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 December 31, 20172019
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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 | | |
Delaware | | 22-3240619 |
(State or other jurisdiction of incorporation or organization)of incorporation)
| | (I.R.S. Employer Identification No.) |
| |
1111 Marcus Avenue
Lake Success, New York
| | 11042 |
(Address of principal executive offices) | | (Zip Code) |
1111 Marcus Avenue, Lake Success, NY 11042
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (516) 587-5000
Former name, former address and former fiscal year, if changed since last report: N/A
___________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $.01 per share | HAIN | The NASDAQ Global Select Market |
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ¨ | | |
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Large accelerated filer | ý | | Accelerated filer | ¨ | | |
| | | | | | |
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 Exchange Act).
Yes ¨☐ No ý
As of January 31, 2018,2020, there were 103,918,020104,384,620 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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| 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 and 4 are not applicable
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 5. | | |
Item 6. | | |
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Cautionary Note Regarding Forward Looking Information
This Quarterly Report on Form 10-Q for the quarter ended December 31, 2019 (the “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” sectionssection 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 and our results of operations and financial condition, our Securities and Exchange Commission (“SEC”) filings, enhancing internal controls and remediating material weaknesses.condition. 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 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 and changes to the competitive environment, changes to consumer preferences, the United Kingdom's exit from the European Union, consolidation of customers or the loss of a significant customer, reliance on independent distributors, 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 proceedingsour ability to manage our supply chain effectively, volatility in the cost of commodities, ingredients, freight and government investigations (including any potential action byfuel, our ability to execute and realize cost savings initiatives, including stock-keeping unit (“SKU”) rationalization plans, the Divisionimpact of Enforcement of the SECour debt and securities class actionour credit agreements on our financial condition and stockholder derivative litigation),our business, our ability to manage our financial reporting and internal control systemssystem processes, potential liabilities due to legal claims, government investigations and processes, the identification of material weaknessesother regulatory enforcement actions, costs incurred due to pending and future litigation, potential liability, including in connection with indemnification obligations to our internal control over financial reporting, the expected salescurrent and former officers and members of our Board of Directors that may not be covered by insurance, potential liability if our products cause illness or physical harm, impairments in the carrying value of goodwill or other intangible assets, our ability to identify and completeconsummate divestitures, our ability to integrate past acquisitions, or divestitures and integrate acquisitions, changes in raw materials, commodity costs and fuel, the availability of organic and natural ingredients, disruption of operations at our manufacturing facilities, loss of one or more independent co-packers, disruption of our transportation systems, risks relating to the protection of intellectual property, the risk of liabilities and claims with respect to environmental matters, the reputation of our brands, changes to and the interpretationour reliance on independent certification for a number of governmental regulations, unanticipated expenditures,our products 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, 20172019 under the heading “Risk Factors” and Part II,I, Item 1A, “Risk Factors” set forth herein,2 of this Quarterly Report on Form 10-Q under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 20172019 AND JUNE 30, 20172019
(In thousands, except par values)
| | | December 31, | | June 30, | | December 31, | | June 30, |
| 2017 | | 2017 | | 2019 | | 2019 |
ASSETS | (Unaudited) | | | ASSETS | (Unaudited) | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 139,216 |
| | $ | 146,992 |
| Cash and cash equivalents | $ | 37,024 | | | $ | 31,017 | |
Accounts receivable, less allowance for doubtful accounts of $1,201 and $1,447, respectively | 274,728 |
| | 248,436 |
| |
Accounts receivable, less allowance for doubtful accounts of $558 and $588, respectively | | Accounts receivable, less allowance for doubtful accounts of $558 and $588, respectively | 206,583 | | | 209,990 | |
Inventories | 502,372 |
| | 427,308 |
| Inventories | 283,127 | | | 299,341 | |
Prepaid expenses and other current assets | 62,994 |
| | 52,045 |
| Prepaid expenses and other current assets | 50,019 | | | 51,391 | |
Current assets of discontinued operations | | Current assets of discontinued operations | — | | | 110,048 | |
Total current assets | 979,310 |
| | 874,781 |
| Total current assets | 576,753 | | | 701,787 | |
Property, plant and equipment, net | 386,077 |
| | 370,511 |
| Property, plant and equipment, net | 298,558 | | | 287,845 | |
Goodwill | 1,083,696 |
| | 1,059,981 |
| Goodwill | 879,705 | | | 875,881 | |
Trademarks and other intangible assets, net | 583,911 |
| | 573,268 |
| Trademarks and other intangible assets, net | 378,796 | | | 380,286 | |
Investments and joint ventures | 19,301 |
| | 18,998 |
| Investments and joint ventures | 18,990 | | | 18,890 | |
Operating lease right of use assets | | Operating lease right of use assets | 83,845 | | | — | |
Other assets | 35,042 |
| | 33,565 |
| Other assets | 48,298 | | | 58,764 | |
Noncurrent assets of discontinued operations | | Noncurrent assets of discontinued operations | — | | | 259,167 | |
Total assets | $ | 3,087,337 |
| | $ | 2,931,104 |
| Total assets | $ | 2,284,945 | | | $ | 2,582,620 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable | $ | 263,395 |
| | $ | 222,136 |
| Accounts payable | $ | 187,376 | | | $ | 219,957 | |
Accrued expenses and other current liabilities | 112,677 |
| | 108,514 |
| Accrued expenses and other current liabilities | 123,272 | | | 114,265 | |
Current portion of long-term debt | 25,021 |
| | 9,844 |
| Current portion of long-term debt | 1,387 | | | 17,232 | |
| Current liabilities of discontinued operations | | Current liabilities of discontinued operations | — | | | 31,703 | |
Total current liabilities | 401,093 |
| | 340,494 |
| Total current liabilities | 312,035 | | | 383,157 | |
Long-term debt, less current portion | 742,125 |
| | 740,304 |
| Long-term debt, less current portion | 324,864 | | | 613,537 | |
Deferred income taxes | 98,127 |
| | 121,475 |
| Deferred income taxes | 35,012 | | | 34,757 | |
Operating lease liabilities, noncurrent portion | | Operating lease liabilities, noncurrent portion | 76,726 | | | — | |
Other noncurrent liabilities | 23,446 |
| | 15,999 |
| Other noncurrent liabilities | 15,225 | | | 14,489 | |
Noncurrent liabilities of discontinued operations | | Noncurrent liabilities of discontinued operations | — | | | 17,361 | |
Total liabilities | 1,264,791 |
| | 1,218,272 |
| Total liabilities | 763,862 | | | 1,063,301 | |
Commitments and contingencies (Note 14)
|
| |
| |
Commitments and contingencies (Note 16) | | Commitments and contingencies (Note 16) | |
Stockholders’ equity: | | | | Stockholders’ equity: | |
Preferred stock - $.01 par value, authorized 5,000 shares; issued and outstanding: none | — |
| | — |
| |
Common stock - $.01 par value, authorized 150,000 shares; issued: 108,371 and 107,989 shares, respectively; outstanding: 103,918 and 103,702 shares, respectively | 1,084 |
| | 1,080 |
| |
Preferred stock - $.01 par value, authorized 5,000 shares; issued and outstanding: NaN | | Preferred stock - $.01 par value, authorized 5,000 shares; issued and outstanding: NaN | — | | | — | |
Common stock - $.01 par value, authorized 150,000 shares; issued: 109,019 and 108,833 shares, respectively; outstanding:104,362 and 104,219 shares, respectively | | Common stock - $.01 par value, authorized 150,000 shares; issued: 109,019 and 108,833 shares, respectively; outstanding:104,362 and 104,219 shares, respectively | 1,091 | | | 1,088 | |
Additional paid-in capital | 1,145,042 |
| | 1,137,724 |
| Additional paid-in capital | 1,164,618 | | | 1,158,257 | |
Retained earnings | 935,771 |
| | 868,822 |
| Retained earnings | 586,593 | | | 695,017 | |
Accumulated other comprehensive loss | (153,351 | ) | | (195,479 | ) | Accumulated other comprehensive loss | (120,197) | | | (225,004) | |
| 1,928,546 |
| | 1,812,147 |
| | 1,632,105 | | | 1,629,358 | |
Less: Treasury stock, at cost, 4,453 and 4,287 shares, respectively | (106,000 | ) | | (99,315 | ) | |
Less: Treasury stock, at cost, 4,658 and 4,614 shares, respectively | | Less: Treasury stock, at cost, 4,658 and 4,614 shares, respectively | (111,022) | | | (110,039) | |
Total stockholders’ equity | 1,822,546 |
| | 1,712,832 |
| Total stockholders’ equity | 1,521,083 | | | 1,519,319 | |
Total liabilities and stockholders’ equity | $ | 3,087,337 |
| | $ | 2,931,104 |
| Total liabilities and stockholders’ equity | $ | 2,284,945 | | | $ | 2,582,620 | |
|
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2017 AND 2016
(In thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net sales | $ | 775,204 |
| | $ | 739,999 |
| | $ | 1,483,480 |
| | $ | 1,421,463 |
|
Cost of sales | 630,933 |
| | 601,606 |
| | 1,207,606 |
| | 1,173,203 |
|
Gross profit | 144,271 |
| | 138,393 |
| | 275,874 |
| | 248,260 |
|
Selling, general and administrative expenses | 90,372 |
| | 85,187 |
| | 181,093 |
| | 170,154 |
|
Amortization of acquired intangibles | 4,909 |
| | 4,693 |
| | 9,820 |
| | 9,421 |
|
Acquisition related expenses, restructuring and integration charges | 4,797 |
| | 108 |
| | 10,643 |
| | 568 |
|
Accounting review and remediation costs, net of insurance proceeds | 4,451 |
| | 7,005 |
| | 3,093 |
| | 12,966 |
|
Long-lived asset impairment | 3,449 |
| | — |
| | 3,449 |
| | — |
|
Operating income | 36,293 |
| | 41,400 |
| | 67,776 |
| | 55,151 |
|
Interest and other financing expense, net | 6,513 |
| | 5,097 |
| | 12,828 |
| | 10,178 |
|
Other (income)/expense, net | (760 | ) | | (1,353 | ) | | (3,897 | ) | | (1,865 | ) |
Income before income taxes and equity in net income of equity-method investees | 30,540 |
| | 37,656 |
| | 58,845 |
| | 46,838 |
|
(Benefit)/provision for income taxes | (16,369 | ) | | 10,509 |
| | (7,899 | ) | | 11,271 |
|
Equity in net income of equity-method investees | (194 | ) | | (38 | ) | | (205 | ) | | (222 | ) |
Net income | $ | 47,103 |
| | $ | 27,185 |
| | $ | 66,949 |
| | $ | 35,789 |
|
| | | | | | | |
Net income per common share: | | | | | | | |
Basic | $ | 0.45 |
| | $ | 0.26 |
| | $ | 0.65 |
| | $ | 0.35 |
|
Diluted | $ | 0.45 |
| | $ | 0.26 |
| | $ | 0.64 |
| | $ | 0.34 |
|
| | | | | | | |
Shares used in the calculation of net income per common share: | | | | | | | |
Basic | 103,837 |
| | 103,597 |
| | 103,773 |
| | 103,532 |
|
Diluted | 104,440 |
| | 104,204 |
| | 104,379 |
| | 104,225 |
|
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 20172019 AND 20162018
(In thousands)thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| December 31, 2017 | | December 31, 2016 |
| Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax benefit | | After-tax amount |
Net income | | | | | $ | 47,103 |
| | | | | | $ | 27,185 |
|
| | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | 8,336 |
| | $ | — |
| | 8,336 |
| | $ | (51,222 | ) | | $ | — |
| | (51,222 | ) |
Change in deferred gains (losses) on cash flow hedging instruments | — |
| | — |
| | — |
| | (13 | ) | | 3 |
| | (10 | ) |
Change in unrealized gain (loss) on available for sale investment | 8 |
| | (3 | ) | | 5 |
| | (32 | ) | | 13 |
| | (19 | ) |
Total other comprehensive income (loss) | $ | 8,344 |
| | $ | (3 | ) | | $ | 8,341 |
| | $ | (51,267 | ) | | $ | 16 |
| | $ | (51,251 | ) |
| | | | | | | | | | | |
Total comprehensive income (loss) | | | | | $ | 55,444 |
| | | | | | $ | (24,066 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Six Months Ended |
| December 31, 2017 | | December 31, 2016 |
| Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax benefit | | After-tax amount |
Net income | | | | | $ | 66,949 |
| | | | | | $ | 35,789 |
|
| | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments | $ | 42,197 |
| | $ | — |
| | 42,197 |
| | $ | (82,958 | ) | | $ | — |
| | (82,958 | ) |
Change in deferred gains (losses) on cash flow hedging instruments | (82 | ) | | 15 |
| | (67 | ) | | (443 | ) | | 38 |
| | (405 | ) |
Change in unrealized gain (loss) on available for sale investment | (2 | ) | | — |
| | (2 | ) | | (89 | ) | | 30 |
| | (59 | ) |
Total other comprehensive income (loss) | $ | 42,113 |
| | $ | 15 |
| | $ | 42,128 |
| | $ | (83,490 | ) | | $ | 68 |
| | $ | (83,422 | ) |
| | | | | | | | | | | |
Total comprehensive income (loss) | | | | | $ | 109,077 |
| | | | | | $ | (47,633 | ) |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 506,784 | | | $ | 533,566 | | | $ | 988,860 | | | $ | 1,052,044 | |
Cost of sales | 401,177 | | | 432,215 | | | 785,422 | | | 861,785 | |
Gross profit | 105,607 | | | 101,351 | | | 203,438 | | | 190,259 | |
Selling, general and administrative expenses | 79,078 | | | 78,496 | | | 159,758 | | | 154,473 | |
Amortization of acquired intangibles | 3,189 | | | 3,322 | | | 6,272 | | | 6,681 | |
Productivity and transformation costs | 12,260 | | | 9,872 | | | 26,435 | | | 20,205 | |
Chief Executive Officer Succession Plan expense, net | — | | | 10,148 | | | — | | | 29,701 | |
Proceeds from insurance claim | — | | | — | | | (2,562) | | | — | |
Accounting review and remediation costs, net of insurance proceeds | — | | | 920 | | | — | | | 4,334 | |
Long-lived asset and intangibles impairment | 1,889 | | | 19,473 | | | 1,889 | | | 23,709 | |
Operating income (loss) | 9,191 | | | (20,880) | | | 11,646 | | | (48,844) | |
Interest and other financing expense, net | 4,737 | | | 5,428 | | | 11,031 | | | 9,742 | |
Other expense, net | 1,244 | | | 371 | | | 2,572 | | | 971 | |
Income (loss) from continuing operations before income taxes and equity in net loss of equity-method investees | 3,210 | | | (26,679) | | | (1,957) | | | (59,557) | |
Provision (benefit) for income taxes | 1,020 | | | 5,097 | | | 489 | | | (4,869) | |
Equity in net loss of equity-method investees | 338 | | | 11 | | | 655 | | | 186 | |
Net income (loss) from continuing operations | $ | 1,852 | | | $ | (31,787) | | | $ | (3,101) | | | $ | (54,874) | |
Net loss from discontinued operations, net of tax | (2,816) | | | (34,714) | | | (104,884) | | | (49,052) | |
Net loss | $ | (964) | | | $ | (66,501) | | | $ | (107,985) | | | $ | (103,926) | |
| | | | | | | |
Net income (loss) per common share: | | | | | | | |
Basic net income (loss) per common share from continuing operations | $ | 0.02 | | | $ | (0.31) | | | $ | (0.03) | | | $ | (0.53) | |
Basic net loss per common share from discontinued operations | (0.03) | | | (0.33) | | | (1.01) | | | (0.47) | |
Basic net loss per common share | $ | (0.01) | | | $ | (0.64) | | | $ | (1.04) | | | $ | (1.00) | |
| | | | | | | |
Diluted net income (loss) per common share from continuing operations | $ | 0.02 | | | $ | (0.31) | | | $ | (0.03) | | | $ | (0.53) | |
Diluted net loss per common share from discontinued operations | (0.03) | | | (0.33) | | | (1.01) | | | (0.47) | |
Diluted net loss per common share | $ | (0.01) | | | $ | (0.64) | | | $ | (1.04) | | | $ | (1.00) | |
| | | | | | | |
Shares used in the calculation of net income (loss) per common share: | | | | | | | |
Basic | 104,318 | | | 104,056 | | | 104,272 | | | 104,009 | |
Diluted | 104,619 | | | 104,056 | | | 104,272 | | | 104,009 | |
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2019 AND 2018
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | |
| December 31, 2019 | | | | | | December 31, 2018 | | | | |
| Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax (expense) benefit | | After-tax amount |
Net loss | | | | | $ | (964) | | | | | | | $ | (66,501) | |
| | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments before reclassifications | $ | 48,655 | | | $ | — | | | 48,655 | | | $ | (27,948) | | | $ | — | | | (27,948) | |
| | | | | | | | | | | |
Change in deferred gains (losses) on cash flow hedging instruments | 52 | | | (10) | | | 42 | | | — | | | — | | | — | |
| | | | | | | | | | | |
Total other comprehensive income (loss) | $ | 48,707 | | | $ | (10) | | | $ | 48,697 | | | $ | (27,948) | | | $ | — | | | $ | (27,948) | |
| | | | | | | | | | | |
Total comprehensive income (loss) | | | | | $ | 47,733 | | | | | | | $ | (94,449) | |
| | | | | | | | | | | |
| Six Months Ended | | | | | | | | | | |
| December 31, 2019 | | | | | | December 31, 2018 | | | | |
| Pre-tax amount | | Tax (expense) benefit | | After-tax amount | | Pre-tax amount | | Tax (expense) benefit | | After-tax amount |
Net loss | | | | | $ | (107,985) | | | | | | | $ | (103,926) | |
| | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustments before reclassifications | $ | 9,713 | | | $ | — | | | 9,713 | | | $ | (41,467) | | | $ | — | | | (41,467) | |
Reclassification of currency translation adjustment included in Net loss from discontinued operations, net of tax | 95,120 | | | — | | | 95,120 | | | — | | | — | | | — | |
Change in deferred losses on cash flow hedging instruments | (26) | | | — | | | (26) | | | — | | | — | | | — | |
| | | | | | | | | | | |
Total other comprehensive income (loss) | $ | 104,807 | | | $ | — | | | $ | 104,807 | | | $ | (41,467) | | | $ | — | | | $ | (41,467) | |
| | | | | | | | | | | |
Total comprehensive loss | | | | | $ | (3,178) | | | | | | | $ | (145,393) | |
| | | | | | | | | | | |
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 20172019
(In thousands, except par values)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional | | | | | | | | Accumulated Other | | |
| | | Amount | | Paid-in | | Retained | | Treasury Stock | | | | Comprehensive | | |
| Shares | | at $.01 | | Capital | | Earnings | | Shares | | Amount | | (Loss) Income | | Total |
Balance at June 30, 2019 | | 108,833 | | | $ | 1,088 | | | $ | 1,158,257 | | | $ | 695,017 | | | 4,614 | | | $ | (110,039) | | | $ | (225,004) | | | $ | 1,519,319 | |
Net loss | | | | | | | (107,021) | | | | | | | | | (107,021) | |
Cumulative effect of adoption of ASU 2016-02 | | | | | | | (439) | | | | | | | | | (439) | |
Other comprehensive income | | | | | | | | | | | | | 56,110 | | | 56,110 | |
Issuance of common stock pursuant to stock-based compensation plans | 40 | | | 1 | | | (1) | | | | | | | | | | | — | |
| | | | | | | | | | | | | | | |
Shares withheld for payment of employee payroll taxes due on shares issued under stock-based compensation plans | | | | | | | | | 17 | | | (312) | | | | | (312) | |
Stock-based compensation expense | | | | | 3,281 | | | | | | | | | | | 3,281 | |
Balance at September 30, 2019 | 108,873 | | | $ | 1,089 | | | $ | 1,161,537 | | | $ | 587,557 | | | 4,631 | | | $ | (110,351) | | | $ | (168,894) | | | $ | 1,470,938 | |
Net loss | | | | | | | (964) | | | | | | | | | (964) | |
| | | | | | | | | | | | | | | |
Other comprehensive income | | | | | | | | | | | | | 48,697 | | | 48,697 | |
Issuance of common stock pursuant to stock-based compensation plans | 146 | | | 2 | | | (2) | | | | | | | | | | | — | |
| | | | | | | | | | | | | | | |
Shares withheld for payment of employee payroll taxes due on shares issued under stock-based compensation plans | | | | | | | | | 27 | | | (671) | | | | | (671) | |
Stock-based compensation expense | | | | | 3,083 | | | | | | | | | | | 3,083 | |
Balance at December 31, 2019 | 109,019 | | | $ | 1,091 | | | $ | 1,164,618 | | | $ | 586,593 | | | 4,658 | | | $ | (111,022) | | | $ | (120,197) | | | $ | 1,521,083 | |
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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, 2017 | 107,989 |
| | $ | 1,080 |
| | $ | 1,137,724 |
| | $ | 868,822 |
| | 4,287 |
| | $ | (99,315 | ) | | $ | (195,479 | ) | | $ | 1,712,832 |
|
Net income |
| |
| |
| | 66,949 |
| |
| |
| |
| | 66,949 |
|
Other comprehensive income (loss) |
| |
| |
| |
| |
| |
| | 42,128 |
| | 42,128 |
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Issuance of common stock pursuant to stock-based compensation plans | 382 |
| | 4 |
| | (4 | ) | |
| |
| |
| |
| | — |
|
Shares withheld for payment of employee payroll taxes due on shares issued under stock-based compensation plans |
| |
| |
| |
| | 166 |
| | (6,685 | ) | |
| | (6,685 | ) |
Stock-based compensation expense |
| |
| | 7,322 |
| |
| |
| |
| |
| | 7,322 |
|
Balance at December 31, 2017 | 108,371 |
| | $ | 1,084 |
| | $ | 1,145,042 |
| | $ | 935,771 |
| | 4,453 |
| | $ | (106,000 | ) | | $ | (153,351 | ) | | $ | 1,822,546 |
|
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2018
(In thousands, except par values)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional | | | | | | | | Accumulated Other | | |
| | | Amount | | Paid-in | | Retained | | Treasury Stock | | | | Comprehensive | | |
| Shares | | at $.01 | | Capital | | Earnings | | Shares | | Amount | | (Loss) Income | | Total |
Balance at June 30, 2018 | | 108,422 | | | $ | 1,084 | | | $ | 1,148,196 | | | $ | 878,516 | | | 4,470 | | | $ | (106,507) | | | $ | (184,240) | | | $ | 1,737,049 | |
Net loss | | | | | | | (37,425) | | | | | | | | | (37,425) | |
Cumulative effect of adoption of ASU 2016-01 | | | | | | | (348) | | | | | | | 348 | | | — | |
Cumulative effect of adoption of ASU 2014-09 | | | | | | | 163 | | | | | | | | | 163 | |
Other comprehensive loss | | | | | | | | | | | | | (13,519) | | | (13,519) | |
Issuance of common stock pursuant to stock-based compensation plans | 85 | | | 1 | | | (1) | | | | | | | | | | | — | |
| | | | | | | | | | | | | | | |
Shares withheld for payment of employee payroll taxes due on shares issued under stock-based compensation plans | | | | | | | | | 35 | | | (979) | | | | | (979) | |
Stock-based compensation expense | | | | | 135 | | | | | | | | | | | 135 | |
Balance at September 30, 2018 | 108,507 | | | $ | 1,085 | | | $ | 1,148,330 | | | $ | 840,906 | | | 4,505 | | | $ | (107,486) | | | $ | (197,411) | | | $ | 1,685,424 | |
Net loss | | | | | | | (66,501) | | | | | | | | | (66,501) | |
| | | | | | | | | | | | | | | |
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Other comprehensive loss | | | | | | | | | | | | | (27,948) | | | (27,948) | |
Issuance of common stock pursuant to stock-based compensation plans | 184 | | | 2 | | | (2) | | | | | | | | | | | — | |
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Shares withheld for payment of employee payroll taxes due on shares issued under stock-based compensation plans | | | | | | | | | 79 | | | (1,943) | | | | | (1,943) | |
Stock-based compensation expense | | | | | 1,911 | | | | | | | | | | | 1,911 | |
Balance at December 31, 2018 | 108,691 | | | $ | 1,087 | | | $ | 1,150,239 | | | $ | 774,405 | | | 4,584 | | | $ | (109,429) | | | $ | (225,359) | | | $ | 1,590,943 | |
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See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 20172019 AND 20162018
(In thousands)
|
| | | | | | | |
| Six Months Ended December 31, |
| 2017 | | 2016 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income | $ | 66,949 |
| | $ | 35,789 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 34,972 |
| | 34,168 |
|
Deferred income taxes | (28,808 | ) | | (5,300 | ) |
Equity in net income of equity-method investees | (205 | ) | | (222 | ) |
Stock based compensation | 7,322 |
| | 5,235 |
|
Impairment of long-lived assets | 3,449 |
| | — |
|
Other non-cash items, net | (1,716 | ) | | 130 |
|
Increase (decrease) in cash attributable to changes in operating assets and liabilities, net of amounts applicable to acquisitions: | | | |
Accounts receivable | (19,194 | ) | | 15,885 |
|
Inventories | (65,431 | ) | | (31,921 | ) |
Other current assets | (4,521 | ) | | 20,854 |
|
Other assets and liabilities | 4,636 |
| | (1,038 | ) |
Accounts payable and accrued expenses | 27,973 |
| | 42,547 |
|
Net cash provided by operating activities | 25,426 |
| | 116,127 |
|
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CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Acquisitions of businesses, net of cash acquired | (13,064 | ) | | — |
|
Purchases of property and equipment | (31,027 | ) | | (28,725 | ) |
Proceeds from sale of business | — |
| | 5,419 |
|
Other | — |
| | 1,000 |
|
Net cash used in investing activities | (44,091 | ) | | (22,306 | ) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Borrowings under bank revolving credit facility | 35,000 |
| | 22,000 |
|
Repayments under bank revolving credit facility | (35,000 | ) | | (56,500 | ) |
Borrowings (repayments) of other debt, net | 13,809 |
| | (13,690 | ) |
Acquisition related contingent consideration | — |
| | (2,498 | ) |
Shares withheld for payment of employee payroll taxes | (6,685 | ) | | (7,934 | ) |
Net cash provided by (used in) financing activities | 7,124 |
| | (58,622 | ) |
| | | |
Effect of exchange rate changes on cash | 3,765 |
| | (6,000 | ) |
| | | |
Net (decrease) increase in cash and cash equivalents | (7,776 | ) | | 29,199 |
|
Cash and cash equivalents at beginning of period | 146,992 |
| | 127,926 |
|
Cash and cash equivalents at end of period | $ | 139,216 |
| | $ | 157,125 |
|
| | | | | | | | | | | |
| Six Months Ended December 31, | | |
| 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net loss | $ | (107,985) | | | $ | (103,926) | |
Net loss from discontinued operations | (104,884) | | | (49,052) | |
Net loss from continuing operations | (3,101) | | | (54,874) | |
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities from continuing operations: | | | |
Depreciation and amortization | 27,142 | | | 25,065 | |
Deferred income taxes | (5,155) | | | (22,666) | |
Chief Executive Officer Succession Plan expense, net | — | | | 29,272 | |
Equity in net loss of equity-method investees | 655 | | | 186 | |
Stock-based compensation, net | 5,820 | | | 1,991 | |
Long-lived asset and intangibles impairment | 1,889 | | | 23,709 | |
Other non-cash items, net | 2,661 | | | 1,285 | |
Increase (decrease) in cash attributable to changes in operating assets and liabilities: | | | |
Accounts receivable | 7,540 | | | 9,540 | |
Inventories | 9,389 | | | (5,748) | |
Other current assets | 1,895 | | | (1,528) | |
Other assets and liabilities | (1,242) | | | 4,594 | |
Accounts payable and accrued expenses | (30,345) | | | (10,830) | |
Net cash provided by (used in) operating activities - continuing operations | 17,148 | | | (4) | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Purchases of property and equipment | (29,337) | | | (40,998) | |
| | | |
| | | |
| | | |
Proceeds from sale of businesses and other | 13,120 | | | 3,863 | |
Net cash used in investing activities - continuing operations | (16,217) | | | (37,135) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Borrowings under bank revolving credit facility | 147,000 | | | 150,000 | |
Repayments under bank revolving credit facility | (245,500) | | | (137,646) | |
| | | |
Repayments under term loan | (206,250) | | | (7,500) | |
Proceeds from discontinued operations entities | 309,929 | | | 13,550 | |
Repayments of other debt, net | (501) | | | (601) | |
Shares withheld for payment of employee payroll taxes | (984) | | | (2,922) | |
Net cash provided by financing activities - continuing operations | 3,694 | | | 14,881 | |
Effect of exchange rate changes on cash - continuing operations | 1,382 | | | (1,492) | |
CASH FLOWS FROM DISCONTINUED OPERATIONS | | | |
Cash used in operating activities | (5,687) | | | (2,859) | |
Cash provided by (used in) investing activities | 301,815 | | | (3,472) | |
Cash used in financing activities | (304,100) | | | (4,417) | |
Effect of exchange rate changes on cash - discontinued operations | (537) | | | (477) | |
Net cash flows used in discontinued operations | (8,509) | | | (11,225) | |
Net decrease in cash and cash equivalents and restricted cash | (2,502) | | | (34,975) | |
Cash and cash equivalents at beginning of period | 39,526 | | | 113,018 | |
Cash and cash equivalents and restricted cash at end of period | $ | 37,024 | | | $ | 78,043 | |
Less: cash and cash equivalents of discontinued operations | — | | | (17,098) | |
Cash and cash equivalents and restricted cash of continuing operations at end of period | $ | 37,024 | | | $ | 60,945 | |
See notes to consolidated financial statements.
