UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-Q
___________________________________________
(Mark One)
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ý | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2016September 30, 2017
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¨ | Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 |
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 | | 22-3240619 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1111 Marcus Avenue Lake Success, New York | | 11042 |
(Address of principal executive offices) | | (Zip Code) |
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, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “large accelerated filer”“smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ý | | Accelerated filer | ¨ | | |
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Non-accelerated filer (Do not check if a smaller reporting company) | ¨ | | Smaller reporting company | ¨ | Emerging growth company | ¨ |
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 May 2, 2016October 30, 2017, there were 103,448,185103,791,688 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 | Page |
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
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. | | |
Item 1A. | |
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Item 2. | | |
Item 6. | | |
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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.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2016 AND JUNE 30, 2015
(In thousands, except share amounts)
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| | | | | | | |
| March 31, | | June 30, |
| 2016 | | 2015 |
ASSETS | (Unaudited) | | (Note) |
Current assets: | | | |
Cash and cash equivalents | $ | 125,390 |
| | $ | 166,922 |
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Accounts receivable, less allowance for doubtful accounts of $1,049 and $896 | 360,964 |
| | 320,197 |
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Inventories | 394,958 |
| | 382,211 |
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Deferred income taxes | 21,421 |
| | 20,758 |
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Prepaid expenses and other current assets | 43,469 |
| | 42,931 |
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Total current assets | 946,202 |
| | 933,019 |
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Property, plant and equipment, net | 392,719 |
| | 344,262 |
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Goodwill | 1,195,305 |
| | 1,136,079 |
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Trademarks and other intangible assets, net | 643,940 |
| | 647,754 |
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Investments and joint ventures | 20,034 |
| | 2,305 |
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Other assets | 32,966 |
| | 33,851 |
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Total assets | $ | 3,231,166 |
| | $ | 3,097,270 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 233,642 |
| | $ | 251,999 |
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Accrued expenses and other current liabilities | 93,050 |
| | 79,167 |
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Current portion of long-term debt | 37,806 |
| | 31,275 |
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Total current liabilities | 364,498 |
| | 362,441 |
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Long-term debt, less current portion | 879,627 |
| | 812,608 |
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Deferred income taxes | 142,188 |
| | 145,297 |
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Other noncurrent liabilities | 5,986 |
| | 5,237 |
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Total liabilities | 1,392,299 |
| | 1,325,583 |
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Stockholders’ equity: | | | |
Preferred stock - $.01 par value, authorized 5,000,000 shares, no shares issued | — |
| | — |
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Common stock - $.01 par value, authorized 150,000,000 shares, issued 107,457,576 and 105,840,586 shares | 1,075 |
| | 1,058 |
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Additional paid-in capital | 1,120,777 |
| | 1,073,671 |
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Retained earnings | 934,748 |
| | 797,514 |
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Accumulated other comprehensive loss | (129,062 | ) | | (42,406 | ) |
| 1,927,538 |
| | 1,829,837 |
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Less: 4,009,837 and 3,229,342 shares of treasury stock, at cost | (88,671 | ) | | (58,150 | ) |
Total stockholders’ equity | 1,838,867 |
| | 1,771,687 |
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Total liabilities and stockholders’ equity | $ | 3,231,166 |
| | $ | 3,097,270 |
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Note: The balance sheet at June 30, 2015 has been derived from the audited financial statements at that date. See notes to condensed consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)BALANCE SHEETS
FOR THE THREESEPTEMBER 30, 2017 AND NINE MONTHS ENDED MARCH 31, 2016 AND 2015JUNE 30, 2017
(In thousands, except per share amounts)
par values)
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| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net sales | $ | 749,862 |
| | $ | 662,739 |
| | $ | 2,189,639 |
| | $ | 1,990,379 |
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Cost of sales | 576,653 |
| | 504,990 |
| | 1,686,820 |
| | 1,539,459 |
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Gross profit | 173,209 |
| | 157,749 |
| | 502,819 |
| | 450,920 |
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Selling, general and administrative expenses | 93,915 |
| | 83,068 |
| | 262,776 |
| | 262,613 |
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Amortization/impairment of acquired intangibles | 4,586 |
| | 10,189 |
| | 13,994 |
| | 19,001 |
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Acquisition related expenses, restructuring and integration charges, and other | 5,701 |
| | 4,298 |
| | 11,852 |
| | 6,273 |
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Operating income | 69,007 |
| | 60,194 |
| | 214,197 |
| | 163,033 |
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Interest and other expenses, net | 7,298 |
| | 8,640 |
| | 28,531 |
| | 21,380 |
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Gain on fire insurance recovery | (9,013 | ) | | — |
| | (9,013 | ) | | — |
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Income before income taxes and equity in earnings of equity-method investees | 70,722 |
| | 51,554 |
| | 194,679 |
| | 141,653 |
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Provision for income taxes | 21,576 |
| | 18,147 |
| | 57,337 |
| | 45,144 |
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Equity in net loss (income) of equity-method investees | 161 |
| | 13 |
| | 108 |
| | (315 | ) |
Net income | $ | 48,985 |
| | $ | 33,394 |
| | $ | 137,234 |
| | $ | 96,824 |
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Net income per common share: | | | | | | | |
Basic | $ | 0.47 |
| | $ | 0.33 |
| | $ | 1.33 |
| | $ | 0.95 |
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Diluted | $ | 0.47 |
| | $ | 0.32 |
| | $ | 1.32 |
| | $ | 0.94 |
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Weighted average common shares outstanding: | | | | | | | |
Basic | 103,265 |
| | 102,252 |
| | 103,030 |
| | 101,401 |
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Diluted | 104,087 |
| | 103,796 |
| | 104,168 |
| | 103,226 |
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| September 30, | | June 30, |
| 2017 | | 2017 |
ASSETS | (Unaudited) | | |
Current assets: | | | |
Cash and cash equivalents | $ | 126,787 |
| | $ | 146,992 |
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Accounts receivable, less allowance for doubtful accounts of $736 and $1,447, respectively | 272,341 |
| | 248,436 |
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Inventories | 484,792 |
| | 427,308 |
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Prepaid expenses and other current assets | 60,976 |
| | 52,045 |
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Total current assets | 944,896 |
| | 874,781 |
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Property, plant and equipment, net | 380,478 |
| | 370,511 |
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Goodwill | 1,073,681 |
| | 1,059,981 |
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Trademarks and other intangible assets, net | 578,419 |
| | 573,268 |
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Investments and joint ventures | 19,109 |
| | 18,998 |
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Other assets | 35,264 |
| | 33,565 |
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Total assets | $ | 3,031,847 |
| | $ | 2,931,104 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 247,321 |
| | $ | 222,136 |
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Accrued expenses and other current liabilities | 111,746 |
| | 108,514 |
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Current portion of long-term debt | 18,231 |
| | 9,844 |
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Total current liabilities | 377,298 |
| | 340,494 |
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Long-term debt, less current portion | 746,392 |
| | 740,304 |
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Deferred income taxes | 124,166 |
| | 121,475 |
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Other noncurrent liabilities | 16,460 |
| | 15,999 |
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Total liabilities | 1,264,316 |
| | 1,218,272 |
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Commitments and contingencies (Note 14)
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Stockholders’ equity: | | | |
Preferred stock - $.01 par value, authorized 5,000 shares; issued and outstanding: none | — |
| | — |
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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 | 1,081 |
| | 1,080 |
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Additional paid-in capital | 1,140,887 |
| | 1,137,724 |
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Retained earnings | 888,668 |
| | 868,822 |
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Accumulated other comprehensive loss | (161,692 | ) | | (195,479 | ) |
| 1,868,944 |
| | 1,812,147 |
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Less: Treasury stock, at cost, 4,339 and 4,287 shares, respectively | (101,413 | ) | | (99,315 | ) |
Total stockholders’ equity | 1,767,531 |
| | 1,712,832 |
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Total liabilities and stockholders’ equity | $ | 3,031,847 |
| | $ | 2,931,104 |
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See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2017 AND 2016 AND 2015
(In thousands)
thousands, except per share amounts)
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| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 31, 2016 | | March 31, 2015 |
| Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax (expense) benefit | | After-tax amount |
Net income | | | | | $ | 48,985 |
| | | | | | $ | 33,394 |
|
| | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | (20,296 | ) | | $ | — |
| | (20,296 | ) | | $ | (59,603 | ) | | $ | 2,485 |
| | (57,118 | ) |
Change in deferred gains (losses) on cash flow hedging instruments | (1,610 | ) | | 401 |
| | (1,209 | ) | | 382 |
| | (130 | ) | | 252 |
|
Change in unrealized gain on available for sale investment | 33 |
| | (13 | ) | | 20 |
| | (175 | ) | | 54 |
| | (121 | ) |
Total other comprehensive income (loss) | $ | (21,873 | ) | | $ | 388 |
| | $ | (21,485 | ) | | $ | (59,396 | ) | | $ | 2,409 |
| | $ | (56,987 | ) |
| | | | | | | | | | | |
Total comprehensive income (loss) | | | | | $ | 27,500 |
| | | | | | $ | (23,593 | ) |
| | | | | | | | | | | |
| Nine Months Ended |
| March 31, 2016 | | March 31, 2015 |
| Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax (expense) benefit | | After-tax amount |
Net income | | | | | $ | 137,234 |
| | | | | | $ | 96,824 |
|
| | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | (86,380 | ) | | $ | — |
| | (86,380 | ) | | $ | (172,301 | ) | | $ | 5,214 |
| | (167,087 | ) |
Change in deferred gains (losses) on cash flow hedging instruments | (288 | ) | | 124 |
| | (164 | ) | | 2,687 |
| | (656 | ) | | 2,031 |
|
Change in unrealized gain on available for sale investment | (183 | ) | | 71 |
| | (112 | ) | | (1,518 | ) | | 509 |
| | (1,009 | ) |
Total other comprehensive income (loss) | $ | (86,851 | ) | | $ | 195 |
| | $ | (86,656 | ) | | $ | (171,132 | ) | | $ | 5,067 |
| | $ | (166,065 | ) |
| | | | | | | | | | | |
Total comprehensive income (loss) | | | | | $ | 50,578 |
| | | | | | $ | (69,241 | ) |
| | | | | | | | | | | |
|
| | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
Net sales | $ | 708,276 |
| | $ | 681,464 |
|
Cost of sales | 576,673 |
| | 571,597 |
|
Gross profit | 131,603 |
| | 109,867 |
|
Selling, general and administrative expenses | 90,721 |
| | 84,967 |
|
Amortization of acquired intangibles | 4,911 |
| | 4,728 |
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Acquisition related expenses, restructuring and integration charges | 5,846 |
| | 461 |
|
Accounting review costs, net of insurance proceeds | (1,358 | ) | | 5,960 |
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Operating income | 31,483 |
| | 13,751 |
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Interest and other financing expense, net | 6,315 |
| | 5,081 |
|
Other (income)/expense, net | (3,137 | ) | | (512 | ) |
Income before income taxes and equity in net income of equity-method investees | 28,305 |
| | 9,182 |
|
Provision for income taxes | 8,470 |
| | 762 |
|
Equity in net income of equity-method investees | (11 | ) | | (184 | ) |
Net income | $ | 19,846 |
| | $ | 8,604 |
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Net income per common share: | | | |
Basic | $ | 0.19 |
| | $ | 0.08 |
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Diluted | $ | 0.19 |
| | $ | 0.08 |
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Shares used in the calculation of net income per common share: | | | |
Basic | 103,709 |
| | 103,468 |
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Diluted | 104,476 |
| | 104,206 |
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See notes to condensed consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITYCOMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE NINETHREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2017 AND 2016
(In thousands, except per share and share amounts)thousands)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional | | | | | | | | Accumulated Other | | |
| | | Amount | | Paid-in | | Retained | | Treasury Stock | | Comprehensive | | |
| Shares | | at $.01 | | Capital | | Earnings | | Shares | | Amount | | Income (Loss) | | Total |
Balance at June 30, 2015 | 105,840,586 |
| | $ | 1,058 |
| | $ | 1,073,671 |
| | $ | 797,514 |
| | 3,229,342 |
| | $ | (58,150 | ) | | $ | (42,406 | ) | | $ | 1,771,687 |
|
Net income |
| |
| |
| | 137,234 |
| |
| |
| |
| | 137,234 |
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Other comprehensive income |
| |
| |
| |
| |
| |
| | (86,656 | ) | | (86,656 | ) |
Issuance of common stock pursuant to stock based compensation plans | 1,376,783 |
| | 14 |
| | 9,749 |
| |
| | 150,362 |
| | (5,363 | ) | |
| | 4,400 |
|
Issuance of common stock in connection with acquisitions | 240,207 |
| | 3 |
| | 16,305 |
| |
| |
| |
| |
| | 16,308 |
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Stock based compensation income tax effects |
| |
| | 11,047 |
| |
| |
| |
| |
| | 11,047 |
|
Shares withheld for payment of employee payroll taxes due on shares issued under stock based compensation plans |
| |
| |
| |
| | 630,133 |
| | (25,158 | ) | |
| | (25,158 | ) |
Stock based compensation charge |
| |
| | 10,005 |
| |
| |
| |
| |
| | 10,005 |
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Balance at March 31, 2016 | 107,457,576 |
| | $ | 1,075 |
| | $ | 1,120,777 |
| | $ | 934,748 |
| | 4,009,837 |
| | $ | (88,671 | ) | | $ | (129,062 | ) | | $ | 1,838,867 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 30, 2017 | | September 30, 2016 |
| Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax benefit | | After-tax amount |
Net income | | | | | $ | 19,846 |
| | | | | | $ | 8,604 |
|
| | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | 33,861 |
| | $ | — |
| | 33,861 |
| | $ | (31,736 | ) | | $ | — |
| | (31,736 | ) |
Change in deferred gains (losses) on cash flow hedging instruments | (82 | ) | | 15 |
