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Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name
of each exchange on which registered
iCommon Stock, par value $.01 per share
iHAIN
iThe
Nasdaq Stock Market LLC
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.
iYesý No ¨
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
iYesý 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.
iLarge
accelerated filer
☒
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
i☐
Emerging
growth company
i☐
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 i☐ No ý
As of April 29, 2022, there were i89,797,463
shares outstanding of the registrant’s Common Stock, par value $.01 per share.
This Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (the “Form 10-Q”) contains forward-looking statements within the meaning of safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of The Hain Celestial Group, Inc. (collectively with its subsidiaries, the “Company,”“Hain Celestial,”“we,”“us” or “our”) may differ materially from those expressed or implied by such forward-looking statements. The words “believe,”“expect,”“anticipate,”“may,”“should,”“plan,”“intend,”“potential,”“will” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include, among other things, our beliefs or expectations relating to our future performance, results of operations and financial condition; our strategic initiatives, business strategy, supply chain, brand portfolio and product performance; the COVID-19 pandemic; the success of our pricing negotiations; current or future macroeconomic trends; and future corporate acquisitions or dispositions.
Risks and uncertainties that may cause actual results to differ materially from forward-looking statements include: challenges and uncertainty resulting from the impact of competition; challenges and uncertainty resulting from the COVID-19 pandemic; our ability
to manage our supply chain effectively; supply chain disruptions, cybersecurity risks and other risks arising from the war in Ukraine; disruption of operations at our manufacturing facilities; reliance on independent contract manufacturers; changes to consumer preferences; customer concentration; reliance on independent distributors; the availability of organic ingredients; risks associated with our international sales and operations; risks associated with outsourcing arrangements; our ability to execute our cost reduction initiatives and related strategic initiatives; our ability to identify and complete acquisitions or divestitures and our level of success in integrating acquisitions; our reliance on independent certification for a number of our products; the reputation of our Company and our
brands; our ability to use and protect trademarks; general economic conditions; input cost inflation; the United Kingdom’s exit from the European Union; cybersecurity incidents; disruptions to information technology systems; the impact of climate change; liabilities, claims or regulatory change with respect to environmental matters; potential liability if our products cause illness or physical harm; the highly regulated environment in which we operate; pending and future litigation; compliance with data privacy laws; compliance with our credit agreement; the discontinuation of LIBOR; our ability to issue preferred stock; the adequacy of our insurance coverage; impairments in the carrying value of goodwill or other intangible assets; and other risks and matters described in our most recent Annual Report on Form 10-K, this Form 10-Q and our other filings from time to time with the U.S. Securities and Exchange Commission.
We
undertake no obligation to update forward-looking statements to reflect actual results or changes in assumptions or circumstances, except as required by applicable law.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except par values and per share data)
1. iBUSINESS
The
Hain Celestial Group, Inc., a Delaware corporation (collectively with its subsidiaries, the “Company,”“Hain Celestial,”“we,”“us” or “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. 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 i80 countries worldwide. The Company operates under itwo
reportable segments: North America and International.
Acquisition
On December 28, 2021, the Company acquired all outstanding stock of Proven Brands, Inc. (and its subsidiary That's How We Roll LLC) and KTB Foods Inc., collectively doing business as "That's How We Roll" ("THWR"), the producer and marketer of ParmCrisps® and Thinsters®. See Note 4, Acquisitions and Dispositions, for details.
Discontinued Operations
The financial statements separately report discontinued operations
and the results of continuing operations (see Note 4, Acquisitions and Dispositions). All footnotes exclude discontinued operations unless otherwise noted.
2. iiBASIS
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 income 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 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 and should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2021 (the “Form 10-K”). The amounts as of and for the periods ended June 30, 2021 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 nine months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2022. Please refer to the Notes to the Consolidated Financial Statements as of June 30, 2021 and for the fiscal year then ended included in 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.
i
Significant Accounting Policies
The Company's significant accounting policies
are described in Note 2, Summary of Significant Accounting Policies and Practices, in the Notes to the Consolidated Financial Statements in the Form 10-K. Included herein are certain updates to those policies.
i
Transfer of Financial Assets
The
Company has non-recourse accounts receivable financing arrangements in which eligible receivables are sold to third-party buyers in exchange for cash. The Company transferred accounts receivable in their entirety to the buyers and satisfied all of the conditions to report the transfer of financial assets in their entirety as a sale. The principal amount of receivables sold under these arrangements was $i112,607 and $i59,871
during the nine months ended March 31, 2022 and 2021, respectively. The incremental cost
of accounts receivable financing arrangements is included in Other (income) expense, net in the Company’s Consolidated Statements of Operations. The proceeds from the sale of receivables are included
in cash provided by operating activities in the accompanying Consolidated Statements of Cash Flows.