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except par values and per share data)
1. BUSINESS
The Hain Celestial Group, Inc., a Delaware corporation (collectively, along with its subsidiaries, the “Company,” and herein referred to as “Hain Celestial,” “we,” “us” and “our”), was founded in 1993 and is headquartered in Lake Success, New York. The Company’s mission has continued to evolve since its founding, with health and wellness being the core tenet — To Create and Inspire A Healthier Way of 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 marketmass-market and e-commerce retailers, food service channels and club, drug and convenience stores in over 8070 countries worldwide.
With a proven track record of strategic growth and profitability, theThe Company manufactures, markets, distributes and sells organic and natural products under brand names that are sold as “better-for-you” products, providing consumers with the opportunity to lead A Healthier Way of LifeTMLife™. Hain Celestial is a leader in many organic and natural products categories, with many recognized brands in the various market categories it serves, including Almond Dream®, Arrowhead MillsBearitos®, Bearitos®, Better BeanTM®, BluePrint®, Casbah®, Celestial Seasonings®, Clarks™, Coconut Dream®, Cully & Sully®, Danival®, DeBoles®, Earth’s Best®, Ella’s Kitchen®, Empire®, Europe’s Best®, Farmhouse Fare®Fare™, Frank Cooper’s®, FreeBirdGale’s®, Gale’s®, Garden of Eatin’®, GG UniqueFiberTM®, Hain Pure Foods®, Hartley’s®, Health Valley®, Imagine®, Johnson’s Juice Co.™, Joya®, JoyaLima®, Kosher Valley®, Lima®, Linda McCartney’sMcCartney® (under license), MaraNatha®, Mary Berry (under license), Natumi®, New Covent Garden Soup Co.®, Plainville FarmsOrchard House®, Rice Dream®, Robertson’s®, Rudi’s Gluten-Free Bakery®Bakery™, Rudi’s Organic Bakery®, Sensible Portions®, Spectrum® Organics, Soy Dream®, Soy DreamSun-Pat®, Sun-PatSunripe®, SunSpireTerra®, Terra®, The Greek Gods®, Tilda®, Walnut Acres®, WestSoy®, Yorkshire ProvenderTM® and, Yves Veggie Cuisine®and William’s™. The Company’s personal care products are marketed under the Alba Botanica®, Avalon Organics®, Earth’s Best®, JASON®, Live Clean® and Queen Helene® brands.
ChangesThe Company’s strategy is to focus on simplifying the Company’s portfolio and reinvigorating profitable sales growth through discontinuing uneconomic investment, realigning resources to coincide with individual brand roles, reducing unproductive stock-keeping units (“SKUs”) and brands, and reassessing current pricing architecture. As part of this initiative, the Company reviewed its product portfolio within North America and divided it into “Get Bigger” and “Get Better” brand categories.
The Company’s “Get Bigger” brands represent its strongest brands with higher margins, which compete in categories with strong growth. In order to capitalize on the potential of these brands, the Company began reallocating resources to optimize assortment and increase share of distribution. In addition, the Company will increase its marketing and innovation investments.
The Company’s “Get Better” brands are the brands in which the Company is primarily focused on simplification and expansion of profit. Some of these are low margin, non-strategic brands that add complexity with minimal benefit to the Company’s operations. Accordingly, in fiscal 2019, the Company initiated a SKU rationalization, which included the elimination of approximately 350 low velocity SKUs. The elimination of these SKUs is expected to impact sales growth in the current fiscal year, but is expected to result in expanded profits and a remaining set of core SKUs that will maintain their shelf space in the store.
As part of the Company’s overall strategy, the Company may seek to dispose of businesses and brands that are less profitable or are otherwise less of a strategic fit within our core portfolio. Accordingly, the Company divested of all of its operations of the Hain Pure Protein reportable segment and WestSoy® tofu, seitan and tempeh businesses in the United States in fiscal 2019, the entities comprising its Tilda operating segment and certain other assets of the Tilda business in August 2019 and its Arrowhead Mills® and SunSpire® brands in October 2019.
Productivity and Transformation Costs
As part of the Company’s historical strategic review, it focused on a productivity initiative, which it called “Project Terra.” A key component of this project was the identification of global cost savings and the removal of complexity from the business. In fiscal 2019, the Company announced a new transformation initiative, of which one aspect is to identify additional areas of productivity savings to support sustainable profitable performance.
Productivity and transformation costs include costs, such as consulting and severance costs, relating to streamlining the Company’s manufacturing plants, co-packers and supply chain, eliminating served categories or brands within those categories, and product rationalization initiatives which are aimed at eliminating slow moving SKUs.
Discontinued Operations
On August 27, 2019, the Company and Ebro Foods S.A. (the “Purchaser”) entered into, and consummated the transactions contemplated by, an agreement titled, "Agreement relating to the sale and purchase of the Tilda Group Entities and certain other assets" (the “Sale and Purchase Agreement”).
On February 15, 2019, the Company completed the sale of substantially all of the assets used primarily for the Plainville Farms business, a component of the Company’s Hain Pure Protein Corporation (“HPPC”) operating segment. On June 28, 2019, the Company completed the sale of the remainder of HPPC and Empire Kosher which included the FreeBird and Empire Kosher businesses. These dispositions were undertaken to reduce complexity in the Company’s operations and simplify the Company’s brand portfolio, in addition to allowing additional flexibility to focus on opportunities for growth and innovation in the Company’s more profitable and faster growing core businesses. Collectively, these dispositions were reported in the aggregate as the Hain Pure Protein reportable segment.
These dispositions represented strategic shifts that had a major impact on the Company’s operations and financial results and therefore, the Company is presenting the operating results and cash flows of the Tilda operating segment and the Hain Pure Protein reportable segment within discontinued operations in the current and prior periods. The assets and liabilities of the Tilda operating segment are presented as assets and liabilities of discontinued operations in the Consolidated Balance Sheet as of June 30, 2019. See Note 5, Discontinued Operations, for additional information.
Change in Reportable Segments
Historically, the Company had 3 reportable segments: United States, United Kingdom and Rest of World. Effective July 1, 2017, due to changes to2019, the Company’s internal management andCompany reassessed its segment reporting structure and as a result, the United Kingdom operations of the Ella’s Kitchen® brand (“Ella’s Kitchen UK”),Canada and Hain Ventures operating segments, which was previouslywere included within the Rest of World reportable segment, were moved to the United States reportable segment and renamed the North America reportable segment. Additionally, the Europe operating segment, which was moved toincluded in the Rest of World reportable segment, was combined with the United Kingdom reportable segment and renamed the International reportable segment. Accordingly, the Company now operates under 2 reportable segments: North America and International. Prior period segment information contained herein has been adjusted to reflect the Company’s new operating and reporting structure. See Note 15, 17, SegmentInformation, for additional information on the Company’s operating and reportable segments.information.
2. BASIS OF PRESENTATION
The Company’s unaudited consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliated companies in which the Company exerts significant influence, but which it does not control, are accounted for under the equity method of accounting. As such, consolidated net loss includes the Company's equity in the current earnings or losses of such companies.
The Company's unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP.GAAP and should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “Form 10-K”). The amounts as of and for the periods ended June 30, 20172019 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 six months ended December 31, 20172019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2018.2020. Please refer to the Notes to the Consolidated Financial Statements as of June 30, 20172019 and for the fiscal year then ended included in the Company’s Annual Report on Form 10-K for the period ended June 30, 2017 (the “Form 10-K”) for information not included in these condensed notes.
All amounts in the unaudited consolidated financial statements, notes and tables have been rounded to the nearest thousand, except par values and per share amounts, unless otherwise indicated.
Newly Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718):Improvements to EmployeeShare-Based Payment Accounting. This ASU, among other things, changes the treatment of share-based payment transactions by recognizing the impact of excess tax benefits or deficiencies related to exercised or vested awards in income tax expense in the period of exercise or vesting, instead of additional paid in capital. The updated guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those annual periods. The Company adopted this new guidance effective July 1, 2017. As a result of this adoption:
Significant Accounting Policies
As required, we prospectively recognized discrete tax benefits of $237 and $836, respectively,
The Company's significant accounting policies are described in the income tax line item of our consolidated income statement for the three and six months ended December 31, 2017 related to excess tax benefits upon vesting or settlement in that period.
We elected to adopt the cash flow presentation of the excess tax benefits retrospectively. As a result, we decreased our cash used in financing activities by $3,314 for the six months ended December 31, 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 and six months ended December 31, 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. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are still evaluating the impact of our pending adoption of the new standard on our consolidated financial statements. We are currently assessing the impact the new standard will have on our Consolidated Financial Statements, which will consist primarily of a balance sheet gross up of our operating leases to show equal and offsetting lease assets and lease liabilities.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance outlines a single, comprehensive model for accounting for revenue from contracts with customers, providing a single five-step model to be applied to all revenue transactions. The guidance also requires improved disclosures to assist users of the financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized. Subsequent to the issuance of ASU 2014-09, the FASB has issued various additional ASUs clarifying and amending this new revenue guidance. The guidance is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that period, and we will adopt the new guidance in fiscal 2019. 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. We are currently performing a diagnostic review of our arrangements with customers across our significant businesses, including our practices of offering rebates, refunds, discounts, and other price allowances, and trade and consumer promotion programs. We are evaluating our methods of estimating the amount and timing of these various forms of variable consideration. We are continuing to evaluate the impact the new guidance will have on our consolidated financial statements, but we currently expect to adopt ASU 2014-09 using the modified retrospective option.
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-K10-K. Included herein are certain updates to those policies.
Leases
Effective July 1, 2019, arrangements containing leases are evaluated as an operating or finance lease at lease inception. For operating leases, the Company recognizes an operating right-of-use ("ROU") asset and operating lease liability at lease commencement based on the present value of lease payments over the lease term.
With the exception of certain finance leases, an implicit rate of return is not readily determinable for the Company's leases. For these leases, an incremental borrowing rate is used in determining the present value of lease payments, and is calculated based on information available at the lease commencement date. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest the Company would have to pay to borrow funds on a collateralized basis over a similar term. The Company references market yield curves which are risk-adjusted to approximate a collateralized rate in the currency of the lease. These rates are updated on a quarterly basis for measurement of new lease obligations.
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Leases with an initial term of 12 months or less are not recognized on the Company's balance sheet. The Company has elected to separate lease and non-lease components.
Recently Adopted Accounting Pronouncements
The Company adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), effective July 1, 2019, using a modified retrospective approach. As permitted by the new guidance, the Company elected the package of practical expedients, which among other things, allowed historical lease classification to be carried forward.
Excluding Tilda, adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities as of July 1, 2019 of $87,414 and $92,982, respectively, with the difference largely due to prepaid and deferred rent that were reclassified to the ROU asset value. In addition, the Company recorded a cumulative-effect adjustment to opening retained earnings of $439 at adoption for the impairment of an abandoned ROU asset for a detailed discussionmanufacturing facility in the United Kingdom that was previously impaired and the remaining lease payments were accounted for under ASC Topic 420, Exit or Disposal Obligations. The standard did not materially affect the Company’s consolidated net income (loss) or cash flows. See Note 8, Leases, for further details.
Recently Issued Accounting Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on additional recentlyFinancial Instruments, which requires measurement and recognition of expected versus incurred credit losses for most financial assets. The new guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In August 2018, the FASB issued accounting pronouncements not yet adopted by the Company. There has been no changeASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the statements madeDisclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurement by removing, modifying or adding certain disclosures. The new guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the Form 10-K as ofrequirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the date of filing ofrequirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amended guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact that this Form 10-Q.standard will have on its consolidated financial statements.
3. FORMER CHIEF EXECUTIVE OFFICER SUCCESSION PLAN
On June 24, 2018, the Company entered into a CEO succession plan, whereby the Company’s former CEO, Irwin D. Simon, agreed to terminate his employment with the Company upon the hiring of a new CEO (the “Succession Agreement”). The Succession Agreement provided Mr. Simon with a cash separation payment of $34,295 payable in a single lump sum and cash benefits continuation costs of $208. These costs were recognized from June 24, 2018 through November 4, 2018, at which time the Company’s new CEO, Mark L. Schiller, commenced his employment. Expense recognized in connection with these payments was $9,080 and $33,051 in the three and six months ended December 31, 2018. The cash separation payment was paid on May 6, 2019. Additionally, the Succession Agreement allowed for acceleration of vesting of all service-based awards outstanding at the termination of Mr. Simon’s employment. In connection with these accelerations, the Company recognized additional stock-based compensation expense of $429 ratably through November 4, 2018, of which $117 was recognized in the three months ended December 31, 2018. The aforementioned impacts were recorded in Chief Executive Officer Succession Plan expense, net in the Consolidated Statements of Operations.
As further discussed in Note13, Stock-based Compensation and Incentive Performance Plans, in the three months ended September 30, 2018, the Company’s Compensation Committee determined that no awards would be paid or vested pursuant to the 2016-2018 LTIP. Accordingly, the Company recorded a benefit of $5,065 associated with the reversal of previously accrued amounts under the net sales portion of the 2016-2018 LTIP associated with Mr. Simon.
On October 26, 2018, the Company and Mr. Simon entered into a consulting agreement (the “Consulting Agreement”) in order to, among other things, assist Mr. Schiller with his transition as the Company’s incoming CEO. The term of the Consulting Agreement commenced on November 5, 2018 and continued until February 5, 2019. Mr. Simon received an aggregate consulting fee of $975 as compensation for his services during the consulting term, of which $650 was recognized in the Consolidated Statements of Operations as a component of “Chief Executive Officer Succession Plan expense, net” in the three and six months ended December 31, 2018.
4. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earningsnet income (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | | | | | | |
Net income (loss) from continuing operations | $ | 1,852 | | | $ | (31,787) | | | $ | (3,101) | | | $ | (54,874) | |
Net loss from discontinued operations, net of tax | (2,816) | | | (34,714) | | | (104,884) | | | (49,052) | |
Net loss | $ | (964) | | | $ | (66,501) | | | $ | (107,985) | | | $ | (103,926) | |
| | | | | | | |
Denominator: | | | | | | | |
Basic weighted average shares outstanding | 104,318 | | | 104,056 | | | 104,272 | | | 104,009 | |
Effect of dilutive stock options, unvested restricted stock and unvested restricted share units | 301 | | | — | | | — | | | — | |
Diluted weighted average shares outstanding | 104,619 | | | 104,056 | | | 104,272 | | | 104,009 | |
| | | | | | | |
Basic net income (loss) per common share: | | | | | | | |
Continuing operations | $ | 0.02 | | | $ | (0.31) | | | $ | (0.03) | | | $ | (0.53) | |
Discontinued operations | (0.03) | | | (0.33) | | | (1.01) | | | (0.47) | |
Basic net loss per common share | $ | (0.01) | | | $ | (0.64) | | | $ | (1.04) | | | $ | (1.00) | |
| | | | | | | |
Diluted net income (loss) per common share: | | | | | | | |
Continuing operations | $ | 0.02 | | | $ | (0.31) | | | $ | (0.03) | | | $ | (0.53) | |
Discontinued operations | (0.03) | | | (0.33) | | | (1.01) | | | (0.47) | |
Diluted net loss per common share | $ | (0.01) | | | $ | (0.64) | | | $ | (1.04) | | | $ | (1.00) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 |
| 2016 | | 2017 | | 2016 |
Numerator: | | | | | | | |
Net income | $ | 47,103 |
| | $ | 27,185 |
| | $ | 66,949 |
| | $ | 35,789 |
|
| | | | | | | |
Denominator: | | | | | | | |
Basic weighted average shares outstanding | 103,837 |
| | 103,597 |
| | 103,773 |
| | 103,532 |
|
Effect of dilutive stock options, unvested restricted stock and unvested restricted share units | 603 |
| | 607 |
| | 606 |
| | 693 |
|
Diluted weighted average shares outstanding | 104,440 |
| | 104,204 |
| | 104,379 |
| | 104,225 |
|
| | | | | | | |
Net income per common share: | | | | | | | |
Basic | $ | 0.45 |
| | $ | 0.26 |
| | $ | 0.65 |
| | $ | 0.35 |
|
Diluted | $ | 0.45 |
| | $ | 0.26 |
| | $ | 0.64 |
| | $ | 0.34 |
|
Basic earningsnet income (loss) per share excludes the dilutive effects of stock options, unvested restricted stock and unvested restricted share units. Diluted earnings per share includes
Due to our net losses in the dilutive effects ofsix months ended December 31, 2019 and the three and six months ended December 31, 2018, all common stock equivalents such as stock options and unvested restricted stock awards.awards have been excluded from the computation of diluted net loss per common share because the effect would have been anti-dilutive to the computations in each period.
There were 567485 and 275 stock-based498 restricted stock awards and stock options excluded from our calculation of diluted earningsnet income (loss) per share calculations for the three and six months ended December 31, 20172019 and 2016,2018, respectively, as such awards were anti-dilutive. Additionally, there were 2,550 and 1,152 stock-based awards excluded for the three months ended December 31, 2019 and 2018, 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, 27
There were 689 and 464 restricted stock awards wereand stock options excluded from our calculation of diluted earningsnet loss per share calculation for the three and six months ended December 31, 20162019 and 2018, respectively, as such awards were antidilutive. Restricted stockanti-dilutive. Additionally, there were 2,745 and 710 stock-based awards excluded from our diluted earnings per share calculation for the three and six months ended December 31, 20172019 and 2018, respectively, as such awards were de minimis.contingently issuable based on market or performance conditions, and such conditions had not been achieved during the respective periods.
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 December 31, 2017,2019, the Company had not repurchased any shares under this program and had $250,000 of remaining capacity under the share repurchase program.
4. ACQUISITIONS5. DISCONTINUED OPERATIONS
Sale of Tilda Business
On August 27, 2019, the Company and the Purchaser entered into, and consummated the transactions contemplated by the Sale and Purchase Agreement. Under the Sale and Purchase Agreement, the Company sold the entities comprising its Tilda operating segment (the “Tilda Group Entities”) and certain other assets of the Tilda business to the Purchaser for an aggregate price of $342,000 in cash, subject to customary post-closing adjustments based on the balance sheets of the Tilda business. The other assets sold in the transaction consisted of raw materials, consumables, packaging, and finished and unfinished goods related to the Tilda business held by other Company entities that are not Tilda Group Entities. In January 2020, the Company and the Purchaser agreed to fully resolve all matters relating to post-closing adjustments to the sale price, resulting in a final aggregate sale price of $341,800. The Company accountsused the proceeds from the sale to pay down the remaining outstanding borrowings under its term loan and a portion of its revolving credit facility.
The Sale and Purchase Agreement contains representations, warranties and covenants that are customary for acquisitions in accordancea transaction of this nature. The Company also entered into certain ancillary agreements with ASC 805, Business Combinations. The results of operationsthe Purchaser and certain of the acquisitions have been includedTilda Group Entities in connection with the consolidated results from their respective dates of acquisition. The purchase price of each acquisition is allocatedSale and Purchase Agreement, including a transitional services agreement (the "TSA") pursuant to which the tangible assets, liabilitiesCompany and identifiable intangible assets acquired based on their estimated fair values. Acquisitions may include contingent consideration, the fair value ofPurchaser provide transitional services to one another, and business transfer agreements pursuant to which is estimated on the acquisition date as the present value of the expected contingent payments, determined using weighted probabilities of possible payments. The fair values assigned to identifiable intangible assets acquired were determined primarily by using an income approach which was based on assumptions and estimates made by management. Significant assumptions utilized in the income approach were based on company-specific information and projections which are not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance. The excess of the purchase price over the fair value of the identifiedapplicable Tilda Group Entities will transfer certain non-Tilda assets and liabilities in India and the United Arab Emirates to subsidiaries of the Company to be formed in those countries. Additionally, the Company will distribute certain Tilda products in the United States, Canada and Europe through the expiration of the TSA.
The disposition of the Tilda operating segment represented a strategic shift that had a major impact on the Company’s operations and financial results and has been recordedaccounted for as goodwill.discontinued operations.
The costs related to all acquisitions have been expensed as incurred and are includedfollowing table presents the major classes of Tilda’s results within “Net loss from discontinued operations, net of tax” in “Acquisition related expenses, restructuring and integration charges” in theour Consolidated Statements of Income. AcquisitionOperations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 2,667 | | | $ | 50,590 | | | $ | 30,399 | | | $ | 92,945 | |
Cost of sales | 2,496 | | | 37,668 | | | 26,648 | | | 69,337 | |
Gross profit | 171 | | | 12,922 | | | 3,751 | | | 23,608 | |
Selling, general and administrative expense | 246 | | | 6,892 | | | 5,185 | | | 13,172 | |
| | | | | | | |
Other expense | 824 | | | 537 | | | 1,172 | | | 1,083 | |
Interest expense(1) | — | | | 3,391 | | | 2,432 | | | 6,782 | |
Translation loss(2) | — | | | — | | | 95,120 | | | — | |
Loss (gain) on sale of discontinued operations | 3,752 | | | — | | | (10,170) | | | — | |
Net (loss) income from discontinued operations before income taxes | (4,651) | | | 2,102 | | | (89,988) | | | 2,571 | |
(Benefit) provision for income taxes(3) | (1,835) | | | (407) | | | 13,865 | | | 76 | |
Net (loss) income from discontinued operations, net of tax | $ | (2,816) | | | $ | 2,509 | | | $ | (103,853) | | | $ | 2,495 | |
(1) Interest expense was allocated to discontinued operations based on borrowings repaid with proceeds from the sale of Tilda.
(2) At the completion of the sale of Tilda, the Company reclassified $95,120 of related costscumulative translation losses from Accumulated other comprehensive loss to discontinued operations, net of $215tax.
(3) Includes a tax (benefit) provision related to the tax gain on the sale of Tilda of $(1,250) and $329 were expensed in$15,250 for the three and six months ended December 31, 2017,2019, respectively. Acquisition related costs
Assets and liabilities of $253discontinued operations associated with Tilda presented in the Consolidated Balance Sheets as of June 30, 2019 are included in the following table:
| | | | | | |
| | June 30, |
ASSETS | | 2019 |
Cash and cash equivalents | | $ | 8,509 | |
Accounts receivable, less allowance for doubtful accounts | | 26,955 | |
Inventories | | 65,546 | |
Prepaid expenses and other current assets | | 9,038 | |
Total current assets of discontinued operations(1) | | 110,048 | |
Property, plant and equipment, net | | 40,516 | |
Goodwill | | 133,098 | |
Trademarks and other intangible assets, net | | 84,925 | |
Other assets | | 628 | |
Total noncurrent assets of discontinued operations(1) | | 259,167 | |
| | |
Total assets of discontinued operations | | $ | 369,215 | |
| | |
LIABILITIES | | |
Accounts payable | | $ | 18,341 | |
Accrued expenses and other current liabilities | | 4,675 | |
Current portion of long-term debt | | 8,687 | |
Total current liabilities of discontinued operations(1) | | 31,703 | |
Deferred tax liabilities | | 17,153 | |
Other noncurrent liabilities | | 208 | |
Total noncurrent liabilities of discontinued operations(1) | | 17,361 | |
Total liabilities of discontinued operations(1) | | $ | 49,064 | |
(1) Assets and liabilities from discontinued operations were expensedclassified as current and noncurrent at June 30, 2019 as they did not meet the held-for-sale criteria.
Sale of Hain Pure Protein Reportable Segment
In March 2018, the Company’s Board of Directors approved a plan to sell all of the operations of the HPPC operating segment, which included the Plainville Farms and FreeBird businesses, and the EK Holdings, Inc. (“Empire Kosher” or “Empire”) operating segment, which were reported in the aggregate as the Hain Pure Protein reportable segment. Collectively, these dispositions represented a strategic shift that had a major impact on the Company’s operations and financial results and have been accounted for as discontinued operations.
The Company is presenting the operating results and cash flows of Hain Pure Protein within discontinued operations in the current and prior periods.
