HAIN CELESTIAL GROUP INC
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
___________________________________________
(Mark One)
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ý
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended
September 30, 2017
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¨
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Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
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for the transition period from to .
Commission File No. 0-22818
___________________________________________
THE HAIN CELESTIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
___________________________________________
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Delaware
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22-3240619
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1111 Marcus Avenue
Lake Success, New York
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11042
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (516) 587-5000
___________________________________________
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 requirements for the past 90 days.
Yes
ý
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
ý
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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ý
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Accelerated filer
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¨
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Non-accelerated filer
(Do not check if a smaller reporting company)
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¨
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Smaller reporting company
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¨
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Emerging growth company
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¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
¨
No
ý
As of
October 30, 2017
, there were
103,791,688
shares outstanding of the registrant’s Common Stock, par value $.01 per share.
THE HAIN CELESTIAL GROUP, INC.
Index
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Part I - Financial Information
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Page
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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Part II - Other Information
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Items 3, 4 and 5 are not applicable
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Item 1.
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Item 1A.
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Item 2.
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Item 6.
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1
Cautionary Note Regarding Forward Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts and projections about future events only as of the date of this Quarterly Report on Form 10-Q, and are not statements of historical fact. We make such forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
Many of our forward-looking statements include discussions of trends and anticipated developments under the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as the use of “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” and similar expressions, or the negative of those expressions. These forward-looking statements include, among other things, our beliefs or expectations relating to our business strategy, growth strategy, market price, brand portfolio and product performance, the seasonality of our business, our results of operations and financial condition, our Securities and Exchange Commission (“SEC”) filings, enhancing internal controls and remediating material weaknesses. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to further update any such statement, or the risk factors described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 under the heading “Risk Factors,” to reflect new information, the occurrence of future events or circumstances or otherwise.
The forward-looking statements in this filing do not constitute guarantees or promises of future performance. Factors that could cause or contribute to such differences may include, but are not limited to, the impact of competitive products, changes to the competitive environment, changes to consumer preferences, general economic and financial market conditions, our ability to introduce new products and improve existing products, changes in relationships with customers, suppliers, strategic partners and lenders, risks associated with our international sales and operations, legal proceedings and government investigations (including any potential action by the Division of Enforcement of the SEC and securities class action and stockholder derivative litigation), our ability to manage our financial reporting and internal control systems and processes, the Company’s non-compliance with certain Nasdaq Stock Market LLC listing rules, the identification of material weaknesses in our internal control over financial reporting, the expected sales of our products, our ability to identify and complete acquisitions or divestitures and integrate acquisitions, changes in raw materials, commodity costs and fuel, the availability of organic and natural ingredients, risks relating to the protection of intellectual property, the reputation of our brands, changes to and the interpretation of governmental regulations, unanticipated expenditures, and other risks described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017 under the heading “Risk Factors” and Part II, Item 1A, “Risk Factors” set forth herein, as well as in other reports that we file in the future.
2
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
SEPTEMBER 30, 2017
AND JUNE 30,
2017
(In thousands, except par values)
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September 30,
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June 30,
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||||||
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2017
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2017
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||||||
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ASSETS
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(Unaudited)
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||||||
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Current assets:
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|||||||
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Cash and cash equivalents
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$
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126,787
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$
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146,992
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Accounts receivable, less allowance for doub
tful accounts of $736 and $1,
447, respectively
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272,341
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248,436
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|||
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Inventories
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484,792
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427,308
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|||
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Prepaid expenses and other current assets
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60,976
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52,045
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|||
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Total current assets
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944,896
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874,781
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|||
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Property, plant and equipment, net
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380,478
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370,511
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|||
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Goodwill
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1,073,681
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1,059,981
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|||
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Trademarks and other intangible assets, net
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578,419
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573,268
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Investments and joint ventures
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19,109
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18,998
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Other assets
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35,264
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33,565
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Total assets
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$
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3,031,847
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$
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2,931,104
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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|||||||
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Current liabilities:
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|||||||
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Accounts payable
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$
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247,321
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$
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222,136
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Accrued expenses and other current liabilities
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111,746
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108,514
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Current portion of long-term debt
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18,231
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9,844
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Total current liabilities
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377,298
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340,494
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Long-term debt, less current portion
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746,392
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740,304
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Deferred income taxes
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124,166
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121,475
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Other noncurrent liabilities
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16,460
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15,999
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Total liabilities
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1,264,316
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1,218,272
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Commitments and contingencies (Note 14)
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|||||
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Stockholders’ equity:
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|||||||
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Preferred stock - $.01 par value, authorized 5,000 shares; issued and outstanding: none
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—
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—
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Common stock - $.01 par value, authorized 150,000 shares; issued: 108,087 and 107,989 shares, respectively; outstanding: 103,748 and 103,702 shares, respectively
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1,081
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1,080
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Additional paid-in capital
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1,140,887
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1,137,724
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Retained earnings
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888,668
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868,822
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Accumulated other comprehensive loss
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(161,692
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)
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(195,479
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)
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|||
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1,868,944
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1,812,147
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||||
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Less: Treasury stock, at cos
t, 4,339 a
nd 4,287 shares, respectively
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(101,413
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)
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(99,315
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)
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Total stockholders’ equity
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1,767,531
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1,712,832
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Total liabilities and stockholders’ equity
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$
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3,031,847
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$
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2,931,104
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See notes to consolidated financial statements.
3
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2017
AND
2016
(In thousands, except per share amounts)
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Three Months Ended September 30,
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||||||
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2017
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2016
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Net sales
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$
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708,276
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$
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681,464
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Cost of sales
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576,673
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571,597
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Gross profit
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131,603
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109,867
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Selling, general and administrative expenses
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90,721
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84,967
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Amortization of acquired intangibles
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4,911
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4,728
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Acquisition related expenses, restructuring and integration charges
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5,846
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461
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Accounting review costs, net of insurance proceeds
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(1,358
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)
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5,960
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Operating income
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31,483
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13,751
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|||
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Interest and other financing expense, net
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6,315
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5,081
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Other (income)/expense, net
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(3,137
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)
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(512
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)
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Income before income taxes and equity in net income of equity-method investees
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28,305
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9,182
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Provision for income taxes
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8,470
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762
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Equity in net income of equity-method investees
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(11
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(184
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)
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Net income
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$
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19,846
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$
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8,604
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Net income per common share:
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|||||||
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Basic
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$
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0.19
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$
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0.08
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Diluted
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$
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0.19
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$
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0.08
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Shares used in the calculation of net income per common share:
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|||||||
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Basic
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103,709
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103,468
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Diluted
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104,476
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104,206
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|||
See notes to consolidated financial statements.
4
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2017
AND
2016
(In thousands)
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Three Months Ended
|
||||||||||||||||||||||
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September 30, 2017
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September 30, 2016
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||||||||||||||||||||||
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Pre-tax
amount
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Tax (expense) benefit
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After-tax amount
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Pre-tax
amount
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Tax benefit
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After-tax amount
|
|||||||||||||||||
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Net income
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$
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19,846
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$
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8,604
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|
|||||||||||||||||
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Other comprehensive income (loss):
|
|||||||||||||||||||||||
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Foreign currency translation adjustments
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$
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33,861
|
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$
|
—
|
|
33,861
|
|
$
|
(31,736
|
)
|
$
|
—
|
|
(31,736
|
)
|
|||||||
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Change in deferred gains (losses) on cash flow hedging instruments
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(82
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)
|
15
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(67
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)
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(430
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)
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35
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(395
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)
|
|||||||||||
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Change in unrealized gain (loss) on available for sale investment
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(10
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)
|
3
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(7
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)
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(57
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)
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17
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(40
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)
|
|||||||||||
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Total other comprehensive income (loss)
|
$
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33,769
|
|
$
|
18
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$
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33,787
|
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$
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(32,223
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)
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$
|
52
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$
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(32,171
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)
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|||||
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Total comprehensive income (loss)
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$
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53,633
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$
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(23,567
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)
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|||||||||||||||||
See notes to consolidated financial statements.
5
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2017
(In thousands, except par values)
|
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Common Stock
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Additional
|
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Accumulated
Other
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|
||||||||||||||||||||||
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Amount
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Paid-in
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Retained
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Treasury Stock
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Comprehensive
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|
||||||||||||||||||||||
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Shares
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at $.01
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Capital
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Earnings
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Shares
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Amount
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Income (Loss)
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Total
|
|||||||||||||||||||||
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Balance at June 30, 2017
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107,989
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$
|
1,080
|
|
$
|
1,137,724
|
|
$
|
868,822
|
|
4,287
|
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$
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(99,315
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)
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$
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(195,479
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)
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$
|
1,712,832
|
|
|||||||
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Net income
|
|
|
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19,846
|
|
|
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19,846
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|
|||||||||||||||||||
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Other comprehensive income (loss)
|
|
|
|
|
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33,787
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33,787
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|
|||||||||||||||||||
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Issuance of common stock pursuant to stock based compensation plans
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98
|
|
1
|
|
(1
|
)
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|
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|
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—
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|
|||||||||||||||||
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Shares withheld for payment of employee payroll taxes due on shares issued under stock based compensation plans
|
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52
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(2,098
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)
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(2,098
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)
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||||||||||||||||||
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Stock-based compensation expense
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3,164
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3,164
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|||||||||||||||||||
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Balance at September 30, 2017
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108,087
|
|
$
|
1,081
|
|
$
|
1,140,887
|
|
$
|
888,668
|
|
4,339
|
|
$
|
(101,413
|
)
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$
|
(161,692
|
)
|
$
|
1,767,531
|
|
|||||||
See notes to consolidated financial statements.
6
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2017
AND
2016
(In thousands)
|
|
Three Months Ended September 30,
|
||||||
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|
2017
|
2016
|
|||||
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CASH FLOWS FROM OPERATING ACTIVITIES
|
|||||||
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Net income
|
$
|
19,846
|
|
$
|
8,604
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|||||||
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Depreciation and amortization
|
17,626
|
|
17,220
|
|
|||
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Deferred income taxes
|
(637
|
)
|
(4,021
|
)
|
|||
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Equity in net income of equity-method investees
|
(11
|
)
|
(184
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)
|
|||
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Stock based compensation
|
3,164
|
|
2,704
|
|
|||
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Other non-cash items, net
|
(2,871
|
)
|
(1,035
|
)
|
|||
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Increase (decrease) in cash attributable to changes in operating assets and liabilities, net of amounts applicable to acquisitions:
|
|||||||
|
Accounts receivable
|
(19,407
|
)
|
18,569
|
|
|||
|
Inventories
|
(51,840
|
)
|
(37,707
|
)
|
|||
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Other current assets
|
(7,919
|
)
|
6,212
|
|
|||
|
Other assets and liabilities
|
(389
|
)
|
(439
|
)
|
|||
|
Accounts payable and accrued expenses
|
23,000
|
|
2,896
|
|
|||
|
Net cash (used in) provided by operating activities
|
(19,438
|
)
|
12,819
|
|
|||
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|||||||
|
Purchases of property and equipment
|
(14,913
|
)
|
(14,553
|
)
|
|||
|
Other
|
—
|
|
1,000
|
|
|||
|
Net cash used in investing activities
|
(14,913
|
)
|
(13,553
|
)
|
|||
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|||||||
|
Borrowings under bank revolving credit facility
|
20,000
|
|
22,000
|
|
|||
|
Repayments under bank revolving credit facility
|
(15,000
|
)
|
(26,500
|
)
|
|||
|
Borrowings (repayments) of other debt, net
|
8,185
|
|
(2,976
|
)
|
|||
|
Acquisition related contingent consideration
|
—
|
|
(2,498
|
)
|
|||
|
Shares withheld for payment of employee payroll taxes
|
(2,098
|
)
|
(1,615
|
)
|
|||
|
Net cash provided by (used in) financing activities
|
11,087
|
|
(11,589
|
)
|
|||
|
Effect of exchange rate changes on cash
|
3,059
|
|
(2,131
|
)
|
|||
|
Net decrease in cash and cash equivalents
|
(20,205
|
)
|
(14,454
|
)
|
|||
|
Cash and cash equivalents at beginning of period
|
146,992
|
|
127,926
|
|
|||
|
Cash and cash equivalents at end of period
|
$
|
126,787
|
|
$
|
113,472
|
|
|
See notes to consolidated financial statements.
7
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except par values and per share data)
1. BUSINESS
The Hain Celestial Group, Inc., a Delaware corporation (collectively along with its subsidiaries, the “Company,” and herein referred to as “Hain Celestial,” “we,” “us” and “our”), was founded in 1993 and is headquartered in Lake Success, New York. The Company’s mission has continued to evolve since its founding, with health and wellness being the core tenet — To Create and Inspire A Healthier Way of Life
TM
and be the leading marketer, manufacturer and seller of organic and natural, “better-for-you” products by anticipating and exceeding consumer expectations in providing quality, innovation, value and convenience. The Company is committed to growing sustainably while continuing to implement environmentally sound business practices and manufacturing processes. Hain Celestial sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass market and e-commerce retailers, food service channels and club, drug and convenience stores in over
80
countries worldwide.