i
iRecently Adopted Accounting Pronouncements
In
October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination on the acquisition date in accordance with Accounting Standards Codification ("ASC") 606, Revenue from Contracts
with Customers, as if it had originated the contracts. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. The Company adopted ASU 2021-08 during the second quarter of fiscal year 2022, and the adoption did not have an impact on the Company's consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. ASU 2020-04 is currently effective and upon adoption may be applied prospectively to contract modifications made on or before December 31, 2022. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies certain provisions in Topic 848, if elected by an entity, to apply to derivative instruments that use an interest rate for margining, discounting, or contract
price alignment that is modified as a result of reference rate reform. During the first quarter of fiscal year 2022, the Company adopted the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Effect
of dilutive stock options, unvested restricted stock and unvested restricted share units
i171
i1,765
i420
i883
Diluted
weighted average shares outstanding
i91,310
i101,596
i94,519
i101,385
Basic
net income per common share:
Continuing operations
$
i0.27
$
i0.34
$
i0.80
$
i0.25
Discontinued
operations
i—
i—
i—
i0.11
Basic
net income per common share
$
i0.27
$
i0.34
$
i0.80
$
i0.36
Diluted
net income per common share:
Continuing operations
$
i0.27
$
i0.34
$
i0.79
$
i0.25
Discontinued
operations
i—
i—
i—
i0.11
Diluted
net income per common share
$
i0.27
$
i0.34
$
i0.79
$
i0.36
/
There
were i508 and i4
restricted stock awards excluded from our calculation of diluted net income per share for the three months ended March 31, 2022 and 2021, respectively, as such awards were anti-dilutive. There were i275 and i182
restricted stock awards excluded from the calculation of diluted net income per share for the nine months ended March 31, 2022 and 2021, respectively, as such awards were anti-dilutive.
Additionally, i231 and i23
stock-based awards outstanding at March 31, 2022 and 2021, respectively, were excluded from the calculation of diluted net income per share for the three months endedMarch 31, 2022 and 2021, respectively, as such awards were contingently issuable based on market or performance conditions, and such conditions had not been achieved during the respective periods. There were i541
and i957 stock-based awards outstanding at March 31, 2022 and 2021, respectively, that were excluded from the calculation of diluted net income per share for the nine months ended March 31, 2022 and 2021, respectively,
as such awards were contingently issuable based on market or performance conditions.
Share Repurchase Program
In June 2017, August 2021 and January 2022, the Company's Board of Directors authorized the repurchase of up to $i250,000, $i300,000
and $i200,000 of the Company’s issued and outstanding common stock, respectively. Share repurchases under the 2021 and 2022 authorizations commenced after the previous authorizations were fully utilized. Repurchases may be made from time to time in the open market, pursuant to pre-set trading plans, in private transactions or otherwise. The current 2022 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. In November 2021, the Company entered into a share repurchase agreement with affiliates of Engaged Capital, LLC (collectively, the “Selling Stockholders”), pursuant to which the Company repurchased i1,700 shares directly from the Selling Stockholders
at a price of $i45.00 per share (see Note 19, Related Party Transactions). During the nine months ended March 31, 2022, the Company repurchased i10,126
shares under the repurchase program, inclusive of the shares repurchased from the Selling Stockholders, for a total of $i395,821, excluding commissions, at an average price of $i39.09
per share. As of March 31, 2022, the Company had $i186,579 of remaining authorization under the share repurchase program. During the nine months ended March 31, 2021, the Company repurchased i2,408
shares under the repurchase program for a total of $i80,255, excluding commissions, at an average price of $i33.33 per share.
On December 28, 2021, the Company acquired all outstanding stock of THWR, the producer and marketer of ParmCrisps®
and Thinsters®, deepening the Company's position in the snacking category. Consideration for the transaction consisted of cash, net of cash acquired, totaling $i260,871, subject to an adjustment for working capital. Of the total consideration, $i260,474
was paid with the remaining $i397 payable as of March 31, 2022. The acquisition was funded with borrowings under the Credit Agreement (as defined in Note 9, Debt and Borrowings). The Company incurred $ii5,103/
of transaction costs in connection with the acquisition which were expensed as incurred, and are included as a component of Selling, general and administrative expenses in the Company's Consolidated Statements of Operations for the nine months ended March 31, 2022.
i
The following table summarizes the
Company's preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. The Company expects to finalize the allocation during fiscal 2022.
The
fair values assigned to identifiable intangible assets acquired were based on assumptions and estimates made by management. Of the $i193,800 of identifiable intangible assets acquired, $i70,800
was preliminarily assigned to customer relationships with a weighted average estimated useful life of i17 years, and $i123,000
was preliminarily assigned to tradenames with indefinite lives. The goodwill recorded as a result of this acquisition is not expected to be deductible for tax purposes.
Results of THWR are included in the United States operating segment, a component of the North America reportable segment. THWR's net sales included in our consolidated results were i5.0% and i1.8%
of consolidated net sales for the three and nine months ended March 31, 2022.
iThe following table provides unaudited pro forma results of continuing operations had the acquisition been completed at the beginning of fiscal 2021. The proforma information reflects certain adjustments related to the acquisition but does not reflect any potential operating efficiencies or cost savings that may result from the acquisition. Accordingly,
this information has been provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by the Company for the periods presented or that will be achieved by the combined company in the future. The pro forma information has been adjusted to give effect to items that are directly attributable to the transactions and are expected to have a continuing impact on the combined results.