Sale of Plainville Farms Business
On February 15, 2019, the Company completed the sale of substantially all of the assets used primarily for the Plainville Farms business (a component of HPPC), which included $25,000 in cash to the purchaser, for a nominal purchase price. In addition, the purchaser assumed the current liabilities of the Plainville Farms business as of the closing date. As a condition to consummating the sale, the Company entered into a Contingent Funding and Earnout Agreement, which provided for the issuance by the Company of an irrevocable stand-by letter of credit (the “Letter of Credit”) of $10,000 which expires nineteen months after issuance. As of June 30, 2019, the purchaser has fully drawn against the Letter of Credit. The Company is entitled to receive an earnout not to exceed, in the aggregate, 120% of the maximum amount that the purchaser draws on the Letter of Credit at any point from the date of issuance through the expiration of the Letter of Credit. Earnout payments are based on a specified percentage of annual free cash flow achieved for all fiscal years ending on or prior to June 30, 2026. If a subsequent change in control of the Plainville Farms business occurs prior to June 30, 2026, the purchaser will pay the Company 120% of the difference between the amount drawn on the Letter of Credit less the sum of all earnout payments made prior to such time up to the net proceeds received by the purchaser. At December 31, 2019, the Company had not recorded an asset associated with the earnout.
Sale of HPPC and Empire Kosher
On June 28, 2019, the Company completed the sale of the remainder of HPPC and EK Holdings, which included the FreeBird and Empire Kosher businesses. The purchase price, net of estimated customary adjustments based on the closing balance sheet of HPPC, was $77,714. The Company is in the process of finalizing the closing adjustments. The Company used the proceeds from the sale to pay down a portion of its outstanding borrowings under its term loan.
The following table presents the major classes of Hain Pure Protein’s results within “Net loss from discontinued operations, net of tax” in our Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | 2019 | | 2018 |
Net sales | $ | — | | | $ | 147,181 | | $ | — | | | $ | 260,720 | |
Cost of sales | — | | | 144,682 | | — | | | 267,796 | |
Gross profit (loss) | — | | | 2,499 | | — | | | (7,076) | |
Selling, general and administrative expense | — | | | 4,750 | | — | | | 8,992 | |
Asset impairments | — | | | 54,946 | | — | | | 57,904 | |
Other expense | — | | | 2,478 | | — | | | 5,195 | |
Loss on sale of discontinued operations(1) | — | | | — | | 1,424 | | | — | |
Net loss from discontinued operations before income taxes | — | | | (59,675) | | (1,424) | | | (79,167) | |
Benefit for income taxes | — | | | (22,452) | | (393) | | | (27,620) | |
Net loss from discontinued operations, net of tax | $ | — | | | $ | (37,223) | | $ | (1,031) | | | $ | (51,547) | |
(1) Primarily relates to preliminary closing balance sheet adjustments.
There were 0 assets or liabilities from discontinued operations associated with Hain Pure Protein at December 31, 2019 or June 30, 2019.
6. INVENTORIES
Inventories consisted of the following:
| | | | | | | | | | | |
| December 31, 2019 | | June 30, 2019 |
Finished goods | $ | 192,587 | | | $ | 199,754 | |
Raw materials, work-in-progress and packaging | 90,540 | | | 99,587 | |
| $ | 283,127 | | | $ | 299,341 | |
At each period end, inventory is reviewed to ensure that it is recorded at the lower of cost or net realizable value. During the six months ended December 31, 2016. The Company did not incur any acquisition-related costs in2019 and the three monthsfiscal year ended December 31, 2016. The expenses incurred primarily related to professional fees and other transaction-related costs associated with our recent acquisitions.
Fiscal 2018
On December 1, 2017,June 30, 2019, the Company acquired Clarks UK Limited, (“Clarks”), a leading maple syruprecorded inventory write-downs of $3,916 and natural sweetener brand,$12,381, respectively, in connection with the United Kingdom. Clarks produces natural sweeteners under the ClarksTM brand, including maple syrup, honey and carob, date and agave syrups, which are sold in leading retailers and used by food service and industrial customers in the United Kingdom. Consideration for the transaction consisteddiscontinuance of cash, net of cash acquired, totaling £9,698 (approximately $13,064 at the transaction date exchange rate). Additionally, contingent consideration of up to a maximum of £1,500 is payable based on the achievement of specified operating results over the 18-month period following completion of the acquisition. Clarks is included in our United Kingdom operating segment. Net sales and income before income taxes attributable to the Clarks acquisition included in our consolidated results represented less than 1% of our consolidated results.
Fiscal 2017
On June 19, 2017, the Company acquired Sonmundo, Inc. d/b/a The Better Bean Company (“Better Bean”), which offers prepared beans and bean-based dips sold in refrigerated tubs under the Better 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 isslow moving SKUs as 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.a product rationalization initiative.
On April 28, 2017, the Company acquired The Yorkshire Provender Limited (“Yorkshire Provender”), a producer of premium branded soups based in North Yorkshire in the United Kingdom. Yorkshire Provender supplies leading retailers, on-the-go food outlets and food service providers in the United Kingdom. Consideration for the transaction consisted of cash, net of cash acquired, totaling £12,465 (approximately $16,110 at the transaction date exchange rate). Additionally, contingent consideration of up to a maximum of £1,500 is payable based on the achievement of specified operating results at the end of the three-year period following the closing date. Yorkshire Provender is included in our United Kingdom operating and reportable segment. Net sales and income before income taxes attributable to Yorkshire Provender included in our consolidated results represented less than 1% of our consolidated results.
5. INVENTORIES
Inventories consisted of the following:
|
| | | | | | | |
| December 31, 2017 | | June 30, 2017 |
Finished goods | $ | 295,927 |
| | $ | 264,148 |
|
Raw materials, work-in-progress and packaging | 206,445 |
| | 163,160 |
|
| $ | 502,372 |
| | $ | 427,308 |
|
6.7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
| | | | | | | | | | | |
| December 31, 2019 | | June 30, 2019 |
Land | $ | 14,323 | | | $ | 14,240 | |
Buildings and improvements | 84,883 | | | 83,151 | |
Machinery and equipment | 290,712 | | | 274,554 | |
Computer hardware and software | 59,889 | | | 48,984 | |
Furniture and fixtures | 19,074 | | | 17,325 | |
Leasehold improvements | 42,026 | | | 32,264 | |
Construction in progress | 14,345 | | | 35,786 | |
| 525,252 | | | 506,304 | |
Less: accumulated depreciation and amortization | 226,694 | | | 218,459 | |
| $ | 298,558 | | | $ | 287,845 | |
|
| | | | | | | |
| December 31, 2017 | | June 30, 2017 |
Land | $ | 34,713 |
| | $ | 33,930 |
|
Buildings and improvements | 113,672 |
| | 116,723 |
|
Machinery and equipment | 367,366 |
| | 350,689 |
|
Computer hardware and software | 53,302 |
| | 51,486 |
|
Furniture and fixtures | 18,067 |
| | 15,993 |
|
Leasehold improvements | 30,290 |
| | 29,296 |
|
Construction in progress | 32,059 |
| | 16,119 |
|
| 649,469 |
| | 614,236 |
|
Less: Accumulated depreciation and amortization | 263,392 |
| | 243,725 |
|
| $ | 386,077 |
| | $ | 370,511 |
|
Depreciation and amortization expense for the three months ended December 31, 20172019 and 20162018 was $10,043$8,024 and $9,888,$6,757, respectively. Such expense for the six months ended December 31, 20172019 and 20162018 was $20,338$15,729 and $20,116,$14,230, respectively.
In the second quarter of fiscalsix months ended December 31, 2018, the Company determined that it was more likely than not that certain fixed assets at onerecorded $5,275 of its manufacturing facilities in the United States would be sold or otherwise disposed of before the end of their estimated useful lives duenon-cash impairment charges primarily related to the Company’s decision to utilize third-party manufacturers. As such,consolidate manufacturing of certain fruit-based products in the United Kingdom. Additionally, the Company recorded a $3,449$534 non-cash impairment charge to write down the value of certain machinery and equipment used to manufacture certain slow moving SKUs in the United States that were discontinued. There were 0 impairment charges recorded during the six months ended December 31, 2019.
8. LEASES
The Company leases office space, warehouse and distribution facilities, manufacturing equipment and vehicles primarily in North America and Europe. The Company determines if an arrangement is or contains a lease at inception. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The Company’s lease agreements generally do not contain residual value guarantees or material restrictive covenants. A limited number of lease agreements include rental payments adjusted periodically for inflation.
Some of the Company’s leases contain variable lease payments, which are expensed as incurred unless those payments are based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and included in the measurement of the lease liability; thereafter, changes to lease payments due to rate or index changes are recorded as variable lease expense in the period incurred. The Company does not have any related party leases, and sublease transactions are de minimis.
The components of lease expenses for the three and six months ended December 31, 2019 were as follows:
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| December 31, 2019 | | December 31, 2019 |
Operating lease expenses | $ | 4,800 | | | $ | 9,489 | |
Finance lease expenses: | | | |
Amortization of ROU assets | 168 | | | 448 | |
Interest on lease liabilities | 20 | | | 41 | |
Total finance lease expenses | 188 | | | 489 | |
Variable lease expenses | 381 | | | 1,240 | |
Short-term lease expenses | 419 | | | 859 | |
Total lease expenses | $ | 5,788 | | | $ | 12,077 | |
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | |
Leases | | Classification | | December 31, 2019 |
Assets | | | | |
Operating lease ROU assets | | Operating lease right of use assets | | $ | 83,845 | |
Finance lease ROU assets, net | | Property, plant and equipment, net | | 1,267 |
Total leased assets | | | | $ | 85,112 | |
| | | | |
Liabilities | | | | |
Current | | | | |
Operating | | Accrued expenses and other current liabilities | | $ | 13,567 | |
Finance | | Current portion of long-term debt | | 442 |
Non-current | | | | |
Operating | | Operating lease liabilities, noncurrent portion | | 76,726 | |
Finance | | Long-term debt, less current portion | | 412 |
Total lease liabilities | | | | $ | 91,147 | |
Additional information related to leases is as follows:
| | | | | |
| Six Months Ended |
| December 31, 2019 |
Supplemental cash flow information | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 8,113 | |
Operating cash flows from finance leases | $ | 12 | |
Financing cash flows from finance leases | $ | 244 | |
Right-of-use assets obtained in exchange for lease obligations (a): | |
Operating leases | $ | 92,640 | |
Finance leases | $ | 1,131 | |
Weighted average remaining lease term: | |
Operating leases | 8.6 years |
Finance leases | 2.4 years |
Weighted average discount rate: | |
Operating leases | 2.7 | % |
Finance leases | 3.1 | % |
(a) Right-of-use assets obtained in exchange for lease obligations includes the closureimpact of the facilityadoption of ASU 2016-02 effective July 1, 2019 (see Note 2) and included $4,851 as assets held for sale within “Prepaid expenses and other current assets”, in itsleases which commenced, were modified or terminated during the six months ended December 31, 2017 Consolidated Balance Sheet.2019.
Maturities of lease liabilities as of December 31, 2019 were as follows:
| | | | | | | | | | | | | | | | | |
Fiscal Year | Operating leases | | Finance leases | | Total |
2020 (remainder of year) | $ | 7,555 | | | $ | 238 | | | | $ | 7,793 | |
2021 | | 15,258 | | 369 | | 15,627 | |
2022 | | 12,987 | | 184 | | 13,171 | |
2023 | | 11,994 | | 54 | | 12,048 | |
2024 | | 10,191 | | 27 | | 10,218 | |
Thereafter | 44,398 | | 6 | | 44,404 | |
Total lease payments | 102,383 | | 878 | | 103,261 |
Less: Imputed interest | 12,090 | | 24 | | 12,114 | |
Total lease liabilities | $ | 90,293 | | | $ | 854 | | | $ | 91,147 | |
7.
The aggregate minimum future lease payments for operating leases at June 30, 2019 were as follows:
| | | | | | | | |
Fiscal Year | | |
2020 | | $ | 19,426 | |
2021 | | 16,584 |
2022 | | 14,218 |
2023 | | 13,221 |
2024 | | 11,041 |
Thereafter | | 44,452 |
| | $ | 118,942 | |
At December 31, 2019, the Company had additional leases that had not yet commenced. Obligations under these leases are not material.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table showsprovides the changes in the carrying amountvalue of goodwill by businessreportable segment:
| | | | | | | | | | | | | | | | | |
| North America | | International | | Total |
Balance as of June 30, 2019 (a) | $ | 612,590 | | | $ | 263,291 | | | $ | 875,881 | |
| | | | | |
Divestiture | (4,357) | | | — | | | (4,357) | |
| | | | | |
Translation and other adjustments, net | (32) | | | 8,213 | | | 8,181 | |
Balance as of December 31, 2019 (a) | $ | 608,201 | | | $ | 271,504 | | | $ | 879,705 | |
|
| | | | | | | | | | | | | | | | | | | |
| 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 |
|
Acquisition activity | — |
| | 6,936 |
| | — |
| | — |
| | 6,936 |
|
Reallocation of goodwill between reporting units (b) | (35,519 | ) | | 35,519 |
| | — |
| | — |
| | — |
|
Translation and other adjustments, net | 134 |
| | 13,567 |
| | — |
| | 3,078 |
| | 16,779 |
|
Balance as of December 31, 2017 (a) | $ | 556,031 |
| | $ | 385,157 |
| | $ | 41,089 |
| | $ | 101,419 |
| | $ | 1,083,696 |
|
(a) The total carrying value of goodwill is reflected net of $126,577$134,277 of accumulated impairment charges, of which $97,358 related to the Company’s United Kingdom operating segment, and $29,219 related to the Company’s Europe operating segment.
(b) Effective July 1, 2017, due to changessegment and $7,700 related to the Company’s internal managementformer Hain Ventures operating segment, whose goodwill and reporting structure,accumulated impairment charges were reallocated within the North America reportable segment to the United Kingdom operations ofStates and Canada operating segments on a relative fair value basis.
During fiscal 2019, the Ella’s Kitchen® brand, which was previously included withinCompany’s reporting units were Hain Pure Personal Care, Grocery and Snacks and Celestial Tea in the United States reportable segment, was moved toHain Daniels, Ella’s Kitchen and Tilda in the United Kingdom reportable segment and Hain Canada, Hain Europe and Hain Ventures within the Rest of World reportable segment. Goodwill totaling $35,519As discussed in Note 17, Segment Information, effective July 1, 2019, the Company changed its segment reporting structure due to changes in how the Company’s Chief Operating Decision Maker (“CODM”) assesses the Company’s performance and allocates resources as a result of a change in the Company’s strategy. In connection with these changes, the Company’s reporting units now consist of the United States (as a single reporting unit) and Hain Canada within the North America reportable segment and Hain Daniels, Ella’s Kitchen, Tilda (prior to its sale on August 27, 2019) and Hain Europe within the International reportable segment. The brands constituting the Hain Ventures reporting unit were combined within the United States and Hain Canada reporting units, and its goodwill was reallocated to the United Kingdom reportable segment in connection with this change. See Note 1, Business,States and Note 15, Segment Information, for additional informationCanada operating segments on the Company’s operating and reportable segments.
a relative fair value basis. The Company performs its annual testcompleted an assessment for goodwill and indefinite lived intangible assetpotential impairment as of the first day ofgoodwill both prior and subsequent to the fourth quarter of its fiscal year. In addition, ifaforementioned changes and when events or circumstances changedetermined that would more likely than not reduce the fair value of any of its reporting units or indefinite-life intangible assets below their carrying value, an interim test is performed.
The change in operating segments as described above was deemed a triggering event, resulting in the Company performing an interim goodwill impairment analysis on the reporting units impacted by this segment change as of immediately before and immediately after the change. There were no impairment indicators resulting from this analysis which was performed inwere present.
On October 7, 2019, the first quarterCompany completed the divestiture of fiscal 2018.
Other than as described above, there were no events or circumstances that warranted an interim impairment testits Arrowhead and Sunspire businesses, components of the United States reporting unit, for goodwill or indefinite lived intangible assetsa purchase price of $13,347 following post-closing adjustments, recognizing a loss on sale of $1,783 during the three and six months ended December 31, 2017.2019. Goodwill of $4,357 was assigned to the divested businesses on a relative fair value basis. An interim impairment analysis was performed for the United States reporting unit both before and after the sale, noting no impairment indicators were present.
Beginning in the three months ended September 30, 2019, operations of Tilda have been classified as discontinued operations as discussed in Note 5, Discontinued Operations. Therefore, goodwill associated with Tilda is presented as Assets of discontinued operations in the consolidated financial statements.
Other Intangible Assets
The following table sets forth balance sheet informationincludes the gross carrying amount and accumulated amortization, where applicable, for intangible assets, excluding goodwill, subject to amortization and intangible assets not subject to amortization:goodwill:
| | | | | | | | | | | |
| December 31, 2019 | | June 30, 2019 |
Non-amortized intangible assets: | | | |
Trademarks and tradenames (a) | $ | 293,362 | | | $ | 291,199 | |
Amortized intangible assets: | | | |
Other intangibles | 209,568 | | | 204,630 | |
Less: accumulated amortization | (124,134) | | | (115,543) | |
Net carrying amount | $ | 378,796 | | | $ | 380,286 | |
|
| | | | | | | |
| December 31, 2017 | | June 30, 2017 |
Non-amortized intangible assets: | | | |
Trademarks and tradenames (a) | $ | 436,106 |
| | $ | 424,817 |
|
Amortized intangible assets: | | | |
Other intangibles | 259,343 |
| | 247,712 |
|
Less: accumulated amortization | (111,538 | ) | | (99,261 | ) |
Net carrying amount | $ | 583,911 |
| | $ | 573,268 |
|
(a) The gross carrying value of trademarks and tradenames is reflected net of $60,202$85,623 and $83,734 of accumulated impairment charges.charges as of December 31, 2019 and June 30, 2019, respectively.
During the three months ended December 31, 2019 and 2018, the Company determined that indicators of impairment existed in certain of the Company’s indefinite-lived tradenames. The Company performed interim impairment analyses during the respective periods, and determined that the fair value of certain of the Company’s tradenames was below their carrying value. During the three months ended December 31, 2019, an impairment charge of $1,889 was recognized in the North America segment. During the three months ended December 31, 2018, an impairment charge of $17,900 was recognized ($15,113 in the North America segment and $2,787 in the International segment).
Amortized intangible assets, which are deemed to have a finite life, primarily consist of customer relationships and are amortized over their estimated useful lives of 3 to 25 years. Amortization expense included in continuing operations was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Amortization of acquired intangibles | $ | 3,189 | | | $ | 3,322 | | | $ | 6,272 | | | $ | 6,681 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Amortization of acquired intangibles | $ | 4,909 |
| | $ | 4,693 |
| | $ | 9,820 |
| | $ | 9,421 |
|
8.10. DEBT AND BORROWINGS
Debt and borrowings consisted of the following:
| | | | | | | | | | | |
| December 31, 2019 | | June 30, 2019 |
Revolving credit facility | $ | 321,700 | | | $ | 420,575 | |
Term loan | — | | | 206,250 | |
Less: Unamortized issuance costs | — | | | (1,022) | |
Other borrowings | 4,551 | | | 4,966 | |
| 326,251 | | | 630,769 | |
Short-term borrowings and current portion of long-term debt | 1,387 | | | 17,232 | |
Long-term debt, less current portion | $ | 324,864 | | | $ | 613,537 | |
|
| | | | | | | |
| December 31, 2017 | | June 30, 2017 |
Credit Agreement borrowings payable to banks | $ | 735,088 |
| | $ | 733,715 |
|
Tilda short-term borrowing arrangements | 19,094 |
| | 7,761 |
|
Other borrowings | 12,964 |
| | 8,672 |
|
| 767,146 |
| | 750,148 |
|
Short-term borrowings and current portion of long-term debt | 25,021 |
| | 9,844 |
|
Long-term debt, less current portion | $ | 742,125 |
| | $ | 740,304 |
|
Credit Agreement
On December 12, 2014,February 6, 2018, the Company entered into the SecondThird Amended and Restated Credit Agreement (the “Credit Agreement”) which. The Credit Agreement provides for a $1,000,000 unsecured revolving credit facility whichthrough February 6, 2023 and provides for a $300,000 term loan. Under the Credit Agreement, the revolving credit facility may be increased by an additional uncommitted $350,000,$400,000, 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 Sterlingeuros, pounds sterling and Canadian Dollarsdollars as well as other currencies which may be designated. In addition, certain wholly-owned foreign subsidiaries of the Company may be designated as co-borrowers. The Credit Agreement contains restrictive covenants, which are usual and customary for facilities of its type, and include, with specified exceptions, limitations on the Company’s ability to engage in certain business activities, incur debt, have liens, make capital expenditures, pay dividends or make other distributions, enter into affiliate transactions, consolidate, merge or acquire or dispose of assets, and make certain
investments, acquisitions and loans. The Credit Agreement also requires the Company to satisfy certain financial covenants, such as maintaining a consolidated interest coverage ratio (as defined in the Credit Agreement) of no less than 4.0 to 1.0 and a consolidated leverage ratio (as defined in the Credit Agreement) of no more than 3.5 to 1.0. The consolidated leverage ratio is subject to a step-up to 4.0 to 1.0 for the four full fiscal quarters following an acquisition.covenants. Obligations under the Credit Agreement are guaranteed by certain existing and future domestic subsidiaries of the Company. As of December 31, 2017,2019, there were $735,088$321,700 of borrowings outstanding under the revolving credit facility and $8,976$9,698 letters of credit outstanding under the Credit Agreement. In the six months ended December 31, 2019, the Company used the proceeds from the sale of Tilda, net of transaction costs, to prepay the entire principal amount of term loan outstanding under its credit facility and to partially pay down its revolving credit facility. In connection with the prepayment, the Company wrote off unamortized deferred debt issuance costs of $973, recorded in Interest and other financing expense, net in the Consolidated Statements of Operations.
On May 8, 2019, the Company entered into the Third Amendment to the Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”), whereby, among other things, its allowable consolidated leverage ratio (as defined in the Credit
Agreement) and $255,936interest coverage ratio (as defined in the Credit Agreement) were adjusted. The Company’s allowable consolidated leverage ratio is no more than 4.75 to 1.0 from March 31, 2019 to December 31, 2019, no more than 4.50 to 1.0 at March 31, 2020, no more than 4.0 to 1.0 at June 30, 2020 and no more than 3.75 to 1.0 on September 30, 2020 and thereafter. Additionally, the Company’s required consolidated interest coverage ratio is no less than 3.0 to 1 through March 31, 2020, no less than 3.75 to 1 through March 31, 2021 and no less than 4.0 to 1 thereafter.
The Amended Credit Agreement also required that the Company and the subsidiary guarantors enter into a Security and Pledge Agreement pursuant to which all of the obligations under the Amended Credit Agreement are secured by liens on assets of the Company and its material domestic subsidiaries, including stock of each of their direct subsidiaries and intellectual property, subject to agreed upon exceptions.
As of December 31, 2019, $668,602 was available under the Amended Credit Agreement, and the Company was in compliance with all associated covenants.covenants, as amended by the Amended Credit Agreement.
The Amended 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%2.50% per annum; or (b) the Base Rate, as defined in the Credit Agreement, plus a rate ranging from 0.00% to 0.70%1.50% 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 Amended 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 Amended Credit Agreement at December 31, 20172019 was 3.00%3.12%. Additionally, the Amended Credit Agreement contains a Commitment Fee, as defined in the Amended Credit Agreement, on the amount unused under the Amended Credit Agreement ranging from 0.20% to 0.30%0.45% per annum. Suchannum, and such Commitment Fee is determined in accordance with a leverage-based pricing grid, as set forth in the Credit Agreement.grid.
Amended Credit Agreement
On February 6, 2018, the Company entered into the Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for the extension of our existing $1,000,000 unsecured revolving credit facility through February 6, 2023 and provides for an additional $300,000 term loan. Under the Amended Credit Agreement, the credit facility may be increased by an additional uncommitted $400,000, provided certain conditions are met. The financial covenants, interest rates, and general terms and conditions of both the unsecured revolving credit facility and term loan under the Amended Credit Agreement are substantially the same as our existing Credit Agreement.
The term loan is payable on the last day of each fiscal quarter commencing June 30, 2018 in an amount equal to $3,750 and can be prepaid in whole or in part without premium or penalty.
Tilda Short-Term Borrowing Arrangements
Tilda maintains short-term borrowing arrangements primarily used to fund the purchase of rice from India and other countries. The maximum borrowings permitted under all such arrangements are £52,000. Outstanding borrowings are collateralized by the current assets of Tilda, typically have six-month terms and bear interest at variable rates typically based on LIBOR plus a margin (weighted average interest rate of approximately 3.20% at December 31, 2017).
Other Borrowings
Other borrowings primarily relate to a cash pool facility in Europe and an uncommited revolving credit facility in India.
The cash pool facility provides our Europe operating segment with sufficient liquidity to support the Company’s growth objectives within this segment. The maximum borrowings permitted under the cash pool arrangement are €12,500. Outstanding borrowings bear interest at variable rates typically based on EURIBOR plus a margin of 1.10% (weighted average interest rate of approximately 1.10% at December 31, 2017).
During the three months ended December 31, 2017, our Tilda Hain Indian subsidiary entered into an uncommitted revolving credit facility to fund its working capital needs. The maximum borrowings permitted under the arrangement are $4,000. There were no amounts outstanding at December 31, 2017.
9.11. INCOME TAXES
TheIn general, 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. The Company calculated its tax rate on a discrete basis for the six months ended December 31, 2018 due to significant variations in the relationship between tax expense and projected pre-tax income. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability inon the effective tax rates from quarter to quarter. The Company’s effective tax rate may change from period-to-period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes and tax audit settlements.
The effective income tax rate from continuing operations was (53.6)%expense of 31.8% and 27.9%19.1% for the three months ended December 31, 20172019 and 2016, respectively,2018, respectively. The effective income tax rate from continuing operations was expense of 25.0% and (13.4)% and 24.1%a benefit of 8.2% for the six months ended December 31, 20172019 and 2016,2018, respectively. The effective income tax raterates from continuing operations in all periods were impacted by provisions in the Tax Cuts and Jobs Act (the "Tax Act"), primarily related to Global Intangible Low Taxed Income and limitations on the deductibility of executive compensation. The effective income tax rates in each period were also impacted by the geographical mix of earnings and state valuation allowance. During the three months ended December 31, 2018, the Company finalized its accounting for income tax effects of the Tax Act and recorded additional expense related to its transition tax liability.
The income tax from discontinued operations was a benefit of $1,835 and expense of $13,472 for the three and six months ended December 31, 2017 was primarily impacted by2019, respectively, while the enactment of the Tax Cuts and Jobs Act (the “Act”) on December 22, 2017. The Act significantly revised the U.S. corporate income tax regime by lowering the U.S. federal corporate tax ratebenefit from 35% to 21% effective January 1, 2018, repealing the deduction for domestic production activities, imposing additional limitations on the deductibility of executive officers’ compensation, implementing a territorial tax systemdiscontinued operations was $22,859 and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. The Act provides for numerous significant tax law changes with varying effective dates. As a fiscal year-end taxpayer, certain provisions of the Act impacted the Company in our second quarter ended December 31, 2017, while other provisions will impact the Company beginning in fiscal 2019.
