THE HAIN CELESTIAL GROUP, INC. 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 endedDecember 31, 2019 contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedJune 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. , aDelaware 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 inLake Success, New York . The Company's mission has continued to evolve since its founding, with health and wellness being the core tenet - To Create andInspire 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 AHealthier 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 ofEatin '®, 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 withinNorth 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 theHain Pure Protein reportable segment and WestSoy® tofu, seitan and tempeh businesses inthe United States in fiscal 2019, the entities comprising its Tilda operating segment and certain other assets of the Tilda business inAugust 2019 and its Arrowhead Mills® and SunSpire® businesses inOctober 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 30 -------------------------------------------------------------------------------- Table of Contents 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 OnAugust 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 . OnFebruary 15, 2019 , the Company completed the sale of substantially all of the assets used primarily for thePlainville Farms business, a component of the Company'sHain Pure Protein Corporation ("HPPC") operating segment. OnJune 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 theHain 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 theHain 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 ofJune 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. EffectiveJuly 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'sUnited States andCanada businesses, as well as among the Company's international businesses in theUnited Kingdom andEurope . As a result, theCanada andHain Ventures operating segment, which were included within the Rest of World reportable segment, were moved tothe United States reportable segment and renamed theNorth America reportable segment. Additionally, theEurope operating segment, which was included in the Rest of World reportable segment, was combined with theUnited 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
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 endedDecember 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 for the three months endedDecember 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 endedDecember 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 theNorth America reportable segment while the International reportable segment remained flat. Further details of changes in net sales by segment are provided below. 32 -------------------------------------------------------------------------------- Table of Contents Gross Profit Gross profit for the three months endedDecember 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 inthe 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2018 . There were no comparable expenses in the three months endedDecember 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
Long-lived Asset and Intangibles Impairment
During the three months endedDecember 31, 2019 , the Company recorded a pre-tax impairment charge of$1.9 million related to certain tradenames within the Company'sNorth America segment. During the three months endedDecember 31, 2018 , the Company recorded a pre-tax impairment charge of$17.9 million related to certain tradenames ($15.1 million related to theNorth 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 endedDecember 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 endedDecember 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. 33 -------------------------------------------------------------------------------- Table of Contents Interest and Other Financing Expense, Net Interest and other financing expense, net totaled$4.7 million for the three months endedDecember 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
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
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 endedDecember 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 endedDecember 31, 2019 andDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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
During the three months endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2018 includes the reversal of the$12.3 million deferred tax liability previously recorded related toHain Pure Protein being classified as held for sale. In 34
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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 endedDecember 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 endedDecember 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 toU.S. GAAP Measures presented following the discussion of our results of operations.
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