Diluted
net income per common share from continuing operations
$
i0.30
$
i0.30
$
i0.86
$
i0.27
(1)The
pro forma adjustments include the elimination of transaction costs totaling $ii5,103/
from the nine months ended March 31, 2022 and recognition of those costs in the nine months ended March 31, 2021. Additionally, the pro forma adjustments include the elimination of integration costs and a fair value inventory adjustment totaling $i1,500 and $i1,800,
respectively, for the three and nine months ended March 31, 2022 and recognition of those costs in the three and nine months ended March 31, 2021.
Dispositions
GG UniqueFiber®
On June 28, 2021, the Company completed the divestiture of its crispbread crackers business, GG UniqueFiber® (“GG”) for total cash consideration of $i336.
The sale of GG is consistent with the Company’s transformation and portfolio simplification process. GG operated in Norway and was part of the Company’s International reportable segment. The Company deconsolidated the net assets of GG during the twelve months ended June 30, 2021, recognizing a pre-tax loss on sale of $i3,753
in the fourth quarter of fiscal 2021.
Dream® and WestSoy®
On April 15, 2021, the Company completed the divestiture of its North America non-dairy beverages business, consisting of the Dream® and WestSoy® brands, for total cash consideration of $i33,000,
subject to customary post-closing adjustments. The final purchase price was $i31,320. The non-dairy beverage business was considered to be non-core within our broader North American business, and the sale aligns with the Company’s portfolio simplification process. The business operated out of the United States and Canada and was part of the
Company’s North America reportable segment. The Company deconsolidated the net assets of the North American non-dairy beverage business during the twelve months ended June 30, 2021, recognizing a pre-tax gain on sale of $i7,519 in the fourth quarter of fiscal 2021.
Fruit
In
August 2020, the Company's Board of Directors approved a plan to sell its prepared fresh fruit, fresh fruit drinks and fresh fruit desserts division ("Fruit"), primarily consisting of the Orchard House® Foods Limited business and associated brands. This decision supported the Company's overall strategy as the Fruit business did not align, and had limited synergies, with the rest of the Company's businesses. The Fruit business operated in the U.K. and was part of the Company’s International reportable segment. The Company determined
that the held for sale criteria was met and classified the assets and liabilities of the Fruit business as held for sale as of September 30, 2020 and December 31, 2020, recognizing a pre-tax non-cash loss to reduce the carrying value to its estimated fair value less costs to sell of $i56,093 during the nine months ended March 31, 2021. The sale was
completed on January 13, 2021 for a total cash consideration of $i38,547, recognizing a pre-tax loss on sale of $i1,904
during the third quarter of fiscal 2021.
Danival
The Company entered into a definitive stock purchase agreement on June 30, 2020 for the sale of its Danival business, a component of the International reportable segment, and the transaction closed on July 21, 2020. The Company deconsolidated the net assets of the Danival business upon closing of the sale during the quarter ended September 30, 2020, recognizing a pre-tax gain on sale of $i611
during the first quarter of fiscal 2021.
On August 27, 2019, the Company sold the entities comprising the Tilda Group Entities and certain other assets of the Tilda business for an aggregate price of $i342,000 in
cash, subject to customary post-closing adjustments based on the balance sheets of the Tilda business. 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 accounted for as discontinued operations. Net income from discontinued operations, net of tax in our Consolidated Statements of Operations was nil for the three months ended March 31, 2022 and 2021 as well as for the nine months ended March 31, 2022. iThe
following table presents the major classes of Tilda’s results within Net income from discontinued operations, net of tax in our Consolidated Statements of Operations for the nine months ended March 31, 2021:
Net
loss from discontinued operations before income taxes
(i75)
Benefit for income taxes(1)
(i11,320)
Net
income from discontinued operations, net of tax
$
i11,245
(1) Includes $i11,320
of tax benefit related to the legal entity reorganization for the nine months ended March 31, 2021.
There were iiiino///
assets or liabilities from discontinued operations associated with Tilda as of March 31, 2022 or June 30, 2021.
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.
Depreciation
and amortization expense for the three months ended March 31, 2022 and 2021 was $i8,292 and $i9,118,
respectively. Depreciation and amortization expense for the nine months ended March 31, 2022 and 2021 was $i22,944 and $i26,302,
respectively.
During the nine months ended March 31, 2022, the Company completed the sale of undeveloped land plots in Boulder, Colorado in the United States for total cash proceeds of $i10,005, net of brokerage and other fees, resulting in a gain in the amount of $i8,656,
which is included as a component of Other (income) expense, net in our Consolidated Statement of Operations.
The Company recognized an impairment charge of $i303 during the nine months ended March 31, 2022 relating to a facility in the United Kingdom. The facility was held for sale as of March 31, 2022 and June 30, 2021
with a net carrying amount of $i1,545 and $i1,874,
respectively. Further, a facility in the United States was held for sale as of March 31, 2022 with a net carrying amount of $i1,768.