As the Company has a June 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. federal statutory rate of approximately 28.1% for fiscal 2018 and a 21% U.S. federal statutory rate for subsequent fiscal years. The three and six months ended December 31, 2017 included the impact of a $29,266 reduction to the value of the Company’s net deferred tax liabilities as a result of the lowering of the U.S. corporate income tax rate, partially offset by an estimated $5,211 transition tax imposed on the deemed repatriation of deferred foreign income.
ASC 740 requires recording the effects of tax law changes in the period enacted as discrete items. However, the SEC issued Staff Accounting Bulletin No. 118 which permits filers to record provisional amounts during a measurement period ending no later than one year from the date of the Act’s enactment. As of December 31, 2017, the Company had not completed its accounting for the tax effects of the Act; however, the Company has made a reasonable estimate of the effects on the existing deferred balances as well as the computation of the one-time transition tax. The final transition impacts of the Act may materially differ from the Company’s estimates. Both the tax benefit and the tax charge represent provisional amounts and are subject to change due to further interpretations of the Act, legislative action to address questions that arise because of the Act, any changes in accounting standards for income taxes or related interpretations in response to the Act and/or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including historical records, changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries as well as the Company’s ongoing analysis of the Act. No additional income taxes have been provided for distributing remaining undistributed foreign earnings or any additional outside basis differences inherent in the entities, as these amounts continue to be indefinitely reinvested in foreign operations. However, we do intend to further study changes enacted by the Act, costs of repatriation and the current and future cash needs of foreign operations to determine whether there is an opportunity to repatriate foreign cash balances in the future on a tax-efficient basis.
The effective tax rate$27,544 for the three and six months ended December 31, 20162018, respectively. The expense for income taxes for the six months ended December 31, 2019 was favorable as comparedimpacted by $15,250 of tax related to the statutory rate as a resulttax gain on the sale of the geographical mixTilda Group Entities. The benefit from income taxes for the three and six months ended December 31, 2018 includes the reversal of earningsthe $12,250 deferred tax liability previously recorded related to Hain Pure Protein being classified as held-for-sale. Additionally, the three and was alsosix month tax benefit is impacted by a reduction in the statutory tax rate in the United Kingdom enacted in the first quartereffect of fiscal 2017. Such reduction resulted in a decrease to the carrying value of netcurrent period book losses as well as deferred tax liabilities of $2,086, which favorably impacted the effective tax rate.benefit arising from asset impairment charges.
10.12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)LOSS
The following tables presenttable presents the changes in accumulated other comprehensive loss:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Foreign currency translation adjustments: | | | | | | | |
Other comprehensive income (loss) before reclassifications (1) | $ | 48,655 | | | $ | (27,948) | | | $ | 9,713 | | | $ | (41,467) | |
Amounts reclassified into income (2) | — | | | — | | | 95,120 | | | — | |
Deferred gains (losses) on cash flow hedging instruments: | | | | | | | |
| | | | | | | |
Amounts reclassified into income (3) | 42 | | | — | | | (26) | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net change in accumulated other comprehensive loss | $ | 48,697 | | | $ | (27,948) | | | $ | 104,807 | | | $ | (41,467) | |
(1) Foreign currency translation adjustments included intra-entity foreign currency transactions that were of a long-term investment nature and were net gains of $613 and net losses of $313 for the three months ended December 31, 2019 and 2018, respectively, and net losses of $250 and $472 for the six months ended December 31, 2019 and 2018, respectively.
(2) Foreign currency translation gains or losses of foreign subsidiaries related to divested businesses are reclassified into income (loss):once the liquidation of the respective foreign subsidiaries is substantially complete. At the completion of the sale of Tilda, the Company reclassified $95,120 of translation losses from accumulated comprehensive loss to the Company’s results of discontinued operations.
(3) Amounts reclassified into income for deferred gains (losses) on cash flow hedging instruments are recorded in Cost of sales in the Consolidated Statements of Operations and, before taxes, were $52 and $(26) in the three and six months ended December 31, 2019, respectively. There were 0 amounts reclassified into income in the three and six months ended December 31, 2018.
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Foreign currency translation adjustments: | | | | | | | |
Other comprehensive income (loss) before reclassifications (1) | $ | 8,336 |
| | $ | (51,222 | ) | | $ | 42,197 |
| | $ | (82,958 | ) |
Deferred gains/(losses) on cash flow hedging instruments: | | | | | | | |
Other comprehensive income before reclassifications | — |
| | 45 |
| | 39 |
| | 101 |
|
Amounts reclassified into income (2) | — |
| | (55 | ) | | (106 | ) | | (506 | ) |
Unrealized gain/(loss) on available for sale investment: | | | | | | | |
Other comprehensive loss before reclassifications | 5 |
| | (19 | ) | | (2 | ) | | (69 | ) |
Amounts reclassified into income (3) | — |
| | — |
| | — |
| | 10 |
|
Net change in accumulated other comprehensive income (loss) | $ | 8,341 |
| | $ | (51,251 | ) | | $ | 42,128 |
| | $ | (83,422 | ) |
| |
(1) | Foreign currency translation adjustments included intra-entity foreign currency transactions that were of a long-term investment nature and were a gain of $315and a loss of $12,908 for the three months ended December 31, 2017and 2016,respectively, and a gain of $1,066 and a loss of $20,061 for the six months ended December 31, 2017 and 2016, respectively.
|
| |
(2) | Amounts reclassified into income for deferred gains/(losses) on cash flow hedging instruments are recorded in “Cost of sales” in the Consolidated Statements of Income and, before taxes, were $530 for the three months ended December 31, 2016 and $132 and $1,150 for the six months ended December 31, 2017 and 2016, respectively. There were no amounts reclassified into income for deferred gains/(losses) on cash flow hedging instruments for the three months ended December 31, 2017. |
| |
(3) | Amounts reclassified into income for losses on sale of available for sale investments were based on the average cost of the shares held (See Note 12, Investments and Joint Ventures). Such amounts are recorded in “Other (income)/expense, net” in the Consolidated Statements of Income and were $16 before taxes for the six months ended December 31, 2016. There were no amounts reclassified into income for losses on sale of available for sale investments for the three and six months ended December 31, 2017. |
11.13. STOCK-BASED COMPENSATION AND INCENTIVE PERFORMANCE PLANS
The Company has two stockholder-approved plans,1 stockholder approved plan, 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. The Company also grants shares under its 2019 Equity Inducement Award Program to induce selected individuals to become employees of the Company. The Company maintains a long-term incentive program (the “LTI Plan”). As of December 31, 2019, the LTI Plan consisted of 2 performance-based long-term incentive plans (the “2018-2020 LTIP” and “2019-2021 LTIP”) that provide for performance equity awards that can be earned over defined performance periods. As of December 31, 2018, the Company maintained the 2017-2019 LTIP in addition to a 2016-2018 LTIP that provided for performance equity awards that could have been earned over a three-year performance period. The Company's plans are described in Note 14, Stock-Based Compensation and Incentive Performance Plans, in the Notes to the Consolidated Financial Statements in the Form 10-K.
Compensation cost and related income tax benefits recognized in the Consolidated Statements of IncomeOperations for stock-based compensation plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Selling, general and administrative expense | $ | 3,083 | | | $ | 1,776 | | | $ | 5,820 | | | $ | 1,562 | |
Chief Executive Officer Succession Plan expense, net | — | | | 117 | | | — | | | 429 | |
Discontinued operations | — | | | 18 | | | 544 | | | 55 | |
Total compensation cost recognized for stock-based compensation plans | $ | 3,083 | | | $ | 1,911 | | | $ | 6,364 | | | $ | 2,046 | |
Related income tax benefit | $ | 297 | | | $ | 256 | | | $ | 670 | | | $ | 295 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 |
| 2016 | | 2017 | | 2016 |
Compensation cost (included in selling, general and administrative expense) | $ | 4,158 |
|
| $ | 2,531 |
| | $ | 7,322 |
|
| $ | 5,235 |
|
Related income tax benefit | $ | 1,187 |
| | $ | 949 |
| | $ | 2,421 |
| | $ | 1,963 |
|
Stock Options
A summary of the stock option activity forDuring the six months ended December 31, 2017 is as follows:2018, the Company determined that the achievement of the adjusted operating income goals required to be met for Section 162(m) funding were not probable and therefore no awards would be paid or vested
|
| | | | | | | | | | | | |
| 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 December 31, 2017 | 122 |
| | $ | 2.26 |
| | 13.5 | | $ | 4,893 |
|
|
| | | | | |
| Six Months Ended December 31, |
| 2017 |
| 2016 |
Intrinsic value of options exercised | — |
| | 6,507 |
|
Tax benefit recognized from stock option exercises | — |
| | 2,538 |
|
Atpursuant to the 2016-2018 LTIP and 2017-2019 LTIP. As such, in the six months ended December 31, 2017, there2018, the Company recorded a benefit of $9,478 associated with the reversal of previously accrued amounts for awards under these plans that were dependent on the achievement of pre-determined performance measures. Of this amount, $5,065 was no unrecognizedrecorded in Chief Executive Officer Succession Plan expense, net, and $4,413 was recorded to Selling, general and administration expense (including $1,867 of stock-based compensation expense related to stock option awards.expense).
Restricted Stock
A summary of the restricted stock and restricted share unit activity for the six months ended December 31, 20172019 is as follows:
| | | | | | | | | | | |
| Number of Shares and Units | | Weighted Average Grant Date Fair Value (per share) |
Non-vested restricted stock, restricted share units, and performance units outstanding at June 30, 2019 | 2,729 | | | $ | 12.94 | |
Granted | 486 | | | $ | 18.43 | |
Vested | (188) | | | $ | 23.31 | |
Forfeited | (1,094) | | | $ | 7.89 | |
Non-vested restricted stock, restricted share units, and performance units outstanding at December 31, 2019 | 1,933 | | | $ | 15.48 | |
|
| | | | | | |
| Number of Shares and Units | | Weighted Average Grant Date Fair Value (per share) |
Non-vested restricted stock, restricted share units, and performance units at June 30, 2017 | 992 |
| | $ | 27.59 |
|
Granted | 431 |
| | $ | 33.85 |
|
Vested | (382 | ) | | $ | 36.96 |
|
Forfeited | (14 | ) | | $ | 29.59 |
|
Non-vested restricted stock, restricted share units, and performance units at December 31, 2017 | 1,027 |
| | $ | 26.71 |
|
|
| | | | | | | |
| Six Months Ended December 31, |
| 2017 | | 2016 |
Fair value of restricted stock and restricted share units granted | $ | 14,595 |
| | $ | — |
|
Fair value of shares vested | $ | 14,238 |
| | $ | 9,004 |
|
Tax benefit recognized from restricted shares vesting | $ | 4,887 |
| | $ | 3,464 |
|
On July 3, 2012, the Company entered into a Restricted Stock Agreement (the “Agreement”) with Irwin D. Simon, the Company’s Chairman, PresidentAt December 31, 2019 and Chief Executive Officer. The Agreement provides for a grant of 800 shares of restricted stock (the “Shares”)June 30, 2019, the vestingtable above includes a total of which is both market1,318 and time-based. The market condition is satisfied in increments1,964 shares, respectively, that represent the target number of 200 Shares upon the Company’s common stock achieving four share price targets. On the last dayshares that may be earned under non-vested performance equity awards that are eligible to vest at 300% of any forty-five consecutive trading day period during which the average closing price of the Company’s common stocktarget depending on the Nasdaq Global Select Market equals or exceeds the following prices: $31.25, $36.25, $41.25achievement of pre-defined performance criteria. Additionally, at December 31, 2019 and $50.00, respectively, the market condition for each increment of 200 Shares will be satisfied. The market conditions were required to be satisfied prior to June 30, 2017. Once each market condition has been satisfied, a tranche of 200 Shares will vest in equal amounts annually over a five-year period. Except in the case of a change of control, termination without cause, death or disability (each as defined in Mr. Simon’s Employment Agreement)2019, the unvested Sharestable above includes a total of 29 and 42 shares, respectively, that represent the target number of shares that may be earned under non-vested performance equity awards that are subject to forfeiture unless Mr. Simon remains employed through the applicable market conditions and time vesting periods. The grant date fair value for each tranche was separately estimated based on a Monte Carlo simulation that calculated the likelihood of goal attainment and the time frame most likely for goal attainment. The total grant date fair value of the Shares was estimated to be $16,151, which was expected to be recognized over a weighted-average period of approximately 4.0 years. On September 28, 2012, August 27, 2013, December 13, 2013 and October 22, 2014, the four respective market conditions were satisfied. As such, the four tranches of 200 Shares each are expectedeligible to vest in equal amounts over the five-year period commencingat 150% of target depending on the first anniversaryachievement of the date the market condition for the respective tranche was satisfied.pre-defined performance criteria.
| | | | | | | | | | | |
| Six Months Ended December 31, | | |
| 2019 | | 2018 |
Fair value of restricted stock and restricted share units granted | $ | 8,963 | | | $ | 10,073 | |
Fair value of shares vested | $ | 4,276 | | | $ | 6,938 | |
Tax (benefit) expense recognized from restricted shares vesting | $ | (58) | | | $ | 2,561 | |
At December 31, 2017, $18,6202019, there was $20,957 of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards inclusive of the Shares, waswhich is expected to be recognized over a weighted-averageweighted average period of approximately 1.91.8 years.
Long-Term Incentive PlanStock Options
The Company maintains a long-term incentive program (the “LTI Plan”). The LTI Plan currently consists of a two-year performance-based long-term incentive plan (the “2015-2016 LTIP”) and two performance-based long-term incentive plans (the “2016-2018 LTIP” and the “2017-2019 LTIP”) that provide for performance equity awards that can be earned over the respective three-year performance period. Participants in the LTI Plan include the Company’s executive officers, including the Chief Executive Officer, and certain other key executives.
The Compensation Committee administers the LTI Plan and is responsible for, among other items, selecting the specific performance measures for awards and setting the target performance required to receive an award after the completionA summary of the performance period. The Compensation Committee determines the specific payout to the participants. Such awards may be paid in cash and/or unrestricted shares of the Company’s common stock at the discretion of the Compensation Committee, provided that any such stock-based awards shall be issued pursuant to and be subject to the terms and conditions of the Amended and Restated 2002 Long-Term Incentive and Stock Award Plan, as in effect and as amended from time-to-time.
Upon the adoption of the 2015-2016 LTIP, the Compensation Committee granted an initial award to each participant in the form of equity-based instruments (restricted stock or restricted share units), for a portion of the individual target awards (the “Initial Equity Grants”). These Initial Equity Grants were subject to the achievement of minimum performance goals and vested on a pro rata basis over the three-year period. The 2015-2016 LTIP awards contain an additional year of time-based vesting. The Initial Equity Grants were expensed over the vesting period of three years on a straight-line basis through November 2017.
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 from July 1, 2017 to June 30, 2019 (the “TSR Grant”), respectively. The grant date fair value for these awards was separately estimated based on a Monte Carlo simulation that calculated the likelihood of goal attainment. Each performance unit translates into one unit of common stock. The TSR grant represents half of each participant’s target award. The other half of the 2016-2018 LTIP and 2017-2019 LTIP is based on the Company’s achievement of specified net sales growth targets over the respective three-year period, if the targets are achieved, the award in connection with the 2016-2018 LTIP may be paid in cash and/or unrestricted shares of the Company’s common stock at the discretion of the Compensation Committee, while the award in connection with the 2017-2019 LTIP may be paid only in unrestricted shares of the Company’s common stock.
The Company recorded a net benefit (in addition to the stock-based compensation expense associated with the Initial Equity Grants and the TSR Grant) of $21 and net expense of $525option activity for the three and six months ended December 31, 2017, respectively, due to the Company’s current estimates of achievement under the plans. The Company recorded expense of $1,128 and $2,255 for the three and six months ended2019 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, 2019 | 122 | | | $ | 2.26 | | | | | |
Exercised | — | | | — | | | | | |
Options outstanding and exercisable at December 31, 2019 | 122 | | | $ | 2.26 | | | 11.5 | | $ | 2,890 | |
At December 31, 2016, respectively,2019, there was 0 unrecognized compensation expense related to the LTI Plan.stock option awards.
14. INVESTMENTS
12. INVESTMENTS AND JOINT VENTURES
Equity method investments
In October 2009, the Company formed a joint venture, Hutchison Hain Organic Holdings Limited (“HHO”), with Hutchison China Meditech Ltd. (“Chi-Med”), a majority-owned subsidiary of CK Hutchison Holdings Limited, to market and distribute certain of the Company’s brands in Hong Kong, China and other surrounding markets. Voting control of the joint venture is shared equally between the Company and Chi-Med, although, in the event of a deadlock, Chi-Med has the ability to cast the deciding vote, and therefore, the investment is being accounted for under the equity method of accounting. At December 31, 2017 and June 30, 2017, the carrying value of the Company’s 50.0% investment in, and advances to, HHO were $2,407 and $1,629, respectively, and are included in the Consolidated Balance Sheet as a component of “Investments and joint ventures.”
On October 27, 2015, the Company acquired a 14.9%minority equity interest in Chop’t Creative Salad Company LLC, predecessor to Chop't Holdings, LLC (“Chop’t”). Chop’tdevelops and operates fast-casual, fresh salad restaurants in the Northeast and Mid-Atlantic United States. Chop’t markets and sells certain of the Company’s branded products and provides consumer insight and feedback. The investment is being accounted for as an equity method investment due to the Company’s representation on the Board of Directors. During the three months ended December 31, 2017, the Company’s ownership interest was reduced to 14.3% due to the distributionDirectors of additional ownership interests. Further ownership interest distributions could potentially dilute the Company’s ownership interest to as low as 11.9%.Chop’t. At December 31, 20172019 and June 30, 2017,2019, the carrying value of the Company’s investment in Chop’t was $16,014$14,287 and $16,487,$14,632, respectively, and is included in the Consolidated Balance Sheets as a component of “InvestmentsInvestments and joint ventures.”
Available-For-Sale Securities
The Company has a less than 1% equity ownership interest in Yeo Hiap Seng Limited (“YHS”), a Singapore-based natural food and beverage company listed on the Singapore Exchange, which is accounted for as an available-for-sale security. The shares held at December 31, 2017 totaled 933. The fair value of these shares held was $880 (cost basis of $1,164) at December 31, 2017 and $882 (cost basis of $1,164) at June 30, 2017 and is included in “Investments and joint ventures,” with the related unrealized gain or loss, net of tax, included in “Accumulated other comprehensive loss” in the Consolidated Balance Sheet. The Company concluded that the decline in its YHS investment below its cost basis is temporary and, accordingly, has not recognized a loss in the Consolidated Statements of Operations. In making this determination, the Company considered its intent and ability to hold the investment until the cost is recovered, the financial condition and near-term prospects of YHS, the magnitude of the loss compared to the investment’s cost and publicly available information about the industry and geographic region in which YHS operates.
13.15. 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 December 31, 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 3,006 | | | $ | 3,006 | | | $ | — | | | $ | — | |
Forward foreign currency contracts | 374 | | | — | | | 374 | | | — | |
Equity investment | 652 | | | 652 | | | — | | | — | |
Total | $ | 4,032 | | | $ | 3,658 | | | $ | 374 | | | $ | — | |
Liabilities: | | | | | | | |
Forward foreign currency contracts | $ | 709 | | | $ | — | | | $ | 709 | | | $ | — | |
Total | $ | 709 | | | $ | — | | | $ | 709 | | | $ | — | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Total | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 20,813 |
| | $ | 20,813 |
| | $ | — |
| | $ | — |
|
Forward foreign currency contracts | 39 |
| | — |
| | 39 |
| | — |
|
Available for sale securities | 880 |
| | 880 |
| | — |
| | — |
|
Total | $ | 21,732 |
| | $ | 21,693 |
| | $ | 39 |
| | $ | — |
|
Liabilities: | | | | | | | |
Forward foreign currency contracts | $ | 216 |
| | $ | — |
| | $ | 216 |
| | $ | — |
|
Contingent consideration, non-current | 4,559 |
| | — |
| | — |
| | 4,559 |
|
Total | $ | 4,775 |
| | $ | — |
| | $ | 216 |
| | $ | 4,559 |
|
The following table presents by level within the fair value hierarchy assets and liabilities measured at fair value on a recurring basis as of June 30, 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| Total | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 44 | | | $ | 44 | | | $ | — | | | $ | — | |
Forward foreign currency contracts | 626 | | | — | | | 626 | | | — | |
Equity investment | 621 | | | 621 | | | — | | | — | |
Total | $ | 1,291 | | | $ | 665 | | | $ | 626 | | | $ | — | |
Liabilities: | | | | | | | |
Forward foreign currency contracts | $ | 103 | | | $ | — | | | $ | 103 | | | $ | — | |
| | | | | | | |
Total | $ | 103 | | | $ | — | | | $ | 103 | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| Total | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 21,800 |
| | $ | 21,800 |
| | $ | — |
| | $ | — |
|
Forward foreign currency contracts | 99 |
| | — |
| | 99 |
| | — |
|
Available for sale securities | 882 |
| | 882 |
| | — |
| | — |
|
Total | $ | 22,781 |
| | $ | 22,682 |
| | $ | 99 |
| | $ | — |
|
Liabilities: | | | | | | | |
Forward foreign currency contracts | $ | 53 |
| | $ | — |
| | $ | 53 |
| | $ | — |
|
Contingent consideration, non-current | 2,656 |
| | — |
| | — |
| | 2,656 |
|
Total | $ | 2,709 |
| | $ | — |
| | $ | 53 |
| | $ | 2,656 |
|
Available for sale securities consistThe equity investment consists of the Company’s less than 1% investment in YHS (see Note 12, InvestmentsYeo Hiap Seng Limited, a food and Joint Ventures).beverage manufacturer and distributor based in Singapore. 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.
The Company estimates the original fair value of thepayment related to existing contingent consideration as the present value of the expected contingent payments, determined using the weighted probabilities of the possible payments. The Company reassesses the fair value of contingent payments on a periodic basis. Although the Company believes its estimates and assumptions are reasonable, different assumptions, including those regarding the operating results of the respective businesses, or changes in the future may result in different estimated amounts.
The following table summarizes the Level 3 activity for the six months ended December 31, 2017.
|
| | | |
Balance as of June 30, 2017 | $ | 2,656 |
|
Fair value of initial contingent consideration(a)
| 1,547 |
|
Contingent consideration adjustment (b) | 325 |
|
Translation adjustment | 31 |
|
Balance as of December 31, 2017 | $ | 4,559 |
|
(a) In connection with the acquisition of Clarks during fiscal 2018, payment of a portion of the purchase price is contingent upon the achievement of certain operating results. Contingent consideration of up to a maximum of £1,500 is payable basedarrangements was remote. Accordingly, no liability was recorded on the achievement of specified operating results over the 18-month period following completion of the acquisition.
(b) The changeConsolidated Balance Sheets 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.
either period.
There were no transfers of financial instruments between the three levels of fair value hierarchy during the six months ended December 31, 2017 or2019 and December 31, 2016.2018.
The carrying amount of cash and cash equivalents, accounts receivable, net, accounts payable and certain accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these financial instruments. The Company’s debt approximates fair value due to the debt bearing fluctuating market interest rates (See Note 8, 10, Debt and Borrowings).
In addition to the instruments named above, the Company also makes fair value measurements in connection with its interim and annual goodwill and tradename impairment testing. These measurements fall into Level 3 of the fair value hierarchy (See Note 9, Goodwill and Other Intangible Assets).
Derivative Instruments
The Company primarily has exposure to changes in foreign currency exchange rates relating to certain anticipated cash flows and firm commitments from its international operations. The Company may enter into certain derivative financial instruments, when available on a cost-effective basis, to manage such risk. Derivative financial instruments are not used for speculative purposes. The fair value of these derivatives is included in prepaidPrepaid expenses and other current assets and accruedAccrued expenses and other current liabilities in the Consolidated Balance Sheet.Sheets. For derivative instruments that qualify as hedges of probable forecasted cash flows, the effective portion of changes in fair value is temporarily reported in accumulatedAccumulated other comprehensive incomeloss and recognized in earnings when the hedged item affects earnings. Fair value hedges and derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.
Derivative instruments designated as hedges 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 accumulatedAccumulated other comprehensive incomeloss and is included in current period results.earnings. 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 no0 discontinued foreign exchange hedges for the three and six months ended December 31, 20172019 and December 31, 2016.2018.
There were no cash flow hedges outstanding as of December 31, 2017. The notional and fair value amountsamount of cash flow hedges at December 31, 2019 and June 30, 2017 were $1,8282019 was $10,095 and $84$2,275, respectively. The fair value of cash flow hedges at December 31, 2019 and June 30, 2019 was $102 of net liabilities and $83 of net assets, respectively. The notional and fair value amounts of derivatives designated as fair value hedges at December 31, 2017 were $4,500 and $94 of net liabilities, respectively. There were no fair value hedges outstanding as of June 30, 2017.
The notional and fair value amounts of derivativesforeign currency exchange contracts not designated as hedges at December 31, 20172019 and June 30, 2019 were $17,903$58,746 and $83$41,845, respectively. The fair values of net liabilities, respectively. There were $6,114 of notional amount and $38 of net liabilities of derivativesforeign currency exchange contracts not designated as hedges as ofat December 31, 2019 and June 30, 2017.2019 were $233 of net liabilities and $440 of net assets, respectively.
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 and six months ended December 31, 20172019 and December 31, 2016.2018.
14.16. COMMITMENTS AND CONTINGENCIES
Securities Class Actions Filed in Federal Court
On August 17, 2016, three3 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 three3 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 (the “Consolidated Securities Action”), and Rosewood Funeral Home and Salamon Gimpel were appointed as Co-Lead Plaintiffs. On June 21, 2017, the Company received notice that plaintiff Spadola voluntarily dismissed his claims without prejudice to his ability to participate in the Consolidated Securities Action as an absent class member. The Co-Lead Plaintiffs in the Consolidated Securities Action filed a Consolidated Amended Complaint on August 4, 2017 and a Corrected Consolidated Amended Complaint on September 7, 2017 on behalf of a purported class consisting of all persons who purchased or otherwise acquired Hain Celestial securities between November 5, 2013 and February 10, 2017 (the “Amended Complaint”). The Amended Complaint namesnamed as defendants the Company and certain of its current and former officers (collectively, the “Defendants”) and assertsasserted violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly materially false or misleading statements and omissions in public statements, press releases and SEC filings regarding the Company’s business, prospects, financial results and internal controls. Defendants filed a motion to dismiss the Amended Complaint on October 3, 2017.2017 which the Court granted on March 29, 2019, dismissing the case in its entirety, without prejudice to replead. Co-Lead Plaintiffs filed a Second Amended Consolidated Class Action Complaint on May 6, 2019 (the “Second Amended Complaint”). The Second Amended Complaint again names as defendants the Company and certain of its current and former officers and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegations similar to those in the Amended Complaint, including materially false or misleading statements and omissions in public statements, press releases and SEC filings regarding the Company’s business, prospects, financial results and internal controls. Defendants filed a motion to dismiss the Second Amended Complaint on June 20, 2019. Co-Lead Plaintiffs filed an opposition on December 1, 2017,August 5, 2019, and Defendants filed thesubmitted a reply on January 16, 2018. TheSeptember 3, 2019. This motion to dismiss is pending beforefully briefed, and the Court.parties await a decision.