With a proven track record of strategic growth and profitability, the Company manufactures, markets, distributes and sells organic and natural products under brand names that are sold as “better-for-you” products, providing consumers with the opportunity to lead A Healthier Way of Life
TM
. Hain Celestial is a leader in many organic and natural products categories, with many recognized brands in the various market categories it serves, including Almond Dream
®
, Arrowhead Mills
®
, Bearitos
®
, Better Bean
TM
, BluePrint
®
, Celestial Seasonings
®
, Coconut Dream
®
, Cully & Sully
®
, Danival
®
, DeBoles
®
, Earth’s Best
®
, Ella’s Kitchen
®
, Empire
®
, Europe’s Best
®
, Farmhouse Fare
®
, Frank Cooper’s
®
, FreeBird
®
, Gale’s
®
, Garden of Eatin’
®
, GG UniqueFiber
TM
, Hain Pure Foods
®
, Hartley’s
®
, Health Valley
®
, Imagine
®
, Johnson’s Juice Co.
®
, Joya
®
, Kosher Valley
®
, Lima
®
, Linda McCartney’s
®
(under license), MaraNatha
®
, Natumi
®
, New Covent Garden Soup Co.
®
, Plainville Farms
®
, Rice Dream
®
, Robertson’s
®
, Rudi’s Gluten-Free Bakery
®
, Rudi’s Organic Bakery
®
, Sensible Portions
®
, Spectrum Organics
®
, Soy Dream
®
, Sun-Pat
®
, SunSpire
®
, Terra
®
, The Greek Gods
®
, Tilda
®
, Walnut Acres
®
, WestSoy
®
, Yorkshire Provender
TM
and Yves Veggie Cuisine
®
. The Company’s personal care products are marketed under the Alba Botanica
®
, Avalon Organics
®
, Earth’s Best
®
, JASON
®
, Live Clean
®
and Queen Helene
®
brands.
Changes in Segments
Effective July 1, 2017, due to changes to the Company’s internal management and reporting structure, the United Kingdom operations of the Ella’s Kitchen
®
brand (“Ella’s Kitchen UK”), which was previously included within the United States reportable segment, was moved to the United Kingdom reportable segment. See Note 15,
Segment
Information
, for additional information on the Company’s operating and reportable segments.
2. BASIS OF PRESENTATION
The Company’s unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) 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 notes required by U.S. GAAP. The amounts as of and for the periods ended
June 30, 2017
are derived from the Company’s audited annual financial statements. The unaudited 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, 2017
are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2018. Please refer to the Notes to the Consolidated Financial Statements as of
June 30, 2017
and for the fiscal year then ended included in the Company’s Annual Report on Form 10-K (the “Form 10-K”) for information not included in these condensed notes.
All amounts in the unaudited consolidated financial statements, notes and tables have been rounded to the nearest thousand, except par values and per share amounts, unless otherwise indicated.
Newly Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09,
Compensation - Stock Compensation (Topic 718):
Improvements to Employee
Share-Based Payment Accounting.
This ASU, among other things, changes the treatment of share-based payment transactions by recognizing the impact of excess tax benefits or deficiencies related to exercised or vested awards in income tax expense in the period of exercise or vesting, instead of additional paid in capital. The updated guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those annual periods. The Company adopted this new guidance effective July 1, 2017. As a result of this adoption:
8
|
•
|
As required, we prospectively recognized discrete tax benefits and deficiencies of
$599
in the income tax line item of our consolidated income statement for the three months ended
September 30, 2017
related to excess tax benefits upon vesting or settlement in that period.
|
|
•
|
We elected to adopt the cash flow presentation of the excess tax benefits retrospectively. As a result, we decreased our cash used in financing activities by
$405
for the three months ended September 30, 2016.
|
|
•
|
We have elected to continue to estimate the number of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine the amount of compensation costs to be recognized in each period.
|
|
•
|
We have not changed our policy on statutory withholding requirements and will continue to allow an employee to withhold at the minimum statutory withholding requirements. Amounts paid by us to taxing authorities when directly withholding shares associated with employees’ income tax withholding obligations are classified as a financing activity in our cash flow statement.
|
|
•
|
We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three months ended
September 30, 2017
.
|
|
•
|
We did not have any material excess tax benefits previously recognized in additional paid-in capital, therefore, it was not necessary to record a deferred tax asset for the unrecognized tax benefits with an adjustment to opening retained earnings.
|
Recently Issued Accounting Pronouncements Not Yet Effective
In February 2016, the FASB issued ASU 2016-02,
Leases
. ASU 2016-02 revises accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term in the balance sheet. The standard is effective for the first interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2016-02.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
Under ASU 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Subsequent to the issuance of ASU 2014-09, the FASB has issued various additional ASUs clarifying and amending this new revenue guidance. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services and are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. The Company is currently evaluating the provisions of ASU No. 2014-09 and assessing the impact on its financial statements. As part of our assessment work-to-date, we have formed an implementation work team, begun training on the new ASU’s revenue recognition model and are beginning to review our customer contracts. We are also evaluating the impact of the new standard on certain common practices currently employed by the Company and by other manufacturers of consumer products, such as slotting fees, co-operative advertising, rebates and other pricing allowances, merchandising funds and consumer coupons. We have not yet determined if the full retrospective or modified retrospective method will be applied.
Refer to Note 2,
Summary of Significant Accounting Policies and Practices
, in the Notes to the Consolidated Financial Statements as of June 30, 2017 and for the fiscal year then ended included in the Form 10-K for a detailed discussion on additional recently issued accounting pronouncements not yet adopted by the Company. There has been no change to the statements made in the Form 10-K as of the date of filing of this Form 10-Q.
9
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
Three Months Ended September 30,
|
||||||
|
|
2017
|
2016
|
|||||
|
Numerator:
|
|||||||
|
Net income
|
$
|
19,846
|
|
$
|
8,604
|
|
|
|
Denominator:
|
|||||||
|
Basic weighted average shares outstanding
|
103,709
|
|
103,468
|
|
|||
|
Effect of dilutive stock options, unvested restricted stock and unvested restricted share units
|
767
|
|
738
|
|
|||
|
Diluted weighted average shares outstanding
|
104,476
|
|
104,206
|
|
|||
|
Net income per common share:
|
|||||||
|
Basic
|
$
|
0.19
|
|
$
|
0.08
|
|
|
|
Diluted
|
$
|
0.19
|
|
$
|
0.08
|
|
|
Basic earnings per share excludes the dilutive effects of stock options, unvested restricted stock and unvested restricted share units. Diluted earnings per share includes the dilutive effects of common stock equivalents such as stock options and unvested restricted stock awards.
There were
573
and
277
stock-based awards excluded from our diluted earnings per share calculations for the three months ended
September 30, 2017
and
2016
, respectively, as such awards were contingently issuable based on market or performance conditions, and such conditions had not been achieved during the respective periods. Additionally,
4
restricted stock awards were excluded from our diluted earnings per share calculation for the three months ended
September 30, 2016
as such awards were antidilutive. Restricted stock awards excluded from our diluted earnings per share calculation for the three months ended
September 30, 2017
were de minimis.
Share Repurchase Program
On June 21, 2017, the Company's Board of Directors authorized the repurchase of up to
$250,000
of the Company’s issued and
outstanding common stock. Repurchases may be made from time to time in the open market, pursuant to pre-set trading plans, in private transactions or otherwise. The authorization does not have a stated expiration date. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations, including the Company’s historical strategy of pursuing accretive acquisitions. As of
September 30, 2017
, the Company had not repurchased any shares under this program, and had
$250,000
of remaining capacity under the share repurchase program.
4. ACQUISITIONS
The Company accounts for acquisitions in accordance with ASC 805, Business Combinations. The results of operations of the acquisitions have been included in the consolidated results from their respective dates of acquisition. The purchase price of each acquisition is allocated to the tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. Acquisitions may include contingent consideration, the fair value of which is estimated on the acquisition date as the present value of the expected contingent payments, determined using weighted probabilities of possible payments. The fair values assigned to identifiable intangible assets acquired were determined primarily by using an income approach which was based on assumptions and estimates made by management. Significant assumptions utilized in the income approach were based on company-specific information and projections which are not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance. The excess of the purchase price over the fair value of the identified assets and liabilities has been recorded as goodwill.
10
The costs related to all acquisitions have been expensed as incurred and are included in “Acquisition related expenses, restructuring and integration charges” in the Consolidated Statements of Income. Acquisition-related costs of
$114
and
$253
were expensed in the three months ended
September 30, 2017
and
September 30, 2016
, respectively. The expenses incurred primarily related to professional fees and other transaction-related costs associated with our recent acquisitions.
Fiscal 2017
On June 19, 2017, the Company acquired Sonmundo, Inc. d/b/a The Better Bean Company (“Better Bean”), which offers prepared beans and bean-based dips sold in refrigerated tubs under the Better Bean
TM
brand. Consideration for the transaction consisted of cash, net of cash acquired, totaling
$3,434
. Additionally, contingent consideration of up to a maximum of
$4,000
is payable based on the achievement of specified operating results over the
three
-year period following the closing date. Better Bean is included in our Cultivate operating segment, which is part of Rest of World. Net sales and income before income taxes attributable to the Better Bean acquisition included in our consolidated results represented less than
1%
of our consolidated results.
On April 28, 2017, the Company acquired The Yorkshire Provender Limited (“Yorkshire Provender”), a producer of premium branded soups based in North Yorkshire in the United Kingdom. Yorkshire Provender supplies leading retailers, on-the-go food
outlets and food service providers in the United Kingdom. Consideration for the transaction consisted of cash, net of cash acquired, totaling
£12,465
(approximately
$16,110
at the transaction date exchange rate). Additionally, contingent consideration of up to a maximum of
£1,500
is payable based on the achievement of specified operating results at the end of the
three
-year period following the closing date. Yorkshire Provender is included in our United Kingdom operating and reportable segment. Net sales and income before income taxes attributable to Yorkshire Provender included in our consolidated results represented less than
1%
of our consolidated results.
5. INVENTORIES
Inventories consisted of the following:
|
September 30,
2017 |
June 30,
2017 |
||||||
|
Finished goods
|
$
|
295,794
|
|
$
|
264,148
|
|
|
|
Raw materials, work-in-progress and packaging
|
188,998
|
|
163,160
|
|
|||
|
$
|
484,792
|
|
$
|
427,308
|
|
||
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
|
September 30,
2017 |
June 30,
2017 |
||||||
|
Land
|
$
|
34,556
|
|
$
|
33,930
|
|
|
|
Buildings and improvements
|
118,553
|
|
116,723
|
|
|||
|
Machinery and equipment
|
361,830
|
|
350,689
|
|
|||
|
Computer hardware and software
|
52,740
|
|
51,486
|
|
|||
|
Furniture and fixtures
|
16,480
|
|
15,993
|
|
|||
|
Leasehold improvements
|
30,199
|
|
29,296
|
|
|||
|
Construction in progress
|
22,907
|
|
16,119
|
|
|||
|
637,265
|
|
614,236
|
|
||||
|
Less: Accumulated depreciation and amortization
|
256,787
|
|
243,725
|
|
|||
|
$
|
380,478
|
|
$
|
370,511
|
|
||
Depreciation and amortization expense for the three months ended
September 30, 2017
and
2016
was
$10,295
and
$10,228
, respectively.
11
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table shows the changes in the carrying amount of goodwill by business segment:
|
United States
|
United Kingdom
|
Hain Pure Protein
|
Rest of World
|
Total
|
|||||||||||||||
|
Balance as of June 30, 2017 (a)
|
$
|
591,416
|
|
$
|
329,135
|
|
$
|
41,089
|
|
$
|
98,341
|
|
$
|
1,059,981
|
|
||||
|
Reallocation of goodwill between reporting units (b)
|
(35,519
|
)
|
35,519
|
|
—
|
|
—
|
|
—
|
|
|||||||||
|
Translation and other adjustments, net
|
—
|
|
10,785
|
|
—
|
|
2,915
|
|
13,700
|
|
|||||||||
|
Balance as of September 30, 2017 (a)
|
$
|
555,897
|
|
$
|
375,439
|
|
$
|
41,089
|
|
$
|
101,256
|
|
$
|
1,073,681
|
|
||||
(a) The total carrying value of goodwill is reflected net of
$126,577
of accumulated impairment charges, of which
$97,358
related to the Company’s United Kingdom operating segment and
$29,219
related to the Company’s Europe operating segment.
(b) Effective July 1, 2017, due to changes to the Company’s internal management and reporting structure, the United Kingdom operations of the Ella’s Kitchen
®
brand, which was previously included within the United States reportable segment, was moved to the United Kingdom reportable segment. Goodwill totaling
$35,519
was reallocated to the United Kingdom reportable segment in connection with this change. See Note 1, Business, and Note 15, Segment Information, for additional information on the Company’s operating and reportable segments.
The Company performs its annual test for goodwill and indefinite lived intangible asset impairment as of the first day of the fourth quarter of its fiscal year. In addition, if and when events or circumstances change that would more likely than not reduce the fair value of any of its reporting units or indefinite-life intangible assets below their carrying value, an interim test is performed.
