The Hain Celestial Group Inc. has settled U.S. Securities and Exchange Commission charges that the Lake Success natural and organic products company’s accounting practices violated federal securities laws.
The SEC order said the company did not properly document and account for incentives it gave to its two largest distributors, and that Hain's finance department didn't initially know about the incentives.
The SEC did not fine Hain, due to its cooperation with the investigation, the agency said in a cease-and-desist order.
The company settled without admitting to or denying the SEC’s findings, the agency said.
Hain did not respond to requests for comment.
“Internal controls failures” led the company to delay its financial reporting in 2016, the SEC said in a statement Tuesday.
“Hain’s internal control failures and poor documentation of the sales incentives contributed to the delay in its financial reporting,” Carolyn Welshhans, associate director of the SEC’s Division of Enforcement, said in the statement. “But the terms of our final settlement take into account Hain’s timely self-reporting, its cooperation during our investigation, and the significant changes it voluntarily made to its organization and to its revenue recognition practices.”
Hain’s products, sold in more than 70 countries, include Celestial Seasonings tea, Sensible Portions snacks, Terra chips, Rudi’s Organic Bakery breads, Earth’s Best baby food and The Greek Gods yogurt.
Hain’s accounting issues stem from a period from at least 2014 to May 2016, when the company’s staff gave sales incentives to its two largest distributors, which accounted for 30 percent of net sales in Hain’s U.S. business segment, the SEC said.
One of the distributors accounted for about $325 million to $350 million in annual net sales in Hain’s U.S. business segment in those years, while the other distributor accounted for more than $115 million, the SEC said.
In exchange for the distributors' spending a certain amount on inventory, Hain offered incentives that varied by quarter, such as cash incentives of up to $500,000; payment terms extended by up to 90 days; discounts of up to 20 percent off list prices; and spoils coverage, in which Hain agreed to reimburse the distributors for products that spoiled or expired before they could be sold to retailers.
The incentives, aimed at meeting internal sales targets, were not improper, but they were not properly documented and could have had financial reporting implications, the SEC said.
Some of the incentives were oral agreements that were not documented, while others were documented only in email exchanges with the distributors, the SEC said.
It's not uncommon for companies to offer incentives to customers to help sell products, said Anthony Vendetti, executive managing director of equity research at Maxim Group LLC, a Manhattan-based investment banking firm.
The issue in Hain’s case is that such practices, when not disclosed, can cause concern in the investment community that “channel stuffing” is going on, he said.
The term refers to a deceptive business practice in which companies intentionally sell to customers, such as retailers or distributors, more products than can typically be sold through the channel, in order to inflate sales numbers.
“You can’t recognize revenue if there is not a reasonable expectation that that product will be bought,” Vendetti said.
In August 2016, Hain reported the incentives practices to the SEC and said it was delaying its financial reporting for the fiscal year.
In June 2017, Hain reported in its fiscal year 2016 annual report that there were issues with its internal controls over financial reporting.
“Hain ultimately determined that no financial restatements were required, but it took the company approximately 10 months to do so, given the existence of an internal review on a number of issues, and Hain’s inadequate documentation of the incentives and lack of sufficient internal accounting controls to provide reasonable assurances that the incentives were accounted for correctly," the order said.
The failures violated the Securities Exchange Act of 1934, which requires Hain to keep accurate records that show transactions and asset sales, and to maintain a system of internal accounting controls that show activities authorized by management, the SEC said.
In remedying the issues, Hain self-reported the issues to the SEC, hired staff in compliance jobs, created an internal audit function and changed its revenue recognition practices, the SEC said.
Hain's stock closed down almost 2 percent to $18.80. A year ago the shares were trading at $40.86.
The Hain Celestial Group Inc.
Headquarters: Lake Success
Year founded: 1993
Products: Include Celestial Seasonings tea, Sensible Portions snacks, Terra chips, Rudi’s Organic Bakery breads, Earth’s Best baby food, The Greek Gods yogurt
Employees: 7,685 full-time as of June 30
Fiscal 2018 net sales: $2.5 billion