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 former Board of Directors and certain former 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, two2 additional stockholder derivative complaints were filed in New York State Supreme Court in Nassau County against the former Board of Directors and certain former officers under the captions Scarola v. Simon (the “Scarola Complaint”) and Shakir v. Simon(the (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 allegealleged 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. Co-Lead Plaintiffs requested leave to file an amended consolidated complaint, and on January 14, 2019, the Court partially lifted the stay, ordering Co-Lead Plaintiffs to file their amended complaint by March 7, 2019. Co-Lead Plaintiffs filed a Verified Amended Shareholder Derivative Complaint on March 7, 2019. The Court continued the stay pending a decision on Defendants’ motion to dismiss in the Consolidated Securities Action until April 11, 2018.(referenced above). After the Court in the Consolidated Securities Action dismissed the Amended Complaint, the Court in the Consolidated Derivative Action ordered Co-Lead Plaintiffs to file a second amended complaint no later than July 8, 2019. Co-Lead Plaintiffs filed a Verified Second Amended Shareholder Derivative Complaint on July 8, 2019 (the “Second Amended Derivative Complaint”). Defendants moved to dismiss the Second Amended Derivative Complaint on August 7, 2019. Co-Lead Plaintiffs filed an opposition to Defendants’ motion to dismiss, and Defendants submitted a reply on September 20, 2019. This motion is fully briefed, and the parties await a decision.
Additional Stockholder Class Action and Derivative Complaints Filed in Federal Court
On April 19, 2017 and April 26, 2017, two2 class action and stockholder derivative complaints were filed in the Eastern District of New York against the former Board of Directors and certain former 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 former Board of Directors and certain former officers of the Company. The complaint allegesalleged that the Company’s former directors and certain former officers made materially false and misleading statements in press releases and SEC filings regarding the Company’s business, prospects and financial results. The complaint also allegesalleged that the Company violated its by-laws and Delaware law by failing to hold its 2016 Annual Stockholders Meeting and includes claims for breach of fiduciary duty, unjust enrichment and corporate waste. On August 9, 2017, the Court granted an order to unseal this case and reveal Gary Merenstein as the plaintiff.plaintiff (the “Merenstein Complaint”).
On August 10, 2017, the court granted the parties stipulation to consolidate the Barnes Compliant,Complaint, the Silva Complaint and the Merenstein CompliantComplaint under the caption In re The Hain Celestial Group, Inc. Stockholder Class and Derivative Litigation (the “Consolidated Stockholder Class and Derivative Action”) and to appoint Robbins Arroyo LLP and Scott+Scott as Co-Lead Counsel, with the Law Offices of Thomas G. Amon as Liaison Counsel for Plaintiffs. On September 14, 2017, a related complaint was filed under the caption Oliver v. Berke, et al.(the (the “Oliver Complaint”), and on October 6, 2017, the Oliver Complaint was consolidated with the Consolidated Stockholder Class and Derivative Action. The Plaintiffs filed their consolidated amended complaint under seal on October 26, 2017. On December 20, 2017, the parties agreed to stay Defendants’ time to answer, move,
or otherwise respond to the consolidated amended complaint through and including 30 days after a decision iswas rendered on the motion to dismiss the Amended Complaint in the consolidatedConsolidated Securities Class Actions,Action, described above.
SEC Investigation
As previously disclosed,On March 29, 2019, the Company voluntarily contacted the SEC in August 2016 to advise it of the Company’s delayCourt in the filing ofConsolidated Securities Action granted Defendants’ motion, dismissing the Amended Complaint in its periodic reports andentirety, without prejudice to replead. Co-Lead Plaintiffs in the performance of the independent review conducted by the Audit Committee.Consolidated Securities Action filed a second amended complaint on May 6, 2019. The Company has continued to provide informationparties to the SEC on an ongoing basis, including, among other things,Consolidated Stockholder Class and Derivative Action agreed to continue the resultsstay of the independent review of the Audit Committee as well as other information pertainingDefendants’ time to its internal accounting review relating to revenue recognition. The SEC has issued subpoenasanswer, move, or otherwise respond to the Company relevantconsolidated amended complaint. The stay is continued through 30 days after the Court rules on the motion to its investigation. The Company isdismiss the Second Amended Complaint in the process of responding to the SEC’s requests for information and intends to cooperate fully with the SEC.Consolidated Securities Action.
Other
In addition to the litigation described above, the Company is and may be a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position, cash flows or liquidity.
15.17. SEGMENT INFORMATION
Prior to July 1, 2017,2019, the Company’s operations were managed in eight operating segments: the United States, United Kingdom, Tilda, Hain Pure Protein Corporation (“HPPC”), EK Holdings, Inc. (“Empire”), Canada, Europe and Cultivate. The United States operating segment was also a reportable segment. The United Kingdom and Tilda operating segments were reported in the aggregate as “United Kingdom”, while HPPC and Empire were reported in the aggregate as “Hain Pure Protein,” and Canada, Europe and Cultivate were combined and reported as “Rest of World.”
Effective July 1, 2017, due to changes to the Company’s internal management and reporting structure, the United Kingdom operations of the Ella’s Kitchen® brand, which was previously included within the United States reportable segment, was moved to the United Kingdom reportable segment. As a result, the Company is now managed in nine7 operating segments: the United States, United Kingdom, Tilda, Ella’s Kitchen UK, HPPC, Empire, Europe, Canada and Cultivate.Hain Ventures. For segment reporting purposes, based on economic similarity as outlined within Accounting Standards Codification ("ASC") 280, Segment Reporting, the Company elected to combine the United Kingdom, Tilda and Ella’s Kitchen UK is nowoperating segments into one reportable segment known as United Kingdom. Additionally, the Canada, Europe and Hain Ventures operating segments were combined as the Rest of World reportable segment. Separately, the United States operating segment comprised its own reportable segment.
Effective July 1, 2019, the Company reassessed its segment reporting structure due to changes in how the Company’s CODM assesses the Company’s performance and allocates resources as a result of a change in the Company’s strategy, which includes creating synergies among the Company’s United States and Canada businesses, as well as among the Company’s international businesses in the United Kingdom and Europe. As a result, the Canada and Hain Ventures operating segments, which were included within the Rest of World reportable segment, were moved to the United States reportable segment and renamed the North America reportable segment. Additionally, the Europe operating segment, which was included in the Rest of World reportable segment, was combined with the United Kingdom reportable segment and Tilda operating segments and is reported withinrenamed the United KingdomInternational reportable segment. There were no changes toAccordingly, the Hain Pure ProteinCompany now operates under 2 reportable segment or Rest of World. The priorsegments: North America and International.
Prior period segment information contained below has been adjusted to reflect the Company’s new operating and reporting structure. Additionally, the Tilda operating segment was classified as discontinued operations as discussed in Note 5, Discontinued Operations. Segment information presented herein excludes the results of Tilda for all periods presented.
Net sales and operating income are the primary measures used by the Company’s Chief Operating Decision Maker (“CODM”)CODM to evaluate segment operating performance and to decide how to allocate resources to segments. The CODM is the Company’s Chief Executive Officer.CEO. Expenses related to certain centralized administration functions that are not specifically related to an operating segment are included in “CorporateCorporate and Other.” Corporate and Other expenses are comprised mainly of the compensation and related expenses of certain of the Company’s senior executive officers and other selected employees who perform duties related to the entire enterprise, as well as expenses for certain professional fees, facilities and other items which benefit the Company as a whole. Additionally, acquisition related expenses, restructuringcertain Productivity and integration charges and other, along with accounting review and remediationtransformation costs are included in “CorporateCorporate and Other.” Expenses that are managed centrally, but can be attributed to a segment, such as employee benefits and certain facility costs, are allocated based on reasonable allocation methods. Assets are reviewed byThe Company’s CODM does not use segment asset information to allocate resources or to assess performance of the CODM on a consolidated basissegments and therefore, aretotal segment assets have not reported by operating segment.been disclosed.
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 December 31, | | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Net Sales: | | | | | | | |
North America | $ | 280,693 | | | $ | 305,574 | | | $ | 552,394 | | | $ | 596,765 | |
International | 226,091 | | | 227,992 | | | 436,466 | | | 455,279 | |
| | | | | | | |
| $ | 506,784 | | | $ | 533,566 | | | $ | 988,860 | | | $ | 1,052,044 | |
| | | | | | | |
Operating Income (Loss): | | | | | | | |
North America | $ | 20,062 | | | $ | 9,563 | | | $ | 35,194 | | | $ | 14,069 | |
International | 12,899 | | | 15,153 | | | 22,006 | | | 20,813 | |
| | | | | | | |
| 32,961 | | | 24,716 | | | $ | 57,200 | | | $ | 34,882 | |
Corporate and Other (a) | (23,770) | | | (45,596) | | | (45,554) | | | (83,726) | |
| $ | 9,191 | | | $ | (20,880) | | | $ | 11,646 | | | $ | (48,844) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 |
| 2016 | | 2017 | | 2016 |
Net Sales: | | | | | | | |
United States | $ | 270,303 |
| | $ | 278,640 |
| | $ | 533,962 |
| | $ | 532,872 |
|
United Kingdom | 238,201 |
| | 212,312 |
| | 460,646 |
| | 432,463 |
|
Hain Pure Protein | 158,972 |
| | 152,979 |
| | 278,029 |
| | 269,648 |
|
Rest of World | 107,728 |
| | 96,068 |
| | 210,843 |
| | 186,480 |
|
| $ | 775,204 |
| | $ | 739,999 |
| | $ | 1,483,480 |
| | $ | 1,421,463 |
|
| | | | | | | |
Operating Income: | | | | | | | |
United States | $ | 21,861 |
| | $ | 39,928 |
| | $ | 42,722 |
| | $ | 58,722 |
|
United Kingdom | 13,598 |
| | 9,321 |
| | 23,199 |
| | 17,140 |
|
Hain Pure Protein | 5,328 |
| | 3,541 |
| | 7,570 |
| | 2,523 |
|
Rest of World | 10,535 |
| | 7,477 |
| | 19,532 |
| | 12,532 |
|
| $ | 51,322 |
| | $ | 60,267 |
| | $ | 93,023 |
| | $ | 90,917 |
|
Corporate and Other (a) | (15,029 | ) | | (18,867 | ) | | (25,247 | ) | | (35,766 | ) |
| $ | 36,293 |
| | $ | 41,400 |
| | $ | 67,776 |
| | $ | 55,151 |
|
(a) Includes $5,092In addition to general Corporate and $7,113Other expenses as described above, for the three months ended December 31, 2019, Corporate and Other includes $9,835 of Productivity and transformation costs and tradename impairment charges of $1,889 (related to North America). For the three months ended December 31, 2018, Corporate and Other includes $10,148 of Chief Executive Officer Succession Plan expense, net, $5,506 of Productivity and transformation costs, $920 of accounting review and remediation costs, net of insurance proceeds, and acquisitiontradename impairment charges of $17,900 ($15,113 related to North America; $2,787 related to International).
In addition to general Corporate and Other expenses restructuring and integration charges for the three months ended December 31, 2017 and 2016, respectively. Such expensesas described above, for the six months ended December 31, 20172019, Corporate and 2016 were $6,347Other includes $20,570 of Productivity and $13,534, respectively.transformation costs and tradename impairment charges of $1,889 (related to North America), partially offset by a benefit of $2,562 of proceeds from insurance claim. For the six months ended December 31, 2018, Corporate and Other includes $29,701 of Chief Executive Officer Succession Plan expense, net, $13,483 of Productivity and transformation costs, $4,334 of accounting review and remediation costs, net of insurance proceeds, and tradename impairment charges of $17,900 ($15,113 related to North America; $2,787 related to International).
The Company’s long-lived assets, which primarily representCompany's net property, plant and equipment,sales by geographic area wereproduct category are as follows: |
| | | | | | | |
| December 31, 2017 | | June 30, 2017 |
United States | $ | 187,960 |
| | $ | 194,348 |
|
United Kingdom | 173,299 |
| | 165,396 |
|
All Other | 79,161 |
| | 63,330 |
|
Total | $ | 440,420 |
| | $ | 423,074 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Grocery | $ | 357,972 | | | | $ | 380,497 | | | | $ | 707,774 | | | | $ | 763,094 | |
| | | | | | | |
Snacks | 72,274 | | | | 72,298 | | | | 148,673 | | | | 144,139 | |
Tea | 39,045 | | | | 39,586 | | | | 60,483 | | | | 61,329 | |
Personal Care | 37,493 | | | | 41,185 | | | | 71,930 | | | | 83,482 | |
Total | $ | 506,784 | | | | $ | 533,566 | | | | $ | 988,860 | | | | $ | 1,052,044 | |
The Company’s net sales by geographic region, which are generally based on the location of the Company’s subsidiary,subsidiaries, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | Six Months Ended December 31, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
United States | $ | 242,891 | | | $ | 270,925 | | | $ | 479,225 | | | $ | 525,867 | |
United Kingdom | 171,014 | | | 178,323 | | | 332,595 | | | 357,759 | |
All Other | 92,879 | | | 84,318 | | | 177,040 | | | 168,418 | |
Total | $ | 506,784 | | | $ | 533,566 | | | $ | 988,860 | | | $ | 1,052,044 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
United States | $ | 445,031 |
| | $ | 446,412 |
| | $ | 842,382 |
| | $ | 832,180 |
|
United Kingdom | 238,201 |
| | 212,312 |
| | 460,646 |
| | 432,463 |
|
All Other | 91,972 |
| | 81,275 |
| | 180,452 |
| | 156,820 |
|
Total | $ | 775,204 |
| | $ | 739,999 |
| | $ | 1,483,480 |
| | $ | 1,421,463 |
|
The Company’s long-lived assets, which primarily represent net property, plant and equipment, by geographic area were as follows:
| | | | | | | | | | | |
| December 31, 2019 | | June 30, 2019 |
United States | $ | 114,592 | | | $ | 115,866 | |
United Kingdom | 143,215 | | | 132,876 | |
All Other | 87,149 | | | 87,277 | |
Total | $ | 344,956 | | | $ | 336,019 | |
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 Consolidated Financial Statements and the related Notes thereto for the period ended December 31, 2017 thereto2019 contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2019. Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading “Cautionary Note Regarding Forward Looking Information” in the introduction of this Form 10-Q.
Overview
The Hain Celestial Group, Inc., a Delaware corporation (collectively, along with its subsidiaries, the “Company,” and herein referred to as “Hain Celestial,” “we,” “us” and “our”), was founded in 1993 and is headquartered in Lake Success, New York. The Company’s mission has continued to evolve since its founding, with health and wellness being the core tenet — To Create and Inspire A Healthier Way of 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 8070 countries worldwide.
With a proven track record of strategic growth and profitability, theThe Company manufactures, markets, distributes and sells organic and natural products under brand names that are sold as “better-for-you” products, providing consumers with the opportunity to lead A Healthier Way of LifeTMLife™. Hain Celestial is a leader in many organic and natural products categories, with many recognized brands in the various market categories it serves, including Almond Dream®, Arrowhead MillsBearitos®, Bearitos®, Better BeanTM®, BluePrint®, Casbah®, Celestial Seasonings®, Clarks™, Coconut Dream®, Cully & Sully®, Danival®, DeBoles®, Earth’s Best®, Ella’s Kitchen®, Empire®, Europe’s Best®, Farmhouse Fare®Fare™, Frank Cooper’s®, FreeBirdGale’s®, Gale’s®, Garden of Eatin’®, GG UniqueFiberTM®, Hain Pure Foods®, Hartley’s®, Health Valley®, Imagine®, Johnson’s Juice Co.™, Joya®, JoyaLima®, Kosher Valley®, Lima®, Linda McCartney’sMcCartney® (under license), MaraNatha®, Mary Berry (under license), Natumi®, New Covent Garden Soup Co.®, Plainville FarmsOrchard House®, Rice Dream®, Robertson’s®, Rudi’s Gluten-Free Bakery®Bakery™, Rudi’s Organic Bakery®, Sensible Portions®, Spectrum® Organics, Soy Dream®, Soy DreamSun-Pat®, Sun-PatSunripe®, SunSpireTerra®, Terra®, The Greek Gods®, Tilda®, Walnut Acres®, WestSoy®, Yorkshire ProvenderTM® and, Yves Veggie Cuisine®and William’s™. The Company’s personal care products are marketed under the Alba Botanica®, Avalon Organics®, Earth’s Best®, JASON®, Live Clean® and Queen Helene® brands.
Exploration of Divestiture of Hain Pure Protein
The Company’s strategy is to focus on simplifying the Company’s portfolio and reinvigorating profitable sales growth through discontinuing uneconomic investment, realigning resources to coincide with individual brand roles, reducing unproductive stock-keeping units (“SKUs”) and brands, and reassessing current pricing architecture. As part of this initiative, the Company reviewed its product portfolio within North America and divided it into “Get Bigger” and “Get Better” brand categories.
The Company’s “Get Bigger” brands represent its strongest brands with higher margins, which compete in categories with strong growth. In order to capitalize on the potential of these brands, the Company began reallocating resources to optimize assortment and increase share of distribution. In addition, the Company will increase its marketing and innovation investments.
The Company’s “Get Better” brands are the brands in which the Company is currently exploringprimarily focused on simplification and expansion of profit. Some of these are low margin, non-strategic brands that add complexity with minimal benefit to the divestitureCompany’s operations. Accordingly, in fiscal 2019, the Company initiated a SKU rationalization, which included the elimination of approximately 350 low velocity SKUs. The elimination of these SKUs is expected to impact sales growth in the current fiscal year, but is expected to result in expanded profits and a remaining set of core SKUs that will maintain their shelf space in the store.
As part of the Company’s overall strategy, the Company may seek to dispose of businesses and brands that are less profitable or are otherwise less of a strategic fit within our core portfolio. Accordingly, the Company divested of all of its operations of the Hain Pure Protein business. The Company cannot give any assurances that this will resultreportable segment and WestSoy® tofu, seitan and tempeh businesses in any specific action or regarding the outcome or timing of any action.
Change in Segments
Prior to July 1, 2017, the Company’s operations were managed in eight operating segments: the United States United Kingdom,in fiscal 2019, the entities comprising its Tilda operating segment and certain other assets of the Tilda business in August 2019 and its Arrowhead Mills® and SunSpire® businesses in October 2019.
Productivity and Transformation
As part of the Company’s historical strategic review, it focused on a productivity initiative, which it called “Project Terra.” A key component of this project was the identification of global cost savings and the removal of complexity from the business. In
fiscal 2019, the Company announced a new transformation initiative, of which one aspect is to identify additional areas of productivity savings to support sustainable profitable performance.
Productivity and transformation costs include costs, such as consulting and severance costs, relating to streamlining the Company’s manufacturing plants, co-packers and supply chain, eliminating served categories or brands within those categories, and product rationalization initiatives which are aimed at eliminating slow moving SKUs.
Discontinued Operations
On August 27, 2019, the Company and Ebro Foods S.A. (the “Purchaser”) entered into, and consummated the transactions contemplated by, an agreement titled, "Agreement relating to the sale and purchase of the Tilda Group Entities and certain other assets" (the “Sale and Purchase Agreement”). The Company sold the entities comprising its Tilda operating segment and certain other assets of the Tilda business to the Purchaser for an aggregate price of $341.8 million.
On February 15, 2019, the Company completed the sale of substantially all of the assets used primarily for the Plainville Farms business, a component of the Company’s Hain Pure Protein Corporation (“HPPC”), EK Holdings, Inc. (“Empire”), Canada, Europe operating segment. On June 28, 2019, the Company completed the sale of the remainder of HPPC and Cultivate. The United States operating segment was also a reportable segment. The United KingdomEmpire Kosher which included the FreeBird and Tilda operating segmentsEmpire Kosher businesses. These dispositions were undertaken to reduce complexity in the Company’s operations and simplify the Company’s brand portfolio, in addition to allowing additional flexibility to focus on opportunities for growth and innovation in the Company’s more profitable and faster growing core businesses. Collectively, these dispositions were reported in the aggregate as “United Kingdom”, while HPPC and Empire were reported in the aggregate as “HainHain Pure Protein” and Canada, Europe and Cultivate were combined and reported as “Rest of World.” reportable segment.
Effective July 1, 2017, due to changes toThese dispositions represented strategic shifts that had a major impact on the Company’s internal managementoperations 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,financial results and therefore, the Company is now managed in ninepresenting the operating segments:results and cash flows of 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 segmentssegment and is reported within the United Kingdom reportable segment. There were no changes to the Hain Pure Protein reportable segment or Restwithin discontinued operations in the current and prior periods. The assets and liabilities of World. All prior period data throughout this Management’s Discussion & Analysisthe Tilda operating segment are presented as assets and liabilities of Financial Condition and Resultsdiscontinued operations in the Consolidated Balance Sheet as of Operations has been adjusted to reflect the new operating and reporting structure. June 30, 2019.
See Note 15, Segment Information5, Discontinued Operations, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional details.information on discontinued operations.
Our businessChange in Reportable Segments
Historically, the Company had three reportable segments: United States, United Kingdom and Rest of World. Effective July 1, 2019, the Company reassessed its segment reporting structure due to changes in how the Company’s Chief Executive Officer (“CEO”), who is the chief operating decision maker, assesses the Company’s performance and allocates resources as a result of a change in the Company’s strategy, is to integrate our brands under one management team within eachwhich includes creating synergies among the Company’s United States and Canada businesses, as well as among the Company’s international businesses in the United Kingdom and Europe. As a result, the Canada and Hain Ventures operating segment, which were included within the Rest of World reportable segment, were moved to the United States reportable segment and employ uniform marketing, salesrenamed the North America reportable segment. Additionally, the Europe operating segment, which was included in the Rest of World reportable segment, was combined with the United Kingdom reportable segment and distribution programs when attainable. We believe that, by integrating our various brands, we will continuerenamed the International reportable segment. Accordingly, the Company now operates under two reportable segments: North America and International.
Prior period segment information contained herein has been adjusted to achieve economies of scalereflect the Company’s new operating and enhanced market penetration. We seek to capitalize on the equity of our brands and the distributionreporting structure.
achieved through each of our acquired businesses with strategic introductions of new products that complement existing lines to enhance revenues and margins.
Results of Operations
Comparison of Three Months Ended December 31, 20172019 to Three Months Ended December 31, 20162018
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 December 31, 20172019 and 20162018 (amounts in thousands, other than percentages, which may not add due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | Change in | | |
| December 31, 2019 | | | | December 31, 2018 | | | | Dollars | | Percentage |
Net sales | $ | 506,784 | | | 100.0% | | | $ | 533,566 | | | 100.0% | | | $ | (26,782) | | | (5.0)% | |
Cost of sales | 401,177 | | | 79.2% | | | 432,215 | | | 81.0% | | | (31,038) | | | (7.2)% | |
Gross profit | 105,607 | | | 20.8% | | | 101,351 | | | 19.0% | | | 4,256 | | | 4.2% | |
Selling, general and administrative expenses | 79,078 | | | 15.6% | | | 78,496 | | | 14.7% | | | 582 | | | 0.7% | |
Amortization of acquired intangibles | 3,189 | | | 0.6% | | | 3,322 | | | 0.6% | | | (133) | | | (4.0)% | |
Productivity and transformation costs | 12,260 | | | 2.4% | | | 9,872 | | | 1.9% | | | 2,388 | | | 24.2% | |
Chief Executive Officer Succession Plan expense, net | — | | | —% | | | 10,148 | | | 1.9% | | | (10,148) | | | * | |
Accounting review and remediation costs, net of insurance proceeds | — | | | —% | | | 920 | | | 0.2% | | | (920) | | | * | |
Long-lived asset and intangibles impairment | 1,889 | | | 0.4% | | | 19,473 | | | 3.6% | | | (17,584) | | | * | |
Operating income (loss) | 9,191 | | | 1.8% | | | (20,880) | | | (3.9)% | | | 30,071 | | | 144.0% | |
Interest and other financing expense, net | 4,737 | | | 0.9% | | | 5,428 | | | 1.0% | | | (691) | | | (12.7)% | |
Other expense, net | 1,244 | | | 0.2% | | | 371 | | | 0.1% | | | 873 | | | 235.3% | |
Income (loss) from continuing operations before income taxes and equity in net loss of equity-method investees | 3,210 | | | 0.6% | | | (26,679) | | | (5.0)% | | | 29,889 | | | 112.0% | |
Provision for income taxes | 1,020 | | | 0.2% | | | 5,097 | | | 1.0% | | | (4,077) | | | (80.0)% | |
Equity in net loss of equity-method investees | 338 | | | —% | | | 11 | | | —% | | | 327 | | | * | |
Net income (loss) from continuing operations | $ | 1,852 | | | 0.4% | | | $ | (31,787) | | | (6.0)% | | | $ | 33,639 | | | 105.8% | |
Net loss from discontinued operations, net of tax | (2,816) | | | (0.6)% | | | (34,714) | | | (6.5)% | | | 31,898 | | | 91.9% | |
Net loss | $ | (964) | | | (0.2)% | | | $ | (66,501) | | | (12.5)% | | | $ | 65,537 | | | 98.6% | |
| | | | | | | | | | | |
Adjusted EBITDA | $ | 45,047 | | | 8.9% | | | $ | 37,888 | | | 7.1% | | | $ | 7,159 | | | 18.9% | |
Diluted net income (loss) per common share from continuing operations | $ | 0.02 | | | | | $ | (0.31) | | | | | $ | 0.33 | | | 106.5% | |
Diluted net loss per common share from discontinued operations | (0.03) | | | | | (0.33) | | | | | 0.30 | | | 90.9% | |
Diluted net loss per common share | $ | (0.01) | | | | | $ | (0.64) | | | | | $ | 0.63 | | | 98.4% | |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Change in |
| December 31, 2017 | | December 31, 2016 | | Dollars | | Percentage |
Net sales | $ | 775,204 |
| | 100.0% | | $ | 739,999 |
| | 100.0% | | $ | 35,205 |
| | 4.8% |
Cost of sales | 630,933 |
| | 81.4% | | 601,606 |
| | 81.3% | | 29,327 |
| | 4.9% |
Gross profit | 144,271 |
| | 18.6% | | 138,393 |
| | 18.7% | | 5,878 |
| | 4.2% |
Selling, general and administrative expenses | 90,372 |
| | 11.7% | | 85,187 |
| | 11.5% | | 5,185 |
| | 6.1% |
Amortization of acquired intangibles | 4,909 |
| | 0.6% | | 4,693 |
| | 0.6% | | 216 |
| | 4.6% |
Acquisition related expenses, restructuring and integration charges | 4,797 |
| | 0.6% | | 108 |
| | — | | 4,689 |
| | * |
Accounting review and remediation costs, net of insurance proceeds | 4,451 |
| | 0.6% | | 7,005 |
| | 0.9% | | (2,554 | ) | | (36.5)% |
Long-lived asset impairment | 3,449 |
| | 0.4% | | — |
| | — | | 3,449 |
| | 100.0% |
Operating income | 36,293 |
| | 4.7% | | 41,400 |
| | 5.6% | | (5,107 | ) | | (12.3)% |
Interest and other financing expense, net | 6,513 |
| | 0.8% | | 5,097 |
| | 0.7% | | 1,416 |
| | 27.8% |
Other (income)/expense, net | (760 | ) | | (0.1)% | | (1,353 | ) | | (0.2)% | | 593 |
| | 43.8% |
Income before income taxes and equity in net income of equity-method investees | 30,540 |
| | 3.9% | | 37,656 |
| | 5.1% | | (7,116 | ) | | (18.9)% |
(Benefit)/provision for income taxes | (16,369 | ) | | (2.1)% | | 10,509 |
| | 1.4% | | (26,878 | ) | | * |
Equity in net income of equity-method investees | (194 | ) | | — | | (38 | ) | | — | | (156 | ) | | * |
Net income | $ | 47,103 |
| | 6.1% | | $ | 27,185 |
| | 3.7% | | $ | 19,918 |
| | 73.3% |
| | | | | | | | | | | |
Adjusted EBITDA | $ | 82,678 |
| | 10.7% | | $ | 69,498 |
| | 9.4% | | $ | 13,180 |
| | 19.0% |
* Percentage is not meaningful
Net Sales
Net sales for the three months ended December 31, 20172019 were $775.2$506.8 million, an increasea decrease of $35.2$26.8 million, or 4.8%5.0%, from net sales of $740.0as compared to $533.6 million forin the three months ended December 31, 2016.2018. On a constant currency basis, net sales increaseddecreased approximately 1.9%4.6% from the prior year quarter. The increase in netNet sales was due to sales growthon a constant currency basis decreased in the United Kingdom, Europe, Hain Pure Protein and Canada businesses, partially offset by a decrease in net sales inNorth America reportable segment while the United States segment.International reportable segment remained flat. Further details of changes in net sales by segment are provided below.