The change in operating segments as described above was deemed a triggering event, resulting in the Company performing an interim goodwill impairment analysis on the reporting units impacted by this segment change as of immediately before and immediately after the change. There were no impairment indicators resulting from this analysis, and there were
no
impairment charges recorded during the three months ended September 30, 2017.
Other Intangible Assets
The following table sets forth balance sheet information for intangible assets, excluding goodwill, subject to amortization and intangible assets not subject to amortization:
|
September 30,
2017 |
June 30,
2017 |
||||||
|
Non-amortized intangible assets:
|
|||||||
|
Trademarks and tradenames (a)
|
$
|
431,321
|
|
$
|
424,817
|
|
|
|
Amortized intangible assets:
|
|||||||
|
Other intangibles
|
253,087
|
|
247,712
|
|
|||
|
Less: accumulated amortization
|
(105,989
|
)
|
(99,261
|
)
|
|||
|
Net carrying amount
|
$
|
578,419
|
|
$
|
573,268
|
|
|
(a) The gross carrying value of trademarks and tradenames is reflected net of
$60,202
of accumulated impairment charges.
Indefinite-lived intangible assets, which are not amortized, consist primarily of acquired trade names and trademarks. Indefinite-lived intangible assets are evaluated on an annual basis, in conjunction with the Company’s evaluation of goodwill. In assessing fair value, the Company utilizes a “relief from royalty” methodology. This approach involves two steps: (i) estimating the royalty rates for each trademark and (ii) applying these royalty rates to a projected net sales stream and discounting the resulting cash flows to determine fair value. If the carrying value of the indefinite-lived intangible assets exceeds the fair value of the asset, the carrying value is written down to fair value in the period identified. The result of this assessment for the fiscal year ended June 30, 2017 indicated that the fair value of certain of the Company’s tradenames was below their carrying value, and therefore an impairment charge of
$14,079
(
$7,579
in the United Kingdom segment and
$6,500
in the United States segment) was recognized
12
during the fiscal year ended June 30, 2017. There were
no
other impairment charges recorded during fiscal 2017, and
no
impairment charges were recorded during the three months ended September 30, 2017.
Amortizable intangible assets, which are deemed to have a finite life, primarily consist of customer relationships and are amortized over their estimated useful lives of
3
to
25
years. Amortization expense included in continuing operations was as follows:
|
Three Months ended September 30,
|
|||||||
|
|
2017
|
2016
|
|||||
|
Amortization of intangible assets
|
$
|
4,911
|
|
$
|
4,728
|
|
|
Debt and borrowings consisted of the following:
|
September 30,
2017 |
June 30,
2017 |
||||||
|
Credit Agreement borrowings payable to banks
|
$
|
739,678
|
|
$
|
733,715
|
|
|
|
Tilda short-term borrowing arrangements
|
16,490
|
|
7,761
|
|
|||
|
Other borrowings
|
8,455
|
|
8,672
|
|
|||
|
764,623
|
|
750,148
|
|
||||
|
Short-term borrowings and current portion of long-term debt
|
18,231
|
|
9,844
|
|
|||
|
Long-term debt, less current portion
|
$
|
746,392
|
|
$
|
740,304
|
|
|
Credit Agreement
On December 12, 2014, the Company entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) which provides for a
$1,000,000
unsecured revolving credit facility which may be increased by an additional uncommitted
$350,000
, provided certain conditions are met. The Credit Agreement expires in
December 2019
. Borrowings under the Credit Agreement may be used to provide working capital, finance capital expenditures and permitted acquisitions, refinance certain existing indebtedness and for other lawful corporate purposes. The Credit Agreement provides for multicurrency borrowings in Euros, Pounds Sterling and Canadian Dollars as well as other currencies which may be designated. In addition, certain wholly-owned foreign subsidiaries of the Company may be designated as co-borrowers. The Credit Agreement contains restrictive covenants, which are usual and customary for facilities of its type, and include, with specified exceptions, limitations on the Company’s ability to engage in certain business activities, incur debt, have liens, make capital expenditures, pay dividends or make other distributions, enter into affiliate transactions, consolidate, merge or acquire or dispose of assets, and make certain investments, acquisitions and loans. The Credit Agreement also requires the Company to satisfy certain financial covenants, such as maintaining a consolidated interest coverage ratio (as defined in the Credit Agreement) of no less than
4.0
to
1.0
and a consolidated leverage ratio (as defined in the Credit Agreement) of no more than
3.5
to
1.0
. The consolidated leverage ratio is subject to a step-up to
4.0
to
1.0
for the four full fiscal quarters following an acquisition. Obligations under the Credit Agreement are guaranteed by certain existing and future domestic subsidiaries of the Company. As of
September 30, 2017
, there were
$739,678
of borrowings and
$6,180
letters of credit outstanding under the Credit Agreement and
$254,142
available, and the Company was in compliance with all associated covenants.
The Credit Agreement provides that loans will bear interest at rates based on (a) the Eurocurrency Rate, as defined in the Credit Agreement, plus a rate ranging from
0.875%
to
1.70%
per annum; or (b) the Base Rate, as defined in the Credit Agreement, plus a rate ranging from
0.00%
to
0.70%
per annum, the relevant rate being the Applicable Rate. The Applicable Rate will be determined in accordance with a leverage-based pricing grid, as set forth in the Credit Agreement. Swing line loans and Global Swing Line loans denominated in U.S, dollars will bear interest at the Base Rate plus the Applicable Rate, and Global Swing Line loans denominated in foreign currencies shall bear interest based on the overnight Eurocurrency Rate for loans denominated in such currency plus the Applicable Rate. The weighted average interest rate on outstanding borrowings under the Credit Agreement at
September 30, 2017
was
2.88%
. Additionally, the Credit Agreement contains a Commitment Fee, as defined in the Credit Agreement, on the amount unused under the Credit Agreement ranging from
0.20%
to
0.30%
per annum. Such Commitment Fee is determined in accordance with a leverage-based pricing grid, as set forth in the Credit Agreement.
13
Tilda Short-Term Borrowing Arrangements
Tilda maintains short-term borrowing arrangements primarily used to fund the purchase of rice from India and other countries. The maximum borrowings permitted under all such arrangements are
£52,000
. Outstanding borrowings are collateralized by the current assets of Tilda, typically have
six
-month terms and bear interest at variable rates typically based on LIBOR plus a margin (weighted average interest rate of approximately
2.72%
at
September 30, 2017
).
Other Borrowings
Other borrowings primarily relate to a cash pool facility in Europe. The cash pool facility provides our Europe operating segment with sufficient liquidity to support the Company’s growth objectives within this segment. The maximum borrowings permitted under the cash pool arrangement are
€12,500
. Outstanding borrowings bear interest at variable rates typically based on EURIBOR plus a margin of
1.10%
(weighted average interest rate of approximately
1.10%
at
September 30, 2017
).
9. INCOME TAXES
The Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter. The Company’s effective tax rate may change from period-to-period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes and tax audit settlements.
The effective income tax rate was
29.9%
and
8.3%
for the three months ended
September 30, 2017
and
2016
, respectively. The effective tax rate for the three months ended
September 30, 2017
and
September 30, 2016
was favorable as compared to the statutory rate as a result of the geographical mix of earnings. The effective tax rate for the three months ended
September 30, 2016
was also impacted by a reduction in the statutory tax rate in the United Kingdom enacted in the first quarter of fiscal 2017. Such reduction resulted in a decrease to the carrying value of net deferred tax liabilities of
$2,086
, which favorably impacted the effective tax rate.
14
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present the changes in accumulated other comprehensive income (loss):
|
Three Months Ended September 30,
|
|||||||
|
2017
|
2016
|
||||||
|
Foreign currency translation adjustments:
|
|||||||
|
Other comprehensive income (loss) before reclassifications
(1)
|
$
|
33,861
|
|
$
|
(31,736
|
)
|
|
|
Deferred gain
s/(losses)
on cash flow hedging instruments:
|
|||||||
|
Other comprehensive income before reclassifications
|
39
|
|
101
|
|
|||
|
Amounts reclassified into income
(2)
|
(106
|
)
|
(496
|
)
|
|||
|
Unrealized gain/(loss) on available for sale investment:
|
|||||||
|
Other comprehensive loss before reclassifications
|
(7
|
)
|
(50
|
)
|
|||
|
Amounts reclassified into income
(3)
|
—
|
|
10
|
|
|||
|
Net change in accumulated other comprehensive income (loss)
|
$
|
33,787
|
|
$
|
(32,171
|
)
|
|
|
(1)
|
Foreign currency translation adjustments included intra-entity foreign currency transactions that were of a long-term investment nature and were a gain of
$751
and a loss of
$7,152
for the three months ended
September 30, 2017
and
2016
,
respectively.
|
|
(2)
|
Amounts reclassified into income for deferred gains/(losses) on cash flow hedging instruments are recorded in “Cost of sales” in the Consolidated Statements of Income and, before taxes, were
$132
and
$620
for the three months ended
September 30, 2017
and
2016
, respectively.
|
|
(3)
|
Amounts reclassified into income for losses on sale of available for sale investments were based on the average cost of the shares held (See Note 12, Investments and Joint Ventures). Such amounts are recorded in “Other (income)/expense, net” in the Consolidated Statements of Income and were
$16
before taxes for the three months ended
September 30, 2016
. There were
no
amounts reclassified into income for losses on sale of available for sale investments for the three months ended
September 30, 2017
.
|
15
11. STOCK-BASED COMPENSATION AND INCENTIVE PERFORMANCE PLANS
The Company has
two
shareholder-approved plans, the Amended and Restated 2002 Long-Term Incentive and Stock Award Plan and the 2000 Directors Stock Plan, under which the Company’s officers, senior management, other key employees, consultants and directors may be granted options to purchase the Company’s common stock or other forms of equity-based awards.
Compensation cost and related income tax benefits recognized in the Consolidated Statements of Income for stock based compensation plans were as follows:
|
|
Three Months Ended September 30,
|
||||||
|
|
2017
|
2016
|
|||||
|
Compensation cost (included in selling, general and administrative expense)
|
$
|
3,164
|
|
$
|
2,704
|
|
|
|
Related income tax benefit
|
$
|
1,234
|
|
$
|
1,014
|
|
|
Stock Options
A summary of the stock option activity for the three months ended
September 30, 2017
is as follows:
|
Number of Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Contractual
Life (years)
|
Aggregate
Intrinsic Value
|
|||||||||
|
Options outstanding and exercisable at June 30, 2017
|
122
|
|
$
|
2.26
|
|
|||||||
|
Exercised
|
—
|
|
$
|
—
|
|
|||||||
|
Options outstanding and exercisable at September 30, 2017
|
122
|
|
$
|
2.26
|
|
13.8
|
$
|
4,742
|
|
|||
At
September 30, 2017
, there was
no
unrecognized compensation expense related to stock option awards.
Restricted Stock
A summary of the restricted stock and restricted share unit activity for the three months ended
September 30, 2017
is as follows:
|
Number of Shares
and Units
|
Weighted
Average Grant
Date Fair
Value (per share)
|
|||||
|
Non-vested restricted stock, restricted share units, and performance units at June 30, 2017
|
992
|
|
$
|
27.59
|
|
|
|
Granted
|
352
|
|
$
|
32.75
|
|
|
|
Vested
|
(98
|
)
|
$
|
24.98
|
|
|
|
Forfeited
|
(4
|
)
|
$
|
33.95
|
|
|
|
Non-vested restricted stock, restricted share units, and performance units at September 30, 2017
|
1,242
|
|
$
|
29.24
|
|
|
|
Three Months Ended September 30,
|
|||||||
|
2017
|
2016
|
||||||
|
Fair value of restricted stock and restricted share units granted
|
$
|
11,516
|
|
$
|
—
|
|
|
|
Fair value of shares vested
|
$
|
4,019
|
|
$
|
2,926
|
|
|
|
Tax benefit recognized from restricted shares vesting
|
$
|
1,567
|
|
$
|
1,139
|
|
|
16
On July 3, 2012, the Company entered into a Restricted Stock Agreement (the “Agreement”) with Irwin D. Simon, the Company’s Chairman, President and Chief Executive Officer. The Agreement provides for a grant of
800
shares of restricted stock (the “Shares”), the vesting of which is both market and time-based. The market condition is satisfied in increments of
200
Shares upon the Company’s common stock achieving
four
share price targets. On the last day of any
forty-five
consecutive trading day period during which the average closing price of the Company’s common stock on the Nasdaq Global Select Market equals or exceeds the following prices:
$31.25
,
$36.25
,
$41.25
and
$50.00
, respectively, the market condition for each increment of
200
Shares will be satisfied. The market conditions were required to be satisfied prior to June 30, 2017. Once each market condition has been satisfied, a tranche of
200
Shares will vest in equal amounts annually over a
five
-year period. Except in the case of a change of control, termination without cause, death or disability (each as defined in Mr. Simon’s Employment Agreement), the unvested Shares are subject to forfeiture unless Mr. Simon remains employed through the applicable market conditions and time vesting periods. The grant date fair value for each tranche was separately estimated based on a Monte Carlo simulation that calculated the likelihood of goal attainment and the time frame most likely for goal attainment. The total grant date fair value of the Shares was estimated to be
$16,151
, which was expected to be recognized over a weighted-average period of approximately
4.0 years
. On September 28, 2012, August 27, 2013, December 13, 2013 and October 22, 2014, the
four
respective market conditions were satisfied. As such, the
four
tranches of
200
Shares each are expected to vest in equal amounts over the
five
-year period commencing on the first anniversary of the date the market condition for the respective tranche was satisfied.
