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MarketScreener Homepage  >  Equities  >  Nasdaq  >  The Hain Celestial Group, Inc.    HAIN

THE HAIN CELESTIAL GROUP, INC.

(HAIN)
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HAIN CELESTIAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/06/2020 | 04:59pm EDT
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, 2019
contained in this Quarterly Report on Form 10-Q and our Annual Report on Form
10-K for the fiscal year ended June 30, 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 70 countries
worldwide.

The Company manufactures, markets, distributes and sells organic and natural
products under brand names that are sold as "better-for-you" products, providing
consumers with the opportunity to lead A Healthier Way of Life™.  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®, Bearitos®, Better Bean®, BluePrint®, Casbah®, Celestial Seasonings®,
Clarks™, Coconut Dream®, Cully & Sully®, Danival®, DeBoles®, Earth's Best®,
Ella's Kitchen®, Europe's Best®, Farmhouse Fare™, Frank Cooper's®, Gale's®,
Garden of Eatin'®, GG UniqueFiber®, Hain Pure Foods®, Hartley's®, Health
Valley®, Imagine®, Johnson's Juice Co.™, Joya®, Lima®, Linda McCartney® (under
license), MaraNatha®, Mary Berry (under license), Natumi®, New Covent Garden
Soup Co.®, Orchard House®, Rice Dream®, Robertson's®, Rudi's Gluten-Free
Bakery™, Rudi's Organic Bakery®, Sensible Portions®, Spectrum® Organics, Soy
Dream®, Sun-Pat®, Sunripe®, Terra®, The Greek Gods®, Walnut Acres®, Yorkshire
Provender®, 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.

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
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® 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
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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") 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, in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information on discontinued operations.

Change 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, 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 segment, 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 renamed 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 reflect the Company's new operating and reporting structure.

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Table of Contents Comparison of Three Months Ended December 31, 2019 to Three Months Ended December 31, 2018

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, 2019 and 2018 (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%

* Percentage is not meaningful

Net Sales


Net sales for the three months ended December 31, 2019 were $506.8 million, a
decrease of $26.8 million, or 5.0%, as compared to $533.6 million in the three
months ended December 31, 2018. On a constant currency basis, net sales
decreased approximately 4.6% from the prior year quarter. Net sales on a
constant currency basis decreased in the North America reportable segment while
the International reportable segment remained flat. Further details of changes
in net sales by segment are provided below.

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Gross Profit

Gross profit for the three months ended December 31, 2019 was $105.6 million, an
increase of $4.3 million, or 4.2%, as compared to the prior year quarter. Gross
profit margin was 20.8% of net sales, compared to 19.0% in the prior year
quarter. The increased profit margin was primarily driven by efficient trade
spending and supply chain cost reductions in the United States as well as other
productivity savings.

Selling, General and Administrative Expenses


Selling, general and administrative expenses were $79.1 million for the three
months ended December 31, 2019, an increase of $0.6 million, or 0.7%, from $78.5
million for the prior year quarter. The increase was due to increased marketing
and advertising spend and variable compensation costs, including stock-based
compensation expense, partially offset by a decrease in broker trade funds.
Selling, general and administrative expenses as a percentage of net sales was
15.6% in the three months ended December 31, 2019 compared to 14.7% in the prior
year quarter, reflecting an increase of 90 basis points primarily attributable
to the aforementioned items.

Amortization of Acquired Intangibles


Amortization of acquired intangibles was $3.2 million for the three months ended
December 31, 2019, a decrease of $0.1 million from $3.3 million in the prior
year quarter as a result of movements in foreign currency.

Productivity and Transformation Costs


Productivity and transformation costs were $12.3 million for the three months
ended December 31, 2019, an increase of $2.4 million from $9.9 million in the
prior year quarter. The increase was primarily due to increased consulting fees
incurred in connection with the Company's 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, Net of Insurance Proceeds

Costs and expenses associated with the internal accounting review, remediation and other related matters were $0.9 million for the three months ended December 31, 2018. No such costs were incurred in the three months ended December 31, 2019.

Long-lived Asset and Intangibles Impairment


During the three months ended December 31, 2019, the Company recorded a pre-tax
impairment charge of $1.9 million related to certain tradenames within the
Company's North America segment. During the three months ended December 31,
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, 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, 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.

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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 $0.7 million, or 12.7%, from $5.4
million in the prior year quarter. The 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 the Notes to Consolidated Financial Statements included in Part
I, Item 1 of this Form 10-Q.

Other Expense, Net

Other expense, net totaled $1.2 million for the three months ended December 31, 2019, compared to $0.4 million in the prior year quarter. The increase was primarily attributable to the loss on sale of the Arrowhead and Sunspire businesses.

Income (Loss) From Continuing Operations Before Income Taxes and Equity in Net Loss of Equity-Method Investees

Income (loss) before income taxes and equity in net loss of our equity-method investees for the three months ended December 31, 2019 was income of $3.2 million compared to a loss of $26.7 million in the prior year quarter. The increase was due to the items discussed above.

Income Taxes


The provision for income taxes includes federal, foreign, state and local income
taxes. Our income tax expense from continuing operations was $1.0 million for
the three months ended December 31, 2019 compared to $5.1 million in the prior
year quarter.

The effective income tax rate from continuing operations was expense of 31.8%
and 19.1% for the three months ended December 31, 2019 and December 31, 2018,
respectively. The effective income tax rates from continuing operations for 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.

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 Loss of Equity-Method Investees


Our equity in net loss from our equity-method investments for the three months
ended December 31, 2019 was $0.3 million and essentially break even in the prior
year quarter. See Note 14, Investments, 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,
2019 was $1.9 million, or $0.02 per diluted share, 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.

Net Loss from Discontinued Operations, Net of Tax

Net loss from discontinued operations, net of tax, for the three months ended December 31, 2019 was $2.8 million, or $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, 2019 associated with the tax gain on the sale of
the Tilda entities and 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
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Table of Contents 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.

© Edgar Online, source Glimpses

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