| | (67 | ) | | (430 | ) | | 35 |
| | (395 | ) |
Change in unrealized gain (loss) on available for sale investment | (10 | ) | | 3 |
| | (7 | ) | | (57 | ) | | 17 |
| | (40 | ) |
Total other comprehensive income (loss) | $ | 33,769 |
| | $ | 18 |
| | $ | 33,787 |
| | $ | (32,223 | ) | | $ | 52 |
| | $ | (32,171 | ) |
| | | | | | | | | | | |
Total comprehensive income (loss) | | | | | $ | 53,633 |
| | | | | | $ | (23,567 | ) |
See notes to condensed consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWSSTOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINETHREE MONTHS ENDED MARCH 31, 2016 AND 2015SEPTEMBER 30, 2017
(In thousands)thousands, except par values)
|
| | | | | | | |
| Nine Months Ended March 31, |
| 2016 | | 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income | $ | 137,234 |
| | $ | 96,824 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 47,494 |
| | 43,064 |
|
Deferred income taxes | (9,377 | ) | | (5,789 | ) |
Equity in net income of equity-method investees | 108 |
| | (315 | ) |
Stock based compensation | 10,005 |
| | 8,934 |
|
Tax (deficiency) benefit from stock based compensation | (261 | ) | | 341 |
|
Contingent consideration expense | 1,511 |
| | 280 |
|
Gain on fire insurance recovery and other, net | (8,401 | ) | | — |
|
Gain on pre-existing ownership interest in Hain Pure Protein Corporation | — |
| | (8,256 | ) |
Non-cash intangible asset impairment charge | — |
| | 5,510 |
|
Other non-cash items including unrealized currency (gains)/losses, net | 7,403 |
| | 4,652 |
|
Increase (decrease) in cash attributable to changes in operating assets and liabilities, net of amounts applicable to acquisitions: | | | |
Accounts receivable | (29,201 | ) | | (59,583 | ) |
Inventories | (11,397 | ) | | (15,106 | ) |
Other current assets | (650 | ) | | 4,050 |
|
Other assets and liabilities | 1,111 |
| | (8,708 | ) |
Accounts payable and accrued expenses | (13,725 | ) | | 4,271 |
|
Net cash provided by operating activities | 131,854 |
| | 70,169 |
|
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Acquisitions of businesses, net of cash acquired and working capital settlements | (157,864 | ) | | (104,419 | ) |
Purchases of property and equipment | (58,022 | ) | | (36,312 | ) |
Proceeds from sale of investment | — |
| | 1,488 |
|
Proceeds from disposals of property and equipment | — |
| | 1,703 |
|
Net cash used in investing activities | (215,886 | ) | | (137,540 | ) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Proceeds from exercises of stock options | — |
| | 18,643 |
|
Borrowings under bank revolving credit facility, net | 63,852 |
| | 82,000 |
|
Repayments of other debt, net | (2,378 | ) | | (50,090 | ) |
Excess tax benefits from stock based compensation | 11,308 |
| | 25,692 |
|
Acquisition related contingent consideration | — |
| | (3,217 | ) |
Shares withheld for payment of employee payroll taxes | (25,158 | ) | | (17,979 | ) |
Net cash provided by financing activities | 47,624 |
| | 55,049 |
|
| | | |
Effect of exchange rate changes on cash | (5,124 | ) | | (11,104 | ) |
| | | |
Net decrease in cash and cash equivalents | (41,532 | ) | | (23,426 | ) |
Cash and cash equivalents at beginning of period | 166,922 |
| | 123,751 |
|
Cash and cash equivalents at end of period | $ | 125,390 |
| | $ | 100,325 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional | | | | | | | | Accumulated Other | | |
| | | Amount | | Paid-in | | Retained | | Treasury Stock | | Comprehensive | | |
| Shares | | at $.01 | | Capital | | Earnings | | Shares | | Amount | | Income (Loss) | | Total |
Balance at June 30, 2017 | 107,989 |
| | $ | 1,080 |
| | $ | 1,137,724 |
| | $ | 868,822 |
| | 4,287 |
| | $ | (99,315 | ) | | $ | (195,479 | ) | | $ | 1,712,832 |
|
Net income |
| |
| |
| | 19,846 |
| |
| |
| |
| | 19,846 |
|
Other comprehensive income (loss) |
| |
| |
| |
| |
| |
| | 33,787 |
| | 33,787 |
|
Issuance of common stock pursuant to stock based compensation plans | 98 |
| | 1 |
| | (1 | ) | |
| |
| |
| |
| | — |
|
Shares withheld for payment of employee payroll taxes due on shares issued under stock based compensation plans |
| |
| |
| |
| | 52 |
| | (2,098 | ) | |
| | (2,098 | ) |
Stock-based compensation expense |
| |
| | 3,164 |
| |
| |
| |
| |
| | 3,164 |
|
Balance at September 30, 2017 | 108,087 |
| | $ | 1,081 |
| | $ | 1,140,887 |
| | $ | 888,668 |
| | 4,339 |
| | $ | (101,413 | ) | | $ | (161,692 | ) | | $ | 1,767,531 |
|
See notes to condensed consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(In thousands)
|
| | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income | $ | 19,846 |
| | $ | 8,604 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 17,626 |
| | 17,220 |
|
Deferred income taxes | (637 | ) | | (4,021 | ) |
Equity in net income of equity-method investees | (11 | ) | | (184 | ) |
Stock based compensation | 3,164 |
| | 2,704 |
|
Other non-cash items, net | (2,871 | ) | | (1,035 | ) |
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 | ) |
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.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except par values and per share data)
1. BUSINESS
The Hain Celestial Group, Inc., a Delaware corporation and(collectively along with its subsidiaries, (collectively, the “Company”“Company,” and herein referred to as “Hain Celestial,” “we,” “us” and “our”) manufacture,, 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 LifeTM 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 distribute and selle-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 whichthat are sold as “better-for-you” products, providing consumers with the opportunity to lead A Healthier Way of LifeTM. The CompanyHain Celestial is a leader in many organic and natural products categories, with many recognized brands in the various market categories they serve. The brand names includeit serves, including Almond Dream®, Arrowhead Mills®, Bearitos®, Better BeanTM, 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 UniqueFiberTM, Hain Pure Foods®, Hartley’s®, Health Valley®, Imagine®, Johnson’s Juice Co.®, Joya®, Kosher Valley®, Lima®, Linda McCartneyMcCartney’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®, Spectrum Essentials Organics®, Soy Dream®, Sun-Pat®, SunSpire®, Terra®, The Greek Gods®, Tilda®, Walnut Acres®, WestSoy®, Yorkshire ProvenderTM and Yves Veggie Cuisine®. OurThe Company’s personal care products are marketed under the Alba Botanica®, Avalon Organics®, Earth’s Best®, JASON®, Live Clean® and Queen Helene® brands.
TheChanges in Segments
Effective July 1, 2017, due to changes to the Company’s internal management and reporting structure, the United Kingdom operations are managed in five operating segments: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 Hain Pure Protein, Canada and Europe. Refer toreportable segment. See Note 15,SegmentInformation, for additional information on the Company’s operating and selected financial information for the reportable segments.
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
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU No. 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU No. 2015-16 is effective for annual reporting periods beginning after December 15, 2015 and for interim periods within such annual period. Early application is permitted for any interim and annual financial statements that have not yet been made available for issuance. The Company has elected to early adopt the provisions of ASU No. 2015-16 at the beginning of fiscal 2016. The adoption of the new guidance did not materially impact the Company’s consolidated financial position or results of operations.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU No. 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The recognition and measurement guidance for debt issuance costs are not affected by the amendments. ASU No. 2015-03 must be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU No. 2015-15 states that for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting such costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company has elected to early adopt the provisions of ASU Nos. 2015-03 and 2015-15 at the beginning of fiscal 2016. The adoption of the new guidance did not materially impact the Company’s consolidated financial position or results of operations.
Recently Issued Accounting Pronouncements Not Yet Effective
In March 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718):Improvements to EmployeeShare-Based Payment AccountingAccounting., which simplifies several aspects This ASU, among other things, changes the treatment of share-based payment transactions by recognizing the accounting for share-based payments, including immediate recognitionimpact of all excess tax benefits andor deficiencies related to exercised or vested awards in income tax expense in the income statement, changing the threshold to qualify for equity classification up to the employees’ maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the numberperiod of awards that are expected to vestexercise or account for forfeitures as they occur, and clarifying the classification on the statementvesting, instead of cash flows for the excess tax benefit and employee taxesadditional paid when an employer withholds shares for tax-withholding purposes.in capital. The standard will be effective for the first interim period within annual periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-09.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementationupdated guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASU’s apply to all companies that enter into contracts with customers to transfer goods or services. These ASU’s are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. Entities have the choice to apply these ASU’s 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 transition method that will be elected and the potential effects of adopting the provisions of these standards.
In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU 2016-07 eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The equity method investor is required to add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. ASU 2016-07 is effective for annual reporting periodsfiscal years beginning after December 15, 2016 and interim periods within those annual periods. The Company is currently evaluatingadopted this new guidance effective July 1, 2017. As a result of this adoption:
As required, we prospectively recognized discrete tax benefits and deficiencies of $599 in the potential effectsincome tax line item of adoptingour consolidated income statement for the provisionsthree 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 ASU No. 2016-07.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 No. 2016-02.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The pronouncement also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-01.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes(Topic 740): Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 requires that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company intends to adopt this new guidance in the fourth quarter of fiscal 2016. The adoption of this guidance will impact the balance sheet classification of such assets and liabilities.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU No. 2015-11 requires inventory measured using any method other than last-in, first out or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. ASU No. 2015-11 is effective for annual reporting periods beginning after December 15, 2016 and for interim periods within such annual period. Early application is permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2015-11.
In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.
ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. ASU No. 2014-12 is effective for annual periods beginning after December 15, 2015 and for interim periods within such annual period, with early adoption permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2014-12.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under ASU No. 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 No. 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.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Numerator: | | | | | | | |
Net income | $ | 48,985 |
| | $ | 33,394 |
| | $ | 137,234 |
| | $ | 96,824 |
|
| | | | | | | |
Denominator for basic earnings per share - weighted average shares outstanding during the period (in thousands) | 103,265 |
| | 102,252 |
| | 103,030 |
| | 101,401 |
|
Effect of dilutive stock options, unvested restricted stock and unvested restricted share units (in thousands) | 822 |
| | 1,544 |
| | 1,138 |
| | 1,825 |
|
Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions (in thousands) | 104,087 |
| | 103,796 |
| | 104,168 |
| | 103,226 |
|
| | | | | | | |
Basic earnings per share | $ | 0.47 |
| | $ | 0.33 |
| | $ | 1.33 |
| | $ | 0.95 |
|
Diluted earnings per share | $ | 0.47 |
| | $ | 0.32 |
| | $ | 1.32 |
| | $ | 0.94 |
|
Note: The sum of our quarterly net income per share amounts may not equal the year-to-date amounts,as presented, due to rounding. |
| | | | | | | |
| 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.
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.
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 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 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 BeanTM 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 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.
On July 24, 2015, the Company acquired Formatio Beratungs- und Beteiligungs GmbH and its subsidiaries (“Mona”), a leader in plant-based foods and beverages with facilities in Germany and Austria. Mona offers a wide rangerepresented less than 1% of organic and natural products under the Joya® and Happy® brands, including soy, oat, rice and nut based drinks as well as plant-based yogurts, desserts, creamers, tofu and private label products, sold to leading retailers in Europe, primarily in Austria and Germany and eastern European countries. Consideration in the transaction consisted of cash totaling €23,012 (approximately $25,233 at the transaction date exchange rate) and 240,207 shares of the Company’s common stock valued at $16,308. Also included in the acquisition was the assumption of net debt totaling €16,252. The cash portion of the purchase price was funded with borrowings under our Credit Agreement. Mona is included in the Europe operating segment. Net sales and income before income taxes attributable to the Mona acquisition and included in our consolidated results were not material in the three and nine months ended March 31, 2016.results.
The following table summarizes the components of the preliminary purchase price allocations for the fiscal 2016 acquisitions:
|
| | | | | | | | | | | |
| Mona | | Orchard House | | Total |
Purchase Price: | | | | | |
Cash paid | $ | 25,233 |
| | $ | 114,113 |
| | $ | 139,346 |
|
Equity issued | 16,308 |
| | — |
| | 16,308 |
|
Fair value of contingent consideration | — |
| | 2,225 |
| | 2,225 |
|
Total investment: | $ | 41,541 |
| | $ | 116,338 |
| | $ | 157,879 |
|
Allocation: | | | | | |
Current assets | $ | 17,811 |
| | $ | 18,960 |
| | $ | 36,771 |
|
Property, plant and equipment | 16,391 |
| | 17,707 |
| | 34,098 |
|
Other long term assets | 226 |
| | — |
| | 226 |
|
Identifiable intangible assets | 14,803 |
| | 24,032 |
| | 38,835 |
|
Deferred taxes | (1,100 | ) | | (4,326 | ) | | (5,426 | ) |
Assumed liabilities | (27,303 | ) | | (19,070 | ) | | (46,373 | ) |
Goodwill | 20,713 |
| | 79,035 |
| | 99,748 |
|
| $ | 41,541 |
| | $ | 116,338 |
| | $ | 157,879 |
|
The purchase price allocations are based upon preliminary valuations, and the Company’s estimates and assumptions are subject to change within the measurement period as valuations are finalized. Any change in the estimated fair value of the net assets, prior to the finalization of the more detailed analyses, but not to exceed one year from the dates of acquisition, will change the amount of the purchase price allocation.
The preliminary fair values assigned to identifiable intangible assets acquired were based on assumptions and estimates made by management. Identifiable intangible assets acquired consisted of customer relationships valued at $27,870 with an estimated
useful life of 12 years and trade names valued at $10,965 with indefinite lives. The goodwill represents the future economic benefits expected to arise that could not be individually identified and separately recognized, including use of the Company’s existing infrastructure to expand sales of the acquired business’ products and to expand sales of the Company’s existing products into new regions. The goodwill recorded as a result of these acquisitions is not expected to be deductible for tax purposes.