At
September 30, 2017
,
$19,737
of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards, inclusive of the Shares, was expected to be recognized over a weighted-average period of approximately
1.9 years
.
Long-Term Incentive Plan
The Company maintains a long-term incentive program (the “LTI Plan”). The LTI Plan currently consists of a
two
-year performance-based long-term incentive plan (the “2015-2016 LTIP”) and two performance-based long-term incentive plans (the “2016-2018 LTIP” and the “2017-2019 LTIP”) that provide for performance equity awards that can be earned over the respective
three
-year performance period. Participants in the LTI Plan include the Company’s executive officers, including the Chief Executive Officer, and certain other key executives.
The Compensation Committee administers the LTI Plan and is responsible for, among other items, selecting the specific performance measures for awards and setting the target performance required to receive an award after the completion of the performance period. The Compensation Committee determines the specific payout to the participants. Such awards may be paid in cash and/or unrestricted shares of the Company’s common stock at the discretion of the Compensation Committee, provided that any such stock-based awards shall be issued pursuant to and be subject to the terms and conditions of the Amended and Restated 2002 Long-Term Incentive and Stock Award Plan, as in effect and as amended from time-to-time.
Upon the adoption of the 2015-2016 LTIP, the Compensation Committee granted an initial award to each participant in the form of equity-based instruments (restricted stock or restricted share units), for a portion of the individual target awards (the “Initial Equity Grants”). These Initial Equity Grants are subject to time vesting requirements, and a portion is also subject to the achievement of minimum performance goals. The 2015-2016 LTIP awards contain an additional year of time-based vesting. The Initial Equity Grants are expensed over the respective vesting periods on a straight-line basis. The payment of the actual awards earned at the end of the applicable performance period, if any, will be reduced by the value of the Initial Equity Grants.
Upon adoption of the 2016-2018 LTIP and 2017-2019 LTIP, the Compensation Committee granted performance units to each participant, the achievement of which is dependent upon a defined calculation of relative total shareholder return over the period from July 1, 2015 to June 30, 2018 and July 1, 2017 to June 30, 2019 (the “TSR Grant”), respectively. The grant date fair value for these awards was separately estimated based on a Monte Carlo simulation that calculated the likelihood of goal attainment. Each performance unit translates into
one
unit of common stock. The TSR grant represents half of each participant’s target award. The other half of the 2016-2018 LTIP and 2017-2019 LTIP is based on the Company’s achievement of specified net sales growth targets over the respective
three
-year period, if the targets are achieved, the award in connection with the 2016-2018 LTIP may be paid in cash and/or unrestricted shares of the Company’s common stock at the discretion of the Compensation Committee, while the award in connection with the 2017-2019 LTIP may be paid only in unrestricted shares of the Company’s common stock.
The Company recorded expense (in addition to the stock-based compensation expense associated with the Initial Equity Grants and the TSR Grant) of
$546
and
$1,127
for the three months ended
September 30, 2017
and
2016
, respectively, due to the Company’s current estimates of achievement under the plans.
17
12. INVESTMENTS AND JOINT VENTURES
Equity method investments
In October 2009, the Company formed a joint venture, Hutchison Hain Organic Holdings Limited (“HHO”), with Hutchison China Meditech Ltd. (“Chi-Med”), a majority-owned subsidiary of CK Hutchison Holdings Limited, to market and distribute certain of the Company’s brands in Hong Kong, China and other surrounding markets. Voting control of the joint venture is shared equally between the Company and Chi-Med, although, in the event of a deadlock, Chi-Med has the ability to cast the deciding vote, and therefore, the investment is being accounted for under the equity method of accounting. At
September 30, 2017
and
June 30, 2017
, the carrying value of the Company’s
50.0%
investment in and advances to HHO were
$1,975
and
$1,629
, respectively, and are included in the Consolidated Balance Sheet as a component of “Investments and joint ventures.”
On October 27, 2015, the Company acquired a
14.9%
interest in Chop’t Creative Salad Company LLC (“Chop’t”). Chop’t develops and operates fast-casual, fresh salad restaurants in the Northeast and Mid-Atlantic United States. Chop’t markets and sells certain of the Company’s branded products and provides consumer insight and feedback. The investment is being accounted for as an equity method investment due to the Company’s representation on the Board of Directors. At
September 30, 2017
and
June 30, 2017
, the carrying value of the Company’s investment in Chop’t was
$16,262
and
$16,487
, respectively, and is included in the Consolidated Balance Sheet as a component of “Investments and joint ventures.” The Company’s current ownership percentage may be diluted in the future to
11.9%
, pending the distribution of additional ownership interests.
Available-For-Sale Securities
The Company has a less than
1%
equity ownership interest in Yeo Hiap Seng Limited (“YHS”), a Singapore-based natural food and beverage company listed on the Singapore Exchange, which is accounted for as an available-for-sale security. The shares held at
September 30, 2017
totaled
933
. The fair value of these shares held was
$872
(cost basis of
$1,164
) at
September 30, 2017
and
$882
(cost basis of
$1,164
) at
June 30, 2017
and is included in “Investments and joint ventures,” with the related unrealized gain or loss, net of tax, included in “Accumulated other comprehensive loss” in the Consolidated Balance Sheet. The Company concluded that the decline in its YHS investment below its cost basis is temporary and, accordingly, has not recognized a loss in the Consolidated Statements of Operations. In making this determination, the Company considered its intent and ability to hold the investment until the cost is recovered, the financial condition and near-term prospects of YHS, the magnitude of the loss compared to the investment’s cost, and publicly available information about the industry and geographic region in which YHS operates.
18
13. FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE
The Company’s financial assets and liabilities measured at fair value are required to be grouped in one of three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
|
•
|
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
•
|
Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
|
|
•
|
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
|
The following table presents by level within the fair value hierarchy assets and liabilities measured at fair value on a recurring basis as of
September 30, 2017
:
|
Total
|
Quoted
prices in
active
markets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
||||||||||||
|
Assets:
|
|||||||||||||||
|
Cash equivalents
|
$
|
7,658
|
|
$
|
7,658
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Forward foreign currency contracts
|
66
|
|
—
|
|
66
|
|
—
|
|
|||||||
|
Available for sale securities
|
872
|
|
872
|
|
—
|
|
—
|
|
|||||||
|
$
|
8,596
|
|
$
|
8,530
|
|
$
|
66
|
|
$
|
—
|
|
||||
|
Liabilities:
|
|||||||||||||||
|
Forward foreign currency contracts
|
217
|
|
—
|
|
217
|
|
—
|
|
|||||||
|
Contingent consideration, current
|
2,853
|
|
—
|
|
—
|
|
2,853
|
|
|||||||
|
Total
|
$
|
3,070
|
|
$
|
—
|
|
$
|
217
|
|
$
|
2,853
|
|
|||
The following table presents by level within the fair value hierarchy assets and liabilities measured at fair value on a recurring basis as of
June 30, 2017
:
|
Total
|
Quoted
prices in
active
markets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
unobservable
inputs
(Level 3)
|
||||||||||||
|
Assets:
|
|||||||||||||||
|
Cash equivalents
|
$
|
21,800
|
|
$
|
21,800
|
|
$
|
—
|
|
$
|
—
|
|
|||
|
Forward foreign currency contracts
|
99
|
|
—
|
|
99
|
|
—
|
|
|||||||
|
Available for sale securities
|
882
|
|
882
|
|
—
|
|
—
|
|
|||||||
|
$
|
22,781
|
|
$
|
22,682
|
|
$
|
99
|
|
$
|
—
|
|
||||
|
Liabilities:
|
|||||||||||||||
|
Forward foreign currency contracts
|
$
|
53
|
|
$
|
—
|
|
$
|
53
|
|
$
|
—
|
|
|||
|
Contingent consideration, current
|
$
|
2,656
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,656
|
|
|||
|
Total
|
$
|
2,709
|
|
$
|
—
|
|
$
|
53
|
|
$
|
2,656
|
|
|||
Available for sale securities consist of the Company’s investment in YHS (see Note 12,
Investments and Joint Ventures
). Fair value is measured using the market approach based on quoted prices. The Company utilizes the income approach to measure fair value for its foreign currency forward contracts. The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices.
19
The Company estimates the original fair value of the contingent consideration as the present value of the expected contingent payments, determined using the weighted probabilities of the possible payments. The Company reassesses the fair value of contingent payments on a periodic basis. Although the Company believes its estimates and assumptions are reasonable, different assumptions, including those regarding the operating results of the respective businesses, or changes in the future may result in different estimated amounts.
The following table summarizes the Level 3 activity for the three months ended
September 30, 2017
.
|
Balance as of June 30, 2017
|
$
|
2,656
|
|
|
Contingent consideration adjustment
(a)
|
174
|
|
|
|
Translation adjustment
|
23
|
|
|
|
Balance as of September 30, 2017
|
$
|
2,853
|
|
(a) The change in the fair value of contingent consideration is included in “Acquisition related expenses, restructuring and integration charges” in the Company’s Consolidated Statements of Income.
There were no transfers of financial instruments between the three levels of fair value hierarchy during the three months ended
September 30, 2017
or
September 30, 2016
.
The carrying amount of cash and cash equivalents, accounts receivable, net, accounts payable and certain accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these financial instruments. The Company’s debt approximates fair value due to the debt bearing fluctuating market interest rates (See Note 8,
Debt and Borrowings
).
Derivative Instruments
The Company primarily has exposure to changes in foreign currency exchange rates relating to certain anticipated cash flows and firm commitments from its international operations. The Company may enter into certain derivative financial instruments, when available on a cost-effective basis, to manage such risk. Derivative financial instruments are not used for speculative purposes. The fair value of these derivatives is included in prepaid expenses and other current assets and accrued expenses and other current liabilities in the Consolidated Balance Sheet. For derivative instruments that qualify as hedges of probable forecasted cash flows, the effective portion of changes in fair value is temporarily reported in accumulated other comprehensive income and recognized in earnings when the hedged item affects earnings. Fair value hedges and derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.
Derivative instruments designated at inception as hedges are measured for effectiveness at the inception of the hedge and on a quarterly basis. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged items. Any ineffective portion of change in fair value is not deferred in accumulated other comprehensive income and is included in current period results. The Company will discontinue cash flow hedge accounting when the forecasted transaction is no longer probable of occurring on the originally forecasted date or when the hedge is no longer effective. There were
no
discontinued foreign exchange hedges for the three months ended
September 30, 2017
and
September 30, 2016
.
There were no cash flow hedges outstanding as of
September 30, 2017
. The notional and fair value amounts of cash flow hedges at
June 30, 2017
were
$1,828
and
$84
of net assets, respectively. The notional and fair value amounts of derivatives designated as fair value hedges at
September 30, 2017
were
$6,000
and
$46
of net liabilities, respectively. There were no fair value hedges outstanding as of
June 30, 2017
.
The notional and fair value amounts of derivatives not designated as hedges at
September 30, 2017
were
$13,200
and
$105
of net liabilities, respectively. There were
$6,114
of notional amount and
$38
of net liabilities of derivatives not designated as hedges as of
June 30, 2017
.
Gains and losses related to both designated and non-designated foreign currency exchange contracts are recorded in the Company’s Consolidated Statements of Operations based upon the nature of the underlying hedged transaction and were not material for the three months ended
September 30, 2017
or
September 30, 2016
.
20
14. COMMITMENTS AND CONTINGENCIES
Securities Class Actions Filed in Federal Court
On August 17, 2016,
three
securities class action complaints were filed in the Eastern District of New York against the Company alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The
three
complaints are: (1)
Flora v. The Hain Celestial Group, Inc., et al.
, (the “Flora Complaint”); (2)
Lynn v. The Hain Celestial Group, Inc., et al.
(the “Lynn Complaint”); and (3)
Spadola v. The Hain Celestial Group, Inc., et al.