Gross Profit
Gross profit for the three months ended December 31, 20172019 was $144.3$105.6 million, an increase of $5.9$4.3 million, or 4.2%, as compared to the prior year quarter. Gross profit margin was 18.6%20.8% of net sales, relatively flat period-over-period. Gross profit was favorably impacted by price realization and operating efficienciescompared to 19.0% in the United Kingdomprior year quarter. The increased profit margin was primarily driven by efficient trade spending and incremental gross profit on higher sales, specifically in Canada and Europe, offset by a decrease in gross profitsupply chain cost reductions in the United States due to increased freight and commodity costs and unfavorable mix, as well as higher commodity costs in the United Kingdom.other productivity savings.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $90.4$79.1 million for the three months ended December 31, 2017,2019, an increase of $5.2$0.6 million, or 6.1%0.7%, from $85.2$78.5 million for the prior year quarter. Selling, general and administrative expenses increased primarilyThe increase was due to higherincreased marketing investmentand advertising spend and variable compensation costs, including stock-based compensation expense, partially offset by a decrease in the United States.broker trade funds. Selling, general and administrative expenses as a percentage of net sales was 11.7%15.6% in the three months ended December 31, 2017 and 11.5%2019 compared to 14.7% in the prior year quarter, reflecting an increase of 2090 basis points primarily attributable to the aforementioned item.items.
Amortization of Acquired Intangibles
Amortization of acquired intangibles was $4.9$3.2 million for the three months ended December 31, 2017, an increase2019, a decrease of $0.2$0.1 million from $4.7$3.3 million in the prior year quarter. The increase was due to the intangibles acquiredquarter as a result of the Company’s acquisitionsmovements in the fourth quarter of fiscal 2017. See Note 4, Acquisitions,foreign currency.
Productivity and Note 7, GoodwillTransformation Costs
Productivity and Other Intangible Assets, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.
Acquisition Related Expenses, Restructuring and Integration Charges
Acquisition related expenses, restructuring and integration chargestransformation costs were $4.8$12.3 million for the three months ended December 31, 2017,2019, an increase of $4.7$2.4 million from $0.1$9.9 million in the prior year quarter. The increase was primarily due to increased severance costs in the current year quarter as compared to the prior year period related to the closure of one of the Company’s manufacturing facilities in the United States and consulting fees incurred in connection with the Company’s Project Terra strategic review.ongoing transformation initiatives and increased severance costs.
Chief Executive Officer Succession Plan Expense, Net
Net costs and expenses associated with the Company’s Former Chief Executive Officer Succession Plan were $10.1 million for the three months ended December 31, 2018. There were no comparable expenses in the three months ended December 31, 2019. See Note 3, Former Chief Executive Officer Succession Plan, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further discussion.
Accounting Review and Remediation Costs, netNet of Insurance Proceeds
Costs and expenses associated with the internal accounting review, remediation and other related matters were $4.5$0.9 million for the three months ended December 31, 2017, compared to $7.0 million in the prior year quarter.
Long-lived Asset Impairment
In the second quarter of fiscal 2018, the Company determined that it was more likely than not that certain fixed assets at one of its manufacturing facilities in the United States would be sold or otherwise disposed of before the end of their estimated useful lives due to the Company’s decision to utilize third-party manufacturers. As2018. No such the Company recorded a $3.4 million non-cash impairment charge related to the closure of the facility for the three months ended December 31, 2017.
Operating Income
Operating income for the three months ended December 31, 2017 was $36.3 million, a decrease of $5.1 million, or 12.3%, from $41.4 millioncosts were incurred in the three months ended December 31, 2016. Operating income as a percentage of net sales was 4.7% in the second quarter of fiscal 2017 compared with 5.6% in the prior year quarter. The decrease in operating income as a percentage of net sales resulted from the items described above.2019.
InterestLong-lived Asset and Other Financing Expense, netIntangibles Impairment
Interest and other financing expense, net totaled $6.5 million forDuring the three months ended December 31, 2017, an increase2019, the Company recorded a pre-tax impairment charge of $1.4$1.9 million or 27.8%, from $5.1 million in the prior year quarter. The increase in interest and other financing expense, net resulted primarily from higher interest expense related to our revolving credit facility ascertain tradenames within the Company's North America segment. During the three months ended December 31, 2018, the Company recorded a resultpre-tax impairment charge of higher variable interest rates on outstanding debt.$17.9 million related to certain tradenames ($15.1 million related to the North America segment and $2.8 million related to the International segment). See Note 8, Debt9, Goodwill and BorrowingsOther Intangible Assets, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q.
Other (Income)/Expense, net
Other (income)/expense, net totaled $0.8 Additionally, in the three months ended December 31, 2018, the Company recorded $1.6 million of non-cash impairment charges primarily related to the write down of the value of certain machinery and equipment.
Operating Income (Loss)
Operating income for the three months ended December 31, 2017,2019 was $9.2 million compared to an operating loss of $20.9 million in the prior year quarter as a result of the items described above.
Interest and Other Financing Expense, Net
Interest and other financing expense, net totaled $4.7 million for the three months ended December 31, 2019, a decrease of $0.6$0.7 million, or 12.7%, from $1.4$5.4 million of income in the prior year quarter. IncludedThe decrease resulted primarily from lower interest expense related to our revolving credit facility as a result of lower outstanding debt and lower variable interest rates. See Note 10, Debt and Borrowings, in other (income)/the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Other Expense, Net
Other expense, net were net unrealized foreign currency gains, which were highertotaled $1.2 million for the three months ended December 31, 2019, compared to $0.4 million in the current quarter than the prior year quarter principally duequarter. The increase was primarily attributable to the effectloss on sale of foreign currency movements on the remeasurement of foreign currency denominated loans.Arrowhead and Sunspire businesses.
Income (Loss) From Continuing Operations Before Income Taxes and Equity in Net IncomeLoss of Equity-Method Investees
Income (loss) before income taxes and equity in the net incomeloss of our equity-method investees for the three months ended December 31, 2017 and 20162019 was $30.5income of $3.2 million and $37.7compared to a loss of $26.7 million respectively.in the prior year quarter. The decreaseincrease 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 benefitexpense from continuing operations was $16.4$1.0 million for the three months ended December 31, 20172019 compared to $10.5$5.1 million of tax expense in the prior year quarter.
OurThe effective income tax rate from continuing operations was (53.6)%expense of 31.8% and 27.9% of pre-tax income19.1% for the three months ended December 31, 20172019 and 2016,December 31, 2018, respectively. The effective rateincome tax rates from continuing operations for the three months ended December 31, 2017 was primarilyall periods were impacted by the enactment ofprovisions in the Tax Cuts and Jobs Act (the “Act”"Tax Act") on December 22, 2017. The Act significantly revised the U.S. corporate income tax regime by lowering the U.S. federal corporate tax rate from 35%, primarily related to 21% effective January 1, 2018, repealing the deduction for domestic production activities, imposing additionalGlobal Intangible Low Taxed Income and limitations on the deductibility of executive officers’ compensation, implementing a territorial tax system, and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. As a fiscal year-end taxpayer, certain provisions of the Act impacted the Company in our second quarter ended December 31, 2017, while other provisions will impact the Company beginning in fiscal 2019.
As the Company has a June 30 fiscal year-end, the lower corporatecompensation. The effective income tax rate will be phasedrates in resulting in a U.S. federal statutory rate of approximately 28.1% for fiscal 2018 and a 21% U.S. federal statutory rate for subsequent fiscal years. The three months ended December 31, 2017 included the impact of a $29.3 million reduction of the value of the Company’s net deferred tax liabilities as a result of the lowering of the U.S. corporate income tax rate, partially offset by an estimated $5.2 million transition tax imposed on the deemed repatriation of deferred foreign income.
ASC 740 requires recording the effects of tax law changes in theeach period enacted as discrete items. However, the SEC issued Staff Accounting Bulletin No. 118 which permits filers to record provisional amounts during a measurement period ending no later than one year from the date of the Act’s enactment. As of December 31, 2017, the Company had not completed its accounting for the tax effects of the Act; however, the Company has made a reasonable estimate of the effects on the existing deferred balances as well as the computation of the one-time transition tax. The final transition impacts of the Act may differ from the Company’s estimates, possibly materially. Both the tax benefit and the tax charge represent provisional amounts and are subject to change due to further interpretations of the Act, legislative action to address questions that arise because of the Act, any changes in accounting standards for income taxes or related interpretations in response to the Act and/or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including historical records, changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries as well as the Company’s ongoing analysis of the Act. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax or any additional outside basis differences inherent in the entities, as these amounts continue to be indefinitely reinvested in foreign operations. However, we do intend to further study changes enacted by the Act, costs of repatriation and the current and future cash needs of foreign operations to determine whether there is an opportunity to repatriate foreign cash balances in the future on a tax-efficient basis.
The effective tax rate for the three months ended December 31, 2016 was favorablywere also impacted by the geographical mix of earnings and a reduction instate valuation allowance. During the statutorythree months ended December 31, 2018, the Company finalized its accounting for income tax rate ineffects of the United Kingdom enacted in the first quarter of fiscal 2017. Tax Act and recorded additional expense related to its transition tax liability.
Our effective tax rate may change from period-to-period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes and tax audit settlements.
Equity in Net IncomeLoss of Equity-Method Investees
Our equity in net incomeloss from our equity-method investments for the three months ended December 31, 2017 increased by $0.22019 was $0.3 million when compared to three months ended December 31, 2016.and essentially break even in the prior year quarter. See Note 12, 14, Investments and Joint Ventures, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Net Income (Loss) from Continuing Operations
Net income from continuing operations for the three months ended December 31, 2017 and 20162019 was $47.1$1.9 million, and $27.2 million, respectively, or $0.45 and $0.26$0.02 per diluted share, respectively.compared to a net loss of $31.8 million, or $0.31 per diluted share, for the three months ended December 31, 2018. The increase was attributable to the factors noted above.
Adjusted EBITDANet Loss from Discontinued Operations, Net of Tax
Our Adjusted EBITDANet loss from discontinued operations, net of tax, for the three months ended December 31, 2019 was $82.7$2.8 million, and $69.5or $0.03 per diluted share, compared to $34.7 million, or $0.33 per diluted share, in the three months ended December 31, 2018.
During the three months ended December 31, 2019, the Company recognized a $3.8 million adjustment to the sale of Tilda entities relating to post-closing adjustments. Net loss from discontinued operations, net of tax, for the three months ended December 31, 2018 included asset impairment charges of $54.9 million associated with our former Hain Pure Protein business.
The income tax benefit from discontinued operations was $1.8 million for the three months ended December 31, 20172019 associated with the tax gain on the sale of the Tilda entities and 2016,the tax effect of current period book losses. The income tax benefit from discontinued operations of $22.9 million for the three months ended December 31, 2018 includes the reversal of the $12.3 million deferred tax liability previously recorded related to Hain Pure Protein being classified as held for sale. In
addition, the benefit is impacted by the tax effect of current period book losses as well as deferred tax benefit arising from asset impairment charges.
See Note 5, Discontinued Operations, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further discussion.
Net Loss
Net loss for the three months ended December 31, 2019 was $1.0 million, or $0.01 per diluted share, compared to $66.5 million, or $0.64 per diuted share, in the prior year quarter. The reduction in net loss was attributable to the factors noted above.
Adjusted EBITDA
Our Adjusted EBITDA was $45.0 million and $37.9 million for the three months ended December 31, 2019 and 2018, respectively, as a result of the factors discussed above and the adjustments described in the Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures presented following the discussion of our results of operations.
Segment Results
The following table provides a summary of net sales and operating income (loss) by reportable segment for the three months ended December 31, 20172019 and 2016:2018:
| | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | North America | | International | | | | Corporate and Other | | Consolidated |
Net sales | | | | | | | | | |
Three months ended 12/31/19 | $ | 280,693 | | | $ | 226,091 | | | | | $ | — | | | $ | 506,784 | |
Three months ended 12/31/18 | 305,574 | | | 227,992 | | | | | — | | | 533,566 | |
$ change | $ | (24,881) | | | $ | (1,901) | | | | | n/a | | | $ | (26,782) | |
% change | (8.1) | % | | (0.8) | % | | | | n/a | | | (5.0) | % |
| | | | | | | | | |
Operating income (loss) | | | | | | | | | |
Three months ended 12/31/19 | $ | 20,062 | | | $ | 12,899 | | | | | $ | (23,770) | | | $ | 9,191 | |
Three months ended 12/31/18 | 9,563 | | | 15,153 | | | | | (45,596) | | | (20,880) | |
$ change | $ | 10,499 | | | $ | (2,254) | | | | | $ | 21,826 | | | $ | 30,071 | |
% change | 109.8 | % | | (14.9) | % | | | | 47.9 | % | | 144.0 | % |
| | | | | | | | | |
Operating income (loss) margin | | | | | | | | | |
Three months ended 12/31/19 | 7.1 | % | | 5.7 | % | | | | n/a | | | 1.8 | % |
Three months ended 12/31/18 | 3.1 | % | | 6.6 | % | | | | n/a | | | (3.9) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | United States | | United Kingdom | | Hain Pure Protein | | Rest of World | | Corporate and Other | | Consolidated |
Net sales | | | | | | | | | | | | |
Three months ended 12/31/17 | | $ | 270,303 |
| | $ | 238,201 |
| | $ | 158,972 |
| | $ | 107,728 |
| | $ | — |
| | $ | 775,204 |
|
Three months ended 12/31/16 | | 278,640 |
| | 212,312 |
| | 152,979 |
| | 96,068 |
| | — |
| | 739,999 |
|
$ change | | $ | (8,337 | ) | | $ | 25,889 |
| | $ | 5,993 |
| | $ | 11,660 |
| | n/a |
| | $ | 35,205 |
|
% change | | (3.0 | )% | | 12.2 | % | | 3.9 | % | | 12.1 | % | | n/a |
| | 4.8 | % |
| | | | | | | | | | | | |
Operating income (loss) | | | | | | | | | | | | |
Three months ended 12/31/17 | | $ | 21,861 |
| | $ | 13,598 |
| | $ | 5,328 |
| | $ | 10,535 |
| | $ | (15,029 | ) | | $ | 36,293 |
|
Three months ended 12/31/16 | | 39,928 |
| | 9,321 |
| | 3,541 |
| | 7,477 |
| | (18,867 | ) | | 41,400 |
|
$ change | | $ | (18,067 | ) | | $ | 4,277 |
| | $ | 1,787 |
| | $ | 3,058 |
| | $ | 3,838 |
| | $ | (5,107 | ) |
% change | | (45.2 | )% | | 45.9 | % | | 50.5 | % | | 40.9 | % | | 20.3 | % | | (12.3 | )% |
| | | | | | | | | | | | |
Operating income margin | | | | | | | | | | | | |
Three months ended 12/31/17 | | 8.1 | % | | 5.7 | % | | 3.4 | % | | 9.8 | % | | n/a |
| | 4.7 | % |
Three months ended 12/31/16 | | 14.3 | % | | 4.4 | % | | 2.3 | % | | 7.8 | % | | n/a |
| | 5.6 | % |
North America
United States
Our net sales in the United StatesNorth America reportable segment for the three months ended December 31, 20172019 were $270.3$280.7 million, a decrease of $8.3$24.9 million, or 3.0%8.1%, from net sales of $278.6$305.6 million forin the three months ended December 31, 2016.prior year quarter. The decrease in net sales was driven by declines in our Better-for-You-Snacks, Better-for-You-Pantry and Fresh Living platforms, partially offset by increases in our Tea, Pure Personal Care and Better-for-You-Baby platforms. In addition, the declines wereprimarily driven by the strategic decision to no longer support certain lower margin stock keeping units (“SKUs”)SKUs in order to reduce complexity and increase gross margins as the Company continues its focus on its top fifty SKUs in the United States. The prior year quarter was negatively impacted by a realignment of customer inventories at certain distributor customers.margins. Operating income in the United StatesNorth America for the three months ended December 31, 20172019 was $21.9$20.1 million, an increase of $10.5 million from $9.6 million in the prior year quarter. The increase was driven by efficient trade spending and supply chain cost reductions in the United States as well as other productivity savings.
International
Our net sales in the International reportable segment for the three months ended December 31, 2019 were $226.1 million, a decrease of $18.1$1.9 million, or 0.8%, from $228.0 million in the prior year quarter. On a constant currency basis, net sales increased 0.1% from the prior year quarter primarily due to growth in our plant based food and beverage products, partially offset by discontinued sales of unprofitable SKUs. Operating income in our International reportable segment for the three months ended December 31, 2019 was $12.9 million, a decrease of $2.3 million from operating income of $39.9$15.2 million for the three months ended December 31, 2016.2018. The decrease in operating income was the result of the aforementioned decrease in net sales, as well as higher marketing investment, increased freight and commodity costs, unfavorable mix, and costs associated with the closure of one of our manufacturing facilities in the United States.
United Kingdom
Our net sales in the United Kingdom segment for the three months ended December 31, 2017 were $238.2 million, an increase of $25.9 million, or 12.2%, from net sales of $212.3 million for the three months ended December 31, 2016. On a constant currency basis, net sales increased 5.1% from the prior year. The net sales increase was primarily due to growth from our Tilda®, Ella’s Kitchen®, Linda McCartney’s® Hartley’s® and Cully and Sully® brands. Also contributing to the increase in net sales was the aforementioned price realization, as well as the acquisitions of The Yorkshire Provender Limited and Clarks UK Limited, both which occurred subsequent to December 31, 2016. Operating income in the United Kingdom segment for the three months ended December 31, 2017 was $13.6 million, an increase of $4.3 million from $9.3 million for the three months ended December 31, 2016. The increase in operating income was primarily due to the aforementioned increase in sales, as well as operating efficiencies achieved at Hain Daniels.
Hain Pure Protein
Our net sales in the Hain Pure Protein segment for the three months ended December 31, 2017 were $159.0 million, an increase of $6.0 million, or 3.9%, from net sales of $153.0 million for the three months ended December 31, 2016. The increase in net sales was primarily due to growth of our FreeBird®, Plainville Farms® and Empire Kosher® brands, partially offset by a decrease in private label sales. Operating income in the segment for the three months ended December 31, 2017 was $5.3 million, an increase of $1.8 million, from $3.5 million for the three months ended December 31, 2016. The increase in operating income was primarily due to the aforementioned increase in net sales and lower conversion costs as a result of production improvements across the business.
Rest of World
Our net sales in Rest of World were $107.7 million for the three months ended December 31, 2017, an increase of $11.7 million, or 12.1%, from net sales of $96.1 million for the three months ended December 31, 2016. On a constant currency basis, net sales increased 5.7% from the prior year. The increase in net sales was primarily due to increased sales volume in Europemarketing and advertising expense and depreciation related to our branded business in grocery and health food channels and private label plant-based beverage business and increased sales in Canada driven by growth in our Sensible Portions®,Yves® and Live Clean® brands, as well as increased private label sales.Operating income incapital expenditures during the segment for the three monthsyear ended December 31, 2017 was $10.5 million, an increase of $3.1 million, from $7.5 million for the three months ended December 31, 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.June 30, 2019.
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, accountingProductivity and transformation costs and tradename impairment charges of $9.8 million and $1.9 million, respectively,are included in Corporate and Other for the three months ended December 31, 2019. Chief Executive Officer Succession Plan expense, net, Productivity and transformation costs and Accounting review and remediation costs, net of insurance proceeds and acquisition related expenses, restructuring and integration charges are included inwithin Corporate and Other andexpenses were $5.1$10.1 million, $5.5 million and $7.1$0.9 million, respectively, for the three months ended December 31, 2017 and 2016, respectively.2018.
Refer to Note 15, 17, Segment Information, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Results of Operations
Comparison of Six Months Ended December 31, 20172019 to Six Months Ended December 31, 20162018
Consolidated Results
The following table compares our results of operations, including as a percentage of net sales, on a consolidated basis, for the six months ended December 31, 20172019 and 20162018 (amounts in thousands, other than percentages, which may not add due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | | | | | | | Change in | | |
| December 31, 2019 | | | | December 31, 2018 | | | | Dollars | | Percentage |
Net sales | $ | 988,860 | | | 100.0% | | | $ | 1,052,044 | | | 100.0% | | | $ | (63,184) | | | (6.0)% | |
Cost of sales | 785,422 | | | 79.4% | | | 861,785 | | | 81.9% | | | (76,363) | | | (8.9)% | |
Gross profit | 203,438 | | | 20.6% | | | 190,259 | | | 18.1% | | | 13,179 | | | 6.9% | |
Selling, general and administrative expenses | 159,758 | | | 16.2% | | | 154,473 | | | 14.7% | | | 5,285 | | | 3.4% | |
Amortization of acquired intangibles | 6,272 | | | 0.6% | | | 6,681 | | | 0.6% | | | (409) | | | (6.1)% | |
Productivity and transformation costs | 26,435 | | | 2.7% | | | 20,205 | | | 1.9% | | | 6,230 | | | 30.8% | |
Chief Executive Officer Succession Plan expense, net | — | | | —% | | | 29,701 | | | 2.8% | | | (29,701) | | | * | |
Proceeds from insurance claim | (2,562) | | | (0.3)% | | | — | | | —% | | | (2,562) | | | * | |
Accounting review and remediation costs, net of insurance proceeds | — | | | —% | | | 4,334 | | | 0.4% | | | (4,334) | | | * | |
Long-lived asset and intangibles impairment | 1,889 | | | 0.2% | | | 23,709 | | | 2.3% | | | (21,820) | | | * | |
Operating income (loss) | 11,646 | | | 1.2% | | | (48,844) | | | (4.6)% | | | 60,490 | | | 123.8% | |
Interest and other financing expense, net | 11,031 | | | 1.1% | | | 9,742 | | | 0.9% | | | 1,289 | | | 13.2% | |
Other expense, net | 2,572 | | | 0.3% | | | 971 | | | 0.1% | | | 1,601 | | | 164.9% | |
Loss from continuing operations before income taxes and equity in net loss of equity-method investees | (1,957) | | | (0.2)% | | | (59,557) | | | (5.7)% | | | 57,600 | | | 96.7% | |
Provision (benefit) for income taxes | 489 | | | —% | | | (4,869) | | | (0.5)% | | | 5,358 | | | 110.0% | |
Equity in net loss of equity-method investees | 655 | | | —% | | | 186 | | | —% | | | 469 | | | 252.2% | |
Net loss from continuing operations | $ | (3,101) | | | (0.3)% | | | $ | (54,874) | | | (5.2)% | | | $ | 51,773 | | | 94.3% | |
Net loss from discontinued operations, net of tax | (104,884) | | | (10.6)% | | | (49,052) | | | (4.7)% | | | (55,832) | | | (113.8)% | |
Net loss | $ | (107,985) | | | (10.9)% | | | $ | (103,926) | | | (9.9)% | | | $ | (4,059) | | | (3.9)% | |
| | | | | | | | | | | |
Adjusted EBITDA | $ | 77,137 | | | 7.8% | | | $ | 66,583 | | | 6.3% | | | $ | 10,554 | | | 15.9% | |
Diluted net income (loss) per common share from continuing operations | $ | (0.03) | | | | | | $ | (0.53) | | | | | | $ | 0.50 | | | 94.3% | |
Diluted net loss per common share from discontinued operations | (1.01) | | | | | | (0.47) | | | | | | (0.54) | | | (114.9)% | |
Diluted net loss per common share | $ | (1.04) | | | | | | $ | (1.00) | | | | | | $ | (0.04) | | | (4.0)% | |
|
| | | | | | | | | | | | | | | | | |
| Six Months Ended | | Change in |
| December 31, 2017 | | December 31, 2016 | | Dollars | | Percentage |
Net sales | $ | 1,483,480 |
| | 100.0% | | $ | 1,421,463 |
| | 100.0% | | $ | 62,017 |
| | 4.4% |
Cost of sales | 1,207,606 |
| | 81.4% | | 1,173,203 |
| | 82.5% | | 34,403 |
| | 2.9% |
Gross profit | 275,874 |
| | 18.6% | | 248,260 |
| | 17.5% | | 27,614 |
| | 11.1% |
Selling, general and administrative expenses | 181,093 |
| | 12.2% | | 170,154 |
| | 12.0% | | 10,939 |
| | 6.4% |
Amortization of acquired intangibles | 9,820 |
| | 0.7% | | 9,421 |
| | 0.7% | | 399 |
| | 4.2% |
Acquisition related expenses, restructuring and integration charges | 10,643 |
| | 0.7% | | 568 |
| | — | | 10,075 |
| | * |
Accounting review and remediation costs, net of insurance proceeds | 3,093 |
| | 0.2% | | 12,966 |
| | 0.9% | | (9,873 | ) | | (76.1)% |
Long-lived asset impairment | 3,449 |
| | 0.2% | | — |
| | — | | 3,449 |
| | 100.0% |
Operating income | 67,776 |
| | 4.6% | | 55,151 |
| | 3.9% | | 12,625 |
| | 22.9% |
Interest and other financing expense, net | 12,828 |
| | 0.9% | | 10,178 |
| | 0.7% | | 2,650 |
| | 26.0% |
Other (income)/expense, net | (3,897 | ) | | (0.3)% | | (1,865 | ) | | (0.1)% | | (2,032 | ) | | (109.0)% |
Income before income taxes and equity in net income of equity-method investees | 58,845 |
| | 4.0% | | 46,838 |
| | 3.3% | | 12,007 |
| | 25.6% |
(Benefit)/Provision for income taxes | (7,899 | ) | | (0.5)% | | 11,271 |
| | 0.8% | | (19,170 | ) | | * |
Equity in net income of equity-method investees | (205 | ) | | — | | (222 | ) | | — | | 17 |
| | 7.7% |
Net income | $ | 66,949 |
| | 4.5% | | $ | 35,789 |
| | 2.5% | | $ | 31,160 |
| | 87.1% |
| | | | | | | | | | | |
Adjusted EBITDA | $ | 142,190 |
| | 9.6% | | $ | 115,116 |
| | 8.1% | | $ | 27,074 |
| | 23.5% |
* Percentage is not meaningful
Net Sales
Net sales for the six months ended December 31, 20172019 were $1.48 billion, an increase$988.9 million, a decrease of $62.0$63.2 million, or 4.4%6.0%, from net sales of $1.42$1.05 billion for the six months ended December 31, 2016.2018. On a constant currency basis, net sales increaseddecreased approximately 2.6%4.7% from the prior year period. The increaseNet sales on a constant currency basis decreased in both the North America and International reportable segments. Further details of changes in net sales was due to sales growth across all segments, as describedby segment are provided below.