The following table provides unaudited pro forma results of continuing operations for the three and nine months ended March 31, 2016 and March 31, 2015, as if the acquisitions of Orchard House and Mona had been completed at the beginning of fiscal 2015. The information has been provided for illustrative purposes only, and does not purport to be indicative of the actual results that would have been achieved by the Company for the periods presented or that will be achieved by the combined company in the future. The pro forma information has been adjusted to give effect to items that are directly attributable to the transactions and are expected to have a continuing impact on the combined results.
|
| | | | | | | | | | | | | | | |
| Three Months ended March 31, | | Nine Months ended March 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net sales | $ | 749,862 |
| | $ | 740,463 |
| | $ | 2,278,151 |
| | $ | 2,251,205 |
|
Net income | $ | 48,985 |
| | $ | 36,076 |
| | $ | 140,576 |
| | $ | 106,319 |
|
Net income per diluted common share | $ | 0.47 |
| | $ | 0.35 |
| | $ | 1.35 |
| | $ | 1.03 |
|
Fiscal 2015
On July 17, 2014, the Company acquired the remaining 51.3% of HPPC that it did not already own, at which point HPPC became a wholly-owned subsidiary. HPPC processes, markets and distributes antibiotic-free, organic and other poultry products. HPPC held a 19% interest in EK Holdings, Inc. (“Empire”), which grows, processes and sells kosher poultry and other products under the Empire and Kosher Valley brand names. Consideration in the transaction consisted of cash totaling $20,310 and 462,856 shares of the Company’s common stock valued at $19,690. The cash consideration paid was funded with existing cash balances. Additionally, HPPC’s existing bank borrowings were repaid on September 30, 2014 with proceeds from borrowings under the Credit Agreement. The carrying amount of the pre-existing 48.7% investment in HPPC as of June 30, 2014 was $30,740. Due to the acquisition of the remaining 51.3% of HPPC, the Company adjusted the carrying amount of its pre-existing investment to its fair value. This resulted in a gain of $5,334 recorded in “Interest and other expenses, net” in the Condensed Consolidated Statements of Income.
On February 20, 2015, the Company acquired Belvedere International, Inc., (“Belvedere”) a leader in health and beauty care products including the Live Clean® brand with approximately 200 baby, body and hair care products as well as several mass market brands sold primarily in Canada and manufactured in a company facility in Mississauga, Ontario, Canada. Consideration in the transaction consisted of cash totaling C$17,454 ($13,988 at the transaction date exchange rate), which included debt that was repaid at closing, and was funded with existing cash balances. Additionally, contingent consideration of up to a maximum of C$4,000 is payable based on the achievement of specified operating results during the two consecutive one-year periods following the closing date. At March 31, 2016, the Company has recorded the maximum amount of C$4,000 for the contingent consideration payable. Belvedere is included in our Canada operating segment.
On March 4, 2015, the Company acquired the remaining 81% of Empire that it did not already own, at which point Empire became a wholly-owned subsidiary. Consideration in the transaction consisted of cash totaling $57,595 (net of cash acquired) which included debt that was repaid at closing. The acquisition was funded with borrowings under the Credit Agreement. The carrying amount of the pre-existing 19% investment in Empire as of March 4, 2015 was $6,864. Due to the acquisition of the remaining 81% of Empire, the Company adjusted the carrying amount of its pre-existing investment to its fair value. This resulted in a gain of $2,922 recorded in “Interest and other expenses, net” in the Condensed Consolidated Statements of Income.
The following table summarizes the components of the purchase price allocations for the fiscal 2016 acquisitions:
|
| | | | | | | | | | | | | | | |
| HPPC | | Belvedere | | Empire | | Total |
Carrying value of pre-existing interest, after fair value adjustments: | $ | 36,074 |
| | $ | — |
| | $ | 9,786 |
| | $ | 45,860 |
|
Purchase Price: | | | | | | | |
Cash paid | 20,310 |
| | 13,988 |
| | 57,595 |
| | 91,893 |
|
Equity issued | 19,690 |
| | — |
| | — |
| | 19,690 |
|
Fair value of contingent consideration | — |
| | 1,603 |
| | — |
| | 1,603 |
|
Total investment: | $ | 76,074 |
| | $ | 15,591 |
| | $ | 67,381 |
| | $ | 159,046 |
|
Allocation: | | | | | | | |
Current assets | $ | 52,055 |
| | $ | 10,042 |
| | $ | 19,629 |
| | $ | 81,726 |
|
Property, plant and equipment | 21,864 |
| | 2,598 |
| | 12,334 |
| | 36,796 |
|
Other assets | 7,288 |
| | — |
| | — |
| | 7,288 |
|
Identifiable intangible assets | 20,700 |
| | 5,850 |
| | 34,800 |
| | 61,350 |
|
Deferred taxes | 1,388 |
| | (3,890 | ) | | (14,764 | ) | | (17,266 | ) |
Assumed liabilities | (42,332 | ) | | (1,825 | ) | | (15,987 | ) | | (60,144 | ) |
Goodwill | 15,111 |
| | 2,816 |
| | 31,369 |
| | 49,296 |
|
| $ | 76,074 |
| | $ | 15,591 |
| | $ | 67,381 |
| | $ | 159,046 |
|
The fair values assigned to identifiable intangible assets acquired were based on assumptions and estimates made by management. Identifiable intangible assets acquired consisted of customer relationships valued at $15,903 with an estimated useful life of 11.0 years, a patent valued at $1,700 with an estimated useful life of 9.0 years, and trade names valued at $43,747 with indefinite lives. The goodwill represents the future economic benefits expected to arise that could not be individually identified and separately recognized, including use of the Company’s existing infrastructure to expand sales of the acquired business’ products. The goodwill recorded as a result of these acquisitions is not expected to be deductible for tax purposes.
The following table provides unaudited pro forma results of continuing operations for the three and nine months ended March 31, 2015 as if only the acquisitions completed in fiscal 2015 (HPPC, Belvedere and Empire) had been completed at the beginning of fiscal year 2015. The information has been provided for illustrative purposes only, and does not purport to be indicative of the actual results that would have been achieved by the Company for the periods presented or that will be achieved by the combined company in the future. The pro forma information has been adjusted to give effect to items that are directly attributable to the transactions and are expected to have a continuing impact on the combined results, which include amortization expense associated with acquired identifiable intangible assets and the impact of reversing our previously recorded equity in HPPC’s net income as prior to the date of acquisition, HPPC was accounted for under the equity-method of accounting.
|
| | | | | | | |
| Three Months ended March 31, 2015 | | Nine Months ended March 31, 2015 |
Net sales | $ | 687,992 |
| | $ | 2,082,712 |
|
Net income | $ | 34,483 |
| | $ | 100,105 |
|
Net income per diluted common share | $ | 0.33 |
| | $ | 0.97 |
|
5. INVENTORIES
Inventories consisted of the following:
| | | March 31, 2016 | | June 30, 2015 | September 30, 2017 | | June 30, 2017 |
Finished goods | $ | 206,853 |
| | $ | 240,004 |
| $ | 295,794 |
| | $ | 264,148 |
|
Raw materials, work-in-progress and packaging | 188,105 |
| | 142,207 |
| 188,998 |
| | 163,160 |
|
| $ | 394,958 |
| | $ | 382,211 |
| $ | 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.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
| | | | | | | |
| March 31, 2016 | | June 30, 2015 |
Land | $ | 36,566 |
| | $ | 36,386 |
|
Buildings and improvements | 103,142 |
| | 88,507 |
|
Machinery and equipment | 401,180 |
| | 359,183 |
|
Furniture and fixtures | 13,900 |
| | 10,272 |
|
Leasehold improvements | 20,677 |
| | 19,257 |
|
Construction in progress | 20,027 |
| | 11,444 |
|
| 595,492 |
| | 525,049 |
|
Less: Accumulated depreciation and amortization | 202,773 |
| | 180,787 |
|
| $ | 392,719 |
| | $ | 344,262 |
|
Depreciation expense for the three months ended March 31, 2016 and 2015 was $9,096 and $7,795, respectively. Such expense for the nine months ended March 31, 2016 and 2015 was $27,039 and $24,539, respectively.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
ChangesGoodwill
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:
|
| | | | | | | | | | | | | | | | | | | |
| United States | | United Kingdom | | Hain Pure Protein | | Rest of World | | Total |
Balance as of June 30, 2015 (a) | $ | 607,843 |
| | $ | 420,166 |
| | $ | 45,328 |
| | $ | 62,742 |
| | $ | 1,136,079 |
|
Acquisition activity | — |
| | 79,035 |
| | 1,154 |
| | 20,611 |
| | 100,800 |
|
Translation adjustments | (2,937 | ) | | (37,363 | ) | | — |
| | (1,274 | ) | | (41,574 | ) |
Balance as of March 31, 2016 (a) | $ | 604,906 |
| | $ | 461,838 |
| | $ | 46,482 |
| | $ | 82,079 |
| | $ | 1,195,305 |
|
|
| | | | | | | | | | | | | | | | | | | |
| 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 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.
(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. 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.
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 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
during the fiscal year ended June 30, 2017. There were no other impairment charges recorded during fiscal 2015,2017, and no impairment charges have beenwere recorded during fiscal 2016 to date.the three months ended September 30, 2017.
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:
|
| | | | | | | |
| March 31, 2016 | | June 30, 2015 |
Non-amortized intangible assets: | | | |
Trademarks and tradenames | $ | 496,082 |
| | $ | 507,853 |
|
Amortized intangible assets: | | | |
Other intangibles | 226,824 |
| | 207,609 |
|
Less: accumulated amortization | (78,966 | ) | | (67,708 | ) |
Net carrying amount | $ | 643,940 |
| | $ | 647,754 |
|
Amortization expense included in continuing operations was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months ended March 31, | | Nine Months ended March 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Amortization of intangible assets | $ | 4,586 |
| | $ | 4,303 |
| | $ | 13,994 |
| | $ | 8,813 |
|
Expected amortization expense over the next five fiscal years is as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal Year ended June 30, |
| 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
Estimated amortization expense | $ | 18,279 |
| | $ | 19,193 |
| | $ | 17,511 |
| | $ | 15,698 |
| | $ | 16,090 |
|
The weighted average remaining amortization period of amortized intangible assets is 9.6 years.
|
| | | | | | | |
| Three Months ended September 30, |
| 2017 | | 2016 |
Amortization of intangible assets | $ | 4,911 |
| | $ | 4,728 |
|
8. DEBT AND BORROWINGS
Debt and borrowings consisted of the following:
| | | March 31, 2016 | | June 30, 2015 | September 30, 2017 | | June 30, 2017 |
Senior Notes | $ | 150,000 |
| | $ | 150,000 |
| |
Revolving Credit Agreement borrowings payable to banks | 720,276 |
| | 660,216 |
| |
Credit Agreement borrowings payable to banks | | $ | 739,678 |
| | $ | 733,715 |
|
Tilda short-term borrowing arrangements | 27,979 |
| | 29,600 |
| 16,490 |
| | 7,761 |
|
Other borrowings | 19,178 |
| | 4,067 |
| 8,455 |
| | 8,672 |
|
| 917,433 |
| | 843,883 |
| 764,623 |
| | 750,148 |
|
Short-term borrowings and current portion of long-term debt | 37,806 |
| | 31,275 |
| 18,231 |
| | 9,844 |
|
| $ | 879,627 |
| | $ | 812,608 |
| |
Long-term debt, less current portion | | $ | 746,392 |
| | $ | 740,304 |
|
The Company has $150,000 in aggregate principal amount of 10 year senior notes due May 2, 2016 issued in a private placement. The notes bear interest at 5.98%, payable semi-annually on November 2 and May 2. As of March 31, 2016, $150,000 of the senior notes was outstanding. On May 2, 2016, the Company utilized capacity under its existing revolving credit facility to redeem these notes. Accordingly, the Company has classified these borrowings as long term in the Condensed Consolidated Balance Sheet as of March 31, 2016 since the notes were refinanced on a long-term basis.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, 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 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 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
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.