(the “Spadola Complaint” and, together with the Flora and Lynn Complaints, the “Securities Complaints”). On June 5, 2017, the court issued an order for consolidation, appointment of Co-Lead Plaintiffs and approval of selection of co-lead counsel. Pursuant to this order, the Securities Complaints were consolidated under the caption
In re The Hain Celestial Group, Inc. Securities Litigation
(the “Consolidated Securities Action”), and Rosewood Funeral Home and Salamon Gimpel were appointed as Co-Lead Plaintiffs. On June 21, 2017, the Company received notice that plaintiff Spadola voluntarily dismissed his claims without prejudice to his ability to participate in the Consolidated Securities Action as an absent class member. The Co-Lead Plaintiffs in the Consolidated Securities Action filed a Consolidated Amended Complaint on August 4, 2017, and a Corrected Consolidated Amended Complaint on September 7, 2017 on behalf of a purported class consisting of all persons who purchased or otherwise acquired Hain Celestial securities between November 5, 2013 and February 10, 2017 (the “Amended Complaint”). The Amended Complaint names as defendants the Company and certain of its current and former officers (collectively, the “Defendants”) and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly materially false or misleading statements and omissions in public statements, press releases and SEC filings regarding the Company’s business, prospects, financial results and internal controls. Defendants filed a motion to dismiss on October 3, 2017. Co-Lead Plaintiffs’ opposition is due by December 4, 2017, and Defendants will file a reply within
45
days after the filing of the Lead Co-Plaintiffs’ opposition.
Stockholder Derivative Complaints Filed in State Court
On September 16, 2016, a stockholder derivative complaint,
Paperny v. Heyer, et al.
(the “Paperny Complaint”)
,
was filed in New York State Supreme Court in Nassau County against the Board of Directors and certain officers of the Company alleging breach of fiduciary duty, unjust enrichment, lack of oversight and corporate waste. On December 2, 2016 and December 29, 2016,
two
additional stockholder derivative complaints were filed in New York State Supreme Court in Nassau County against the Board of Directors and certain officers under the captions
Scarola v. Simon
(the “Scarola Complaint”) and
Shakir v. Simon
(the “Shakir Complaint” and, together with the Paperny Complaint and the Scarola Complaint, the “Derivative Complaints”), respectively. Both the Scarola Complaint and the Shakir Complaint allege breach of fiduciary duty, lack of oversight and unjust enrichment. On February 16, 2017, the parties for the Derivative Complaints entered into a stipulation consolidating the matters under the caption
In re The Hain Celestial Group
(the “Consolidated Derivative Action”) in New York State Supreme Court in Nassau County, ordering the
Shakir
Complaint as the operative complaint. On November 2, 2017, the parties agreed to stay the Consolidated Derivative Action until April 11, 2018.
Additional Stockholder Class Action and Derivative Complaints Filed in Federal Court
On April 19, 2017 and April 26, 2017,
two
class action and stockholder derivative complaints were filed in the Eastern District of New York against the Board of Directors and certain officers of the Company under the captions
Silva v. Simon, et al.
(the “Silva Complaint”) and
Barnes v. Simon, et al.
(the “Barnes Complaint”), respectively. Both the Silva Complaint and the Barnes Complaint allege violation of securities law, breach of fiduciary duty, waste of corporate assets and unjust enrichment.
On May 23, 2017, an additional stockholder filed a complaint under seal in the Eastern District of New York against the Board of Directors and certain officers of the Company. The complaint alleges that the Company’s directors and certain officers made materially false and misleading statements in press releases and SEC filings regarding the Company’s business, prospects and financial results. The complaint also alleges that the Company violated its by-laws and Delaware law by failing to hold its 2016 Annual Stockholders Meeting and includes claims for breach of fiduciary duty, unjust enrichment and corporate waste. On August 9, 2017, the Court granted an order to unseal this case and reveal Gary Merenstein as the plaintiff.
On August 10, 2017, the court granted the parties stipulation to consolidate the Barnes Compliant, the Silva Complaint and the Merenstein Compliant under the caption
In re The Hain Celestial Group, Inc. Stockholder Class and Derivative Litigation
(the “Consolidated Stockholder Class and Derivative Action”) and to appoint Robbins Arroyo LLP and Scott+Scott as Co-Lead Counsel, with the Law Offices of Thomas G. Amon as Liaison Counsel for Plaintiffs. On September 14, 2017, a related complaint was filed under the caption
Oliver v. Berke, et al.
(the “Oliver Complaint”), and on October 6, 2017, the Oliver Complaint was consolidated with the Consolidated Stockholder Class and Derivative Action. The Plaintiffs filed their consolidated amended complaint under seal on October 26, 2017. Defendants’ answer, motion, or other response to the consolidated amended complaint is due by December 26, 2017.
21
SEC Investigation
As previously disclosed, the Company voluntarily contacted the SEC in August 2016 to advise it of the Company’s delay in the filing of its periodic reports and the performance of the independent review conducted by the Audit Committee. The Company has continued to provide information to the SEC on an ongoing basis, including, among other things, the results of the independent review of the Audit Committee as well as other information pertaining to its internal accounting review relating to revenue recognition. On January 31, 2017, the SEC issued a subpoena to the Company seeking documents relevant to its investigation. The Company is in the process of responding to the SEC’s requests for information and intends to cooperate fully with the SEC.
Other
In addition to the litigation described above, the Company is and may be a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position, cash flows or liquidity.
15. SEGMENT INFORMATION
Prior to July 1, 2017, the Company’s operations were managed in
eight
operating segments: the United States, United Kingdom, Tilda, Hain Pure Protein Corporation (“HPPC”), EK Holdings, Inc. (“Empire”), Canada, Europe and Cultivate. The United States operating segment was also a reportable segment. The United Kingdom and Tilda operating segments were reported in the aggregate as “United Kingdom”, while HPPC and Empire were reported in the aggregate as “Hain Pure Protein,” and Canada, Europe and Cultivate were combined and reported as “Rest of World.”
Effective July 1, 2017, due to changes to the Company’s internal management and reporting structure, the United Kingdom operations of the Ella’s Kitchen
®
brand, which was previously included within the United States reportable segment, was moved to the United Kingdom reportable segment. As a result, the Company is now managed in
nine
operating segments: the United States, United Kingdom, Tilda, Ella’s Kitchen UK, HPPC, Empire, Europe, Canada and Cultivate. Ella’s Kitchen UK is now combined with the United Kingdom and Tilda operating segments and is reported within the United Kingdom reportable segment. There were no changes to the Hain Pure Protein reportable segment or Rest of World. The prior period segment information contained below has been adjusted to reflect the Company’s new operating and reporting structure.
Net sales and operating income are the primary measures used by the Company’s Chief Operating Decision Maker (“CODM”) to evaluate segment operating performance and to decide how to allocate resources to segments. The CODM is the Company’s Chief Executive Officer. Expenses related to certain centralized administration functions that are not specifically related to an operating segment are included in “Corporate and Other.” Corporate and Other expenses are comprised mainly of the compensation and related expenses of certain of the Company’s senior executive officers and other selected employees who perform duties related to the entire enterprise, as well as expenses for certain professional fees, facilities, and other items which benefit the Company as a whole. Additionally, acquisition related expenses, restructuring and integration charges and other, along with accounting review costs, are included in “Corporate and Other.” Expenses that are managed centrally but can be attributed to a segment, such as employee benefits and certain facility costs, are allocated based on reasonable allocation methods. Assets are reviewed by the CODM on a consolidated basis and therefore are not reported by operating segment.
22
The following tables set forth financial information about each of the Company’s reportable segments. Transactions between reportable segments were insignificant for all periods presented.
|
Three Months Ended September 30,
|
|||||||
|
2017
|
2016
|
||||||
|
Net Sales:
|
|||||||
|
United States
|
$
|
263,659
|
|
$
|
254,232
|
|
|
|
United Kingdom
|
222,445
|
|
220,151
|
|
|||
|
Hain Pure Protein
|
119,057
|
|
116,669
|
|
|||
|
Rest of World
|
103,115
|
|
90,412
|
|
|||
|
$
|
708,276
|
|
$
|
681,464
|
|
||
|
Operating Income:
|
|||||||
|
United States
|
$
|
20,861
|
|
$
|
18,794
|
|
|
|
United Kingdom
|
9,601
|
|
7,819
|
|
|||
|
Hain Pure Protein
|
2,242
|
|
(1,018
|
)
|
|||
|
Rest of World
|
8,997
|
|
5,055
|
|
|||
|
$
|
41,701
|
|
$
|
30,650
|
|
||
|
Corporate and Other
(a)
|
(10,218
|
)
|
(16,899
|
)
|
|||
|
$
|
31,483
|
|
$
|
13,751
|
|
||
(a) Includes
$4,488
and
$6,421
of accounting review costs, net of insurance proceeds and acquisition related expenses, restructuring and integration charges for the three months ended
September 30, 2017
and
2016
, respectively.
The Company’s long-lived assets, which primarily represent net property, plant and equipment, by geographic area are as follows:
|
September 30,
2017 |
June 30,
2017 |
||||||
|
United States
|
$
|
196,087
|
|
$
|
194,348
|
|
|
|
United Kingdom
|
169,054
|
|
165,396
|
|
|||
|
All Other
|
69,710
|
|
63,330
|
|
|||
|
Total
|
$
|
434,851
|
|
$
|
423,074
|
|
|
The Company’s net sales by geographic region, which are generally based on the location of the Company’s subsidiary, are as follows:
|
Three Months Ended September 30,
|
||||||||
|
2017
|
2016
|
|||||||
|
United States
|
$
|
397,351
|
|
$
|
385,768
|
|
||
|
United Kingdom
|
222,445
|
|
220,151
|
|
||||
|
All Other
|
88,480
|
|
75,545
|
|
||||
|
Total
|
$
|
708,276
|
|
$
|
681,464
|
|
||
23
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and the related Notes for the period ended
September 30, 2017
thereto contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended
June 30, 2017
. Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading “Cautionary Note Regarding Forward Looking Information” in the introduction of this Form 10-Q.
Overview
The Hain Celestial Group, Inc., a Delaware corporation (collectively along with its subsidiaries, the “Company,” and herein referred to as “Hain Celestial,” “we,” “us” and “our”), was founded in 1993 and is headquartered in Lake Success, New York. The Company’s mission has continued to evolve since its founding, with health and wellness being the core tenet — To Create and Inspire A Healthier Way of Life
TM
and be the leading marketer, manufacturer and seller of organic and natural, “better-for-you” products by anticipating and exceeding consumer expectations in providing quality, innovation, value and convenience. The Company is committed to growing sustainably while continuing to implement environmentally sound business practices and manufacturing processes. Hain Celestial sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, drug and convenience stores in over
80
countries worldwide.
With a proven track record of strategic growth and profitability, the Company manufactures, markets, distributes and sells organic and natural products under brand names that are sold as “better-for-you” products, providing consumers with the opportunity to lead A Healthier Way of Life
TM
. Hain Celestial is a leader in many organic and natural products categories, with many recognized brands in the various market categories it serves, including Almond Dream
®
, Arrowhead Mills
®
, Bearitos
®
, Better Bean
TM
, BluePrint
®
, Celestial Seasonings
®
, Coconut Dream
®
, Cully & Sully
®
, Danival
®
, DeBoles
®
, Earth’s Best
®
, Ella’s Kitchen
®
, Empire
®
, Europe’s Best
®
, Farmhouse Fare
®
, Frank Cooper’s
®
, FreeBird
®
, Gale’s
®
, Garden of Eatin’
®
, GG UniqueFiber
TM
, Hain Pure Foods
®
, Hartley’s
®
, Health Valley
®
, Imagine
®
, Johnson’s Juice Co.
®
, Joya
®
, Kosher Valley
®
, Lima
®
, Linda McCartney’s
®
(under license), MaraNatha
®
, Natumi
®
, New Covent Garden Soup Co.
®
, Plainville Farms
®
, Rice Dream
®
, Robertson’s
®
, Rudi’s Gluten-Free Bakery
®
, Rudi’s Organic Bakery
®
, Sensible Portions
®
, Spectrum Organics
®
, Soy Dream
®
, Sun-Pat
®
, SunSpire
®
, Terra
®
, The Greek Gods
®
, Tilda
®
, Walnut Acres
®
, WestSoy
®
, Yorkshire Provender
TM
and Yves Veggie Cuisine
®
. The Company’s personal care products are marketed under the Alba Botanica
®
, Avalon Organics
®
, Earth’s Best
®
, JASON
®
, Live Clean
®
and Queen Helene
®
brands.
Change in Segments
Prior to July 1, 2017, the Company’s operations were managed in
eight
operating segments: the United States, United Kingdom, Tilda, Hain Pure Protein Corporation (“HPPC”), EK Holdings, Inc. (“Empire”), Canada, Europe and Cultivate. The United States operating segment was also a reportable segment. The United Kingdom and Tilda operating segments were reported in the aggregate as “United Kingdom”, while HPPC and Empire were reported in the aggregate as “Hain Pure Protein,” and Canada, Europe and Cultivate were combined and reported as “Rest of World.”
Effective July 1, 2017, due to changes to the Company’s internal management and reporting structure, the United Kingdom operations of the Ella’s Kitchen
®
brand, which was previously included within the United States reportable segment, was moved to the United Kingdom reportable segment. As a result, the Company is now managed in
nine
operating segments: the United States, United Kingdom, Tilda, Ella’s Kitchen UK, HPPC, Empire, Europe, Canada and Cultivate. Ella’s Kitchen UK is now combined with the United Kingdom and Tilda operating segments and is reported within the United Kingdom reportable segment. There were no changes to the Hain Pure Protein reportable segment or Rest of World. All prior period data throughout this Management’s Discussion & Analysis of Financial Condition and Results of Operations has been adjusted to reflect the new operating and reporting structure. See Note 15,
Segment Information
, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional details.
