Food & Beverage

Hain's plunge puts revenue recognition in spotlight again

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Hain Celestial Group's announcement late Monday about revenue-recognition timing issues shines a spotlight on accounting rules that have tripped up other companies over the years and sometimes raised alarm by federal regulators.

On the surface, revenue recognition may appear to be an issue solely for bean counters given the sometimes sophisticated nature of the financial reporting today. But the question is important for investors, too, because there have been cases across several industries where companies claimed revenue early to boost earnings.

Over the decades, there also have been revenue recognition questions raised from the likes of IBM, General Electric, and Xerox, among others. Some of the cases led to investigations by the U.S. Securities and Exchange Commission.

At this stage, nobody is suggesting Hain — a major natural and organic food products company — broke any laws or that it cooked the books. However, there are legitimate questions whether there was a disconnect in the company's internal controls.

A spokesperson for SEC declined comment when contacted about Hain. A Hain spokesperson wasn't immediately available to comment.

Separately, Hain said late Monday it will miss its fiscal 2016 forecast and will delay reporting its financial results for the fiscal fourth quarter ending in June. Hain had been expected to report the June quarter results this week.

During the June quarter, Hain said it identified concessions that were granted to certain U.S. distributors. Historically, the food company has recognized revenue from the sale of its products to certain distributors at the time the products are shipped to the distributor.

In the case of Hain, the accounting questions and miss triggered a huge selloff Tuesday and several analysts downgraded the stock's ratings. Shares of Hain traded down as much as 27 percent on heavy volume. Around midday, more than 34.1 million shares had changed hands compared with its average daily volume of 1.7 million shares.

"We have seen several growth companies in the food space, especially ones that have been acquisitive, go through similar challenges," said Jefferies analyst Akshay Jagdale in a note on Tuesday. "Although we do not know what triggered the investigation and/or the potential impact it could have on Hain's financials, we believe the issue is timing related and that the market is likely pricing in all the bad news."

Wedbush analyst Phil Terpolilli pointed out in a note Tuesday that the both the chief financial officer and chief accounting officer left Hain within the past year. The analyst also said Keurig Green Mountain and Diamond Foods (since sold to another company) have also faced "notable account questions" in the last roughly six years.

Keurig Green Mountain's case back in 2010 involved regulators looking at how the company booked sales.

In the case of Hain, the issue relates to the company's revenue recognition practices with certain U.S. distributors. Hain didn't disclose the name of the distributors in question. The company said the board's audit committee is conducting an independent review of the matter and has retained independent counsel to assist in that process.

"The company is currently evaluating whether the revenue associated with those concessions was accounted for in the correct period and is also currently evaluating its internal control over financial reporting," Hain said.

Buckingham Research Group analyst Eric Larson said in a note Tuesday that "it would appear Hain's internal cost control systems did not identify the amount of product sold to these customers, and therefore, pre-sold too much product into the trade. The impact would then overstate fiscal year fourth-quarter revenues at the expense of future quarters."

Larson said Hain's gross profits are considered "among the lowest in the industry at around 25-26 percent."

According to Hain's last 10-K regulatory filing, it is not unusual for the company to periodically offer sales incentives and promotions, including outright price discounts and couponing, to its customers. These incentives are then deducted from the company's gross sales to determine reported net sales each quarter.

Hain's largest customer has been United Natural Foods, a distributor that accounted for about 12 percent of its sales in fiscal 2015, according to the 10-K. The second largest customer is Wal-Mart Stores with 10 percent of the company's net sales last year. The company also sells its products to Whole Foods Market and Sprouts, among others.