rate.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present the changes in accumulated other comprehensive income (loss):
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | Three Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Foreign currency translation adjustments: | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications (1) | $ | (20,296 | ) | | $ | (57,118 | ) | | $ | (86,380 | ) | | $ | (167,087 | ) | $ | 33,861 |
| | $ | (31,736 | ) |
Amounts reclassified into income | — |
| | — |
| | — |
| | — |
| |
Deferred gains/(losses) on cash flow hedging instruments: | | | | | | | | |
Other comprehensive income (loss) before reclassifications | 753 |
| | 750 |
| | 4,024 |
| | 5,179 |
| |
Deferred gains/(losses) on cash flow hedging instruments: | | | | |
Other comprehensive income before reclassifications | | 39 |
| | 101 |
|
Amounts reclassified into income (2) | (1,962 | ) | | (498 | ) | | (4,188 | ) | | (3,148 | ) | (106 | ) | | (496 | ) |
Unrealized gain/(loss) on available for sale investment: | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | 20 |
| | (120 | ) | | (112 | ) | | (819 | ) | |
Other comprehensive loss before reclassifications | | (7 | ) | | (50 | ) |
Amounts reclassified into income (3) | — |
| | (1 | ) | | — |
| | (190 | ) | — |
| | 10 |
|
Net change in accumulated other comprehensive income (loss) | $ | (21,485 | ) | | $ | (56,987 | ) | | $ | (86,656 | ) | | $ | (166,065 | ) | $ | 33,787 |
| | $ | (32,171 | ) |
| |
(1) | Foreign currency translation adjustments includeincluded intra-entity foreign currency transactions that arewere of a long-term investment nature and were a gain of $35,592$751 and$21,210 a loss of $7,152 for the three months ended March 31,September 30, 2017and 2016, and 2015,respectively, and $74,508 and $64,316 for the nine months ended March 31, 2016 and 2015, 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 $2,546$132 and $711$620 for the three months ended March 31,September 30, 2017 and 2016, and 2015, respectively and $5,492 and $4,126 for the nine months ended March 31, 2016 and 2015, respectively. |
| |
(3) | Amounts reclassified into income for gainslosses on sale of available for sale investments were based on the average cost of the shares held (See Note 12)12, Investments and Joint Ventures). Such amounts are recorded in “Interest and other expenses,“Other (income)/expense, net” in the Condensed Consolidated Statements of Income and were $312$16 before taxes for the ninethree months ended March 31, 2015.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. |
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:
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2016 | | 2015 | | 2016 | | 2015 |
Compensation cost (included in selling, general and administrative expense) | $ | 2,776 |
| | $ | 2,935 |
| | $ | 10,005 |
| | $ | 8,934 |
|
Related income tax benefit | $ | 1,041 |
| | $ | 1,125 |
| | $ | 3,752 |
| | $ | 3,438 |
|
|
| | | | | | | |
| 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 ninethree months ended March 31, 2016September 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, 2015 | 1,248,912 |
| | $ | 6.12 |
| | | | |
Exercised | (907,302 | ) | | $ | 5.91 |
| | | | |
Options outstanding and exercisable at March 31, 2016 | 341,610 |
| | $ | 6.66 |
| | 5.9 years | | $ | 11,701 |
|
|
| | | | | | | |
| Nine Months Ended March 31, |
| 2016 | | 2015 |
Intrinsic value of options exercised | $ | 27,147 |
| | $ | 62,213 |
|
Cash received from stock option exercises | $ | — |
| | $ | 18,643 |
|
Tax benefit recognized from stock option exercises | $ | 10,587 |
| | $ | 24,213 |
|
|
| | | | | | | | | | | | |
| 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 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:
| | | Number of Shares and Units | | Weighted Average Grant Date Fair Value (per share) | 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, 2015 | 1,145,042 |
| | $ | 32.30 |
| |
Non-vested restricted stock, restricted share units, and performance units at June 30, 2017 | | 992 |
| | $ | 27.59 |
|
Granted | 409,564 |
| | $ | 24.29 |
| 352 |
| | $ | 32.75 |
|
Vested | (386,854 | ) | | $ | 33.79 |
| (98 | ) | | $ | 24.98 |
|
Forfeited | (28,365 | ) | | $ | 45.90 |
| (4 | ) | | $ | 33.95 |
|
Non-vested restricted stock, restricted share units, and performance units at March 31, 2016 | 1,139,387 |
| | $ | 28.82 |
| |
Non-vested restricted stock, restricted share units, and performance units at September 30, 2017 | | 1,242 |
| | $ | 29.24 |
|
| | | Nine Months Ended March 31, | Three Months Ended September 30, |
| 2016 | | 2015 | 2017 | | 2016 |
Fair value of restricted stock, restricted share units, and performance units granted | $ | 9,947 |
| | $ | 14,255 |
| |
Fair value of restricted stock and restricted share units granted | | $ | 11,516 |
| | $ | — |
|
Fair value of shares vested | $ | 17,904 |
| | $ | 21,121 |
| $ | 4,019 |
| | $ | 2,926 |
|
Tax benefit recognized from restricted shares vesting | $ | 6,762 |
| | $ | 8,223 |
| $ | 1,567 |
| | $ | 1,139 |
|
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.
The Compensation Committee administers the LTI PlansPlan and is responsible for, among other items, establishing the target values of awards to participants and selecting the specific performance factorsmeasures for such awards. Followingawards and setting the endtarget performance required to receive an award after the completion of eachthe performance period, theperiod. The Compensation Committee determines at its sole discretion, the specific payout to each participant.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.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 areis 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 thisthe respective three-year period, and 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.
In October 2015, althoughCommittee, while the target values previously set under the 2014-2015 LTIP were fully achieved, the Compensation Committee exercised its discretion to reduce the awards due to the challenges faced by the Companyaward in connection with the nut butter voluntary recall during fiscal year 2015. After deducting the value of the Initial Equity Grants, the reduced awards to participants related to the 2014-20152017-2019 LTIP totaled $4,400 (which were settled by the issuance of 82,495may be paid only in unrestricted shares of the Company’s common stock in October 2015).stock.
InThe Company recorded expense (in addition to the stock basedstock-based compensation expense associated with the Initial Equity Grants and the TSR Grant, there wasGrant) of $546 and $1,127 of expense for the three months ended March 31,September 30, 2017 and 2016, and a reversal of expense of $4,290 for the nine months ended March 31,
2016,respectively, due to the Company’s current estimates of achievement under the plans. The Company recorded expense of $2,149 and $5,410 for the three and nine months ended March 31, 2015, respectively, related to LTI plans.
12. INVESTMENTS AND JOINT VENTURES
Equity method investments
At March 31, 2016,In October 2009, the Company owned 50.0% offormed a joint venture, Hutchison Hain Organic Holdings Limited (“HHO”), with Hutchison China Meditech Ltd. (“Chi-Med”), a majority ownedmajority-owned subsidiary of CK Hutchison Holdings Limited, a company listed on the Hong Kong Stock Exchange. HHO marketsto market and distributesdistribute certain of the Company’s brands in Hong Kong, China and other surrounding markets. Voting control of the joint venture is shared 50/50equally between the Company and Chi-Med, although, in the event of a deadlock, Chi-Med has the ability to cast the deciding vote. The carrying value ofvote, and therefore, the investment and advances to HHO of $1,279 are included on the Condensed Consolidated Balance Sheet in “Investments and joint ventures.” 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 15.2%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 aan equity method investment due to the Company’s representation on the Board of Directors. At September 30, 2017 and itsJune 30, 2017, the carrying value of $17,741the Company’s investment in Chop’t was $16,262 and $16,487, respectively, and is included in the Condensed Consolidated Balance Sheet inas a component of “Investments and joint ventures.” The Company’s current ownership percentage may be diluted in the future to 12.1%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 basedSingapore-based natural food and beverage company listed on the Singapore Exchange, which is accounted for as an available-for-sale security. The Company sold 943,300 of its YHS shares during the nine months ended March 31, 2015 which resulted in a pre-tax gain of $312 on the sales. No shares were sold during the nine months ended March 31, 2016. The remaining shares held at March 31, 2016September 30, 2017 totaled 1,035,338.933. The fair value of these shares held was $1,014$872 (cost basis of $1,291)$1,164) at March 31, 2016September 30, 2017 and $1,196$882 (cost basis of $1,291)$1,164) at June 30, 20152017 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 Condensed Consolidated Balance Sheets.
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.
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 March 31, 2016:September 30, 2017:
| | | Total | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | Total | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets: | | | | | | | | | | | | | | |
Cash equivalents | $ | 26,300 |
| | $ | 26,300 |
| | $ | — |
| | $ | — |
| $ | 7,658 |
| | $ | 7,658 |
| | $ | — |
| | $ | — |
|
Forward foreign currency contracts | 1,047 |
| | — |
| | 1,047 |
| | — |
| 66 |
| | — |
| | 66 |
| | — |
|
Available for sale securities | 1,014 |
| | 1,014 |
| | — |
| | — |
| 872 |
| | 872 |
| | — |
| | — |
|
| $ | 28,361 |
| | $ | 27,314 |
| | $ | 1,047 |
| | $ | — |
| $ | 8,596 |
| | $ | 8,530 |
| | $ | 66 |
| | $ | — |
|
Liabilities: | | | | | | | | | | | | | | |
Contingent consideration, of which $3,738 is noncurrent | 7,437 |
| | — |
| | — |
| | 7,437 |
| |
Forward foreign currency contracts | | 217 |
| | — |
| | 217 |
| | — |
|
Contingent consideration, current | | 2,853 |
| | — |
| | — |
| | 2,853 |
|
Total | $ | 7,437 |
| | $ | — |
| | $ | — |
| | $ | 7,437 |
| $ | 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, 2015:2017:
| | | Total | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | Total | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets: | | | | | | | | | | | | | | |
Cash equivalents | $ | 45,101 |
| | $ | 45,101 |
| | $ | — |
| | $ | — |
| $ | 21,800 |
| | $ | 21,800 |
| | $ | — |
| | $ | — |
|
Forward foreign currency contracts | 1,590 |
| | — |
| | 1,590 |
| | — |
| 99 |
| | — |
| | 99 |
| | — |
|
Available for sale securities | 1,196 |
| | 1,196 |
| | — |
| | — |
| 882 |
| | 882 |
| | — |
| | — |
|
| $ | 47,887 |
| | $ | 46,297 |
| | $ | 1,590 |
| | $ | — |
| $ | 22,781 |
| | $ | 22,682 |
| | $ | 99 |
| | $ | — |
|
Liabilities: | | | | | | | | | | | | | | |
Forward foreign currency contracts | $ | 274 |
| | $ | — |
| | $ | 274 |
| | $ | — |
| $ | 53 |
| | $ | — |
| | $ | 53 |
| | $ | — |
|
Contingent consideration, of which $3,789 is noncurrent | 3,789 |
| | — |
| | — |
| | 3,789 |
| |
Contingent consideration, current | | $ | 2,656 |
| | $ | — |
| | $ | — |
| | $ | 2,656 |
|
Total | $ | 4,063 |
| | $ | — |
| | $ | 274 |
| | $ | 3,789 |
| $ | 2,709 |
| | $ | — |
| | $ | 53 |
| | $ | 2,656 |
|
Available for sale securities consist of the Company’s investment in YHS (see Note 12)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.
In connection with the acquisitions of Belvedere in February 2015 and GG UniqueFiber AS in January 2011, payment of a portion of the respective purchase prices are contingent upon the achievement of certain operating results. During the nine months ended March 31, 2016, additional expense of $1,541 was recorded related to the Belvedere acquisition. In addition, additional consideration of £3,000 related to the acquisition of Orchard House may be payable to the sellers based on the outcome of a review by the Competition and Markets Authority in the United Kingdom. The Company estimatedestimates the original fair value of thesethe contingent consideration arrangements as the present value of the expected contingent payments, determined using the weighted probabilities of the possible payments. The Company is required to reassessreassesses the fair value of contingent payments on a periodic basis. The significant inputs used in the estimates include numerous possible scenarios for the payments based on the contractual terms of the contingent consideration, for which probabilities are assigned to each scenario, which are then discounted based on an individual risk analysis of the liability (weighted average discount rate of 4.5% for the outstanding liability as of March 31, 2016). 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 ninethree months ended March 31, 2016.September 30, 2017.
|
| | | |
Balance as of June 30, 2015 | $ | 3,789 |
|
Fair value of initial contingent consideration
| 2,225 |
|
Contingent consideration adjustment | 1,541 |
|
Translation adjustment | (118 | ) |
Balance as of March 31, 2016 | $ | 7,437 |
|
|
| | | |
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 ninethree months ended March 31, 2016September 30, 2017 or 2015.September 30, 2016.
Cash Flow HedgesThe 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. To reduce that risk, theThe 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 Company utilizes foreign currency contracts to hedge forecasted transactions, primarily intercompany transactions, on certain foreign currencies and designates these derivative instruments as foreign currency cash flow hedges when appropriate. The notional and fair value amounts of the Company’s foreign exchange derivative contracts at March 31, 2016 were $14,861 and $1,047 of net assets. There were $47,202 of notional amount and $1,316 of net assets of foreign exchange derivative contracts outstanding at June 30, 2015. The fair value of these derivatives is included in prepaid expenses and other current assets and accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.Sheet. For these derivatives, whichderivative 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. These foreign exchange contracts have maturities over the next 3 months.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.
The Company assessesDerivative 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. For the three and nine months ended March 31, 2016 and 2015, the impact of hedge ineffectiveness on earnings was not significant. 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 March 31, 2016September 30, 2017 and 2015.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.
14. COMMITMENTS AND CONTINGENCIES
Securities Class Actions Filed in Federal Court
On May 11, 2011, Rosminah Brown,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 herselfa purported class consisting of all persons who purchased or otherwise acquired Hain Celestial securities between November 5, 2013 and all other similarly situated individuals,February 10, 2017 (the “Amended Complaint”). The Amended Complaint names as well as a non-profit organization,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 putativemotion 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 Superior CourtEastern District of California, Alameda CountyNew 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 allegedalleges that the labels ofCompany’s directors and certain Avalon Organics® brandofficers made materially false and JASON® brand personal care products used prior tomisleading statements in press releases and SEC filings regarding the Company’s implementationbusiness, 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 ANSI/NSF-305 certification in mid-2011 violated certain California statutes. Defendants removedfiduciary 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 United States District CourtBarnes 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 Northern District of California. The actioncaption Oliver v. Berke, et al. (the “Oliver Complaint”), and on October 6, 2017, the Oliver Complaint was consolidated with a subsequently-filed putative class action containing substantially identical allegations concerning only the JASON® brand personal care products.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.
consolidated actions sought an award for damages, injunctive relief, costs, expenses and attorney’s fees. In July 2015,
SEC Investigation
As previously disclosed, the Company reachedvoluntarily 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 agreementongoing 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 principlethe process of responding to the SEC’s requests for information and intends to cooperate fully with the plaintiffs to settle the class action for $7,500 inSEC.
Other
In addition to the distribution of consumer coupons up to a value of $2,000. In connection with the proposed settlement,litigation described above, the Company recorded a charge of $5,725 in the fourth quarter of fiscal 2015 (a separate charge of $1,775 was recorded in prior years). The parties finalized the settlementis and the court granted preliminary approval in October 2015. The court granted final approval of the settlement and issued a judgment dismissing the case on February 17, 2016.
The Company may be a partydefendant in lawsuits from time to a number of legal actions, proceedings, audits, tax audits, claims and disputes, arisingtime in the ordinarynormal course of business, including those with current and former customers over amounts owed.business. While any action, proceeding, audit or claim contains an element of uncertainty and may materially affect the Company’s cash flows and results of operationslitigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in a particular quarter or year, based on current facts and circumstances, the Company’s managementaggregate, are not material. Additionally, the Company believes that the probable final outcome of such actions, proceedings, audits, claims and disputesmatters will not have a material adverse effect on the Company’s business, prospects,consolidated results of operations, financial condition,position, cash flows or liquidity.