Our business strategy is to integrate our brands under one management team within each operating segment and employ uniform marketing, sales and distribution programs when attainable. We believe that, by integrating our various brands, we will continue to achieve economies of scale and enhanced market penetration. We seek to capitalize on the equity of our brands and the distribution achieved through each of our acquired businesses with strategic introductions of new products that complement existing lines to enhance revenues and margins.
24
Results of Operations
Comparison of Three Months Ended September 30, 2017 to Three Months Ended September 30, 2016
Consolidated Results
The following table compares our results of operations, including as a percentage of net sales, on a consolidated basis, for the three months ended
September 30, 2017
and
2016
(amounts in thousands, other than percentages which may not add due to rounding):
|
|
Three Months Ended
|
Change in
|
|||||||||||||||
|
|
September 30, 2017
|
September 30, 2016
|
Dollars
|
Percentage
|
|||||||||||||
|
Net sales
|
$
|
708,276
|
|
100.0%
|
$
|
681,464
|
|
100.0%
|
$
|
26,812
|
|
3.9%
|
|||||
|
Cost of sales
|
576,673
|
|
81.4%
|
571,597
|
|
83.9%
|
5,076
|
|
0.9%
|
||||||||
|
Gross profit
|
131,603
|
|
18.6%
|
109,867
|
|
16.1%
|
21,736
|
|
19.8%
|
||||||||
|
Selling, general and administrative expenses
|
90,721
|
|
12.8%
|
84,967
|
|
12.5%
|
5,754
|
|
6.8%
|
||||||||
|
Amortization of acquired intangibles
|
4,911
|
|
0.7%
|
4,728
|
|
0.7%
|
183
|
|
3.9%
|
||||||||
|
Acquisition related expenses, restructuring and integration charges
|
5,846
|
|
0.8%
|
461
|
|
0.1%
|
5,385
|
|
1,168.1%
|
||||||||
|
Accounting review costs, net of insurance
proceeds
|
(1,358
|
)
|
(0.2)%
|
5,960
|
|
0.9%
|
(7,318
|
)
|
n/a
|
||||||||
|
Operating income
|
31,483
|
|
4.4%
|
13,751
|
|
2.0%
|
17,732
|
|
129.0%
|
||||||||
|
Interest and other financing expense, net
|
6,315
|
|
0.9%
|
5,081
|
|
0.7%
|
1,234
|
|
24.3%
|
||||||||
|
Other (income)/expense, net
|
(3,137
|
)
|
(0.4)%
|
(512
|
)
|
(0.1)%
|
(2,625
|
)
|
512.7%
|
||||||||
|
Income before income taxes and equity in net income of equity-method investees
|
28,305
|
|
4.0%
|
9,182
|
|
1.3%
|
19,123
|
|
208.3%
|
||||||||
|
Provision for income taxes
|
8,470
|
|
1.2%
|
762
|
|
0.1%
|
7,708
|
|
1,011.5%
|
||||||||
|
Equity in net income of equity-method investees
|
(11
|
)
|
—
|
(184
|
)
|
—
|
173
|
|
94.0%
|
||||||||
|
Net income
|
$
|
19,846
|
|
2.8%
|
$
|
8,604
|
|
1.3%
|
$
|
11,242
|
|
130.7%
|
|||||
|
Adjusted EBITDA
|
$
|
59,512
|
|
8.4%
|
$
|
45,617
|
|
6.7%
|
$
|
13,895
|
|
30.5%
|
|||||
Net Sales
Net sales for the three months ended
September 30, 2017
were
$708.3 million
, an increase of
$26.8 million
, or
3.9%
, from net sales of
$681.5 million
for the three months ended
September 30, 2016
. On a constant currency basis, net sales increased approximately
3.3%
from the prior year quarter. The increase in net sales was due to sales growth in Europe related to our plant-based, branded and private label beverage business and increased sales in Canada driven by our Sensible Portions
®
, Tilda
®
and Yves
®
brands. In addition, net sales in the United States segment for the three months ended
September 30, 2017
increased
3.7%
from the prior year quarter, which was negatively impacted by a realignment of customer inventories.
Gross Profit
Gross profit for the three months ended
September 30, 2017
was
$131.6 million
, an increase of
$21.7 million
, or
19.8%
, as compared to the prior year quarter. Gross profit margin was
18.6%
of net sales, up
250 basis points
period-over-period. Gross profit was favorably impacted by more efficient trade spend in the United States in the current year quarter as compared to the prior year quarter, price realization and operating efficiencies in the United Kingdom, improved profitability at HPPC as a result of lower conversion costs, and incremental gross profit on higher sales, specifically in Canada and Europe.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were
$90.7 million
for the three months ended
September 30, 2017
, an increase of
$5.8 million
, or
6.8%
, from
$85.0 million
for the prior year quarter. Selling, general and administrative expenses increased primarily due to higher marketing investment and personnel costs in the United States. Selling, general and administrative expenses
25
as a percentage of net sales was
12.8%
in the three months ended
September 30, 2017
and
12.5%
in the prior year quarter, an increase of
30
basis points, primarily attributable to the aforementioned items.
Amortization of Acquired Intangibles
Amortization of acquired intangibles was
$4.9 million
for the three months ended
September 30, 2017
, an increase of
$0.2 million
from
$4.7 million
in the prior year quarter. The increase was due to the intangibles acquired as a result of the Company’s acquisitions in the fourth quarter of fiscal 2017. See Note 4,
Acquisitions
, and Note 7,
Goodwill and Other Intangible Assets
, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.
Acquisition Related Expenses, Restructuring and Integration Charges
Acquisition related expenses, restructuring and integration charges were
$5.8 million
for the three months ended
September 30, 2017
, an increase of
$5.4 million
from
$0.5 million
in the prior year quarter. The increase was primarily due to increased severance costs in the current year quarter as compared to the prior year quarter and consulting fees incurred in connection with the Company’s Project Terra strategic review.
Accounting Review Costs, net of Insurance Proceeds
Costs and expenses associated with the internal accounting review and the independent review by the Audit Committee and other related matters were
$3.6 million
for the three months ended
September 30, 2017
, compared to
$6.0 million
in the prior year quarter. Included in accounting review costs for the three months ended
September 30, 2017
were insurance proceeds of
$5.0 million
related to the reimbursement of costs incurred as part of the internal accounting review and the independent review by the Audit Committee and other related matters. The net amount of accounting review costs for the three months ended
September 30, 2017
was income of
$1.4 million
.
Operating Income
Operating income for the three months ended
September 30, 2017
was
$31.5 million
, an increase of
$17.7 million
, or
129.0%
, from
$13.8 million
in the three months ended
September 30, 2016
. Operating income as a percentage of net sales was
4.4%
in the first quarter of fiscal 2017 compared with
2.0%
in the prior year quarter. The increase in operating income as a percentage of net sales resulted from the items described above.
Interest and Other Financing Expense, net
Interest and other financing expense, net totaled
$6.3 million
for the three months ended
September 30, 2017
, an increase of
$1.2 million
, or
24.3%
, from
$5.1 million
in the prior year quarter. The increase in interest and other financing expense, net resulted primarily from higher interest expense related to our revolving credit facility as a result of higher variable interest rates on outstanding debt. See Note 8,
Debt and Borrowings
, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.
Other (Income)/Expense, net
Other (income)/expense, net totaled
$3.1 million
of income for the three months ended
September 30, 2017
, an increase of
$2.6 million
from
$0.5 million
of income in the prior year quarter. Included in other (income)/expense, net were net unrealized foreign currency gains, which were higher in the current quarter than the prior year quarter principally due to the effect of foreign currency movements on the remeasurement of foreign currency denominated loans.
Income Before Income Taxes and Equity in Net Income of Equity-Method Investees
Income before income taxes and equity in the net income of our equity-method investees for the three months ended
September 30, 2017
and
2016
was
$28.3 million
and
$9.2 million
, respectively. The increase was due to the items discussed above.
Income Taxes
The provision for income taxes includes federal, foreign, state and local income taxes. Our income tax expense was
$8.5 million
for the three months ended
September 30, 2017
compared to
$0.8 million
in the prior year quarter.
26
Our effective income tax rate was
29.9%
and
8.3%
of pre-tax income for the three months ended
September 30, 2017
and
2016
, respectively. The effective tax rate for the three months ended
September 30, 2017
and
September 30, 2016
was favorable as compared to the statutory rate as a result of the geographical mix of earnings. The effective tax rate for the three months ended
September 30, 2016
was favorably impacted by a reduction in the statutory tax rate in the United Kingdom enacted in the first quarter of 2017. Our effective tax rate may change from period-to-period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes and tax audit settlements.
Equity in Net Income of Equity-Method Investees
Our equity in net income from our equity-method investments for the three months ended
September 30, 2017
was essentially breakeven compared to
$0.2 million
for the three months ended
September 30, 2016
. See Note 12,
Investments and Joint Ventures
, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.
Net Income
Net income for the three months ended
September 30, 2017
and
2016
was
$19.8 million
and
$8.6 million
, respectively, or
$0.19
and
$0.08
per diluted share, respectively. The increase was attributable to the factors noted above.
Adjusted EBITDA
Our Adjusted EBITDA was
$59.5 million
and
$45.6 million
for the three months ended
September 30, 2017
and
2016
, respectively, as a result of the factors discussed above. See
Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures
following the discussion of our results of operations.
Segment Results
The following table provides a summary of net sales and operating income by reportable segment for the three months ended
September 30, 2017
and
2016
:
|
(dollars in thousands)
|
United States
|
United Kingdom
|
Hain Pure Protein
|
Rest of World
|
Corporate and Other
|
Consolidated
|
||||||||||||||||||
|
Net sales
|
||||||||||||||||||||||||
|
Three months ended 9/30/17
|
$
|
263,659
|
|
$
|
222,445
|
|
$
|
119,057
|
|
$
|
103,115
|
|
$
|
—
|
|
$
|
708,276
|
|
||||||
|
Three months ended 9/30/16
|
254,232
|
|
220,151
|
|
116,669
|
|
90,412
|
|
—
|
|
681,464
|
|
||||||||||||
|
$ change
|
$
|
9,427
|
|
$
|
2,294
|
|
$
|
2,388
|
|
$
|
12,703
|
|
n/a
|
|
$
|
26,812
|
|
|||||||
|
% change
|
3.7
|
%
|
1.0
|
%
|
2.0
|
%
|
14.1
|
%
|
n/a
|
|
3.9
|
%
|
||||||||||||
|
Operating income (loss)
|
||||||||||||||||||||||||
|
Three months ended 9/30/17
|
$
|
20,861
|
|
$
|
9,601
|
|
$
|
2,242
|
|
$
|
8,997
|
|
$
|
(10,218
|
)
|
$
|
31,483
|
|
||||||
|
Three months ended 9/30/16
|
18,794
|
|
7,819
|
|
(1,018
|
)
|
5,055
|
|
(16,899
|
)
|
13,751
|
|
||||||||||||
|
$ change
|
$
|
2,067
|
|
$
|
1,782
|
|
$
|
3,260
|
|
$
|
3,942
|
|
$
|
6,681
|
|
$
|
17,732
|
|
||||||
|
% change
|
11.0
|
%
|
22.8
|
%
|
320.2
|
%
|
78.0
|
%
|
39.5
|
%
|
129.0
|
%
|
||||||||||||
|
Operating income (loss)
margin
|
||||||||||||||||||||||||
|
Three months ended 9/30/17
|
7.9
|
%
|
4.3
|
%
|
1.9
|
%
|
8.7
|
%
|
n/a
|
|
4.4
|
%
|
||||||||||||
|
Three months ended 9/30/16
|
7.4
|
%
|
3.6
|
%
|
(0.9
|
)%
|
5.6
|
%
|
n/a
|
|
2.0
|
%
|
||||||||||||
27
United States
Our net sales in the United States segment for the three months ended
September 30, 2017
were
$263.7 million
, an increase of
$9.4 million
, or
3.7%
, from net sales of
$254.2 million
for the three months ended
September 30, 2016
. The increase in net sales was driven by growth in our Pure Personal Care, Better-for-You-Baby and Better-for-You-Pantry platforms, partially offset by declines in our Fresh Living, Better-for-You-Snacks and Tea platforms. In addition, the prior year quarter was negatively impacted by a realignment of customer inventories. Operating income in the United States for the three months ended
September 30, 2017
was
$20.9 million
, an increase of
$2.1 million
from operating income of
$18.8 million
for the three months ended
September 30, 2016
. The increase in operating income was the result of the aforementioned items discussed above, as well as the negative impact of the initiation of the stock-keeping unit rationalization which occurred in the prior year quarter.