Gross Profit
Gross profit for the six months ended December 31, 20172019 was $275.9$203.4 million, an increase of $27.6$13.2 million, or 11.1%6.9%, as compared to the prior year period. Gross profit margin was 18.6%20.6% of net sales, up 110 basis points period-over-period. Grosscompared to 18.1% in the prior year period. The increased profit margin was favorably impactedprimarily driven by more efficient trade spendspending and supply chain cost reductions in the United States in the current year period as compared to the prior year period, price realization and operating efficiencies in the United Kingdom, improved profitability at Hain Pure Proteinwell as a result of lower conversion costs and incremental gross profit on higher sales and operating efficiencies, specifically in Canada and Europe.other productivity savings.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $181.1$159.8 million for the six months ended December 31, 2017,2019, an increase of $10.9$5.3 million, or 6.4%3.4%, from $170.2$154.5 million for the prior year period. 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 12.2% in the six months ended December 31, 2017 and 12.0% in the prior year period, reflecting an increase of 20 basis points primarily attributable to the aforementioned item.
Amortization of Acquired Intangibles
Amortization of acquired intangibles was $9.8 million for the six months ended December 31, 2017, an increase of $0.4 million from $9.4 million in the prior year period. The increase was due to the intangibles acquired as a result of the Company’s acquisitionsincreased marketing and advertising spend in the fourth quartercurrent year period and lower variable compensation costs in the prior year period, including stock-based compensation expense, primarily related to the reversal of fiscal 2017.previously accrued amounts under certain performance based incentive plans of which achievement was no longer probable. See Note 4, Acquisitions,13, Stock-based Compensation and Note 7, Goodwill and Other Intangible AssetsIncentive Performance Plans, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.10-Q for further discussion. These increases were partially offset by a decrease in broker trade funds in the current year period. Selling, general and administrative expenses as a percentage of net sales was 16.2% in the six months ended December 31, 2019 compared to 14.7% in the prior year period, reflecting an increase of 150 basis points primarily attributable to the aforementioned items.
Acquisition Related Expenses, Restructuring and Integration ChargesAmortization of Acquired Intangibles
Acquisition related expenses, restructuring and integration charges were $10.6Amortization of acquired intangibles was $6.3 million for the six months ended December 31, 2017,2019, a decrease of $0.4 million from $6.7 million in the prior year period. The decrease was due to finite-lived intangibles from certain historical acquisitions becoming fully amortized in periods subsequent to December 31, 2018 and the impact of movements in foreign currency.
Productivity and Transformation Costs
Productivity and transformation costs were $26.4 million for the six months ended December 31, 2019, an increase of $10.1$6.2 million from $0.6$20.2 million in the prior year period. The increase was primarily due to increased severance costs in the current year quarter as compared to the prior year period related to the closure of one of the Company’s manufacturing facilities in the United States and consulting fees incurred in connection with the Company’s Project Terra strategic review.ongoing transformation initiatives and increased severance costs for the six months ended December 31, 2019 as compared to the prior year period.
Chief Executive Officer Succession Plan Expense, Net
Net costs and expenses associated with the Company’s Former Chief Executive Officer Succession Plan were $29.7 million for the six months ended December 31, 2018. There were no comparable expenses in the six months ended December 31, 2019. See Note 3, Former Chief Executive Officer Succession Plan, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further discussion.
Proceeds from Insurance Claim
In July of 2019, the Company received $7.0 million as partial payment from an insurance claim relating to business disruption costs associated with a co-packer. Of this amount $4.5 million was recognized in fiscal 2019 as it relates to reimbursement of costs already incurred. The Company recorded the additional $2.6 million in the six months ended December 31, 2019.
Accounting Review and Remediation Costs, netNet of Insurance Proceeds
Costs and expenses associated with the internal accounting review, remediation and other related matters were $8.1$4.3 million for the six months ended December 31, 2017, compared to $13.0 million2018. No such costs were incurred in the prior year period. Included in accounting review and remediation costs for the six months ended December 31, 2017 were insurance proceeds of $5.0 million related to the reimbursement of costs incurred as part of the internal accounting review2019.
Long-lived Asset and the independent review by the Audit Committee and other related matters. The net amount of accounting review and remediation costs forIntangibles Impairment
During the six months ended December 31, 2017 was $3.1 million.
Long-lived Asset Impairment
In the second quarter of fiscal 2018, the Company determined that it was more likely than not that certain fixed assets at one of its manufacturing facilities in the United States would be sold or otherwise disposed of before the end of their estimated useful lives due to the Company’s decision to utilize third-party manufacturers. As such,2019, the Company recorded a $3.4 million non-cashpre-tax impairment charge of $1.9 million related to certain tradenames within the closure of the facility forCompany's North America segment. During the six months ended December 31, 2017.2018, the Company recorded a pre-tax impairment charge of $17.9 million related to certain tradenames ($15.1 million related to the North America segment and $2.8 million related to the International segment). See Note 9, Goodwill and Other Intangible Assets, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q. Additionally, the Company recorded $5.3 million of non-cash impairment charges primarily related to the Company’s decision to consolidate manufacturing of certain fruit-based products in the United Kingdom.
Operating Income (Loss)
Operating income for the six months ended December 31, 20172019 was $67.8$11.6 million compared to an increaseoperating loss of $12.6 million, or 22.9%, from $55.2 million in the six months ended December 31, 2016. Operating income as a percentage of net sales was 4.6% in the six months ended December 31, 2017 compared with 3.9% for the comparable period of fiscal 2016. The increase in operating income as a percentage of net sales resulted from the items described above.
Interest and Other Financing Expense, net
Interest and other financing expense, net totaled $12.8 million for the six months ended December 31, 2017, an increase of $2.7 million, or 26.0%, from $10.2$48.8 million in the prior year period. The increase in interestoperating income resulted from the items described above.
Interest and Other Financing Expense, Net
Interest and other financing expense, net totaled $11.0 million for the six months ended December 31, 2019, an increase of $1.3 million, or 13.2%, from $9.7 million in the prior year period. The increase resulted primarily from a $0.9 million write-off of deferred financing costs due to the repayment of the Company’s term loan and higher interest expense related to our revolving credit facility as a result of higher variable interest rates on outstanding debt. See Note 8, 10, Debt and Borrowings, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Other (Income)/Expense, netNet
Other (income)/expense, net, totaled $3.9$2.6 million of income for the six months ended December 31, 2017, an increase of $2.02019, compared to $1.0 million from $1.9 million of income in the prior year period. Included in other (income)/expense, net were net unrealized foreign currency gains, which were higher in the current period than the prior year period principally dueThe increase was primarily attributable to the effectloss on sale of foreign currency movements on the remeasurement of foreign currency denominated loans.Arrowhead and Sunspire businesses.
IncomeLoss From Continuing Operations Before Income Taxes and Equity in Net IncomeLoss of Equity-Method Investees
IncomeLoss before income taxes and equity in the net incomeloss of our equity-method investees for the six months ended December 31, 2017 and 20162019 was $58.8$2.0 million and $46.8compared to $59.6 million respectively.in the prior year period. The increasereduction in net loss 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 benefitexpense from continuing operations was $7.9$0.5 million for the six months ended December 31, 20172019 compared to $11.3a benefit of $4.9 million of tax expense in the prior year period.
OurThe effective income tax raterates from continuing operations was (13.4)%expense of 25.0% and 24.1%a benefit of pre-tax income8.2% for the six months ended December 31, 20172019 and 2016,December 31, 2018, respectively. The effective income tax rate for the six months ended December 31, 2017 was primarilyboth periods were impacted by provisions in the enactment of theTax Cuts and Jobs Act, on December 22, 2017. The Act significantly revised the U.S. corporate income tax regime by lowering the U.S. federal corporate tax rate from 35%primarily related to 21% effective January 1, 2018, repealing the deduction for domestic production activities, imposing additionalGlobal Intangible Low Taxed Income and limitations on the deductibility of executive officers’ compensation, implementing a territorial tax system, and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries. For an additional discussion on the impact of the Act, see above under the Comparison of Three Months Ended December 31, 2017 to Three Months Ended December 31, 2016, as well as Note 9, Income Taxes, in the Notes to the Consolidated Financial Statements included in Item 1 of this Form 10-Q.
compensation. The effective income tax rate for the six months ended December 31, 2016 was favorable as compared to the statutory rate as a result of the geographical mix of earnings. The effective tax rate for the six months ended December 31, 2016 was favorablyrates in each period were also impacted by the geographical mix of earnings and a reduction instate valuation allowance. During the statutorysix months ended December 31, 2018, the Company finalized its accounting for income tax rate ineffects of the United Kingdom enacted in the first quarter of 2017. Tax Act and recorded additional expense related to its transition tax liability.
Our effective tax rate may change from period-to-period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes and tax audit settlements.
Equity in Net IncomeLoss of Equity-Method Investees
Our equity in net incomeloss from our equity-method investments for the six months ended December 31, 20172019 was flat$0.7 million compared to $0.2 million in the prior year over year.period. See Note 12, 14, Investments and Joint Ventures, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Net IncomeLoss from Continuing Operations
Net incomeloss from continuing operations for the six months ended December 31, 2017 and 20162019 was $66.9$3.1 million and $35.8compared $54.9 million respectively, or $0.64 and $0.34in the prior year period. Net loss per diluted share respectively.from continuing operations was $0.03 for the six months ended December 31, 2019 compared to $0.53 in the prior year period. The increasereduction in net loss was attributable to the factors noted above.
Adjusted EBITDANet Loss from Discontinued Operations, Net of Tax
Our Adjusted EBITDANet loss from discontinued operations, net of tax, for the six months ended December 31, 2019 was $142.2$104.9 million, and $115.1or $1.01 per diluted share, compared to $49.1 million, or $0.47 per diluted share, in the prior year period.
Net loss from discontinued operations, net of tax, for the six months ended December 31, 2019 included a reclassification of $95.1 million of cumulative translation losses from Accumulated comprehensive loss related to the Tilda business to discontinued operations. Net loss from discontinued operations, net of tax, for the six months ended December 31, 2018 included asset impairment charges of $57.9 million associated with our former Hain Pure Protein business.
The income tax expense from discontinued operations was $13.5 million for the six months ended December 31, 20172019 and 2016,is impacted by $15.3 million of tax relating to the tax gain on the sale of the Tilda entities. The income tax benefit from discontinued operations of $27.5 million for the six months ended December 31, 2018 includes the reversal of the $12.3 million deferred tax liability previously recorded related to Hain Pure Protein being classified as held for sale. In addition, the benefit is impacted by the tax effect of current period book losses as well as deferred tax benefit arising from asset impairment charges.
See Note 5, Discontinued Operations, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further discussion.
Net Loss
Net loss for the six months ended December 31, 2019 was $108.0 million, or $1.04 per diluted share, compared to $103.9 million, or $1.00 per diluted share, in the prior year period. The increase in net loss was attributable to the factors noted above.
Adjusted EBITDA
Our Adjusted EBITDA was $77.1 million and $66.6 million for the six months ended December 31, 2019 and 2018, respectively, as a result of the factors discussed above and the adjustments described in the Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures presented 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 six months ended December 31, 20172019 and 2016:2018:
| | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | North America | | International | | | | Corporate and Other | | Consolidated |
Net sales | | | | | | | | | |
Six months ended 12/31/19 | $ | 552,394 | | | $ | 436,466 | | | | | $ | — | | | $ | 988,860 | |
Six months ended 12/31/18 | 596,765 | | | 455,279 | | | | | — | | | 1,052,044 | |
$ change | $ | (44,371) | | | $ | (18,813) | | | | | n/a | | | $ | (63,184) | |
% change | (7.4) | % | | (4.1) | % | | | | n/a | | | (6.0) | % |
| | | | | | | | | |
Operating income (loss) | | | | | | | | | |
Six months ended 12/31/19 | $ | 35,194 | | | $ | 22,006 | | | | | $ | (45,554) | | | $ | 11,646 | |
Six months ended 12/31/18 | 14,069 | | | 20,813 | | | | | (83,726) | | | (48,844) | |
$ change | $ | 21,125 | | | $ | 1,193 | | | | | $ | 38,172 | | | $ | 60,490 | |
% change | 150.2 | % | | 5.7 | % | | | | 45.6 | % | | 123.8 | % |
| | | | | | | | | |
Operating income (loss) margin | | | | | | | | | |
Six months ended 12/31/19 | 6.4 | % | | 5.0 | % | | | | n/a | | | 1.2 | % |
Six months ended 12/31/18 | 2.4 | % | | 4.6 | % | | | | n/a | | | (4.6) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | United States | | United Kingdom | | Hain Pure Protein | | Rest of World | | Corporate and Other | | Consolidated |
Net sales | | | | | | | | | | | | |
Six months ended 12/31/17 | | $ | 533,962 |
| | $ | 460,646 |
| | $ | 278,029 |
| | $ | 210,843 |
| | $ | — |
| | $ | 1,483,480 |
|
Six months ended 12/31/16 | | 532,872 |
| | 432,463 |
| | 269,648 |
| | 186,480 |
| | — |
| | 1,421,463 |
|
$ change | | $ | 1,090 |
| | $ | 28,183 |
| | $ | 8,381 |
| | $ | 24,363 |
| | n/a |
| | $ | 62,017 |
|
% change | | 0.2 | % | | 6.5 | % | | 3.1 | % | | 13.1 | % | | n/a |
| | 4.4 | % |
| | | | | | | | | | | | |
Operating income (loss) | | | | | | | | | | | | |
Six months ended 12/31/17 | | $ | 42,722 |
| | $ | 23,199 |
| | $ | 7,570 |
| | $ | 19,532 |
| | $ | (25,247 | ) | | $ | 67,776 |
|
Six months ended 12/31/16 | | 58,722 |
| | 17,140 |
| | 2,523 |
| | 12,532 |
| | (35,766 | ) | | 55,151 |
|
$ change | | $ | (16,000 | ) | | $ | 6,059 |
| | $ | 5,047 |
| | $ | 7,000 |
| | $ | 10,519 |
| | $ | 12,625 |
|
% change | | (27.2 | )% | | 35.4 | % | | 200.0 | % | | 55.9 | % | | 29.4 | % | | 22.9 | % |
| | | | | | | | | | | | |
Operating income margin | | | | | | | | | | | | |
Six months ended 12/31/17 | | 8.0 | % | | 5.0 | % | | 2.7 | % | | 9.3 | % | | n/a |
| | 4.6 | % |
Six months ended 12/31/16 | | 11.0 | % | | 4.0 | % | | 0.9 | % | | 6.7 | % | | n/a |
| | 3.9 | % |
North America
United States
Our net sales in the United StatesNorth America reportable segment for the six months ended December 31, 20172019 were $534.0$552.4 million, an increasea decrease of $1.1$44.4 million, or 0.2%7.4%, from net sales of $532.9$596.8 million forin the six months ended December 31, 2016.prior year period. The increasedecrease in net sales was driven by growth in our Better-for-You-Baby, Pure Personal Care and Tea platforms, partially offset by declines in our Better-for-You-Snacks, Fresh Living and Better-for-You-Pantry platforms. In addition, the declines wereprimarily driven by the strategic decision to no longer support certain lower margin SKUs in order to reduce complexity and increase gross margins as the Company continues its focus on its top fifty SKUs in the United States. Net sales in the prior year period were negatively impacted by a realignment of customer inventories at certain distributor customers.margins. Operating income in the United StatesNorth America for the six months ended December 31, 20172019 was $42.7$35.2 million, a decreasean increase of $16.0$21.1 million from operating income of $58.7$14.1 million forin the six months ended December 31, 2016.prior year period. The decreaseincrease in operating income was the result of higher marketing investment, increased freight and commodity costs, unfavorable mix and costs associated with the closure of one of our manufacturing facilitiesgross profit in the United States. Additionally, operating incomeStates driven by efficient trade spending and supply chain cost reductions in the prior year period was negatively impactedUnited States as well as other productivity savings, offset in part by changes related to the initiation of the stock keeping unit rationalization.increased marketing and advertising expense.
United KingdomInternational
Our net sales in the United KingdomInternational reportable segment for the six months ended December 31, 20172019 were $460.6$436.5 million, an increasea decrease of $28.2$18.8 million, or 6.5%4.1%, from net sales of $432.5$455.3 million forin the six months ended December 31, 2016.prior year period. On a constant currency basis, net sales increased 3.1%decreased 1.2% from the prior year. The net sales increase wasyear primarily due to discontinued sales of unprofitable SKUs, partially offset by growth fromin our Tilda®, Ella’s Kitchen®, Hartley’s®plant based food and Linda McCartney’s® brands. Also contributing to the increase in net sales was the aforementioned price realization, as well as the acquisitions of The Yorkshire Provender Limited and Clarks UK Limited, both which occurred subsequent to December 31, 2016.beverage products. Operating income in the United Kingdomour International reportable segment for the six months ended December 31, 20172019 was $23.2$22.0 million, an increase of $6.1$1.2 million from $17.1$20.8 million in the prior year period. Operating income for the six months ended December 31, 2016. The increase in2018 was negatively impacted by a long-lived asset impairment of $4.3 million recognized during the period. Excluding the impairment, operating income was primarily due to the aforementioned increase in sales, as well as operating efficiencies achieved at Hain Daniels, offset in part by restructuring costs incurred at Tilda.
Hain Pure Protein
Our net sales in the Hain Pure Protein segment for the six months ended December 31, 2017 were $278.02019 decreased $3.1 million an increase of $8.4 million, or 3.1%, from net sales of $269.6 million for the six months ended December 31, 2016. The increase in net sales was primarily due to growth of our FreeBird® and Plainville Farms® brands, partially offset by a decrease in sales in private label sales. Operating income in the segment for the six months ended December 31, 2017 was $7.6 million, an increase of $5.0 million, from $2.5 million for the six months ended December 31, 2016. The increase in operating income was primarily due to the aforementioned increase in net sales and lower conversion costs as a result of production improvements across the business.
Rest of World
Our net sales in Rest of World were $210.8 million for the six months ended December 31, 2017, an increase of $24.4 million, or 13.1%, from net sales of $186.5 million for the six months ended December 31, 2016. On a constant currency basis, net sales increased 7.5% from the prior year. The increase in net sales wasyear period primarily due to increased sales volume in Europemarketing and advertising expense and depreciation related to our branded business in grocery and health food channels and private label plant-based beverage business, as well as increased sales in Canada driven by growth in our Sensible Portions®, Yves® and Live Clean® brands, as well as increased private label sales.Operating income incapital expenditures during the segment for the six monthsyear ended December 31, 2017 was $19.5 million, an increase of $7.0 million, from $12.5 million for the six months ended December 31, 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.June 30, 2019.
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, accountingProductivity and transformation costs and tradename impairment charges of $20.6 million and $1.9 million, respectively, are included in Corporate and Other for the six months ended December 31, 2019. Chief Executive Officer Succession Plan expense, net, Productivity and transformation costs and Accounting review and remediation costs, net of insurance proceeds and acquisition related expenses, restructuring and integration charges are included inwithin Corporate and Other andexpenses were $6.3$29.7 million, $13.5 million and $13.5$4.3 million, respectively, for the six months ended December 31, 2017 and 2016, respectively.2018.
Refer to Note 15, 17, Segment Information, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Liquidity and Capital Resources
We finance our operations and growth primarily with the cash flows we generate from our operations and from borrowings available to us under our credit agreement.Third Amended and Restated Credit Agreement (as amended, the “Amended Credit Agreement”). As of December 31, 2019, $668.6 million was available under the Amended Credit Agreement, and the Company was in compliance with all associated covenants.
Our cash and cash equivalents balance decreased $7.8increased $6.0 million at December 31, 20172019 to $139.2$37.0 million as compared to $147.0$31.0 million at June 30, 2017.2019. Our working capital from continuing operations was $578.2$264.7 million at December 31, 2017,2019, an increase of $43.9$24.4 million from $534.3$240.3 million at the end of fiscal 2017.2019.
Liquidity is affected by many factors, some of which are based on normal ongoing operations of the Company’s business and some of which arise from fluctuations related to global economics and markets. Our cash balances are held in the United States, United Kingdom, Canada, Europe and India. As of December 31, 2017, approximately 72.6% ($101.1 million)2019, substantially all of the total cash balance from continuing operations was held outside of the United States.States due to debt repayments made towards our revolving credit facility at the end of the period by the United States operating segment. It is our current intent to indefinitely reinvest our foreign earnings outside the United States. However, we do intend to further study changes enacted by the Tax Cuts and Jobs Act, costs of repatriation and the current and future cash needs of foreign operations to determine whether there is an opportunity to repatriate foreign cash balances in the future on a tax-efficient basis.
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of December 31, 2017,2019, 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended December 31, | | | | Change in | | |
(amounts in thousands) | 2019 | | | 2018 | | | Dollars | | | Percentage | |
Cash flows provided by (used in): | | | | | | | |
Operating activities from continuing operations | $ | 17,148 | | | $ | (4) | | | $ | 17,152 | | | * | |
Investing activities from continuing operations | (16,217) | | | (37,135) | | | 20,918 | | | 56.3% | |
Financing activities from continuing operations | 3,694 | | | 14,881 | | | (11,187) | | | (75.2)% | |
Effect of exchange rate changes on cash from continuing operations | 1,382 | | | (1,492) | | | 2,874 | | | 192.6% | |
Increase (decrease) in cash from continuing operations | 6,007 | | | (23,750) | | | 29,757 | | | 125.3% | |
Decrease in cash from discontinued operations | (8,509) | | | (11,225) | | | 2,716 | | | 24.2% | |
Net decrease in cash and cash equivalents and restricted cash | $ | (2,502) | | | $ | (34,975) | | | $ | 32,473 | | | 92.8% | |
|
| | | | | | | | | | | | | | |
| Six Months Ended December 31, | | Change in |
(amounts in thousands) | 2017 | | 2016 | | Dollars | | Percentage |
Cash flows provided by (used in): | | | | | | | |
Operating activities | $ | 25,426 |
| | $ | 116,127 |
| | $ | (90,701 | ) | | (78.1 | )% |
Investing activities | (44,091 | ) | | (22,306 | ) | | (21,785 | ) | | (97.7 | )% |
Financing activities | 7,124 |
| | (58,622 | ) | | 65,746 |
| | 112.2 | % |
Effect of exchange rate changes on cash | 3,765 |
| | (6,000 | ) | | 9,765 |
| | 162.8 | % |
Net (decrease) increase in cash | $ | (7,776 | ) | | $ | 29,199 |
| | $ | (36,975 | ) | | (126.6 | )% |
* Percentage is not meaningful
Cash provided by operating activities from continuing operations was $25.4$17.1 million for the six months ended December 31, 2017, a decrease2019, an increase of $90.7$17.2 million from the $116.1 million of cash provided by operating activities for the six months ended December 31, 2016.prior year period. This decreaseincrease resulted primarily from an additional $102.9improvement of $25.9 million in net loss adjusted for non-cash charges and a decrease of $8.8 million of cash used withinin working capital accounts, primarily related to inventory, accounts receivablea decrease in Accounts payable and other current assets, partially offset by an increase of $12.2 million in net income adjusted for non-cash charges.accrued expenses.
Cash used in investing activities from continuing operations was $44.1$16.2 million for the six months ended December 31, 2017, an increase2019, a decrease of $21.8$20.9 million from cash used of $37.1 million in the prior year period primarily due to proceeds of $13.8 million from the $22.3 million of cash used in investing activities for the six months ended December 31, 2016. The increase resulted primarily from a $13.1 million payment for the acquisition of Clarks UK Limited, net of cash acquired, and an increase of $2.3 million in capital expenditures. During the six months ended December 31, 2016, we generated $5.4 million in connection with the sale of our own-label juice business in the United Kingdom. There were no comparable investing activities in the current period.Arrowhead and Sunspire businesses and decreased capital expenditures.
Cash provided by financing activities from continuing operations was $7.1$3.7 million for the six months ended December 31, 2017, an increase2019, a decrease of $65.7$11.2 million from $14.9 million in the $58.6 million of net cash used inprior year period. Cash provided by financing activities from continuing operations for the six months ended December 31, 2016. The increase was due2018 included $309.9 million primarily related to netthe proceeds from the sale of Tilda, partially offset by $305.3 million of repayments of $48.2 million on our term loan and revolving credit facility and other debt forfunded primarily through proceeds received from the six months ended December 31, 2016, compared with net borrowingssale of $13.8Tilda.
Operating Free Cash Flow from Continuing Operations
Our operating free cash flow from continuing operations was negative $12.2 million for the six months ended December 31, 2017, which was primarily used to fund advanced rice purchases at Tilda and to fund capital expenditures within our Europe business. Additionally, included2019, an improvement of $28.8 million from negative $41.0 million in the six months ended December 31, 2017 was $6.7 million related to stock repurchases to satisfy employee payroll tax withholdings. Included in the six months ended December 31, 2016 was $7.9 million related to stock repurchases to satisfy employee payroll tax withholdings, as well as $2.52018. This improvement resulted primarily from an improvement of $25.9 million in acquisition-related contingent consideration.