During the nine months ended March 31, 2021, the Company recorded a non-cash impairment charge
of $i1,333 related to the write-down of building improvements.
7. iiLEASES/
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.
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.
Cash
paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i11,632
$
i12,954
Operating
cash flows from finance leases
$
i16
$
i13
Financing
cash flows from finance leases
$
i182
$
i285
ROU
assets obtained in exchange for lease obligations:
Operating leases
$
i4,100
$
i18,349
Finance
leases
$
i251
$
i671
ROU
assets obtained in connection with an acquisition (See Note 4):
Operating leases
$
i4,098
$
i—
Weighted
average remaining lease term:
Operating leases
i9.0 years
i10.0
years
Finance leases
i4.2 years
i4.1
years
Weighted average discount rate:
Operating leases
i3.3
%
i3.2
%
Finance
leases
i4.0
%
i3.9
%
iiMaturities
of lease liabilities as of March 31, 2022 were as follows:
Fiscal Year
Operating leases
Finance leases
Total
2022 (remainder of year)
$
i3,427
$
i56
$
i3,483
2023
i16,144
i162
i16,306
2024
i14,498
i80
i14,578
2025
i12,270
i80
i12,350
2026
i11,581
i67
i11,648
Thereafter
i53,640
i78
i53,718
Total
lease payments
i111,560
i523
i112,083
Less:
Imputed interest
i17,084
i45
i17,129
Total
lease liabilities
$
i94,476
$
i478
$
i94,954
//
On
December 17, 2021, the Company entered into an operating lease in the United States that has not yet commenced. Obligations under this lease are approximately $i41,638, and the lease is expected to commence during the fourth quarter of fiscal year ending June 30, 2022 with a lease term of i10.5
years, excluding ione renewal option.
There
were no events or circumstances that warranted an interim impairment test for indefinite-lived intangible assets during the three and nine months endedMarch 31, 2022 or 2021. See Note 4, Acquisitions and Dispositions, for details surrounding the acquisition of THWR, including $i193,800
of identifiable intangible assets acquired on December 28, 2021.
Amortized intangible assets, which are deemed to have a finite life, primarily consist of customer relationships and trademarks and tradenames and are amortized over their estimated useful lives of i5 to i25
years. iAmortization expense included in continuing operations was as follows:
Short-term
borrowings and current portion of long-term debt
i7,774
i530
Long-term
debt, less current portion
$
i827,771
$
i230,492
/
Amended
and Restated Credit Agreement
On December 22, 2021, the Company refinanced its revolving credit facility by entering into a Fourth Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for senior secured financing of $i1,100,000 in the aggregate, consisting of (1) $i300,000
in aggregate principal amount of term loans (the "Term Loans") and (2) an $i800,000 senior secured revolving credit facility (which includes borrowing capacity available for letters of credit, and is comprised of a $i440,000
U.S. revolving credit facility and $i360,000 global revolving credit facility) (the "Revolver"). Both the Revolver and the Term Loans mature on December 22, 2026. As of March 31, 2022, there were $i538,000
of loans under the Revolver, $i298,125 of Term Loans, and $i8,919 letters of credit outstanding under the Credit Agreement.
The
Credit Agreement provides that loans will bear interest at rates based on (a) the Eurodollar Rate plus a rate ranging from i0.875% to i1.75% per annum or (b) the
Base Rate plus a rate ranging from i0.00% to i0.75% per annum, the relevant rate being the Applicable Rate. The Applicable Rate will be determined in accordance
with a leverage-based pricing grid, as set forth in the Credit Agreement. Swing Line Loans and Global Swing Line Loans denominated in U.S. 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 (a) the Euro Short Term Rate, or €STR, in the case of such loans denominated in Euros plus the Applicable Rate, (b) the Sterling Overnight Index Average Reference Rate, or SONIA, in the case of such loans denominated in Sterling plus the Applicable Rate or (c) the Canadian Prime Rate plus the Applicable Rate. The weighted average interest rate on outstanding borrowings under the Credit Agreement at March 31, 2022 was i1.67%.
Additionally, the Credit Agreement contains a Commitment Fee on the amount unused under the Credit Agreement ranging from i0.15% to i0.25%
per annum, and such Commitment Fee is determined in accordance with a leverage-based pricing grid.
The Credit Agreement includes maintenance covenants that will require compliance with a consolidated interest coverage ratio, a consolidated secured leverage ratio and a consolidated leverage ratio. As of March 31, 2022, $i253,081 was available under the Credit Agreement,
and the Company was in compliance with all associated covenants.
In connection with the Credit Agreement, the Company and its material domestic subsidiaries entered into an Amended and Restated Security and Pledge Agreement (the “Security Agreement”), pursuant to which all of the obligations under the Credit Agreement will be secured by liens on assets of the Company and its material domestic subsidiaries, including the equity interests in each of their
direct subsidiaries and intellectual property, subject to agreed-upon exceptions.