15. SEGMENT INFORMATION
ThePrior to July 1, 2017, the Company’s operations arewere managed in fiveeight operating segments: the United States, United Kingdom, Tilda, Hain Pure Protein Corporation (“HPPC”), EK Holdings, Inc. (“Empire”), Canada, Europe and Europe.Cultivate. The United States theoperating segment was also a reportable segment. The United Kingdom and HainTilda operating segments were reported in the aggregate as “United Kingdom”, while HPPC and Empire were reported in the aggregate as “Hain Pure Protein, are currently reportable segments, while” and Canada, Europe and Europe do not currently meet the quantitative thresholds for reporting and are thereforeCultivate 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 profitincome 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.Other.” Corporate and otherOther 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 impairment and integration charges and other, along with accounting review costs, are included in “Corporate and other.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.
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 March 31, | | Nine Months Ended March 31, | Three Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 | 2017 | | 2016 |
Net Sales: | | | | | | | | | | |
United States | $ | 351,887 |
| | $ | 343,728 |
| | $ | 1,025,398 |
| | $ | 1,034,612 |
| $ | 263,659 |
| | $ | 254,232 |
|
United Kingdom | 208,391 |
| | 178,068 |
| | 567,971 |
| | 551,144 |
| 222,445 |
| | 220,151 |
|
Hain Pure Protein | 113,643 |
| | 83,192 |
| | 379,336 |
| | 240,078 |
| 119,057 |
| | 116,669 |
|
Rest of World | 75,941 |
| | 57,751 |
| | 216,934 |
| | 164,545 |
| 103,115 |
| | 90,412 |
|
| $ | 749,862 |
| | $ | 662,739 |
| | $ | 2,189,639 |
| | $ | 1,990,379 |
| $ | 708,276 |
| | $ | 681,464 |
|
| | | | | | | | | | |
Operating Income: | | | | | | | | | | |
United States | $ | 54,546 |
| | $ | 55,851 |
| | $ | 149,233 |
| | $ | 141,031 |
| $ | 20,861 |
| | $ | 18,794 |
|
United Kingdom | 16,217 |
| | 11,760 |
| | 45,189 |
| | 29,618 |
| 9,601 |
| | 7,819 |
|
Hain Pure Protein | 4,613 |
| | 4,970 |
| | 33,009 |
| | 16,505 |
| 2,242 |
| | (1,018 | ) |
Rest of World | 6,198 |
| | 4,412 |
| | 12,981 |
| | 10,660 |
| 8,997 |
| | 5,055 |
|
| $ | 81,574 |
| | $ | 76,993 |
| | $ | 240,412 |
| | $ | 197,814 |
| $ | 41,701 |
| | $ | 30,650 |
|
Corporate and other (1) | (12,567 | ) | | (16,799 | ) | | (26,215 | ) | | (34,781 | ) | |
Corporate and Other (a) | | (10,218 | ) | | (16,899 | ) |
| $ | 69,007 |
| | $ | 60,194 |
| | $ | 214,197 |
| | $ | 163,033 |
| $ | 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.
| |
(1) | Includes $5,227 and $4,263 of acquisition related expenses, restructuring and integration charges for the three months ended March 31, 2016 and 2015, respectively. Such expenses for the nine months ended March 31, 2016 and 2015 were $9,818 and $5,925, respectively. A non-cash impairment charge of $5,510 for the three and nine months ended March 31, 2015 related to a United Kingdom indefinite-lived intangible asset is also included in Corporate and other. |
The Company’s long-lived assets, which primarily represent net property, plant and equipment, by geographic area are as follows: | | | March 31, 2016 | | June 30, 2015 | September 30, 2017 | | June 30, 2017 |
United States | $ | 182,155 |
| | $ | 151,450 |
| $ | 196,087 |
| | $ | 194,348 |
|
Canada | 10,655 |
| | 11,386 |
| |
United Kingdom | 210,676 |
| | 195,131 |
| 169,054 |
| | 165,396 |
|
Europe | 42,233 |
| | 22,451 |
| |
| $ | 445,719 |
| | $ | 380,418 |
| |
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 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the March 31, 2016 Condensed 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, 2015. Forward-looking2017. Forward looking statements in this reviewForm 10-Q are qualified by the cautionary statement included in this reviewForm 10-Q under the sub-heading “Cautionary Note Regarding Forward Looking Information,” below.Information” in the introduction of this Form 10-Q.
Overview
The Hain Celestial Group, Inc., a Delaware corporation and(collectively along with its subsidiaries, (collectively, the “Company,” and herein referred to as “Hain Celestial,” “we,” “us,”“us” and “our”) manufacture, market, distribute, was founded in 1993 and sellis 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 LifeTM 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 whichthat are sold as “better-for-you” products, providing consumers with the opportunity to lead A Healthier Way of LifeTM. We areHain Celestial is a leader in many organic and natural products categories, with an extensive portfoliomany recognized brands in the various market categories it serves, including Almond Dream®, Arrowhead Mills®, Bearitos®, Better BeanTM, 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 well-knownEatin’®, GG UniqueFiberTM, 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 ProvenderTM 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. Our
Change in Segments
Prior to July 1, 2017, the Company’s operations arewere managed in fiveeight 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 Europe. 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 long-term business strategy is to integrate theour brands in each of our segments under one management team within each operating segment and employ uniform marketing, sales and distribution strategies where possible. We market our products through a combination of direct sales people, brokers and distributors. We believe that our direct sales people combined with brokers and distributors provide an effective means of reaching a broad and diverse customer base. Our products are sold to specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, drug and convenience stores. Our products are sold in more than 70 countries. We manufacture domestically and internationally in our own plants as well as through co-packers.
We have acquired numerous brands since our formation and our goal is to continue to grow both organically as well as through the acquisition of complementary brands. We consider the acquisition of organic and natural food and personal care products companies or product lines a part of our business strategy. We also seek to broaden the distribution of our key brands across all sales channels and geographies.programs when attainable. We believe that, by integrating our various brands, we will continue to achieve economies of scale and enhanced market penetration. We perform ongoing reviews of our products and categories and have and may continue to eliminate certain products and/or brands that do not meet our standards for profitability or are not in line with our overall strategy. We seek to capitalize on the equity of our brands and the distribution achieved through each of our acquired businesses with strategic and timely introductions of new products that complement and provide innovation to existing lines to enhance revenues and margins. We believe our continuing investments in the operational performance of our business units and our focused execution on cost containment, productivity, cash flow and margin enhancement positions us to offer innovative new products with healthful attributes and enables us to build on the foundation of our long-term strategy of sustainable growth. We are committed to creating and inspiring A Healthier Way of LifeTM for the benefit of consumers, customers, shareholders and employees.
The global economic and political environment remains challenging. With the recent acquisitions we have made, a large portion of our sales take place outside of the United States. A deterioration in economic or political conditions in the areas in which we operate may have an adverse impact on our sales volumes and profitability. Additionally, the translation of the financial statements of our non-United States operations is impacted by fluctuations in foreign currency exchange rates. Commodity prices can be volatile, and our management team continues to work on our worldwide sourcing and procurement initiatives to meet the needs of our growing business, and we continue to look for opportunities to supply our growth. We have taken, and will continue to take, measures to mitigate the impact of these challenging conditions, including foreign currency and input cost risks, with improvements in operating efficiencies, cost savings initiatives and continue with our cash flow hedging program.
Project Terra
In the third quarter of 2016, the Company commenced a strategic review which identified approximately $100 million in global cost savings, which it expects to achieve during fiscal years 2017 through 2019. These initiatives are expected to include optimizing plants, co-packers and procurement and rationalizing the Company’s product portfolio, and reinvesting these incremental savings into the business to further brand building efforts and household penetration.
The strategic review has also resulted in the Company redefining its core platforms, initially in the United States, for future growth based upon consumer trends to create and inspire A Healthier Way of Life™. The core platforms are now defined by common consumer need, route-to-market or internal advantage and are aligned with the Company’s strategic roadmap to continue its leadership position in the organic and natural, better for-you industry. Beginning in fiscal year 2017, the Company plans to establish five strategic platforms within Hain Celestial US with the purpose to drive accelerated net sales and margin growth. The platforms supported by our brands and brand strategies will be:
Fresh Living - includes poultry, yogurt, plant-based proteins and other refrigerated products;
Better-for-You Baby -includes infant foods, infant formula, diapers and wipe products that nurture and care for babies and toddlers;
Better-for-You Snacking - wholesome products for in-between meals;
Better-for-You Pantry - core consumer staples; and
Pure Personal Care - personal care products focused on providing consumers with cleaner and gentler ingredients.
In addition, the Company will launch Cultivate Ventures (“Cultivate”), a venture unit whose purpose is threefold: (i) to strategically invest in the Company’s smaller brands in high potential categories such as SunSpire® chocolates and DeBoles® pasta by giving them a dedicated, creative focus for refresh and relaunch; (ii) to incubate small acquisitions until they reach the scale for inclusion in the Company’s core platforms; and (iii) to invest in concepts, products and technology, which focus on health and wellness.
The Company has also identified certain brands representing approximately $30 million in sales which no longer fit into its core strategy for future growth, and it intends to sell these brands as a group.
Recent Developments
On December 21, 2015, the Company acquired Orchard House Foods Limited (“Orchard House”), a leader in prepared fruit, juices, fruit desserts and ingredients with facilities in Corby and Gateshead in the United Kingdom. Orchard House supplies leading retailers, on-the-go food outlets, food service providers and manufacturers in the United Kingdom. Consideration in the transaction consisted of cash (net of cash acquired) totaling £76.9 million (approximately $114.1 million at the transaction date exchange rate). The acquisition was funded with borrowings under the Credit Agreement. Additionally, contingent consideration of £3.0 million may be payable to the sellers based on the outcome of a review by the Competition and Markets Authority in the United Kingdom. Orchard House is included in the United Kingdom operating segment.
On October 27, 2015, the Company acquired a 15.2% interest in Chop’t Creative Salad Company LLC (“Chop’t”). The Company’s current ownership percentage may be diluted in the future to 12.1% pending the distribution of additional ownership shares. 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.
On July 24, 2015, the Company acquired Formatio Beratungs- und Beteiligungs GmbH and its subsidiaries (“Mona”), a leader in plant-based foods and beverages with facilities in Germany and Austria. Mona offers a wide range of organic and natural products under the Joya® and Happy® brands, including soy, oat, rice and nut based drinks as well as plant-based yogurts, desserts, creamers, tofu and private label products, sold to leading retailers in Europe, primarily in Austria and Germany and eastern European countries. Mona’s facilities will provide us additional manufacturing capacity, and the acquired business also presents us with the opportunity to expand our existing European product offerings into new regions. Consideration in the transaction consisted of cash totaling €23.0 million (approximately $25.2 million at the transaction date exchange rate) and 240,207 shares of the Company’s common stock valued at $16.3 million. Also included in the acquisition was the assumption of net debt totaling €16.3 million (approximately $17.8 million at the transaction date exchange rate). The cash portion of the purchase price was funded with borrowings under our Credit Agreement. Mona is included in our Europe operating segment.
Constant Currency Presentation
Revenue from our international operations represents a significant portion of our business. As a result, our revenue growth and operating income have been impacted, and we expect we will continue to be impacted, by fluctuations in foreign currency exchange rates. To provide a framework for assessing how our consolidated and our non-United States operating results performed excluding the impact of foreign currency fluctuations, we additionally present the year over year percentage changes on a constant currency basis, which assumes no change in the exchange rate from the prior year period. This constant currency is provided in addition to, and not as a substitute for, the year over year percentage changes on an as-reported basis.
Results of Operations
Comparison of Three Months Ended March 31, 2016September 30, 2017 to Three Months Ended March 31, 2015September 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 March 31,September 30, 2017 and 2016 and 2015 (amounts in thousands, other than percentages which may not add due to rounding):
| | | Three Months Ended | Three Months Ended | | Change in |
| March 31, 2016 | | March 31, 2015 | September 30, 2017 | | September 30, 2016 | | Dollars | | Percentage |
Net sales | $ | 749,862 |
| | 100.0% | | $ | 662,739 |
| | 100.0% | $ | 708,276 |
| | 100.0% | | $ | 681,464 |
| | 100.0% | | $ | 26,812 |
| | 3.9% |
Cost of sales | 576,653 |
| | 76.9% | | 504,990 |
| | 76.2% | 576,673 |
| | 81.4% | | 571,597 |
| | 83.9% | | 5,076 |
| | 0.9% |
Gross profit | 173,209 |
| | 23.1% | | 157,749 |
| | 23.8% | 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% |
| | | | | | | | | | |
Selling, general and administrative expenses | 93,915 |
| | 12.5% | | 83,068 |
| | 12.5% | |
Amortization/impairment of acquired intangibles | 4,586 |
| | 0.6% | | 10,189 |
| | 1.5% | |
Acquisition related expenses, restructuring and integration charges, and other | 5,701 |
| | 0.8% | | 4,298 |
| | 0.6% | |
Operating income | 69,007 |
| | 9.2% | | 60,194 |
| | 9.1% | |
Interest and other expenses, net | 7,298 |
| | 1.0% | | 8,640 |
| | 1.3% | |
Gain on fire insurance recovery
| (9,013 | ) | | (1.2)% | | — |
| | —% | |
Income before income taxes and equity in earnings of equity-method investees | 70,722 |
| | 9.4% | | 51,554 |
| | 7.8% | |
Provision for income taxes | 21,576 |
| | 2.9% | | 18,147 |
| | 2.7% | |
Equity in net loss (income) of equity-method investees | 161 |
| | —% | | 13 |
| | —% | |
Net income | $ | 48,985 |
| | 6.5% | | $ | 33,394 |
| | 5.0% | |
Adjusted EBITDA | | $ | 59,512 |
| | 8.4% | | $ | 45,617 |
| | 6.7% | | $ | 13,895 |
| | 30.5% |
Net Sales
Net sales for the three months ended March 31, 2016September 30, 2017 were $749.9$708.3 million, an increase of $87.1$26.8 million, or 13%3.9%, from net sales of $662.7$681.5 million for the three months ended March 31, 2015. Foreign exchange rates negatively impacted net sales by $13.9 million as compared to the prior year quarter.September 30, 2016. On a constant currency basis, net sales increased 15%approximately 3.3% from the prior year quarter. The increase in net sales increase primarily resulted fromwas due to sales growth in Europe related to our recent acquisitions of Orchard Houseplant-based, branded and private label beverage business and increased sales in December 2015, Mona in July 2015, EK Holdings, Inc. (“Empire”) in March 2015Canada driven by our Sensible Portions®, Tilda® and Belvedere International, Inc (“Belvedere”) in February 2015, which collectively accounted for approximately $93.5 millionYves® brands. In addition, net sales in the third quarter of 2016, which includesUnited States segment for the growth of these businesses under our ownership,three months ended September 30, 2017 increased 3.7% from $18.0 million in the prior year quarter. Refer to the Segment Results section for additional discussion.quarter, which was negatively impacted by a realignment of customer inventories.