Operating Free Cash Flow
Our operating free cash flow was negative $5.6 millionnet loss adjusted for the six months ended December 31, 2017,non-cash charges, a decrease of $93.0$11.7 million from the six months ended December 31, 2016. Thisin capital expenditures, and a decrease resulted primarily from $102.9of $8.8 million of more cash used withinin working capital accounts, partially offset by an increase of $12.2 million adjusted for the impact of non-cash charges.accounts. We expect that our capital spending for fiscal 20182020 will be approximately $75$60-$70 million, and we may incur additional costs in connection with Project Terra. We referongoing productivity and transformation initiatives. See 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 (used in) operating activities from continuing operations to operating free cash flow.flow from continuing operations.
Credit AgreementShare Repurchase Program
On December 12, 2014, we entered intoJune 21, 2017, the Second AmendedCompany’s Board of Directors authorized the repurchase of up to $250 million of the Company’s issued and Restated Credit Agreement (the “Credit Agreement”) which provides us with a $1.0 billion revolving credit facility whichoutstanding common stock. Repurchases 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 definedmade from time to time in the Credit Agreement) plus an applicable margin,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 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 expendituresCompany repurchases its shares and permitted acquisitions, refinance certain existing indebtednessthe timing of such repurchases will depend upon market conditions and for other general corporate purposes.considerations. As of December 31, 20172019, the Company had not repurchased any shares under this program and June 30, 2017, there were $735.1had $250 million and $733.7of remaining capacity under the share repurchase program.
million of borrowings outstanding, respectively, under the Credit Agreement. The weighted average interest rate on outstanding borrowings under the Credit Agreement at December 31, 2017 was 3.00%.
The Credit Agreement is guaranteed by substantially all of our current and future direct and indirect domestic subsidiaries. We are required by the terms of the Credit Agreement to comply with financial and other customary affirmative and negative covenants for facilities of this nature. As of December 31, 2017 and June 30, 2017, the Company was in compliance with all associated covenants.
Our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 includes a table summarizing our contractual obligations of approximately $1.3 billion as of June 30, 2017, including approximately $793.8 million for long-term debt obligations, including projected future interest. That table appears under Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the report. On February 6, 2018, the Company entered into the Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for the extension of our existing $1.0 billion unsecured revolving credit facility through February 6, 2023, and provides for an additional $300.0 million term loan. Under the Amended Credit Agreement, the credit facility may be increased by an additional uncommitted $400.0 million, provided certain conditions are met. The financial covenants, interest rates, and general terms and conditions of both the unsecured revolving credit facility and term loan under the Amended Credit Agreement are substantially the same as our existing Credit Agreement.
The term loan is payable on the last day of each fiscal quarter commencing June 30, 2018 in an amount equal to $3.8 million and can be prepaid in whole or in part without premium or penalty.
Tilda Short-Term Borrowing Arrangements
Tilda maintains short-term borrowing arrangements primarily used to fund the purchase of rice from India and other countries. The maximum borrowings permitted under all such arrangements are £52.0 million. Outstanding borrowings are collateralized by the current assets of Tilda, typically have six-month terms and bear interest at variable rates typically based on LIBOR plus a margin (weighted average interest rate of approximately 3.20% at December 31, 2017).
Other Borrowings
Other borrowings primarily relate to a cash pool facility in Europe. The cash pool facility provides our Europe operating segment with sufficient liquidity to support the Company’s growth objectives within this segment. The maximum borrowings permitted under the cash pool arrangement are €12.5 million. Outstanding borrowings bear interest at variable rates typically based on EURIBOR plus a margin of 1.10% (weighted average interest rate of approximately 1.10% at December 31, 2017).
During the three months ended December 31, 2017, our Tilda Hain Indian subsidiary entered into an uncommitted revolving credit facility to fund its working capital needs. The maximum borrowing permitted under the arrangement are $4 million. There were no amounts outstanding at December 31, 2017.
We believe that our cash on hand of $139.2 million at December 31, 2017, as well as projected cash flows from operations and availability under our Credit Agreement, are sufficient to fund our working capital needs in the ordinary course of business, anticipated fiscal 2018 capital expenditures of approximately $75 million and other expected cash requirements for at least the next twelve months.
Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures
We have included in this report measures of financial performance that are not defined by U.S. GAAP. We believe that these measures provide useful information to investors and include these measures in other communications to investors.
For each of these non-U.S. GAAP financial measures, we are providing below a reconciliation of the differences between the non-U.S. GAAP measure and the most directly comparable U.S. GAAP measure, an explanation of why our management and Board of Directors believesbelieve the non-U.S. GAAP measure provides useful information to investors and any additional purposes for which our management and Board of Directors usesuse the non-U.S. GAAP measures. These non-U.S. GAAP measures should be viewed in addition to, and not in lieu of, the comparable U.S. GAAP measures.
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(decrease) increase is as follows:
| | | | | | | | | | | | | | | | | |
(amounts in thousands) | North America | | International | | Hain Consolidated |
Net sales - Three months ended 12/31/19 | $ | 280,693 | | | $ | 226,091 | | | $ | 506,784 | |
Impact of foreign currency exchange | (69) | | | 2,081 | | | 2,012 | |
Net sales on a constant currency basis - Three months ended 12/31/19 | $ | 280,624 | | | $ | 228,172 | | | $ | 508,796 | |
| | | | | |
Net sales - Three months ended 12/31/18 | $ | 305,574 | | | $ | 227,992 | | | $ | 533,566 | |
Net sales (decline) growth on a constant currency basis | (8.2) | % | | 0.1 | % | | (4.6) | % |
| | | | | |
Net sales - Six months ended 12/31/19 | $ | 552,394 | | | $ | 436,466 | | | $ | 988,860 | |
Impact of foreign currency exchange | 287 | | | 13,419 | | | 13,706 | |
Net sales on a constant currency basis - Six months ended 12/31/19 | $ | 552,681 | | | $ | 449,885 | | | $ | 1,002,566 | |
| | | | | |
Net sales - Six months ended 12/31/18 | $ | 596,765 | | | $ | 455,279 | | | $ | 1,052,044 | |
Net sales decline on a constant currency basis | (7.4) | % | | (1.2) | % | | (4.7) | % |
|
| | | | | | | | | | | |
(amounts in thousands) | United Kingdom | | Rest of World | | Hain Consolidated |
Net sales - Three months ended 12/31/2017 | $ | 238,201 |
| | $ | 107,728 |
| | $ | 775,204 |
|
Impact of foreign currency exchange | (14,987 | ) | | (6,161 | ) | | (21,148 | ) |
Net sales on a constant currency basis - Three months ended 12/31/2017 | $ | 223,214 |
| | $ | 101,567 |
| | $ | 754,056 |
|
| | | | | |
Net sales - Three months ended 12/31/2016 | $ | 212,312 |
| | $ | 96,068 |
| | $ | 739,999 |
|
Net sales growth on a constant currency | 5.1 | % | | 5.7 | % | | 1.9 | % |
| | | | | |
Net sales - Six months ended 12/31/2017 | $ | 460,646 |
| | $ | 210,843 |
| | $ | 1,483,480 |
|
Impact of foreign currency exchange | (14,954 | ) | | (10,338 | ) | | (25,292 | ) |
Net sales on a constant currency basis - Six months ended 12/31/2017 | $ | 445,692 |
| | $ | 200,505 |
| | $ | 1,458,188 |
|
| | | | | |
Net sales - Six months ended 12/31/2016 | $ | 432,463 |
| | $ | 186,480 |
| | $ | 1,421,463 |
|
Net sales growth on a constant currency | 3.1 | % | | 7.5 | % | | 2.6 | % |
Adjusted EBITDA
Adjusted EBITDA is defined as net income (loss) before income taxes, net interest expense, depreciation and amortization, impairment of long-lived and intangible assets, equity in the earnings of equity-method investees, stock-based compensation, acquisition related expenses, including integrationProductivity and restructuring charges,transformation costs, and other non-recurring items.adjustments. 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 incomeloss to Adjusted EBITDA is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | | | Six Months Ended December 31, | | |
(amounts in thousands) | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Net loss | $ | (964) | | | $ | (66,501) | | | $ | (107,985) | | | $ | (103,926) | |
Net loss from discontinued operations | (2,816) | | | (34,714) | | | (104,884) | | | (49,052) | |
Net income (loss) from continuing operations | 1,852 | | | (31,787) | | | (3,101) | | | (54,874) | |
| | | | | | | |
Provision (benefit) for income taxes | 1,020 | | | 5,097 | | | 489 | | | (4,869) | |
Interest expense, net | 4,000 | | | 4,884 | | | 8,552 | | | 8,688 | |
Depreciation and amortization | 13,219 | | | 12,205 | | | 27,142 | | | 25,065 | |
Equity in net loss of equity-method investees | 338 | | | 11 | | | 655 | | | 186 | |
Stock-based compensation, net | 3,083 | | | 1,776 | | | 5,820 | | | 1,562 | |
Stock-based compensation expense in connection with Chief Executive Officer Succession Agreement | — | | | 117 | | | — | | | 429 | |
Long-lived asset and intangibles impairment | 1,889 | | | 19,473 | | | 1,889 | | | 23,709 | |
Unrealized currency (gains) losses | (485) | | | 439 | | | 1,199 | | | 1,029 | |
EBITDA | $ | 24,916 | | | $ | 12,215 | | | $ | 42,645 | | | $ | 925 | |
| | | | | | | |
Productivity and transformation costs | 12,260 | | | 9,872 | | | 26,435 | | | 20,205 | |
Chief Executive Officer Succession Plan expense, net | — | | | 10,031 | | | — | | | 29,272 | |
Proceeds from insurance claim | — | | | — | | | (2,562) | | | — | |
Accounting review and remediation costs, net of insurance proceeds | — | | | 920 | | | — | | | 4,334 | |
SKU rationalization | 3,927 | | | 1,530 | | | 3,916 | | | 1,530 | |
Loss on sale of business | 1,783 | | | — | | | 1,783 | | | — | |
Plant closure related costs | 1,522 | | | 1,490 | | | 2,354 | | | 3,319 | |
Warehouse/manufacturing facility start-up costs | 639 | | | 1,708 | | | 2,518 | | | 6,307 | |
Litigation and related expenses | — | | | 122 | | | 48 | | | 691 | |
Adjusted EBITDA | $ | 45,047 | | | $ | 37,888 | | | $ | 77,137 | | | $ | 66,583 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended December 31, | | Six Months Ended December 31, |
(amounts in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 47,103 |
| | $ | 27,185 |
| | $ | 66,949 |
| | $ | 35,789 |
|
(Benefit)/provision for income taxes | (16,369 | ) | | 10,509 |
| | (7,899 | ) | | 11,271 |
|
Interest expense, net | 5,827 |
| | 4,426 |
| | 11,447 |
| | 8,780 |
|
Depreciation and amortization | 17,346 |
| | 16,948 |
| | 34,972 |
| | 34,168 |
|
Equity in net income of equity-method investees | (194 | ) | | (38 | ) | | (205 | ) | | (222 | ) |
Stock-based compensation expense | 4,158 |
| | 2,531 |
| | 7,322 |
| | 5,235 |
|
Long-lived asset impairment | 3,449 |
| | — |
| | 3,449 |
| | — |
|
Unrealized currency gains | (287 | ) | | (1,984 | ) | | (3,706 | ) | | (3,277 | ) |
EBITDA | 61,033 |
| | 59,577 |
| | 112,329 |
| | 91,744 |
|
| | | | | | | |
Acquisition related expenses, restructuring and integration charges, and other
| 4,797 |
| | 108 |
| | 10,643 |
| | 1,516 |
|
Accounting review and remediation costs, net of insurance proceeds | 4,451 |
| | 7,005 |
| | 3,093 |
| | 12,966 |
|
Losses on terminated chilled desserts contract | 2,142 |
| | — |
| | 3,614 |
| | — |
|
U.K. and Hain Pure Protein start-up costs | 2,381 |
| | — |
| | 3,464 |
| | — |
|
Discontinuation of Round Hill Brand | 2,177 |
| | — |
| | 2,177 |
| | — |
|
Hain Pure Protein network distribution redesign | 1,952 |
| | — |
| | 1,952 |
| | — |
|
Co-packer disruption | 1,567 |
| | — |
| | 2,740 |
| | — |
|
Regulated packaging change | 1,007 |
| | — |
| | 1,007 |
| | — |
|
Plant closure related costs | 700 |
| | 1,804 |
| | 700 |
| | 1,804 |
|
Hain Pure Protein feed formulation test | 471 |
| | — |
| | 471 |
| | — |
|
SKU rationalization | — |
| | 160 |
| | — |
| | 5,359 |
|
U.K. deferred synergies due to CMA Board decision | — |
| | 447 |
| | — |
| | 918 |
|
Recall and other related costs | — |
| | 397 |
| | — |
| | 809 |
|
Adjusted EBITDA | $ | 82,678 |
| | $ | 69,498 |
| | $ | 142,190 |
| | $ | 115,116 |
|
Operating Free Cash Flow from Continuing Operations
In our internal evaluations, we use the non-U.S. GAAP financial measure “operating free cash flow.flow from continuing operations.” The difference between operating free cash flow from continuing operations and cash flow provided by or used in operating activities from continuing operations, which is the most comparable U.S. GAAP financial measure, is that operating free cash flow from continuing operations 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 or used in operating activities. We view operating free cash flow from continuing operations 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 from continuing operations in isolation or as an alternative to financial measures determined in accordance with U.S. GAAP.
A reconciliation from Cash flow provided by (used in) operating activities from continuing operations to Operating free cash flow from continuing operations is as follows:
| | | | | | | | | | | |
| Six Months Ended December 31, | | |
(amounts in thousands) | 2019 | | | 2018 | |
Cash flow provided by (used in) operating activities - continuing operations | $ | 17,148 | | | $ | (4) | |
Purchases of property, plant and equipment | (29,337) | | | (40,998) | |
Operating Free Cash Flow - continuing operations | $ | (12,189) | | | $ | (41,002) | |
|
| | | | | | | |
| Six Months Ended December 31, |
(amounts in thousands) | 2017 | | 2016 |
Cash flow provided by operating activities | $ | 25,426 |
| | $ | 116,127 |
|
Purchase of property, plant and equipment | (31,027 | ) | | (28,725 | ) |
Operating free cash flow | $ | (5,601 | ) | | $ | 87,402 |
|
Off Balance Sheet Arrangements
At December 31, 2017,2019, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K that have had, or are likely to have, a material current or future effect on our consolidated financial statements.
Critical Accounting Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The accounting principles we use require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting periods presented. We believe in the quality and reasonableness of our critical accounting policies; however, materially different amounts may be reported under different conditions or using assumptions different from those that we have applied. The accounting policies that have been identified as critical to our business operations and to understanding the results of our operations pertain to revenue recognition, trade promotions and sales incentives, valuation of accounts and chargebacks receivable, accounting for acquisitions, valuation of long-lived assets, goodwill and intangible assets, stock basedstock-based compensation, and valuation allowances for deferred tax assets. The application of each of these critical accounting policies and estimates is discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,of our Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2019.
Recent Accounting Pronouncements
Refer to Note 2, Basis of Presentation, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Seasonality
Certain of our product lines have seasonal fluctuations. Hot tea, baking products, hot cereal, hot-eating desserts and soup sales are stronger in colder months, while sales of snack foods, sunscreen and certain of our prepared food and personal care products are stronger in the warmer months. Additionally, with our acquisitions of HPPC, Empire and Tilda, our net sales and earnings may further fluctuate based on the timing of holidays throughout the year. As such, our results of operations and our cash flows for any particular quarter are not indicative of the results we expect for the full year, and our historical seasonality may not be indicative of future quarterly results of operations. In recent years, net sales and diluted earnings per share in the first fiscal quarter have typically been the lowest of our four quarters.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in market risk for the three and six months ended December 31, 20172019 from those addressed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2019. See the information set forth in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.2019.
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. Our disclosure controls and procedures are intended to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based on this review, although the Company continues to work to remediate the material weaknesses in internal control over financial reporting as described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 and significant progress has been made to date, our CEO and CFO have concluded that the disclosure controls and procedures related to these material weaknesses were not effective as of December 31, 2017.2019.
Consistent with guidance issued by the Securities Exchange Commission that an assessment of internal controls over financial reporting of a recently acquired business may be omitted from management’s evaluation of disclosure controls and procedures, management has excluded an assessment of such controls of Clarks UK Limited (“Clarks”) acquired by the Company on December 1, 2017, from its evaluation of the effectiveness of the Company’s disclosure controls and procedures. Clarks represented less than one percent of total assets, net assets, revenues and net income, respectively, as of December 31, 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 ControlsControl Over Financial Reporting
Under applicable SEC rules (Exchange Act Rules 13a-15(c) and 15d-15(c)), management is required to evaluate any changeThere were no changes in our internal controlcontrols 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 February 7, 2018, 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 months ended December 31, 20172019 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.reporting.
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 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 (the “Consolidated Securities Action”), and Rosewood Funeral Home and Salamon Gimpel were appointed as Co-Lead Plaintiffs. On June 21, 2017, the Company received notice that plaintiff Spadola voluntarily dismissed his claims without prejudice to his ability to participate in the Consolidated Securities Action as an absent class member. The Co-Lead Plaintiffs in the Consolidated Securities Action filed a Consolidated Amended Complaint on August 4, 2017 and a Corrected Consolidated Amended Complaint on September 7, 2017 on behalf of a purported class consisting of all persons who purchased or otherwise acquired Hain Celestial securities between November 5, 2013 and February 10, 2017 (the “Amended Complaint”). The Amended Complaint namesnamed as defendants the Company and certain of its current and former officers (collectively, the “Defendants”) and assertsasserted violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly materially false or misleading statements and omissions in public statements, press releases and SEC filings regarding the Company’s business, prospects, financial results and internal controls. Defendants filed a motion to dismiss the Amended Complaint on October 3, 2017.2017 which the Court granted on March 29, 2019, dismissing the case in its entirety, without prejudice to replead. Co-Lead Plaintiffs filed a Second Amended Consolidated Class Action Complaint on May 6, 2019 (the “Second Amended Complaint”). The Second Amended Complaint again names as defendants the Company and certain of its current and former officers and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegations similar to those in the Amended Complaint, including materially false or misleading statements and omissions in public statements, press releases and SEC filings regarding the Company’s business, prospects, financial results and internal controls. Defendants filed a motion to dismiss the Second Amended Complaint on June 20, 2019. Co-Lead Plaintiffs filed an opposition on December 1, 2017,August 5, 2019, and Defendants filed thesubmitted a reply on January 16, 2018. TheSeptember 3, 2019. This motion to dismiss is pending beforefully briefed, and the Court.parties await a decision.
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 former Board of Directors and certain former 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 former Board of Directors and certain former officers under the captions Scarola v. Simon (the “Scarola Complaint”) and Shakir v. Simon(the (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 allegealleged 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. Co-Lead Plaintiffs requested leave to file an amended consolidated complaint, and on January 14, 2019, the Court partially lifted the stay, ordering Co-Lead Plaintiffs to file their amended complaint by March 7, 2019. Co-Lead Plaintiffs filed a Verified Amended Shareholder Derivative Complaint on March 7, 2019. The Court continued the stay pending a decision on Defendants’ motion to dismiss in the Consolidated Securities Action until April 11, 2018.(referenced above). After the Court in the Consolidated Securities Action dismissed the Amended Complaint, the Court in the Consolidated Derivative Action ordered Co-Lead Plaintiffs to file a second amended complaint no later than July 8, 2019. Co-Lead Plaintiffs filed a Verified Second Amended Shareholder Derivative Complaint on July 8, 2019 (the “Second Amended Derivative Complaint”). Defendants moved to dismiss the Second Amended Derivative Complaint on August 7, 2019. Co-Lead Plaintiffs filed an opposition to Defendants’ motion to dismiss, and Defendants submitted a reply on September 20, 2019. This motion is fully briefed, and the parties await a decision.
Additional Stockholder Class Action and Derivative Complaints Filed in Federal Court
On April 19, 2017 and April 26, 2017, two class action and stockholder derivative complaints were filed in the Eastern District of New York against the former Board of Directors and certain former 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 former Board of Directors and certain former officers of the Company. The complaint allegesalleged that the Company’s former directors and certain former officers made materially false and misleading statements in press releases and SEC filings regarding the Company’s business, prospects and financial results. The complaint also allegesalleged that the Company violated its by-laws and Delaware law by failing to hold its 2016 Annual Stockholders Meeting and includes claims for breach of fiduciary duty, unjust enrichment and corporate waste. On August 9, 2017, the Court granted an order to unseal this case and reveal Gary Merenstein as the plaintiff.plaintiff (the “Merenstein Complaint”).
On August 10, 2017, the court granted the parties stipulation to consolidate the Barnes Compliant,Complaint, the Silva Complaint and the Merenstein CompliantComplaint under the caption In re The Hain Celestial Group, Inc. Stockholder Class and Derivative Litigation (the “Consolidated Stockholder Class and Derivative Action”) and to appoint Robbins Arroyo LLP and Scott+Scott as Co-Lead Counsel, with the Law Offices of Thomas G. Amon as Liaison Counsel for Plaintiffs. On September 14, 2017, a related complaint was filed under the caption Oliver v. Berke, et al.(the (the “Oliver Complaint”), and on October 6, 2017, the Oliver Complaint was consolidated with the Consolidated Stockholder Class and Derivative Action. The Plaintiffs filed their consolidated amended
complaint under seal on October 26, 2017. On December 20, 2017, the parties agreed to stay Defendants’ time to answer, move, or otherwise respond to the consolidated amended complaint through and including 30 days after a decision iswas rendered on the motion to dismiss the Amended Complaint in the consolidatedConsolidated Securities Class Actions,Action, described above.
SEC Investigation
As previously disclosed,On March 29, 2019, the Company voluntarily contacted the SEC in August 2016 to advise it of the Company’s delayCourt in the filing ofConsolidated Securities Action granted Defendants’ motion, dismissing the Amended Complaint in its periodic reports andentirety, without prejudice to replead. Co-Lead Plaintiffs in the performance of the independent review conducted by the Audit Committee.Consolidated Securities Action filed a second amended complaint on May 6, 2019. The Company has continued to provide informationparties to the SEC on an ongoing basis, including, among other things,Consolidated Stockholder Class and Derivative Action agreed to continue the resultsstay of the independent review of the Audit Committee as well as other information pertainingDefendants’ time to its internal accounting review relating to revenue recognition. The SEC has issued subpoenasanswer, move, or otherwise respond to the Company relevantconsolidated amended complaint. The stay is continued through 30 days after the Court rules on the motion to its investigation. The Company isdismiss the Second Amended Complaint in the process of responding to the SEC’s requests for information and intends to cooperate fully with the SEC.Consolidated Securities Action.
Other
In addition to the litigation described above, the Company is and may be a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position, cash flows or liquidity.
Item 1A.Risk Factors
We have disclosed the risk factors affecting our business, results of operations and financial condition in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017,2019, filed with the SEC on September 13, 2017.August 29, 2019. 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 Company 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 (in millions of dollars) (2) |
October 1, 2019 - October 31, 2019 | 1,921 | | | $ | 20.85 | | | — | | | 250 | |
November 1, 2019 - November 30, 2019 | 16,375 | | | 24.33 | | | — | | | 250 | |
December 1, 2019 - December 31, 2019 | 8,991 | | | 25.95 | | | — | | | 250 | |
Total | 27,287 | | | $ | 24.62 | | | | | |
(1) Shares surrendered for payment of employee payroll taxes due on shares issued under stock-based compensation plans.
(2) On June 21, 2017, the Company’s Board of Directors authorized the repurchase of up to $250 million of the Company’s issued and outstanding common stock. Repurchases may be made from time to time in the open market, pursuant to preset trading plans, in private transactions or otherwise. The authorization does not have a stated expiration date. As of December 31, 2019, the Company had not repurchased any shares under this program and had $250 million of remaining capacity under the share repurchase program.
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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 (in millions of dollars) (2) |
October 1, 2017 - October 31, 2017 | 22,444 |
| | $ | 37.06 |
| | — |
| | 250 |
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November 1, 2017 - November 30, 2017 | 63,981 |
| | 40.89 |
| | — |
| | 250 |
|
December 1, 2017 - December 31, 2017 | 27,814 |
| | 40.98 |
| | — |
| | 250 |
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Total | 114,239 |
| | $ | 40.16 |
| | — |
| | — |
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(1) | Shares surrendered for payment of employee payroll taxes due on shares issued under stockholder-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 5. Other Information
As previously disclosed in the Company’s Current Report on Form 8-K, filed with the SEC on November 21, 2017, at the Company’s 2017 Annual MeetingResignation of Stockholders, stockholders approved amendments to the Company’s Amended and Restated By-Laws (as amended, the “By-Laws”) to implement “proxy access.” The proxy access amendments enableDirector
On February 4, 2020, Roger Meltzer resigned as a stockholder, or a group of up to 20 stockholders, that has owned 3% or more of the Company’s shares continuously for at least three years to include director
nominees constituting up to the greater of two nominees or 20%member of the Board of Directors in(the “Board”) of the Company’s proxy materials, subjectCompany, effective February 6, 2020. Mr. Meltzer’s decision to resign was due to the other termsongoing and conditionsincreasing demands of serving as co-chairman of one of the By-Laws.
The foregoing summarylargest global law firms. Mr. Meltzer’s resignation was not the result of any disagreement with the amendments toCompany or the By-Laws is qualified in its entirety by reference to the full text of the By-Laws, a copy of which was filed as Exhibit 3.1Board on any matter relating to the Company’s Current Reportoperations, policies or practices. In connection with Mr. Meltzer’s resignation, the Board approved the acceleration of the vesting of Mr. Meltzer’s unvested restricted stock.
The Company would like to thank Mr. Meltzer for his dedication, guidance and leadership during his 20-year tenure on Form 8-K, filed on November 21, 2017.the Board.
Departure of Executive Officer
Kevin McGahren, the Company’s President, North America, is departing the Company effective February 7, 2020.The position of President, North America will be eliminated and the responsibilities will be transitioned to other executives.In connection with Mr. McGahren’s departure, he is entitled to receive severance of $832,500 pursuant to the terms of his offer letter with the Company. Mr. McGahren’s performance share units under the 2019-2021 LTIP will be forfeited.
Item 6. Exhibits
See Exhibit Index immediately preceding the signature page hereto, which is incorporated herein by reference.
EXHIBIT INDEX
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Exhibit Number | | Description |
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101.INS | | Inline XBRL document. |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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) |
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Date: | February 6, 2020 | THE HAIN CELESTIAL GROUP, INC./s/ Mark L. Schiller |
| | (Registrant) |
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Date: | February 7, 2018 | /s/ Irwin D. Simon |
| | Irwin D. Simon,
Chairman, Mark L. Schiller, President and Chief
Executive Officer |
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Date: | February 7, 20186, 2020 | /s/ James LangrockJavier H. Idrovo |
| | James Langrock,
Javier H. Idrovo, Executive Vice President and Chief Financial Officer
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