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 endedSeptember 30, 2021 contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 . Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading "Forward-Looking Statements" in the introduction of this Form 10-Q. OverviewThe Hain Celestial Group, Inc. , aDelaware corporation (collectively with its subsidiaries, the "Company," "Hain Celestial ," "we," "us" or "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. The Company continues to be a leading marketer, manufacturer and seller of organic and natural, "better-for-you" products by anticipating and exceeding consumer expectations in providing quality, innovation, value and convenience. The Company is committed to growing sustainably while continuing to implement environmentally sound business practices and manufacturing processes.Hain Celestial sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, drug and convenience stores in over 80 countries worldwide. The Company operates under two reportable segments:North America and International. The Company manufactures, markets, distributes and sells organic and natural products under brand names 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 Celestial Seasonings®, Clarks™, Cully & Sully®, Earth's Best®, Ella's Kitchen®,Frank Cooper's ®, Gale's®, Garden ofEatin '®, Hain Pure Foods®, Hartley's®, Health Valley®, Imagine®, Joya®, Lima®,Linda McCartney's ® (under license), MaraNatha®, Natumi®, New Covent Garden Soup Co.®, Robertson's®, Rose's® (under license), Sensible Portions®, Spectrum®, Sun-Pat®, Terra®, The Greek Gods®, Yorkshire Provender® and Yves Veggie Cuisine®. The Company's personal care products are marketed under the Alba Botanica®, Avalon Organics®, JASON®, Live Clean®, and Queen Helene® brands. Since fiscal 2019, we have been executing the four key pillars of our strategy-(1) simplify our portfolio; (2) strengthen our capabilities; (3) expand profit margins and cash flow? and (4) reinvigorate profitable top line growth-which we refer to as Hain 2.0. This strategy, which is on schedule to be completed ahead of our planned timeline, has laid the foundation for Hain 3.0, our vision and strategy for the next several years, which is about building a global healthy food and beverage company with industry-leading top line growth. We believe Hain 3.0 positions us as an advantaged and differentiated company, as compared to others in the food industry for several reasons:
•we are singularly focused on health and wellness, •we are a global company in high-growth categories with opportunities for expansion in existing and new channels and geographies, •we have unique and advantaged brands with strong points of difference, and •given our size, small wins can drive material incremental growth.
We have re-segmented the brand portfolio with a more global view to where we have the most growth potential. As a result, we are migrating from a strategy focused on rejuvenatingNorth America behind a construct of "Get Bigger" and "Get Better" brand categories to one that focuses on growing global brands in categories where we think we have the most potential. The categories we have identified are called Turbocharge Growth,Targeted Investment , and Fuel: •The Turbocharge Growth brands are leading-share brands in very high-growth categories. The Turbocharge Growth brands are made up of plant-based meat and non-dairy beverages as well as snacks. Our meat and dairy alternatives are concentrated outsidethe United States , while the snacks businesses include brands both withinthe United States and in International. •The Targeted Investment brands are made up of leading-share brands in lower-growth categories. To date, we have demonstrated our ability to drive market share and reinvigorate these categories, and we expect that we can continue to do this in the future. The Targeted Investment brands are made up of tea, baby, yogurt, and personal care. In contrast with Hain 2.0, baby is now one of our growth focus areas, due to its strong brands, scale, profitability, and growth prospects. •The Fuel brands are stable brands that will be leveraged to fuel investment in the Turbocharge Growth andTargeted Investment categories. Fuel brands are made up of premium pantry brands with scale, in categories such as soup, cooking oils and nut butters. 32 -------------------------------------------------------------------------------- Table of Contents Additionally, as part of Hain 3.0, we will continue to simplify our brand portfolio as we continue to identify brands that are declining and have low margins. The Simplify brands are subscale declining businesses that have limited long-term potential for the Company, and therefore will be managed for profit until they are potentially divested, likely over the course of the next several years. Acquisitions are expected to play a role in Hain 3.0 and part of our capital allocation strategy is focused on actively looking for targets in the market. As we continue to simplify and stabilize the organization and consolidate sales into fewer priority categories, we are well-positioned and expect to make targeted acquisitions supported by our borrowing capacity to help us further strengthen our position in those categories.