Credit Agreement Issuance Costs
Based on the Company's evaluation of the borrowing capacity associated with the creditors participating in the previous facility compared to those in the Credit Agreement, $i1,762
of the $i2,036 of unamortized deferred financing costs at December 22, 2021 were deferred and the remaining $i274 were expensed as a component
of Interest and other financing expense, net on our Consolidated Statement of Operations. Additionally, the Company incurred debt issuance costs of approximately $i2,764 in connection with the Credit Agreement. Of the total $i4,526
of deferred debt issuance costs, $i3,292 were associated with the Revolver and are being amortized on a straight-line basis within Other assets on our Consolidated Balance Sheet, and $i1,234
are being amortized on a straight-line basis, which approximates the effective interest method, as an adjustment to the carrying amount of the Term Loans as a component of Interest and other financing expense, net on our Consolidated Statement of Operations over the term of the Credit Agreement.
In 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. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability on 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 an expense of i23.7% and i25.7%
for the three months ended March 31, 2022 and 2021, respectively. The effective income tax rate from continuing operations was an expense of i20.3% and i55.5%
for the nine months ended March 31, 2022 and 2021, respectively. The effective income tax rate from continuing operations for the nine months ended March 31, 2022 was impacted by the reversal of uncertain tax position accruals based on filing and approval of certain elections by taxing authorities, deductions related to stock-based compensation, non-deductible transaction costs related to the acquisition of THWR (see Note 4, Acquisitions and Dispositions), the reversal of a valuation allowance due to the utilization of a capital loss carryover and the finalization of fiscal year 2021 U.S. income tax returns. The effective income tax rate from continuing operations for the nine months ended March 31,
2021 was negatively impacted by various discrete items including the tax impact of the United Kingdom Fruit business reserve, the legal entity reorganization, and the U.K. rate change. The effective income tax rates in each period were also impacted by the geographical mix of earnings and state valuation allowance.
The income tax benefit from discontinued operations was iinil/
for the three and nine months endedMarch 31, 2022, while the income tax from discontinued operations was inil and a benefit of $i11,320
for the three and nine months ended March 31, 2021, respectively. The benefit for income tax for the nine months ended March 31, 2021 was impacted by a legal entity reorganization.
Other comprehensive (loss) income before reclassifications
$
(i18,701)
$
i1,672
$
(i43,649)
$
i80,491
Amounts
reclassified into income (1)
i—
i14,725
i—
i15,906
Deferred
gains (losses) on cash flow hedging instruments:
Amount of gain (loss) recognized in AOCL on derivatives (2)
i2,007
i1,168
i3,544
(i621)
Amount
of (loss) gain reclassified from AOCL into (expense) income (2)
(i553)
(i914)
(i1,517)
i995
Deferred
gains (losses) on net investment hedging instruments:
Amount of gain (loss) recognized in AOCL on derivatives (2)
i1,240
i3,107
i4,610
(i2,763)
Amount
of loss reclassified from AOCL into expense (2)
(i113)
(i97)
(i327)
(i298)
Net
change in AOCL
$
(i16,120)
$
i19,661
$
(i37,339)
$
i93,710
(1)Foreign
currency translation gains or losses of foreign subsidiaries related to divested businesses are reclassified into income once the liquidation of the respective foreign subsidiaries is substantially complete. During the three and nine months ended March 31, 2021, the Company reclassified $i14,725
and $i15,906 of translation losses, respectively, from AOCL to Other income, net on the Consolidated Statements of Operations.
(2)See Note 15, Derivatives and Hedging Activities, for the amounts reclassified into income for deferred gains (losses) on cash flow and net investment hedging instruments recorded
in the Consolidated Statements of Operations in the three and nine months ended March 31, 2022 and 2021.
/
12. iSTOCK-BASED
COMPENSATION AND INCENTIVE PERFORMANCE PLANS
The Company has a stockholder-approved plan, the Amended and Restated 2002 Long-Term Incentive and Stock Award Plan (the "2002 Plan"), under which the Company’s officers, senior management, other key employees, consultants and directors may be granted equity-based awards. The Company also grants shares under its 2019 Equity Inducement Award Program (the "2019 Inducement Program") to induce selected individuals to become employees of the Company. The 2002 Plan and 2019 Inducement Program
are collectively referred to as the "Stock Award Plans." In conjunction with the Stock Award Plans, the Company maintains a long-term incentive program (the “LTI Program” or "LTIP") that provides for equity awards, including performance and market-based equity awards that can be earned over defined performance periods.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.
i
Compensation
cost and related income tax benefits recognized in the Consolidated Statements of Operations for stock-based compensation plans were as follows:
Awards of restricted stock are either restricted stock awards ("RSAs") or restricted stock units ("RSUs") that are issued at no cost to the recipient. Performance-based or market-based RSUs are issued in the form of performance share units ("PSUs"). iA summary of the restricted
stock activity (including all RSAs, RSUs and PSUs) for the nine months ended March 31, 2022 is as follows:
Number of Shares and Units
Weighted Average Grant Date Fair Value (per share)
Non-vested RSAs, RSUs and PSUs outstanding at June 30, 2021
i1,780
$
i16.55
Granted
i828
$
i44.70
Vested
(i1,579)
$
i15.58
Forfeited
(i158)
$
i25.26
Non-vested
RSAs, RSUs and PSUs outstanding at March 31, 2022
i871
$
i43.54
The
table above includes a total of i190 shares granted during the nine months ended March 31, 2022 that represent the target number of shares that may be earned based on pre-defined market conditions that are eligible to vest ranging from izero
to i200% of target. All such shares relate to the 2022-2024 LTIP as further described below. Granted shares also include i56
shares that may be earned based on certain performance-based metrics being met. Vested shares during the nine months ended March 31, 2022 include a total of i1,299 shares under the 2019-2021 LTIP that vested at i100%
of target based on achievement of target absolute total shareholder return ("TSR") levels, and a total of i13 shares granted in a previous period that vested based on certain performance-based metrics being met.