Gross Profit
Gross profit for the three months ended March 31, 2016September 30, 2017 was $173.2$131.6 million, an increase of $15.5$21.7 million, or 9.8%19.8%, from last year’s third quarter. The increase in gross profit was dueas compared to the increase in sales on aprior year over year basis.quarter. Gross profit margin was 23.1%18.6% of net sales, down 70up 250 basis points year over year.period-over-period. Gross profit margin was unfavorablyfavorably impacted by product mixmore efficient trade spend in the United States primarily duein the current year quarter as compared to lower sales of Celestial Seasonings tea resulting from the new packaging launch, increased product costs of United States dollar denominated purchases in Canada, and additional costs related to a chiller breakdown and resultant temporary stop in production at one of our Hain Pure Protein Corporation (“HPPC”) turkey facilities of $2.6 million, which were partially offset by increased sales of higher margin branded products at both HPPC and Europe. In the prior year quarter, gross profit margin was unfavorably impacted by start-up costs of certain lines in our chilled desserts factoryprice realization and operating efficiencies in the United Kingdom, totaling $2.5 millionimproved profitability at HPPC as a result of lower conversion costs, and $1.6 million of additional factory expenses associated with bringing our nut butter production facility back to full operations after the previously mentioned nut butter recall, as well as expenses associated with the restructuringincremental gross profit on higher sales, specifically in Canada and relocation of our New York-based BluePrint manufacturing facility in the United States segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $93.9$90.7 million an increase of $10.8 million, or 13.1%, infor the three months ended March 31, 2016September 30, 2017, an increase of $5.8 million, or 6.8%, from $83.1$85.0 million in last year’s quarter. Selling, general and administrative expenses increased by $6.6 million due to the acquisitions of Orchard House, Mona, Empire and Belvedere, as well as $2.7 million of incremental spend for Celestial Seasonings marketing support related to our new packaging launch. Selling, general and administrative expenses as a percentage of net sales was 12.5% in the three months ended March 31, 2016 and 12.5% in 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
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, were impacted by $4.9 millionan increase of charges for consumer refunds and other administrative costs associated with30 basis points, primarily attributable to the nut butter recall.aforementioned items.
Amortization/ImpairmentAmortization of Acquired Intangibles
Amortization/impairmentAmortization of acquired intangibles was $4.6$4.9 million a decrease of $5.6 million infor the three months ended March 31, 2016September 30, 2017, an increase of $0.2 million from $10.2$4.7 million in the prior year quarter. The decreaseincrease was primarily due to a non-cash partial impairment charge of $5.5 million in the prior year quarter related to a United Kingdom indefinite-lived intangible asset, offset by the intangibles acquired as a result of the Company’s recent acquisitions.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
We incurred acquisition,Acquisition related expenses, restructuring and integration related expenses totaling $5.7charges were $5.8 million infor the three months ended March 31, 2016, which relateSeptember 30, 2017, an increase of $5.4 million from $0.5 million in the prior year quarter. The increase was primarily due to additional contingent consideration expense for the Belvedere acquisition of $1.5 million,increased severance costs related to a recently completed restructuring of $1.6 million, most of which occurred in the United States, integration costscurrent 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 Orchard House acquisitioninternal accounting review and the independent review by the Audit Committee and other professional fees.
We incurred acquisition, restructuring and integration related expenses totaling $4.3matters were $3.6 million infor the three months ended March 31, 2015, which relateSeptember 30, 2017, compared to professional fees, severance and other transaction related costs associated with the three acquisitions completed$6.0 million in the prior fiscal year. 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 March 31, 2016September 30, 2017 was $69.0$31.5 million, an increase of $8.8$17.7 million, or 14.6%129.0%, from $60.2$13.8 million in the three months ended March 31, 2015.September 30, 2016. Operating income as a percentage of net sales was 9.2%4.4% in the thirdfirst quarter of fiscal 20162017 compared with 9.1%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 Expenses,Financing Expense, net
Interest and other expenses,financing expense, net (which includes foreign currency gains and losses) were $7.3 million and $8.6totaled $6.3 million for the three months ended March 31, 2016 and 2015, respectively. Net interest expense totaled $6.6 million in the third quarter of fiscal 2016,September 30, 2017, an increase of $0.6$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 resulted from higher than average borrowings underinterest expense related to our Credit Agreement,revolving credit facility as a result of higher variable interest rates on outstanding debt. See Note 8, Debt and Borrowings, in the proceedsNotes to Consolidated Financial Statements included in Item 1 of which were used to fund our recent acquisitionsthis Form 10-Q.
Other (Income)/Expense, net
Other (income)/expense, net totaled $3.1 million of Mona and and Orchard House. Net other expense was $0.7 millionincome for the three months ended March 31, 2016 as compared to $2.7September 30, 2017, an increase of $2.6 million forfrom $0.5 million of income in the three months ending March 31, 2015.prior year quarter. Included in other (income)/expense, net other expenses arewere net unrealized foreign currency losses,gains, which were lowerhigher 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 intercompany balances.
Gain on Fire Insurance Recovery
The gain on fire insurance recovery was the result of fixed assets purchased with insurance proceeds that exceeded the net book value of fixed assets destroyed in the fire that occurred at our Tilda rice milling facility in the second quarter of fiscal 2015.loans.
Income Before Income Taxes and Equity in EarningsNet Income of Equity-Method Investees
Income before income taxes and equity in the after tax earningsnet income of our equity-method investees for the three months ended March 31,September 30, 2017 and 2016 and 2015 was $70.7$28.3 million and $51.6$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 $21.6$8.5 million infor the three months ended March 31, 2016September 30, 2017 compared to $18.1$0.8 million in the prior year quarter.
Our effective income tax rate from continuing operations was 30.5%29.9% and 35.2%8.3% of pre-tax income for the three months ended March 31,September 30, 2017 and 2016, and 2015, respectively. The effective income tax rate for the three months ended March 31,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 the geographical mix of earnings and a reduction in the statutory tax rate in the United Kingdom enacted in the secondfirst quarter of 2016.
2017. Our 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.
Equity in EarningsNet Income of Equity-Method Investees
Our equity in the net income/lossincome from our joint ventureequity-method investments for the three months ended March 31, 2016September 30, 2017 was a loss of $161 thousandessentially breakeven compared to a loss of $13 thousand$0.2 million for the three months ended March 31, 2015.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 March 31,September 30, 2017 and 2016 and 2015 was $49.0$19.8 million and $33.4$8.6 million, respectively, or $0.47$0.19 and $0.32$0.08 per diluted share, respectively. The increase was attributable to the factors noted above.
Adjusted EBITDA
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 March 31, 2016September 30, 2017 and 2015:2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | United States | | United Kingdom | | Hain Pure Protein | | Rest of World | | Corporate and other (1) | | Consolidated |
Net sales - Three months ended 3/31/16 | | $ | 351,887 |
| | $ | 208,391 |
| | $ | 113,643 |
| | $ | 75,941 |
| | $ | — |
| | $ | 749,862 |
|
Net sales - Three months ended 3/31/15 | | $ | 343,728 |
| | $ | 178,068 |
| | $ | 83,192 |
| | $ | 57,751 |
| | $ | — |
| | $ | 662,739 |
|
% change | | 2.4 | % | | 17.0 | % | | 36.6 | % | | 31.5 | % | | | | 13.1 | % |
| | | | | | | | | | | | |
Operating income - Three months ended 3/31/16 | | $ | 54,546 |
| | $ | 16,217 |
| | $ | 4,613 |
| | $ | 6,198 |
| | $ | (12,567 | ) | | $ | 69,007 |
|
Operating income - Three months ended 3/31/15 | | $ | 55,851 |
| | $ | 11,760 |
| | $ | 4,970 |
| | $ | 4,412 |
| | $ | (16,799 | ) | | $ | 60,194 |
|
% change | | (2.3 | )% | | 37.9 | % | | (7.2 | )% | | 40.5 | % | | | | 14.6 | % |
| | | | | | | | | | | | |
Operating income margin - Three months ended 3/31/16 | | 15.5 | % | | 7.8 | % | | 4.1 | % | | 8.2 | % | | | | 9.2 | % |
Operating income margin - Three months ended 3/31/15 | | 16.2 | % | | 6.6 | % | | 6.0 | % | | 7.6 | % | | | | 9.1 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(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 | % |
| |
(1) | Includes $5,227 and $4,263 of acquisition related expenses, restructuring and integration charges for the three months ended March 31, 2016 and 2015, respectively. |
United States
Our operations are managednet sales in five operating segments: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 Canadasegment 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 Europe.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 United States,increase in operating income was primarily due to the United Kingdomaforementioned increase in net sales of our FreeBird® brand and Hain Pure Protein are currently reportable segments, while Canada and Europe do not currently meet the quantitative thresholds for reporting and are therefore combined and reportedlower conversion costs as “Resta result of World.” 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. Refer to Note 15, Segment Information, for additional details.
Our net sales in the United States in the three months ended March 31, 2016Other and were $351.9$4.5 million an increase of $8.2 million, or 2.4%, from net sales of $343.7and $6.4 million for the three months ended March 31, 2015. The sales increase was principally due to an increase in the volume of our products sold as a result of increased consumptionSeptember 30, 2017 and expanded distribution. We experienced volume growth in many of our brands including Sensible Portions, The Greek Gods, Terra, Garden of Eatin’, Jason and Alba Botanica, offset by the exiting of certain unprofitable club store programs, as well as lower tea consumption related to our recent packaging change at Celestial Seasonings. Operating income in the United States in the three months ended March 31, 2016, was $54.5 million, a decrease of $1.3 million from operating income of $55.9 million in the three months ended March 31, 2015. The decrease in operating income is primarily the result of an increase in trade promotions and related marketing spend for our Celestial Seasonings packaging launch. This was partially offset by reduced headcount as a result of a recently completed restructuring and reduction in incentive compensation. Operating income in the prior year quarter was negatively impacted by charges totaling $3.7 million related to additional factory expenses associated with bringing our nut butter production facility back to full operations after the previously mentioned nut butter recall, expenses associated with the restructuring and relocation of our New York-based BluePrint manufacturing facility and the outsourcing of our natural channel merchandising function. respectively.
Our net sales in the United Kingdom segment in the three months ended March 31, 2016 were $208.4 million, an increase of $30.3 million, or 17.0%, from net sales of $178.1 million in the three months ended March 31, 2015. Foreign currency exchange rates negatively impacted net sales by $9.4 million as compared to the prior year quarter. The sales increase was primarily due to the acquisition of Orchard House, which accounted for $37.8 million of net sales in the third quarter and which includes growth in the business under our ownership. Additionally, the sales increase was driven by growth in our chilled desserts business, new business in fruit and hot eating desserts, and strong promotional programs on Tilda Ready to Heat rice resulting from recently increased capacity. Operating income in the United Kingdom segment for the three months ended March 31, 2016 was $16.2 million, an increase of $4.5 million, from $11.8 million in the three months ended March 31, 2015. The increase in operating income was primarily due to the acquisition of Orchard House, improved procurement of raw materials at Tilda, as well as the prior year including incremental expenses totaling $2.5 million related to factory start-up costs at our chilled desserts facility, which did not recur in the current quarter.
Our net sales in the Hain Pure Protein segment in the three months ended March 31, 2016 were $113.6 million, an increase of $30.5 million, or 36.6%, from net sales of $83.2 million in the three months ended March 31, 2015. The sales increase was primarily due to increased consumer demand in this segment, sales mix, as well as the acquisition of Empire in March 2015, which accounted for $33.2 million of net sales in the current quarter, which includes growth in the business under our ownership, as compared to $15.3 million in the prior year quarter. Operating income in the segment for the three months ended March 31, 2016 was $4.6 million, a decrease of $0.4 million, from $5.0 million in the three months ended March 31, 2015. The decrease in operating income is the result of a chiller breakdown and resultant temporary stop in production at one of our HPPC turkey facilities, offset by higher net sales volume related to more branded product sales and more organic poultry product sales, which have higher selling prices, and the income associated with the acquisition of Empire.
Our net sales in the Rest of World segment were $75.9 million in the three months ended March 31, 2016, an increase of $18.2 million, or 31.5%, from net sales of $57.8 million, in the three months ended March 31, 2015. Foreign currency exchange rates negatively impacted net sales by $3.3 million as compared to the prior year quarter. The increase was primarily the result of the acquisitions of Mona and Belvedere, which collectively accounted for $20.6 million of net sales in the current quarter and which includes those businesses growth under our ownership, as compared to $2.8 million in the prior year quarter. Operating income increased $1.8 million primarily due to the Mona and Belvedere acquisitions, partially offset by increased product costs of our U.S. dollar denominated purchases in the quarter.