COVID-19
The COVID-19 pandemic has resulted in a net increase in overall demand for our products. The impact was particularly pronounced during the early stages of the pandemic as consumers reacted to stay-at-home measures and the uncertainty of the pandemic. In particular, our net sales during the third quarter of fiscal 2020 through the second quarter of fiscal 2021 benefited from pandemic-driven demand. The pandemic-driven demand for our products has subsided as effective vaccines have become available, governments have eased safety measures and consumer purchasing behaviors have started to return to pre-pandemic norms. As a result, net sales were lower in the third and fourth quarters of fiscal 2021 compared to the third and fourth quarters of fiscal 2020, respectively. Further, net sales in the first quarter of fiscal 2022 were lower than our net sales during the first quarter of fiscal 2021 as a result of normalizing consumer demand, among other factors as described more fully below under the heading "Comparison of Three Months EndedSeptember 30, 2021 to Three Months EndedSeptember 30, 2020 ." The pandemic and the measures being taken by governments, businesses and consumers to limit the spread of COVID-19 have led to operational challenges in our business and may result in broader and longer-term challenges and uncertainty that we will need to manage successfully. Such challenges include but are not limited to: •manufacturing, supply chain and logistics challenges resulting from health and safety precautions among our employees and the general population as well as macroeconomic factors resulting from the pandemic, including labor market shortages; •an uncertain future demand environment as a result of changing consumer behaviors amid uncertain economic conditions; and •increased costs of operating our business and managing our supply chain during a global pandemic. Discontinued Operations OnAugust 27, 2019 , the Company and Ebro Foods S.A. (the "Purchaser") entered into, and consummated the transactions contemplated by, an agreement relating to the sale and purchase of the entities comprising the Company's Tilda operating segment and certain other assets.
The Company's dispositions are described in more detail in Note 5, Dispositions, in the Notes to the Consolidated Financial Statements in the Form 10-K.
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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 endedSeptember 30, 2021 and 2020 (amounts in thousands, other than percentages, which may not add due to rounding): Three Months Ended Change in September 30, 2021 September 30, 2020 Dollars Percentage Net sales$ 454,903 100.0%$ 498,627 100.0%$ (43,724) (8.8)% Cost of sales 349,485 76.8% 379,463 76.1% (29,978) (7.9)% Gross profit 105,418 23.2% 119,164 23.9% (13,746) (11.5)% Selling, general and administrative 73,989 16.3% 79,521 15.9% (5,532) (7.0)%
expenses
Amortization of acquired intangible 2,095 0.5% 2,433 0.5% (338) (13.9)%
assets
Productivity and transformation costs 3,983 0.9% 1,433 0.3% 2,550 177.9% Proceeds from insurance claim (196) -% - -% (196) * Long-lived asset impairment - -% 32,497 6.5% (32,497) (100.0)% Operating income 25,547 5.6% 3,280 0.7% 22,267 678.9% Interest and other financing expense, 1,856 0.4% 2,453 0.5% (597) (24.3)%
net
Other income, net (788) (0.2)% (1,373) (0.3)% 585 (42.6)% Income from continuing operations before income taxes and equity in net 24,479 5.4% 2,200 0.4% 22,279 1,012.7% loss of equity-method investees Provision for income taxes 4,542 1.0% 12,962 2.6% (8,420) (65.0)% Equity in net loss of equity-method 526 -% 19 -% 507 2,668.4%
investees
Net income (loss) from continuing$ 19,411 4.3%$ (10,781) (2.2)%$ 30,192 *
operations
Net income from discontinued - -% 11,266 2.3% (11,266) (100.0)% operations, net of tax Net income$ 19,411 4.3%$ 485 0.1%$ 18,926 3,902.3% Adjusted EBITDA$ 47,316 10.4%$ 54,895 11.0%$ (7,579) (13.8)% Diluted net income (loss) per common$ 0.20 $ (0.11) $ 0.31 * share from continuing operations Diluted net income per common share - 0.11 (0.11) (100.0)% from discontinued operations Diluted net income per common share$ 0.20 $ -$ 0.20 100.0%
* Percentage is not meaningful due to a comparison of a positive figure and a negative figure.
Net Sales Net sales for the three months endedSeptember 30, 2021 were$454.9 million , a decrease of$43.7 million , or 8.8%, as compared to$498.6 million in the three months endedSeptember 30, 2020 . On a constant currency basis, adjusted for the impact of divestitures and discontinued brands, net sales decreased approximately$0.6 million and 0.1% from the prior year quarter driven by theNorth America reportable segment. Further details of changes in net sales by segment are provided below in the Segment Results section. 34 -------------------------------------------------------------------------------- Table of Contents Gross Profit Gross profit for the three months endedSeptember 30, 2021 was$105.4 million , a decrease of$13.7 million , or 11.5%, as compared to the prior year quarter. Gross profit margin was 23.2% of net sales, compared to 23.9% in the prior year quarter. The gross profit decrease was driven primarily by ourNorth America reportable segment, and mostly bythe United States operating segment, as a result of lower net sales when compared with the prior year period as well as higher delivery and warehouse expenses. The decrease in theNorth America reportable segment was offset in part by an increase in the International reportable segment, due to the performance of the twoUK operating segments. The Ella's KitchenUK operating segment had higher net sales than the prior year quarter due to COVID-driven consumer demand issues in the prior year period which negatively impacted prior year net sales as well as lower cost of sales in the current year due to cost savings, partially offset by higher delivery and warehouse expense in the current year. The otherUK operating segment, HainUnited Kingdom , delivered improved gross margins versus prior year driven by the implementation of productivity initiatives and the divestiture of the low gross margin fruit business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were$74.0 million for the three months endedSeptember 30, 2021 , a decrease of$5.5 million , or 7.0%, from$79.5 million for the prior year quarter. The decrease occurred primarily inthe United States andEurope operating segments. The decrease inthe United States operating segment was primarily due to lower marketing expenses in the current year. The decrease in theEurope operating segment was due to lower broker commissions.