i
The
fair value of RSAs, RSUs and PSUs granted and of shares vested, and the tax benefit recognized from restricted shares vesting was as follows:
Tax
benefit recognized from restricted shares vesting
$
i3,643
$
i1,786
/
At
March 31, 2022, there was $i29,787 of unrecognized stock-based compensation expense related to non-vested restricted stock awards which is expected to be recognized over a weighted average period of i2.2
years.
2022-2024 LTIP
During the nine months ended March 31, 2022, the Company granted market-based PSU awards under the LTI Program with a total target payout of i190 shares of common stock.
At March 31, 2022, i175 of such shares were outstanding. Vesting is pursuant to a defined calculation of either relative TSR or absolute TSR (as defined) over the period from November 18, 2021 through the earlier of (i) November 17, 2024; (ii) the date the participant’s employment is
terminated due to death or Disability (as defined); or (iii) the effective date of a Change in Control (as defined) (the “TSR Performance Period”). Vesting of i117 target shares of the outstanding PSU awards is pursuant to a defined calculation of relative TSR over the TSR Performance Period (the “Relative TSR PSUs”). Vesting of i58
target shares of the outstanding PSU awards is pursuant to the achievement of pre-established ithree-year compound annual TSR targets over the TSR Performance Period (the “Absolute TSR PSUs”). Total shares eligible to vest for both the Relative TSR PSUs and Absolute TSR PSUs range from izero
to i200% of the target amount. iGrant
date fair values are calculated using a Monte-Carlo simulation model with grant date fair values per target share and related valuation assumptions as follows:
On October 27, 2015, the Company acquired a minority equity interest in Chop’t Creative Salad Company
LLC, predecessor to Founders Table Restaurant Group, LLC (“Founders Table”). Founders Tableowns and operates the fast-casual restaurant chains Chop't Creative Salad Co. and Dos Toros Taqueria. The investment is being accounted for as an equity method investment due to the Company’s representation on the Board of Directors of Founders Table. At March 31, 2022 and June 30, 2021, the carrying value of the Company’s investment in Founders Table was $i9,808
and $i10,699, respectively, and is included in the Consolidated Balance Sheets as a component of Investments and joint ventures.
The Company also holds the following investments: (a) Hutchison Hain Organic Holdings Limited, a joint venture with HUTCHMED (China) Limited, accounted for under the equity method of accounting, (b) Hain Future Natural Products Private Ltd., a joint venture with Future Consumer
Ltd, accounted for under the equity method of accounting, and (c) Yeo Hiap Seng Limited, in which the Company holds a less than i1% equity ownership interest. The carrying value of these combined investments was $i6,248
and $i6,218 as of March 31, 2022 and June 30, 2021, respectively, and is included in the Consolidated Balance Sheets as a component of Investments and joint ventures.
14. iFINANCIAL
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).
i
The following table presents assets and liabilities measured at fair value on a recurring basis as of March 31, 2022:
The following table presents assets and liabilities measured at fair value on a recurring basis as of June 30, 2021:
Total
Quoted
prices in
active
markets
(Level 1)
Significant
other
observable
inputs
(Level
2)
Significant
unobservable
inputs
(Level 3)
Assets:
Derivative financial instruments
$
i699
$
i—
$
i699
$
i—
Equity
investment
i646
i646
i—
i—
Total
$
i1,345
$
i646
$
i699
$
i—
Liabilities:
Derivative
financial instruments
i11,968
i—
i11,968
i—
Total
$
i11,968
$
i—
$
i11,968
$
i—
The
equity investment consists of the Company’s less than i1% investment in Yeo Hiap Seng Limited, a food and 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.
There were no transfers of financial instruments between the three levels of fair value hierarchy during the nine months ended March 31, 2022 or 2021.
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 9, Debt and
Borrowings).
In addition to the instruments named above, the Company makes fair value measurements in connection with its interim and annual goodwill and tradename impairment testing and accounting for acquisitions. These measurements fall into Level 3 of the fair value hierarchy (See Note 8, Goodwill and Other Intangible Assets).
Derivative Instruments
The Company uses interest rate swaps to manage its interest rate risk and cross-currency swaps and foreign currency exchange contracts
to manage its exposure to fluctuations in foreign currency exchange rates. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
In accordance with the provisions of ASC 820, Fair
Value Measurements, the Company incorporates credit valuation adjustments to appropriately reflect both the Company’s nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Although
the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract,
was not significant to the overall valuation. As a result, all of the derivatives held as of March 31, 2022 and June 30, 2021 were classified as Level 2 of the fair value hierarchy.