Results of Operations
Comparison of Nine Months Ended March 31, 2016 to Nine Months Ended March 31, 2015
The following table compares our results of operations, including as a percentage of net sales, on a consolidated basis, for the nine months ended March 31, 2016 and 2015 (amounts in thousands, other than percentages which may not add due to rounding):
|
| | | | | | | | | | | |
| Nine Months Ended |
| March 31, 2016 | | March 31, 2015 |
Net sales | $ | 2,189,639 |
| | 100.0% | | $ | 1,990,379 |
| | 100.0% |
Cost of sales | 1,686,820 |
| | 77.0% | | 1,539,459 |
| | 77.3% |
Gross profit | 502,819 |
| | 23.0% | | 450,920 |
| | 22.7% |
| | | | | | | |
Selling, general and administrative expenses | 262,776 |
| | 12.0% | | 262,613 |
| | 13.2% |
Amortization/impairment of acquired intangibles | 13,994 |
| | 0.6% | | 19,001 |
| | 1.0% |
Acquisition related expenses, restructuring and integration charges, and other | 11,852 |
| | 0.5% | | 6,273 |
| | 0.3% |
Operating income | 214,197 |
| | 9.8% | | 163,033 |
| | 8.2% |
Interest and other expenses, net | 28,531 |
| | 1.3% | | 21,380 |
| | 1.1% |
Gain on fire insurance recovery
| (9,013 | ) | | (0.4)% | | — |
| | —% |
Income before income taxes and equity in earnings of equity-method investees | 194,679 |
| | 8.9% | | 141,653 |
| | 7.1% |
Provision for income taxes | 57,337 |
| | 2.6% | | 45,144 |
| | 2.3% |
Equity in net loss (income) of equity-method investees | 108 |
| | —% | | (315 | ) | | —% |
Net income | $ | 137,234 |
| | 6.3% | | $ | 96,824 |
| | 4.9% |
Net Sales
Net sales for the nine months ended March 31, 2016 were $2.19 billion, an increase of $199.3 million, or 10.0%, from net sales of $1.99 billion for the nine months ended March 31, 2015. Foreign exchange rates negatively impacted net sales by $56.6 million as compared to the prior year period. On a constant currency basis, net sales increased 13% from the prior year. The sales increase resulted from the acquisitions of Orchard House in December 2015, Mona in July 2015, Empire in March 2015, and Belvedere in February 2015, which collectively accounted for approximately $206.5 million of net sales in the nine months ended March 31, 2016 and which includes the growth of these businesses under our ownership, from $18.0 million in the prior year. Additionally, in the prior year period, sales were negatively impacted by $15.8 million of sales returns related to the voluntary nut butter recall. Refer to the Segment Results section for additional discussion.
Gross Profit
Gross profit for the nine months ended March 31, 2016 was $502.8 million, an increase of $51.9 million, or 11.5%, from the prior year period. The increase in gross profit was due to the increase in sales on a year over year basis, including from the aforementioned acquisitions. Gross profit margin was 23.0% of sales, an increase of 30 basis points year over year. The increase in gross profit margin primarily resulted from improved procurement of raw materials at Tilda, shift in product mix toward organic poultry sales at HPPC, and the impact of the voluntary nut butter recall in the prior year period, which included $11.6 million of inventory write-offs. We incurred what we expect to be the last of our start-up costs of certain lines in our chilled desserts factory in the United Kingdom, which totaled $0.7 million in the current period (all of which were incurred in the first quarter) compared to $8.4 million in the prior year. Gross profit margin was unfavorably impacted by product mix in the United States primarily due to lower sales of Celestial Seasonings tea resulting from the new packaging launch, increased product costs of United States dollar denominated purchases in Canada, and additional costs related to a chiller breakdown and resultant temporary stop of production at one of our HPPC turkey facilities of $3.5 million, which were partially offset by increased sales of higher margin branded products at both HPPC and Europe.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $262.8 million, an increase of $0.2 million, or 0.1%, in the nine months ended March 31, 2016 from $262.6 million in the prior year period. Selling, general and administrative expenses have increased primarily due to the recent acquisitions of Orchard House, Mona, and Empire totaling $14.1 million and $4.7 million of incremental spend related to our packaging launch and transition of K-cup products from Keurig Green Mountain, offset by $13 million of reduced incentive compensation, savings from headcount reductions and other benefit cost savings, while the prior year period included costs related to the nut butter voluntary recall of $4.9 million. Selling, general and administrative expenses as a percentage of net sales was 12.0% in the nine months ended March 31, 2016 and 13.2% in the prior year period, a decrease of 120 basis points, primarily attributable to the aforementioned items, as well as the achievement of additional operating leverage with the impact of acquisitions.
Amortization/Impairment of Acquired Intangibles
Amortization/impairment of acquired intangibles was $14.0 million, a decrease increase of $5.0 million, in the nine months ended March 31, 2016 from $19.0 million in the prior year period. The decrease was primarily due to a non-cash partial impairment charge of $5.5 million in the prior year quarter related to a United Kingdom indefinite-lived intangible asset, offset by the intangibles acquired as a result of the Company’s recent acquisitions.
Acquisition Related Expenses, Restructuring and Integration Charges
We incurred acquisition, restructuring and integration related expenses totaling $11.9 million in the nine months ended March 31, 2016, which primarily relate to stamp duty and professional fees associated with the Orchard House and Mona acquisitions, severance costs for a recent internal restructuring, most of which occurred in the United States, and to a lesser extent, additional contingent consideration expense for Belvedere of $1.5 million.
We incurred acquisition, restructuring and integration related expenses totaling $6.3 million in the nine months ended March 31, 2015, which relate to professional fees, severance and other transaction related costs related to previously completed acquisitions. Additionally, we wrote-off $1.0 million of leasehold improvements (a non-cash charge) due to the relocation of our New York-based BluePrint manufacturing facility. Finally, we incurred $1.1 million of severance charges associated with that relocation as well as for the outsourcing of our natural channel merchandising function.
Operating Income
Operating income for the nine months ended March 31, 2016 was $214.2 million, an increase of $51.2 million, or 31.4%, from $163.0 million in the nine months ended March 31, 2015. Operating income as a percentage of net sales was 9.8% for the nine months ended March 31, 2016 compared with 8.2% for the comparable period of fiscal 2015. The increase in operating income as a percentage of net sales resulted from the items described above. Foreign exchange rates resulted in decreased operating income of $4.0 million as compared to the prior period.
Interest and Other Expenses, net
Interest and other expenses, net (which includes foreign currency gains and losses) were $28.5 million and $21.4 million for the nine months ended March 31, 2016 and 2015, respectively. Net interest expense totaled $18.4 million in the nine months ended March 31, 2016, a decrease of $0.2 million from the prior year period. Interest expense decreased primarily as a result of lower average borrowings under Tilda’s short-term borrowing arrangements as well as lower average interest rate on borrowings under our Credit Agreement starting in December 2014, when our Credit Agreement was amended. Net other expenses were $10.2 million for the nine months ended March 31, 2016 as compared to $2.8 million for the nine months ending March 31, 2015. Included in net other expenses are net unrealized foreign currency losses, which were lower in the current year than the prior year period principally due to the effect of foreign currency movements on the remeasurement of foreign currency denominated intercompany balances. Additionally, included in the prior year period’s other expenses are a $8.3 million non-cash gain on the Company’s pre-existing ownership interests in HPPC and Empire.
Gain on Fire Insurance Recovery
The gain on fire insurance recovery was the result of fixed assets purchased with insurance proceeds that exceeded the net book value of fixed assets destroyed in the fire that occurred at our Tilda rice milling facility in the second quarter of fiscal 2015.
Income Before Income Taxes and Equity in Earnings of Equity-Method Investees
Income before income taxes and equity in the after tax earnings of our equity-method investees for the nine months ended March 31, 2016 and 2015 was $194.7 million and $141.7 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 $57.3 million in the nine months ended March 31, 2016 compared to $45.1 million in the prior year period.
Our effective income tax rate from continuing operations was 29.5% and 31.9% of pre-tax income for the nine months ended March 31, 2016 and 2015, respectively. The effective tax rate for the nine months ended March 31, 2016 was favorably impacted by the geographical mix of earnings and a reduction in the statutory tax rate in the United Kingdom enacted in the second quarter of fiscal 2016. Such reduction resulted in a decrease to the carrying value of net deferred tax liabilities of $4.4 million, which favorably impacted the effective tax rate, partially offset by an unfavorable settlement of a tax claim of $1.2 million 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 $8.3 million.
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 Earnings of Equity-Method Investees
Our equity in the net income from our joint venture investments for the nine months ended March 31, 2016 was a loss of $108 thousand compared to income of $315 thousand for the nine months ended March 31, 2015.
Net Income
Net income for the nine months ended March 31, 2016 and 2015 was $137.2 million and $96.8 million, or $1.32 and $0.94 per diluted share, respectively. The increase was attributable to the factors noted above.
Segment Results
The following table provides a summary of net sales and operating income by reportable segment for the nine months ended March 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | United States | | United Kingdom | | Hain Pure Protein | | Rest of World | | Corporate and other (1) | | Consolidated |
Net sales - Nine months ended 3/31/16 | | $ | 1,025,398 |
| | $ | 567,971 |
| | $ | 379,336 |
| | $ | 216,934 |
| | $ | — |
| | $ | 2,189,639 |
|
Net sales - Nine months ended 3/31/15 | | $ | 1,034,612 |
| | $ | 551,144 |
| | $ | 240,078 |
| | 164,545 |
| | $ | — |
| | $ | 1,990,379 |
|
% change | | (0.9 | )% | | 3.1 | % | | 58.0 | % | | 31.8 | % | | | | 10.0 | % |
| | | | | | | | | | | | |
Operating income - Nine months ended 3/31/16 | | $ | 149,233 |
| | $ | 45,189 |
| | $ | 33,009 |
| | $ | 12,981 |
| | $ | (26,215 | ) | | $ | 214,197 |
|
Operating income - Nine months ended 3/31/15 | | $ | 141,031 |
| | $ | 29,618 |
| | $ | 16,505 |
| | $ | 10,660 |
| | $ | (34,781 | ) | | $ | 163,033 |
|
% change | | 5.8 | % | | 52.6 | % | | 100.0 | % | | 21.8 | % | | | | 31.4 | % |
| | | | | | | | | | | | |
Operating income margin - Nine months ended 3/31/16 | | 14.6 | % | | 8.0 | % | | 8.7 | % | | 6.0 | % | | | | 9.8 | % |
Operating income margin - Nine months ended 3/31/16 | | 13.6 | % | | 5.4 | % | | 6.9 | % | | 6.5 | % | | | | 8.2 | % |
| |
(1) | Includes $9,818 and $5,925 of acquisition related expenses, restructuring and integration charges for the nine months ended March 31, 2016 and 2015, respectively. |
Our operations are managed in five operating segments: United States, United Kingdom, Hain Pure Protein, Canada and Europe. The United States, the United Kingdom and Hain Pure Protein are currently reportable segments, while Canada and Europe do not currently meet the quantitative thresholds for reporting and are therefore combined and reported as “Rest of World.”
The Corporate category consists of expenses related to the Company’s centralized administrative functions, which do not specifically relate to an operating segment. Such Corporate 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, acquisition related expenses, restructuring and integration charges are included in Corporate and other. Refer to Note 15, Segment Information for additional details.
Our net sales, in the United StatesNotes to Consolidated Financial Statements included in the nine months ended March 31, 2016 were $1,025.4 million, a decreaseItem 1 of $9.2 million, or 0.9%, from net sales of $1,034.6 million for the nine months ended March 31, 2015. The sales decrease was principally due to temporary disruptions from some of our distributor and retail customers, merchandising changes at one of our mass-market customers, inventory reductions at certain customers, exiting of certain unprofitable club programs, as well as lower tea consumption related to our current packaging change at Celestial Seasonings. Overall, changes in selling prices did not materially impact the net sales in the United States, however, sales were impacted by increased trade promotion and related marketing spend to proactively address competition in certain brands. Operating income in the United States in the nine months ended March 31, 2016 was $149.2 million, an increase of $8.2 million from operating income of $141.0 million in the nine months ended March 31, 2015. The increase in operating income was principally the result of prior period charges totaling $32.3 million related to the voluntary nut butter recall.
Our net sales in the United Kingdom segment in the nine months ended March 31, 2016 were $568.0 million, an increase of $16.8 million, or 3.1%, from net sales of $551.1 million in the nine months ended March 31, 2015. Foreign currency exchange rates negatively impacted net sales by $31.5 million over the prior year period. The increase in net sales was primarily due to the acquisition of Orchard House, which accounted for $39.8 million of net sales in the period, as well as growth in our chilled desserts business and new business in fruit and hot eating desserts, which was partially offset by decreased sales of a secondary rice brand.
Operating income in the United Kingdom segment for the nine months ended March 31, 2016 was $45.2 million, an increase of $15.6 million, from $29.6 million in the nine months ended March 31, 2015. The increase in operating income was due to the recent acquisition of Orchard House and an $8.4 million reduction of factory start-up costs at our chilled desserts facility in the current period as compared to the prior year period. Additionally, operating income increased at Tilda as a result of improved procurement of raw materials as compared to the prior year period.
Our net sales in the Hain Pure Protein segment in the nine months ended March 31, 2016 were $379.3 million, an increase of $139.3 million, or 58.0%, from net sales of $240.1 million in the nine months ended March 31, 2015. The sales increase was primarily due to increased volume as a result of strong consumption trends in this segment, sales mix, as well as the acquisition of Empire in March 2015, which accounted for $105 million of net sales in the period, as compared to $15.3 million in the prior year. Operating income in the segment for the nine months ended March 31, 2016 was $33.0 million, an increase of $16.5 million, from $16.5 million in the nine months ended March 31, 2015. The increase in operating income is the result of higher net sales volume related to more branded product sales and more organic poultry product sales, which have higher selling prices, lower commodity prices, productivity initiatives, and the income associated with the acquisition of Empire, partially offset by $3.9 million related to a chiller breakdown and resultant temporary stop in production at one of our HPPC turkey facilities.
Our net sales in the Rest of World segment were $216.9 million in the nine months ended March 31, 2016, an increase of $52.4 million, or 31.8%, from net sales of $164.5 million in the nine months ended March 31, 2015. Net sales were negatively impacted by unfavorable Canadian Dollar and Euro exchange rates that resulted in decreased net sales upon translation of $21.3 million over the prior year period. The sales increase was primarily the result of the acquisitions of Mona and Belvedere, which collectively accounted for $61.7 million of net sales in the period, as compared to $2.8 million in the prior year. Operating income in the segment for the nine months ended March 31, 2016 was $13.0 million, an increase of $2.3 million, from $10.7 million in the nine months ended March 31, 2015. Operating income increased primarily due to our acquisition of Mona and Belvedere in the current fiscal year, offset partially by increased product costs of our U.S. dollar denominated purchases as well as the negative impact of foreign currency.