Amortization of Acquired Intangible Assets
Amortization of acquired intangibles was$2.1 million for the three months endedSeptember 30, 2021 , a decrease of$0.3 million from$2.4 million in the prior year quarter due to prior year dispositions that occurred in the later part of fiscal 2021.
Productivity and Transformation Costs
Productivity and transformation costs were$4.0 million for the three months endedSeptember 30, 2021 , an increase of$2.6 million from$1.4 million in the prior year quarter. The increase was primarily due to a$1.6 million increase related to costs incurred for consulting fees related to supply chain optimization and other productivity and transformation initiatives.
Long-lived Asset Impairment
During the three months endedSeptember 30, 2020 , the Company recognized a pre-tax impairment charge of$32.5 million related to the reserve recorded against the assets of the Company'sUnited Kingdom fruit business (see Note 4, Dispositions, in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q). There was no impairment charge recorded in the corresponding period in the three months endedSeptember 30, 2021 .
Operating Income
Operating income for the three months ended
Interest and Other Financing Expense, Net
Interest and other financing expense, net totaled$1.9 million for the three months endedSeptember 30, 2021 , a decrease of$0.6 million , or 24.3%, from$2.5 million in the prior year quarter. The decrease resulted primarily from lower variable interest rates applied to borrowings outstanding under our revolving credit facility. See Note 9, Debt and Borrowings, in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Other Income, Net
Other income, net totaled$0.8 million for the three months endedSeptember 30, 2021 , compared to$1.4 million in the prior year quarter. The change was primarily attributable to a lower gain on sale of business and higher realized foreign currency losses in the current year. 35 -------------------------------------------------------------------------------- Table of Contents Income from Continuing Operations Before Income Taxes and Equity in Net Loss of Equity-Method Investees Income before income taxes and equity in net loss of our equity-method investees for the three months endedSeptember 30, 2021 was$24.5 million compared to$2.2 million in the prior year quarter. The increase was due to the items discussed above. Provision for Income Taxes The provision for income taxes includes federal, foreign, state and local income taxes. Our income tax expense from continuing operations was$4.5 million for the three months endedSeptember 30, 2021 compared to an income tax expense of$13.0 million in the prior year quarter. The effective income tax rate from continuing operations was expense of 18.6% and 589.2% for the three months endedSeptember 30, 2021 and 2020, respectively. Lower effective income tax rate relative to our statutory tax rates for the current quarter is mainly due to the reversal of uncertain tax position accruals based on filing and approval of certain elections by the tax authorities. In addition, the effective income tax rates from continuing operations for the three months endedSeptember 30, 2021 and 2020 were negatively impacted by provisions in the Tax Cuts and Jobs Act (the "Tax Act"), primarily related to Global Intangible Low Taxed Income ("GILTI") and limitations on the deductibility of executive compensation. Furthermore, the effective income tax rate from continuing operations for the three months endedSeptember 30, 2020 was negatively impacted by various discrete items including the tax impact of theUnited Kingdom fruit business reserve, the legal entity reorganization, and theUK rate change. The effective income tax rates in each period were also impacted by the geographical mix of earnings and state valuation allowance. 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 endedSeptember 30, 2021 was$0.5 million and less than$0.1 million in the prior year quarter. See Note 13, Investments, in the Notes to the 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
Net Income from Discontinued Operations, Net of Tax
Net income from discontinued operations, net of tax, for the three months ended
During the three months endedSeptember 30, 2020 , the Company recognized a$11.3 million adjustment to the Tilda business primarily related to the recognition of a deferred tax benefit.
See Note 4, Dispositions, in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further discussion.
Net Income
Net income for the three months endedSeptember 30, 2021 was$19.4 million , or$0.20 per diluted share, compared to$0.5 million , or$0.00 per diluted share, in the prior year quarter. The change was attributable to the factors noted above.
Adjusted EBITDA
Our Adjusted EBITDA was$47.3 million and$54.9 million for the three months endedSeptember 30, 2021 and 2020, 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. 36
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