The fair value estimates presented in the fair value hierarchy tables above are based on information available to management as of March 31, 2022 and June 30, 2021. These estimates are not necessarily indicative of the amounts we could ultimately realize.
15. iDERIVATIVES
AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the
Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s receivables and borrowings.
Certain of the Company’s foreign operations expose the
Company to fluctuations of foreign exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain assets and liabilities in terms of its functional currency, the U.S. Dollar.
Accordingly, the Company uses derivative financial instruments to manage and mitigate such risks. The Company
does not use derivatives for speculative or trading purposes.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of
the agreements without exchange of the underlying notional amount. During the three and nine months ended March 31, 2022 and 2021, such derivatives were used to hedge the variable cash flows associated with existing variable rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCL and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in AOCL related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable rate debt. During the remaining three months of fiscal 2022, the
Company estimates that an additional $i301 will be reclassified as an increase to interest expense.
i
As
of March 31, 2022, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
Interest Rate Derivative
Number of Instruments
Notional Amount
Interest Rate Swap
i4
$i230,000
/
Cash
Flow Hedges of Foreign Exchange Risk
The Company is exposed to fluctuations in various foreign currencies against its functional currency, the U.S. Dollar. The Company uses foreign currency derivatives including cross-currency swaps to manage its exposure to fluctuations in the USD-EUR exchange rates. Cross-currency swaps involve exchanging fixed-rate interest payments for fixed-rate interest receipts, both of which will occur at the USD-EUR forward exchange rates in effect upon entering into the instrument. The Company, at times, also uses forward contracts
to manage its exposure to fluctuations in the GBP-EUR exchange rates. The Company designates these derivatives as cash flow hedges of foreign exchange risk.
For derivatives designated and that qualify as cash flow hedges of foreign exchange risk, the gain or loss on the derivative is recorded in AOCL and subsequently reclassified in the period(s) during which the hedged transaction affects earnings within
the same income statement line item as the earnings effect of the hedged transaction.
During the remaining three months of fiscal 2022, the Company estimates that an additional $i47 relating to cross-currency swaps will be reclassified as a decrease to interest expense.
As of March 31, 2022, the
Company had the following outstanding foreign currency derivatives that were used to hedge its foreign exchange risk:
The Company is exposed to fluctuations in foreign exchange rates on investments it holds in its European foreign entities and their exposure to the Euro. The Company uses fixed-to-fixed cross-currency swaps to hedge its exposure to changes in the foreign exchange rate on its foreign investment in Europe. Currency forward agreements involve fixing the USD-EUR exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in U.S. Dollars for their fair value at or close to their settlement date. Cross-currency swaps involve the receipt of functional-currency-fixed-rate amounts from a counterparty in exchange for the
Company making foreign-currency fixed-rate payments over the life of the agreement.
For derivatives designated as net investment hedges, the gain or loss on the derivative is reported in AOCL as part of the cumulative translation adjustment. Amounts are reclassified out of AOCL into earnings when the hedged net investment is either sold or substantially liquidated.
As of March 31, 2022, the Company had the following outstanding foreign currency derivatives that were used to hedge its net investments in foreign operations:
Foreign
Currency Derivative
Number of Instruments
Notional Sold
Notional Purchased
Cross-currency swap
i2
€i76,969
$i83,225
Non-Designated
Hedges
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements and/or the Company has not elected to apply hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
As of March 31, 2022, the Company had ino
outstanding derivatives that were not designated as hedges in qualifying hedging relationships.