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.
Our cash and cash equivalents balance decreased $41.5$20.2 million at March 31, 2016September 30, 2017 to $125.4 million.$126.8 million when compared to $147.0 million at June 30, 2017. Our working capital was $581.7$567.6 million at March 31, 2016,September 30, 2017, an increase of $11.1$33.3 million from $570.6$534.3 million at the end of fiscal 2015.2017.
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. The Company’sOur cash balances are held in the United States, the United Kingdom, Canada, Europe and India. It is the Company’sour current intent to indefinitely reinvest its foreign earnings outside the United States. As of March 31, 2016,September 30, 2017, approximately 54%85.7% ($67.6108.6 million) of the total cash balance iswas held outside of the United States. Although a significant portion of the consolidated cash balances are maintained outside of the United States, the Company’sour current plans do not demonstrate a need to repatriate these balances to fund itsour United States operations. If these funds were to be needed for the Company’sour operations in the United States, itwe 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 March 31, 2016,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.
| | | Nine Months Ended March 31, | Three Months Ended September 30, | | Change in |
(amounts in thousands) | 2016 | | 2015 | 2017 | | 2016 | | Dollars | | Percentage |
Cash flows provided by (used in): | | | | | | | | | | |
Operating activities | $ | 131,854 |
| | $ | 70,169 |
| $ | (19,438 | ) | | $ | 12,819 |
| | $ | (32,257 | ) | | (251.6 | )% |
Investing activities | (215,886 | ) | | (137,540 | ) | (14,913 | ) | | (13,553 | ) | | (1,360 | ) | | (10.0 | )% |
Financing activities | 47,624 |
| | 55,049 |
| 11,087 |
| | (11,589 | ) | | 22,676 |
| | 195.7 | % |
Effect of exchange rate changes on cash | (5,124 | ) | | (11,104 | ) | 3,059 |
| | (2,131 | ) | | 5,190 |
| | 243.5 | % |
Net decrease in cash | $ | (41,532 | ) | | $ | (23,426 | ) | $ | (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.
Net cash provided by operating activities was $131.9 million for the nine months ended March 31, 2016, compared to $70.2 million in the nine months ended March 31, 2015. The increase in cash provided by operating activities primarily resulted from a $40.5 million increase in net income as well as $21.2 million of less cash used within working capital accounts in 2016 compared to 2015.
In the nine months ended March 31, 2016, $215.9 million of cash was used in investing activities. We used $157.9 million of cash in connection with our acquisitions of Orchard House, Mona, and our investment in Chop’t and $58.0 million for capital expenditures as discussed further below. We used cash in investing activities of $137.5 million during the nine months ended March 31, 2015, which was principally for the acquisition of HPPC, Empire and Belvedere and for capital expenditures.
Net cash of $49.1 million was provided by financing activities for the nine months ended March 31, 2016. We had net borrowings of $62.9 million, which was primarily used to fund the acquisitions of Orchard House and Mona. Additionally, we paid $25.2 million during the period for stock repurchases to satisfy employee payroll tax withholdings and $11.3 million of excess tax benefits. Net cash of $55.0 million was provided by financing activities for the nine months ended March 31, 2015, which included net borrowings of $32.0 million under our revolving credit facility, which was primarily used to subsequently repay HPPC’s acquired borrowings. In addition, we received proceeds from exercises of stock options of $18.6 million and paid $18.0 million during the period for stock repurchases to satisfy employee payroll tax withholdings, and $25.2 million during 2015 for excess tax benefits.
In our internal evaluations, we also use the non-GAAP financial measure “operating free cash flow.” The difference between operating free cash flow and net cash 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 from 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.
|
| | | | | | | |
| Nine Months Ended March 31, |
(amounts in thousands) | 2016 | | 2015 |
Cash flow provided by operating activities | $ | 131,854 |
| | $ | 70,169 |
|
Purchase of property, plant and equipment | (58,022 | ) | | (36,312 | ) |
Operating free cash flow | $ | 73,832 |
| | $ | 33,857 |
|
Our operating free cash flow was $73.8 million for the nine months ended March 31, 2016, an increase of $40.0 million from the nine months ended March 31, 2015. The increase in operating free cash flow primarily resulted from an increase in net income as well as less cash used within working capital accounts in 2016 compared to 2015. This was offset partially by an increase in our capital expenditures principally related to the purchase of a new factory location and production equipment at HPPC to accommodate the current demand in this segment, as well as the expansion of production lines at both our Tilda ready-to-heat rice facility in the United Kingdom and our plant-based beverage facilities in Europe to accommodate new products and increased volume. We expect that our capital spending for the current fiscal year will be approximately $65.0 million.
We have $150.0 million in the aggregate principal amount of 10 year senior notes due May 2, 2016 issued in a private placement. The notes bear interest at 5.98%, payable semi-annually on November 2 and May 2. As of March 31, 2016 and June 30, 2015, $150.0 million of the senior notes was outstanding. On May 2, 2016, the Company utilized capacity under its existing revolving credit facility to redeem these notes. Subsequent to the redemption on May 2, 2016, the Company had $146.7 million available on the revolving credit facility.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 March 31, 2016September 30, 2017 and June 30, 2015,2017, there were $720.3$739.7 million and $660.2$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 and the notes areis guaranteed by substantially all of our current and future direct and indirect domestic subsidiaries. We are required by the terms of the Credit Agreement and the senior notes to comply with financial and other
customary affirmative and negative covenants for facilities and notes of this nature. As of March 31, 2016September 30, 2017 and June 30, 2015,2017, and the Company was in compliance with all associated covenants under the credit facility and senior notes.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 monthsix-month terms and bear interest at variable rates typically based on LIBOR plus a margin.margin (weighted average interest rate of approximately 2.72% at September 30, 2017).
On October 26, 2015, we filedOther Borrowings
Other borrowings primarily relate to a “well-known seasoned issuer” shelf registration statementcash pool facility in Europe. The cash pool facility provides our Europe operating segment with sufficient liquidity to support the SEC which registers an indeterminate amountCompany’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 securities for future sale. The shelf registration statement expires on October 26, 2018.1.10% (weighted average interest rate of approximately 1.10% at September 30, 2017).
We believe that our cash on hand of $125.4$126.8 million at March 31, 2016,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 20162018 capital expenditures of approximately $65$75 million and the 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.
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 |
|
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 March 31, 2016,September 30, 2017, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.
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, salestrade promotions and promotionalsales incentives, valuation of accounts and chargebacks receivable, inventory, property, plant and equipment, accounting for acquisitions, stock based compensation,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 wasis 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, 2015.2017.
We completed our annual impairment testingRecent Accounting Pronouncements
Refer to Note 2, Basis of goodwill and our trade names as of April 1, 2015. The analysis and assessment of these assets indicated that no impairment was required at that time as either the fair values equaled or exceeded the recorded carrying values (for our indefinite-lived intangible assets and certain reporting units)Presentation, or our qualitative assessment resulted in a determination that it was more likely than not that the fair value of the reporting unit exceeded its carrying amount (for certain of our reporting units). Although we believe our assumptions are reasonable, different assumptions or changes in the future may resultNotes to Consolidated Financial Statements included in different conclusions and expose us to impairment charges in the future. The fair value of our Hain Daniels reporting unit, and certain of its intangible assets, exceeded its carrying value by approximately 10%. As of AprilPart I, Item 1 2015, this reporting unit represented approximately 22% of our goodwill balance, and its indefinite-lived intangible assets represented approximately 25% of our consolidated indefinite-lived intangible asset balance. Holding all other assumptions constant at the testing date, a one percentage point increase in the discount rate used in the testing of this unit would reduce the estimated fair values of the respective assets to approximately its carrying value. We believe this operation can support the value of goodwill and intangible assets recorded based on our current estimates of future results of operations and cash flows, however this reporting unit is the most sensitive to changes in the underlying assumptions.
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 recent 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 ourthe lowest of our four quarters. For the remainder of fiscal 2016, we anticipate that our net sales and earnings will be lower in the third quarter than the fourth quarter. However, this may be impacted by the timing of any future acquisitions we complete.
Cautionary Note Regarding Forward Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are predictions based on expectations and projections about future events, and are not statements of historical fact. You can identify forward-looking statements by the use of forward-looking terminology such as “plan”, “continue”, “expect”, “anticipate”, “intend”, “predict”, “project”, “estimate”, “likely”, “believe”, “might”, “seek”, “may”, “potential”, “can”, “should”, “could”, “future” 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, our growth strategy, the seasonality of our business, and our results of operations and financial condition.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, levels of activity, performance or achievements of the Company, or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:
general economic and financial market conditions;
competition;
our ability to respond to changes and trends in customer and consumer demand, preferences and consumption;
our reliance on third party distributors, manufacturers and suppliers;
the consolidation or loss of a significant customer;
our ability to introduce new products and improve existing products;
availability and retention of key personnel;
our ability to effectively integrate our acquisitions;
our ability to successfully consummate any proposed divestitures;
liabilities arising from potential product recalls, market withdrawals or product liability claims;
outbreaks of diseases or food-borne illnesses;
potential litigation;
the availability of organic and natural ingredients;
our ability to manage our supply chain effectively;
changes in fuel, raw material and commodity costs;
effects of climate change on our business and operations;
our ability to offset input cost increases;
the interruption, disruption or loss of operations at one or more of our manufacturing facilities;
the loss of one or more of our independent co-packers;
the disruption of our transportation systems;
risks associated with expansion into countries in which we have no prior operating experience;
risks associated with our international sales and operations, including foreign currency risks;
impairment in the carrying value of our goodwill or other intangible assets;
our ability to use our trademarks;
reputational damage;
changes in, or the failure to comply with, government laws and regulations;
liabilities or claims with respect to environmental matters;
our reliance on independent certification for our products;
a breach of security measures;
our reliance on our information technology systems;
effects of general global capital and credit market issues on our liquidity and cost of borrowing;
potential liabilities not covered by insurance;
the ability of joint venture investments to successfully execute business plans;
dilution in the value of our common shares; and
the other risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.
As a result of the foregoing and other factors, no assurance can be given as to the future results, levels of activity and achievements of the Company, and neither the Company nor any person assumes responsibility for the accuracy and completeness of these statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in market risk for the three months ended March 31, 2016September 30, 2017 from those addressed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.2017. 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, 2015.2017.
Item 4. Controls and Procedures
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. Based upon this review, these officers concluded that, as of the end of the period covered by this report, ourOur disclosure controls and procedures are effectiveintended 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 SEC’sSecurities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive OfficerCEO and Chief Financial Officer,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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Securities Class Actions Filed in Federal Court
On May 11, 2011, Rosminah Brown,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 herselfa purported class consisting of all persons who purchased or otherwise acquired Hain Celestial securities between November 5, 2013 and all other similarly situated individuals,February 10, 2017 (the “Amended Complaint”). The Amended Complaint names as well as a non-profit organization,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 putativemotion 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 Superior CourtEastern District of California, Alameda CountyNew 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 allegedalleges that the labels ofCompany’s directors and certain Avalon Organics® brandofficers made materially false and JASON® brand personal care products used prior tomisleading statements in press releases and SEC filings regarding the Company’s implementationbusiness, 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 ANSI/NSF-305 certification in mid-2011 violated certain California statutes. Defendants removedfiduciary 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 United States District CourtBarnes 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 Northern District of California. The actioncaption Oliver v. Berke, et al. (the “Oliver Complaint”), and on October 6, 2017, the Oliver Complaint was consolidated with a subsequently-filed putative class action containing substantially identical allegations concerning only the JASON® brand personal care products.Consolidated Stockholder Class and Derivative Action. The Plaintiffs filed their consolidated actions sought an award for damages, injunctive relief, costs, expenses and attorney’s fees. In July 2015,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.
SEC Investigation
As previously disclosed, the Company reachedvoluntarily 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 agreementongoing 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 principlethe process of responding to the SEC’s requests for information and intends to cooperate fully with the plaintiffs to settle the class action for $7,500 inSEC.
Other
In addition to the distributionlitigation described above, the Company is and may be a defendant in lawsuits from time to time in the normal course of consumer coupons up tobusiness. 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 valuematerial adverse effect on the Company’s consolidated results of $2,000. The parties finalized the settlement and the court granted preliminary approval in October 2015. The court granted final approval of the settlement and issued a judgment dismissing the case on February 17, 2016.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, 2015,2017, filed with the SEC on August 21, 2015.September 13, 2017. There have been no material changes from the risk factors previously disclosed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The table below sets forth information regarding repurchases by the Issuer and Affiliated PurchasersCompany of its common stock during the periods indicated.
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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 |
January 2016 | 210 |
| | $ | 36.40 |
| | — |
| | — |
|
February 2016 | 276 |
| | 37.06 |
| | — |
| | — |
|
March 2016 | — |
| | — |
| | — |
| | — |
|
Total | 486 |
| | $ | 36.77 |
| | — |
| | — |
|
|
| | | | | | | | | | | | |
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 |
| | — |
| | — |
|
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(1) | Shares surrendered for payment of employee payroll taxes due on shares issued under stockholder approved stock basedstockholder-approved stock-based compensation plans. |
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(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.
Item 6. Exhibits
See Exhibit Index immediately followingpreceding the signature page hereto, which is incorporated herein by reference.
EXHIBIT INDEX
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.
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.
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| | |
| | THE HAIN CELESTIAL GROUP, INC. |
| | (Registrant) |
| | |
Date: | May 10, 2016November 7, 2017 | /s/ Irwin D. Simon |
| | Irwin D. Simon, Chairman, President and Chief Executive Officer |
|
| | |
Date: | May 10, 2016November 7, 2017 | /s/ Pasquale ConteJames Langrock |
| | Pasquale Conte,James Langrock,
Executive Vice President and Chief Financial Officer |
EXHIBIT INDEX
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Exhibit
Number
| | Description |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
| |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. |
| |
32.1 | | Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
32.2 | | Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
101 | | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statement of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.
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