UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________ 

FORM 10-Q

___________________________________________ 

(Mark One)

___________________________________________ 

THE HAIN CELESTIAL GROUP, INC.

___________________________________________ 

___________________________________________ 

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.     

THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    BUSINESS

2.    BASIS OF PRESENTATION

The Company’s condensedunaudited 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 accounting principles generally accepted in the United States (“U.S. GAAP”).GAAP. The amounts as of and for the periods ended June 30, 20152017 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 and nine months ended March 31, 2016September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2016.2018. Please refer to the notesNotes to the consolidated financial statementsConsolidated Financial Statements as of June 30, 20152017 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 condensedunaudited consolidated financial statements, notes and tables have been rounded to the nearest thousand, except sharepar values and per share amounts, unless otherwise indicated.

Newly Adopted Accounting Pronouncements

3.    EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

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.

Restricted stock awards totaling 195,244 were excluded from our diluted earnings per share calculations for the three and nine months ended March 31, 2016 as such awards were antidilutive. There were 107,460573 and 277 stock-based awards excluded from our diluted earnings per share calculations for the three and nine months ended March 31, 2015September 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.

4.    ACQUISITIONS

The Company accounts for acquisitions in accordance with Accounting Standards Codification “BusinessASC 805, Business Combinations.” The results of operations of the acquisitions typically 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 specificcompany-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.

The costs related to all acquisitions have been expensed as incurred and are included in “Acquisition related expenses, restructuring and integration charges, net”charges” in the Condensed Consolidated Statements of Income. Acquisition-related expensescosts of $720$114 and $3,681$253 were expensed in the three and nine months ended March 31,September 30, 2017 and September 30, 2016, and $2,184 and $3,672 were expensed in the three and nine months ended March 31, 2015, respectively. The expenses incurred during the first nine months of fiscal 2016 primarily related to the acquisitions of Orchard Houseprofessional fees and Mona (as defined below). The expenses incurred during the first nine months of fiscal 2015 primarily relate to the acquisition of the remaining interest in Hain Pure Protein Corporation (“HPPC”).other transaction-related costs associated with our recent acquisitions.

Fiscal 20162017

On December 21, 2015,April 28, 2017, the Company acquired Orchard House FoodsThe Yorkshire Provender Limited (“Orchard House”Yorkshire Provender”), a leaderproducer of premium branded soups based in prepared fruit, juices, fruit desserts and ingredients with facilities in Corby and GatesheadNorth Yorkshire in the United Kingdom. Orchard HouseYorkshire Provender supplies leading retailers, on-the-go food

outlets and food service providers and manufacturers in the United Kingdom. Consideration infor the transaction consisted of cash, (netnet of cash acquired)acquired, totaling £76,923£12,465 (approximately $114,113$16,110 at the transaction date exchange rate). The acquisition was funded with borrowings under the Credit Agreement (as defined below). Additionally, contingent consideration of £3,000 may beup to a maximum of £1,500 is payable to the sellers based on the outcomeachievement of a review byspecified operating results at the Competition and Markets Authority inend of the United Kingdom. Orchard Housethree-year period following the closing date. Yorkshire Provender is included in theour United Kingdom operating and reportable segment. Net sales and income before income taxes attributable to the Orchard House acquisition andYorkshire Provender included in our consolidated results were not material in the three and nine months ended March 31, 2016.

5.    INVENTORIES

Inventories consisted of the following:

The following table shows the changes in the carrying amount of goodwill by reportable segment for the nine months ended March 31, 2016 were as follows:business segment:

(a) The total carrying value of goodwill for all periods in the table above is reflected net of $42,029$126,577 of accumulated impairment charges, recorded during fiscal 2009of which relate$97,358 related to the Company’s United Kingdom operating segment and $29,219 related to the Company’s Europe operating segments.segment.

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. During fiscal 2015,

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.

