporation authorizes the issuance of up to 5cmam000cmam000 shares of “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors |
| Although we have no present intention to issue any shares of our preferred stock, we may do so in the future under appropriate circumstances |
| Future Sales or the Perception of Future Sales of Our Common Stock Could Adversely Affect Our Stock Price The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that those sales could occur |
| These sales or the possibility that they may occur also could make it more difficult for us to raise funds in any equity offering in the future at a time and price that we deem appropriate |