United Kingdom
Our net sales in the United Kingdom segment for the three months ended
September 30, 2017
were
$222.4 million
, an increase of
$2.3 million
, or
1.0%
, from net sales of
$220.2 million
for the three months ended
September 30, 2016
. The net sales increase was primarily due to growth from our Tilda
®
and Ella’s Kitchen
®
brands, the aforementioned price increases, as well as the acquisition of The Yorkshire Provender Limited, which occurred in the fourth quarter of fiscal 2017. These increases were partially offset by the sale of our own-label juice business which occurred at the end of the first quarter of fiscal 2017. Operating income in the United Kingdom segment for the three months ended
September 30, 2017
was
$9.6 million
, an increase of
$1.8 million
from
$7.8 million
for the three months ended
September 30, 2016
. The increase in operating income was primarily due to the aforementioned increase in sales, as well as operating efficiencies achieved at Orchard House and Hain Daniels, offset in part by restructuring costs incurred at Tilda.
Hain Pure Protein
Our net sales in the Hain Pure Protein segment for the three months ended
September 30, 2017
were
$119.1 million
, an increase of
$2.4 million
, or
2.0%
, from net sales of
$116.7 million
for the three months ended
September 30, 2016
. The increase in net sales was primarily due to growth of our FreeBird
®
brand, offset in part by volume declines in our Plainville Farms
®
ground turkey business and Empire Kosher
®
brand. Operating income in the segment for the three months ended
September 30, 2017
was
$2.2 million
, an increase of
$3.3 million
, from an operating loss of
$1.0 million
for the three months ended
September 30, 2016
. The increase in operating income was primarily due to the aforementioned increase in net sales of our FreeBird
®
brand and lower conversion costs as a result of production improvements at our Plainville Farms manufacturing facility.
Rest of World
Our net sales in Rest of World were
$103.1 million
for the three months ended
September 30, 2017
, an increase of
$12.7 million
, or
14.1%
, from net sales of
$90.4 million
for the three months ended
September 30, 2016
. The increase in net sales was primarily due to increased sales volume in Europe related to our branded and private label plant-based beverage business, as well as increased sales in Canada driven by growth in our Sensible Portions
®
, Tilda
®
,
and Yves
®
brands.
Operating income in the segment for the three months ended
September 30, 2017
was
$9.0 million
, an increase of
$3.9 million
, from
$5.1 million
for the three months ended
September 30, 2016
. The increase in operating income was primarily due to the aforementioned increase in sales as well as operating efficiencies achieved at our plant-based manufacturing facilities in Europe.
Corporate and Other
Our Corporate and Other category consists of expenses related to the Company’s centralized administrative functions, which do not specifically relate to an operating segment. Such Corporate and Other expenses are comprised mainly of the compensation and related expenses of certain of the Company’s senior executive officers and other employees who perform duties related to our entire enterprise, as well as expenses for certain professional fees, facilities, and other items which benefit the Company as a whole. Additionally, accounting review costs, net of insurance proceeds and acquisition related expenses, restructuring and integration charges are included in Corporate and Other and were
$4.5 million
and
$6.4 million
for the three months ended
September 30, 2017
and
2016
, respectively.
Refer to Note 15,
Segment Information
, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.
Liquidity and Capital Resources
We finance our operations and growth primarily with the cash flows we generate from our operations and from borrowings available to us under our credit agreement.
28
Our cash and cash equivalents balance decreased
$20.2 million
at
September 30, 2017
to
$126.8 million
when compared to
$147.0 million
at June 30, 2017. Our working capital was
$567.6 million
at
September 30, 2017
, an increase of
$33.3 million
from
$534.3 million
at the end of fiscal 2017.
Liquidity is affected by many factors, some of which are based on normal ongoing operations of the Company’s business and some of which arise from fluctuations related to global economics and markets. Our cash balances are held in the United States, United Kingdom, Canada, Europe and India. It is our current intent to indefinitely reinvest its foreign earnings outside the United States. As of
September 30, 2017
, approximately
85.7%
(
$108.6 million
) of the total cash balance was held outside of the United States. Although a significant portion of the consolidated cash balances are maintained outside of the United States, our current plans do not demonstrate a need to repatriate these balances to fund our United States operations. If these funds were to be needed for our operations in the United States, we may be required to record and pay significant United States income taxes to repatriate these funds.
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of
September 30, 2017
, all of our investments were expected to mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. Cash provided by (used in) operating, investing and financing activities is summarized below.
|
Three Months Ended September 30,
|
Change in
|
|||||||||||||
|
(amounts in thousands)
|
2017
|
2016
|
Dollars
|
Percentage
|
||||||||||
|
Cash flows provided by (used in):
|
||||||||||||||
|
Operating activities
|
$
|
(19,438
|
)
|
$
|
12,819
|
|
$
|
(32,257
|
)
|
(251.6
|
)%
|
|||
|
Investing activities
|
(14,913
|
)
|
(13,553
|
)
|
(1,360
|
)
|
(10.0
|
)%
|
||||||
|
Financing activities
|
11,087
|
|
(11,589
|
)
|
22,676
|
|
195.7
|
%
|
||||||
|
Effect of exchange rate changes on cash
|
3,059
|
|
(2,131
|
)
|
5,190
|
|
243.5
|
%
|
||||||
|
Net decrease in cash
|
$
|
(20,205
|
)
|
$
|
(14,454
|
)
|
$
|
(5,751
|
)
|
(39.8
|
)%
|
|||
Cash used in operating activities was
$19.4 million
for the three months ended
September 30, 2017
, a decrease of
$32.3 million
from the
$12.8 million
of cash provided by operating activities for the three months ended
September 30, 2016
. This decrease resulted primarily from an additional
$46.1 million
of cash used within working capital accounts, primarily related to inventory and accounts receivable, partially offset by an increase of
$13.8 million
in net income adjusted for non-cash charges.
Cash used in investing activities was
$14.9 million
for the three months ended
September 30, 2017
, an increase of
$1.4 million
from the
$13.6 million
of cash used in investing activities for the three months ended
September 30, 2016
. The increase resulted primarily from a
$1.0 million
shareholder loan repayment that occurred in the first quarter of fiscal 2017 related to our joint venture with Hutchison Hain Organic Holdings Limited.
Cash provided by financing activities was
$11.1 million
for the three months ended
September 30, 2017
, an increase of
$22.7 million
from the
$11.6 million
of net cash used in financing activities for the three months ended
September 30, 2016
. The increase was due to net repayments of
$7.5 million
on our revolving credit facility and other debt in the first quarter of fiscal 2017, compared with net borrowings of
$13.2 million
in the first quarter of fiscal 2018, which was primarily used to fund advanced rice purchases at Tilda. Additionally, the first quarter of fiscal 2018 included
$2.1 million
related to stock repurchases to satisfy employee payroll tax withholdings. The first quarter of fiscal 2017 included
$1.6 million
related to stock repurchases to satisfy employee payroll tax withholdings, as well as
$2.5 million
in acquisition-related contingent consideration.
Operating Free Cash Flow
Our operating free cash flow was negative
$34.4 million
for the three months ended
September 30, 2017
, a decrease of
$32.6 million
from the three months ended
September 30, 2016
. This decrease resulted primarily from
$46.1 million
of more cash used within working capital accounts, partially offset by an increase of
$13.8 million
adjusted for the impact of non-cash charges. We expect that our capital spending for fiscal 2018 will be approximately
$75 million
, and we may incur additional costs in connection with Project Terra. We refer the reader to the Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures following the discussion of our results of operations for definitions and a reconciliation from our net cash provided by operating activities to operating free cash flow.
29
Credit Agreement
On December 12, 2014, we entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) which provides us with a $1.0 billion revolving credit facility which may be increased by an additional uncommitted $350.0 million provided certain conditions are met. The Credit Agreement expires in December 2019. Loans under the Credit Agreement bear interest at a Base Rate or a Eurocurrency Rate (both of which are defined in the Credit Agreement) plus an applicable margin, which is determined in accordance with a leverage-based pricing grid, as set forth in the Credit Agreement. Borrowings may be used to provide working capital, finance capital expenditures and permitted acquisitions, refinance certain existing indebtedness and for other general corporate purposes. As of
September 30, 2017
and
June 30, 2017
, there were
$739.7 million
and
$733.7 million
of borrowings outstanding, respectively, under the Credit Agreement. The weighted average interest rate on outstanding borrowings under the Credit Agreement at
September 30, 2017
was
2.88%
.
The Credit Agreement is guaranteed by substantially all of our current and future direct and indirect domestic subsidiaries. We are required by the terms of the Credit Agreement to comply with financial and other customary affirmative and negative covenants for facilities of this nature. As of
September 30, 2017
and
June 30, 2017
, and the Company was in compliance with all associated covenants.
Tilda Short-Term Borrowing Arrangements
Tilda maintains short-term borrowing arrangements primarily used to fund the purchase of rice from India and other countries. The maximum borrowings permitted under all such arrangements are
£52.0 million
. Outstanding borrowings are collateralized by the current assets of Tilda, typically have six-month terms and bear interest at variable rates typically based on LIBOR plus a margin (weighted average interest rate of approximately
2.72%
at
September 30, 2017
).
Other Borrowings
Other borrowings primarily relate to a cash pool facility in Europe. The cash pool facility provides our Europe operating segment with sufficient liquidity to support the Company’s growth objectives within this segment. The maximum borrowings permitted under the cash pool arrangement are
€12.5 million
. Outstanding borrowings bear interest at variable rates typically based on EURIBOR plus a margin of
1.10%
(weighted average interest rate of approximately
1.10%
at
September 30, 2017
).
We believe that our cash on hand of
$126.8 million
at
September 30, 2017
, as well as projected cash flows from operations and availability under our Credit Agreement, are sufficient to fund our working capital needs in the ordinary course of business, anticipated fiscal 2018 capital expenditures of approximately
$75 million
and other expected cash requirements for at least the next twelve months.
Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures
We have included in this report measures of financial performance that are not defined by U.S. GAAP. We believe that these measures provide useful information to investors, and include these measures in other communications to investors.
For each of these non-U.S. GAAP financial measures, we are providing below a reconciliation of the differences between the non-U.S. GAAP measure and the most directly comparable U.S. GAAP measure, an explanation of why our management and Board of Directors believes the non-U.S. GAAP measure provides useful information to investors and any additional purposes for which our management and Board of Directors uses the non-U.S. GAAP measure. These non-U.S. GAAP measures should be viewed in addition to, and not in lieu of, the comparable U.S. GAAP measure.
Constant Currency Presentation
We believe that this measure provides useful information to investors because it provides transparency to underlying performance in our consolidated net sales by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given the volatility in foreign currency exchange markets. To present this information for historical periods, current period net sales for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average monthly exchange rates in effect during the corresponding period of the prior fiscal year, rather than at the actual average monthly exchange rate in effect during the current period of the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.
30
A reconciliation between reported and constant currency net sales growth is as follows:
|
(amounts in thousands)
|
Hain Consolidated
|
||
|
Net sales - Three months ended 9/30/2017
|
$
|
708,276
|
|
|
Impact of foreign currency exchange
|
(4,143
|
)
|
|
|
Net sales on a constant currency basis - Three months ended 9/30/2017
|
$
|
704,133
|
|
|
Net sales - Three months ended 9/30/2016
|
$
|
681,464
|
|
|
Net sales growth on a constant currency
|
3.3
|
%
|
|
Adjusted EBITDA
Adjusted EBITDA is defined as net income before income taxes, net interest expense, depreciation and amortization, impairment of long lived assets, equity in the earnings of equity-method investees, stock-based compensation, acquisition-related expenses, including integration and restructuring charges, and other non-recurring items. The Company’s management believes that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses this measure for reviewing the financial results of the Company and as a component of performance-based executive compensation. Adjusted EBITDA is a Non-U.S. GAAP measure and may not be comparable to similarly titled measures reported by other companies.
We do not consider Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with U.S. GAAP. The principal limitation of Adjusted EBITDA is that it excludes certain expenses and income that are required by U.S. GAAP to be recorded in our consolidated financial statements. In addition, Adjusted EBITDA is subject to inherent limitations as this metric reflects the exercise of judgment by management about which expenses and income are excluded or included in determining Adjusted EBITDA. In order to compensate for these limitations, management presents Adjusted EBITDA in connection with U.S. GAAP results.