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 non-cash partial“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 $5,510 related to a$14,079 ($7,579 in the United Kingdom indefinite-lived intangible asset (the Company’s New Covent Garden Soup Co.^® tradename).segment and $6,500 in the United States segment) was recognized

Amounts assigned to indefinite-lifeAmortizable intangible assets, primarily represent the values of trademarks and tradenames. At March 31, 2016, included in trademarks and other intangible assets on the balance sheetwhich are $226,824 of intangible assets deemed to have a finite life, which are primarily related toconsist of customer relationships and are being amortized over their estimated useful lives of 3 to 25 years. The following table reflects the components of trademarks and other intangible assets:

8.    DEBT AND BORROWINGS

Debt and borrowings consisted of the following:

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, whichand 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 March 31, 2016,September 30, 2017, there were $723,326$739,678 of borrowings and $6,180 letters of credit outstanding under the Credit Agreement and $276,674$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.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 March 31, 2016September 30, 2017 was 1.92%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.

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 monthsix-month terms and bear interest at variable rates typically based on LIBOR plus a margin (weighted average interest rate of approximately 2.8%2.72% at March 31, 2016)September 30, 2017).

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 at Mona and include only long-term arrangements. Mona entered into long-term borrowings which were used to finance capital expenditures.permitted under the cash pool arrangement are €12,500. Outstanding borrowings are collateralized by the assets of Mona and have terms ranging from 12 months to 8 years.  Such borrowings bear interest at variable rates typically based on EURIBOR plus a margin of 1.10% (weighted average interest rate of approximately 2.5%1.10% at March 31, 2016)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 periodperiod-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 from continuing operations was 30.5%29.9% and 35.2%8.3% for the three months ended March 31,September 30, 2017 and 2016, and 2015, respectively, and 29.5% and 31.9% for the nine months ended March 31, 2016 and 2015, respectively. The effective tax rate for the ninethree months ended March 31,September 30, 2017 and September 30, 2016 was favorably impacted byfavorable as compared to the statutory rate as a result of the geographical mix of earnings andearnings. 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 secondfirst quarter of fiscal 2016.2017. Such reduction resulted in a decrease to the carrying value of net deferred tax liabilities of $4,436$2,086, which favorably impacted the effective tax rate partially offset by an unfavorable settlement of a tax claim of $1,151 in the United Kingdom relating to a prior acquisition. The effective tax rate for the nine months ended March 31, 2015 was favorably impacted by the non-taxable gain recorded on the pre-existing ownership interests in HPPC and Empire of $8,256.

10.     ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the changes in accumulated other comprehensive income (loss):

11.    STOCK BASEDSTOCK-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 Condensed Consolidated Statements of Income for stock based compensation plans were as follows:

Stock Options

A summary of the stock option activity for the ninethree months ended March 31, 2016September 30, 2017 is as follows:

At March 31, 2016September 30, 2017, there was no unrecognized compensation expense related to stock option awards.

Restricted Stock

A summary of the restricted stock and restricted share unitsunit activity for the ninethree months ended March 31, 2016September 30, 2017 is as follows:

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 800,000800 shares of restricted stock (the “Shares”), the vesting of which is both market and time-based. The market condition is satisfied in increments of 200,000200 Shares upon the Company’s common stock achieving four share price targets. On the last day of any forty-five (45) 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 200,000200 Shares will be satisfied. The market conditions mustwere required to be satisfied prior to June 30, 2017. Once each market condition has been satisfied, a tranche of 200,000200 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 200,000200 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 March 31, 2016, $19,625September 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, iswas 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”). As of March 31, 2016, theThe LTI Plan consistedcurrently consists of a two-year performance-based long-term incentive plan (the “2015-2016 LTIP”) and a three-yeartwo performance-based long-term incentive planplans (the “2016-2018 LTIP” and the “2017-2019 LTIP”) that provide for a combination ofperformance equity grants and performance awards that can be earned over the respective three-year performance period. Participants in the LTI PlansPlan include the Company’s executive officers, including the Chief Executive Officer, and certain other key executives.