A reconciliation of net income to Adjusted EBITDA is as follows:
|
Three Months Ended September 30,
|
|||||||
|
(amounts in thousands)
|
2017
|
2016
|
|||||
|
Net income
|
$
|
19,846
|
|
$
|
8,604
|
|
|
|
Income taxes
|
8,470
|
|
762
|
|
|||
|
Interest expense, net
|
5,620
|
|
4,354
|
|
|||
|
Depreciation and amortization
|
17,626
|
|
17,220
|
|
|||
|
Equity in earnings of equity-method investees
|
(11
|
)
|
(184
|
)
|
|||
|
Stock-based compensation expense
|
3,164
|
|
2,704
|
|
|||
|
Unrealized currency gains
|
(3,419
|
)
|
(1,293
|
)
|
|||
|
EBITDA
|
51,296
|
|
32,167
|
|
|||
|
Acquisition related expenses, restructuring and integration charges, and other
|
5,846
|
|
1,408
|
|
|||
|
Losses on terminated chilled desserts contract
|
1,472
|
|
—
|
|
|||
|
U.K. and HPP start-up costs
|
1,083
|
|
—
|
|
|||
|
Co-packer disruption
|
1,173
|
|
—
|
|
|||
|
SKU rationalization
|
—
|
|
5,199
|
|
|||
|
U.K. deferred synergies due to CMA Board decision
|
—
|
|
471
|
|
|||
|
Accounting review costs, net of insurance proceeds
|
(1,358
|
)
|
5,960
|
|
|||
|
Recall and other related costs
|
—
|
|
412
|
|
|||
|
Adjusted EBITDA
|
$
|
59,512
|
|
$
|
45,617
|
|
|
31
Operating Free Cash Flow
In our internal evaluations, we use the non-U.S. GAAP financial measure “operating free cash flow.” The difference between operating free cash flow and cash flow provided by operating activities, which is the most comparable U.S. GAAP financial measure, is that operating free cash flow reflects the impact of capital expenditures. Since capital spending is essential to maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider capital spending when evaluating our cash provided by operating activities. We view operating free cash flow as an important measure because it is one factor in evaluating the amount of cash available for discretionary investments. We do not consider operating free cash flow in isolation or as an alternative to financial measures determined in accordance with U.S. GAAP.
A reconciliation from Cash flow provided by operating activities to Operating free cash flow is as follows:
|
Three Months Ended September 30,
|
|||||||
|
(amounts in thousands)
|
2017
|
2016
|
|||||
|
Cash flow (used in) provided by operating activities
|
$
|
(19,438
|
)
|
$
|
12,819
|
|
|
|
Purchase of property, plant and equipment
|
(14,913
|
)
|
(14,553
|
)
|
|||
|
Operating free cash flow
|
$
|
(34,351
|
)
|
$
|
(1,734
|
)
|
|
Off Balance Sheet Arrangements
At
September 30, 2017
, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K that have had, or are likely to have, a material current or future effect on our consolidated financial statements.
Critical Accounting Estimates
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, materially different amounts may be reported under different conditions or using assumptions different from those that we have applied. The accounting policies that have been identified as critical to our business operations and understanding the results of our operations pertain to revenue recognition, trade promotions and sales incentives, valuation of accounts and chargebacks receivable, accounting for acquisitions, valuation of long-lived assets, goodwill and intangible assets, stock based compensation, and valuation allowances for deferred tax assets. The application of each of these critical accounting policies and estimates is discussed in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
,
of our Annual Report on Form 10-K for the fiscal year ended
June 30, 2017
.
Recent Accounting Pronouncements
Refer to Note 2,
Basis of Presentation
, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Seasonality
Certain of our product lines have seasonal fluctuations. Hot tea, baking products, hot cereal, hot-eating desserts and soup sales are stronger in colder months, while sales of snack foods, sunscreen and certain of our prepared food and personal care products are stronger in the warmer months. Additionally, with our acquisitions of HPPC, Empire and Tilda, our net sales and earnings may further fluctuate based on the timing of holidays throughout the year. As such, our results of operations and our cash flows for any particular quarter are not indicative of the results we expect for the full year, and our historical seasonality may not be indicative of future quarterly results of operations. In recent years, net sales and diluted earnings per share in the first fiscal quarter have typically been the lowest of our four quarters.
There have been no significant changes in market risk for the three months ended
September 30, 2017
from those addressed in the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2017
. See the information set forth in Part II, Item 7A,
Quantitative and Qualitative Disclosures About Market Risk
, of the Company’s Annual Report on Form 10-K for the fiscal year ended
June 30, 2017
.
32
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), with the assistance of other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Our disclosure controls and procedures are intended 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 Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based on this review, although the Company continues to work to remediate the material weaknesses in internal control over financial reporting as described in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2017
and significant progress has been made to date, our CEO and CFO have concluded that the disclosure controls and procedures related to these material weaknesses were not effective as of
September 30, 2017
.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect every misstatement. An evaluation of effectiveness is subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may decrease over time.
Changes in Internal Controls Over Financial Reporting
Under applicable SEC rules (Exchange Act Rules 13a-15(c) and 15d-15(c)), management is required to evaluate any change in internal control over financial reporting that occurred during each fiscal quarter that had materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As explained in greater detail under Item 9A,
Controls and Procedures,
in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017, we undertook a broad range of remedial procedures prior to November 7, 2017, the filing date of this report, to address the material weaknesses in our internal control over financial reporting identified as of June 30, 2017. Our efforts to improve our internal controls are ongoing and focused on organizational enhancements, information technology general controls and IT dependent controls, revenue practices and training practices. Therefore, while we determined, with the participation of our CEO and CFO, that there have been no changes in our internal control over financial reporting in the three month period ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, we continue to monitor the operation of these remedial measures through the date of this report.
For a more comprehensive discussion of the material weaknesses in internal control over financial reporting identified by management as of
June 30, 2017
, and the remedial measures undertaken to address these material weaknesses, investors are encouraged to review Item 9A,
Controls and Procedures
, in our Annual Report on Form 10-K for the year ended
June 30, 2017
.
33
Item 1.
Legal Proceedings
Securities Class Actions Filed in Federal Court
On August 17, 2016, three securities class action complaints were filed in the Eastern District of New York against the Company alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The three complaints are: (1)
Flora v. The Hain Celestial Group, Inc., et al.
, (the “Flora Complaint”); (2)
Lynn v. The Hain Celestial Group, Inc., et al.
(the “Lynn Complaint”); and (3)
Spadola v. The Hain Celestial Group, Inc., et al.
(the “Spadola Complaint” and, together with the Flora and Lynn Complaints, the “Securities Complaints”). On June 5, 2017, the court issued an order for consolidation, appointment of Co-Lead Plaintiffs and approval of selection of co-lead counsel. Pursuant to this order, the Securities Complaints were consolidated under the caption
In re The Hain Celestial Group, Inc. Securities Litigation
(the “Consolidated Securities Action”), and Rosewood Funeral Home and Salamon Gimpel were appointed as Co-Lead Plaintiffs. On June 21, 2017, the Company received notice that plaintiff Spadola voluntarily dismissed his claims without prejudice to his ability to participate in the Consolidated Securities Action as an absent class member. The Co-Lead Plaintiffs in the Consolidated Securities Action filed a Consolidated Amended Complaint on August 4, 2017, and a Corrected Consolidated Amended Complaint on September 7, 2017 on behalf of a purported class consisting of all persons who purchased or otherwise acquired Hain Celestial securities between November 5, 2013 and February 10, 2017 (the “Amended Complaint”). The Amended Complaint names as defendants the Company and certain of its current and former officers (collectively, the “Defendants”) and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly materially false or misleading statements and omissions in public statements, press releases and SEC filings regarding the Company’s business, prospects, financial results and internal controls. Defendants filed a motion to dismiss on October 3, 2017. Co-Lead Plaintiffs’ opposition is due by December 4, 2017, and Defendants will file a reply within 45 days after the filing of the Lead Co-Plaintiffs’ opposition.
Stockholder Derivative Complaints Filed in State Court
On September 16, 2016, a stockholder derivative complaint,
Paperny v. Heyer, et al.
(the “Paperny Complaint”)
,
was filed in New York State Supreme Court in Nassau County against the Board of Directors and certain officers of the Company alleging breach of fiduciary duty, unjust enrichment, lack of oversight and corporate waste. On December 2, 2016 and December 29, 2016, two additional stockholder derivative complaints were filed in New York State Supreme Court in Nassau County against the Board of Directors and certain officers under the captions
Scarola v. Simon
(the “Scarola Complaint”) and
Shakir v. Simon
(the “Shakir Complaint” and, together with the Paperny Complaint and the Scarola Complaint, the “Derivative Complaints”), respectively. Both the Scarola Complaint and the Shakir Complaint allege breach of fiduciary duty, lack of oversight and unjust enrichment. On February 16, 2017, the parties for the Derivative Complaints entered into a stipulation consolidating the matters under the caption
In re The Hain Celestial Group
(the “Consolidated Derivative Action”) in New York State Supreme Court in Nassau County, ordering the
Shakir
Complaint as the operative complaint. On November 2, 2017, the parties agreed to stay the Consolidated Derivative Action until April 11, 2018.
Additional Stockholder Class Action and Derivative Complaints Filed in Federal Court
On April 19, 2017 and April 26, 2017, two class action and stockholder derivative complaints were filed in the Eastern District of New York against the Board of Directors and certain officers of the Company under the captions
Silva v. Simon, et al.
(the “Silva Complaint”) and
Barnes v. Simon, et al.
(the “Barnes Complaint”), respectively. Both the Silva Complaint and the Barnes Complaint allege violation of securities law, breach of fiduciary duty, waste of corporate assets and unjust enrichment.
On May 23, 2017, an additional stockholder filed a complaint under seal in the Eastern District of New York against the Board of Directors and certain officers of the Company. The complaint alleges that the Company’s directors and certain officers made materially false and misleading statements in press releases and SEC filings regarding the Company’s business, prospects and financial results. The complaint also alleges that the Company violated its by-laws and Delaware law by failing to hold its 2016 Annual Stockholders Meeting and includes claims for breach of fiduciary duty, unjust enrichment and corporate waste. On August 9, 2017, the Court granted an order to unseal this case and reveal Gary Merenstein as the plaintiff.
On August 10, 2017, the court granted the parties stipulation to consolidate the Barnes Compliant, the Silva Complaint and the Merenstein Compliant under the caption
In re The Hain Celestial Group, Inc. Stockholder Class and Derivative Litigation
(the “Consolidated Stockholder Class and Derivative Action”) and to appoint Robbins Arroyo LLP and Scott+Scott as Co-Lead Counsel, with the Law Offices of Thomas G. Amon as Liaison Counsel for Plaintiffs. On September 14, 2017, a related complaint was filed under the caption
Oliver v. Berke, et al.
(the “Oliver Complaint”), and on October 6, 2017, the Oliver Complaint was consolidated with the Consolidated Stockholder Class and Derivative Action. The Plaintiffs filed their consolidated amended
34
complaint under seal on October 26, 2017. Defendants’ answer, motion, or other response to the consolidated amended complaint is due by December 26, 2017.
SEC Investigation
As previously disclosed, the Company voluntarily contacted the SEC in August 2016 to advise it of the Company’s delay in the filing of its periodic reports and the performance of the independent review conducted by the Audit Committee. The Company has continued to provide information to the SEC on an ongoing basis, including, among other things, the results of the independent review of the Audit Committee as well as other information pertaining to its internal accounting review relating to revenue recognition. On January 31, 2017, the SEC issued a subpoena to the Company seeking documents relevant to its investigation. The Company is in the process of responding to the SEC’s requests for information and intends to cooperate fully with the SEC.
Other
In addition to the litigation described above, the Company is and may be a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position, cash flows or liquidity.
Item 1A.
Risk Factors
We have disclosed the risk factors affecting our business, results of operations and financial condition in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017, filed with the SEC on
September 13, 2017
. There have been no material changes from the risk factors previously disclosed.
Issuer Purchases of Equity Securities
The table below sets forth information regarding repurchases by the Company of its common stock during the periods indicated.
|
Period
|
(a)
Total number
of shares
purchased (1)
|
(b)
Average
price paid
per share
|
(c)
Total number of
shares purchased
as part of
publicly
announced plans
|
(d)
Maximum
number of shares
that may yet be
purchased under
the plans (in millions of dollars) (2)
|
||||||||
|
July 1, 2017 - July 31, 2017
|
—
|
|
$
|
—
|
|
—
|
|
250
|
|
|||
|
August 1, 2017 - August 31, 2017
|
22,451
|
|
40.63
|
|
—
|
|
250
|
|
||||
|
September 1, 2017 - September 30, 2017
|
28,967
|
|
40.95
|
|
—
|
|
250
|
|
||||
|
Total
|
51,418
|
|
$
|
40.81
|
|
—
|
|
—
|
|
|||
|
(1)
|
Shares surrendered for payment of employee payroll taxes due on shares issued under stockholder-approved stock-based compensation plans.
|
|
(2)
|
On June 21, 2017, the Company’s Board of Directors authorized the repurchase of up to $250 million of the Company’s
|
issued and outstanding common stock. Repurchases may be made from time to time in the open market, pursuant to preset trading plans, in private transactions or otherwise. The authorization does not have a stated expiration date.
See Exhibit Index immediately preceding the signature page hereto, which is incorporated herein by reference.
35
EXHIBIT INDEX
|
Exhibit
Number
|
Description
|
|
|
|
||
|
|
||
|
|
||
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
36
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.
|
|
|
(Registrant)
|
||
|
Date:
|
November 7, 2017
|
/s/ Irwin D. Simon
|
|
|
Irwin D. Simon,
Chairman, President and Chief
Executive Officer
|
|
|
Date:
|
November 7, 2017
|
/s/ James Langrock
|
|
|
James Langrock,
Executive Vice President and
Chief Financial Officer
|
|
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TABLE OF CONTENTS
Part I - Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6. Exhibits