The following table presents the fair
value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of March 31, 2022:
Asset Derivatives
Liability
Derivatives
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps
Prepaid expenses and other current assets
$
i2,683
Accrued
expenses and other current liabilities / Other noncurrent liabilities
Total derivatives designated as hedging instruments
$
i2,698
$
i3,841
The
following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of June 30, 2021:
Asset Derivatives
Liability
Derivatives
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate swaps
Prepaid expenses and other current assets
$
i43
Accrued
expenses and other current liabilities / Other noncurrent liabilities
$
i312
Cross-currency swaps
Prepaid expenses and other current assets
i656
Other
noncurrent liabilities
i11,656
Total derivatives designated as hedging instruments
The following table presents the pre-tax effect of cash flow hedge accounting on AOCL and Consolidated Statements of Operations as of the three months ended March 31, 2022 and 2021:
Derivatives
in Cash Flow Hedging Relationships
Amount of Gain (Loss) Recognized in AOCL on Derivatives
Location of Gain (Loss) Reclassified from AOCL into Income (Expense)
Amount of Gain (Loss) Reclassified from AOCL into Income (Expense)
The
following table presents the pre-tax effect of cash flow hedge accounting on AOCL and Consolidated Statements of Operations for the nine months ended March 31, 2022 and 2021:
Derivatives in Cash Flow Hedging Relationships
Amount
of Gain (Loss) Recognized in AOCL on Derivatives
Location of Gain (Loss) Reclassified from AOCL into Income (Expense)
Amount of Gain (Loss) Reclassified from AOCL into Income (Expense)
The following table presents the pre-tax effect of the Company’s derivative financial instruments electing cash flow hedge accounting on the Consolidated Statements of Operations for the three months ended of March 31, 2022 and 2021:
Location
and Amount of Gain (Loss) Recognized in the Consolidated Statements of Operations on Cash Flow Hedging Relationships
The
following table presents the pre-tax effect of the Company’s derivative financial instruments electing cash flow hedge accounting on the Consolidated Statements of Operations for the nine months ended March 31, 2022 and 2021:
Location
and Amount of Gain (Loss) Recognized in the Consolidated Statements of Operations on Cash Flow Hedging Relationships
The following table presents the pre-tax effect of the Company’s net investment hedges on AOCL and the Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021:
Derivatives
in Net Investment Hedging Relationships
Amount of Gain (Loss) Recognized in AOCL on Derivatives
Location of Gain (Loss) Recognized in Income (Expense) on Derivatives
Amount of Gain (Loss) Recognized in Income (Expense) on Derivatives
The
following table presents the pre-tax effect of the Company’s net investment hedges on AOCL and the Consolidated Statements of Operations for the nine months ended March 31, 2022 and 2021:
Derivatives
in Net Investment Hedging Relationships
Amount of Gain (Loss) Recognized in AOCL on Derivatives
Location of Gain (Loss) Recognized in Income (Expense) on Derivatives
Amount of Gain (Loss) Recognized in Income (Expense) on Derivatives
The
following table presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Consolidated Statements Operations for the nine months ended March 31, 2022 and 2021:
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income
on Derivative
Amount of Gain (Loss) Recognized in Income (Expense) on Derivatives
The Company has agreements with each of its derivative counterparties that contain a provision providing that upon certain defaults by the Company on any of its indebtedness, the Company could also be declared in default on its derivative obligations.
16. iTERMINATION
BENEFITS RELATED TO PRODUCTIVITY AND TRANSFORMATION INITIATIVES
As a part of the ongoing productivity and transformation initiatives related to the Company’s strategic objective to expand profit margins and cash flow, the Company initiated a reduction in workforce at targeted locations in the United States as well as at certain locations internationally. The reduction in workforce associated with these initiatives are expected to result in charges throughout fiscal 2022.
iThe
following table displays the termination benefits and personnel realignment activities and liability balances relating to the reduction in workforce for the period ended as of March 31, 2022:
The
liability balance as of March 31, 2022 and June 30, 2021 is included within Accrued expenses and other current liabilities on the Company’s Consolidated Balance Sheets.
17. iCOMMITMENTS
AND CONTINGENCIES
Securities Class Actions Filed in Federal Court
On August 17, 2016, ithree securities class action complaints were filed in the Eastern District of New York (the "District Court") against the Company alleging violations
of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The ithree 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 District Court issued an order for consolidation, appointment of Co-Lead Plaintiffs and approval of selection of co-lead counsel. Pursuant to this order, the Securities Complaints were consolidated under the caption In re The Hain Celestial Group, Inc. Securities Litigation (the “Consolidated Securities Action”), and Rosewood Funeral Home and Salamon Gimpel were appointed as Co-Lead Plaintiffs. On June 21, 2017, the Company received notice that plaintiff Spadola voluntarily dismissed his claims without prejudice to his ability to participate in the Consolidated Securities Action as an absent class member. The Co-Lead Plaintiffs in the Consolidated Securities Action filed a Consolidated
Amended Complaint on August 4, 2017 and a Corrected Consolidated Amended Complaint on September 7, 2017 on behalf of 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 named as defendants the Company and certain of its former officers (collectively, “Defendants”) and asserted 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 which the District 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 named as defendants the Company and certain of its 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. On April 6, 2020, the District Court granted Defendants' motion to dismiss the Second Amended Complaint in its entirety, with prejudice. Co-Lead Plaintiffs appealed the District Court’s decision dismissing the Second Amended Complaint to the United States Court of Appeals for the Second Circuit (the "Second Circuit"). By decision dated December
17, 2021, the Second Circuit vacated the District Court’s judgment and remanded the case for further proceedings. On April 6, 2022, the District Court issued an order directing the parties to submit position papers outlining their views regarding: (a) the scope of the Court's reconsideration of Defendants’ Motion to Dismiss the Second Amended Complaint; and (b) the appropriate procedure the Court should follow in light of the Second Circuit's opinion. On April 14, 2022, the District Court entered an order setting the schedule for, and determining the scope of, supplemental briefing on Defendants’ Motion to Dismiss the Second Amended Complaint, which is due to be fully briefed on or before June 23, 2022.
Additional Stockholder Class Action
and Derivative Complaints Filed in Federal Court
On April 19, 2017 and April 26, 2017, itwo 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 alleged 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 alleged 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
District Court granted an order to unseal this case and reveal Gary Merenstein as the plaintiff (the “Merenstein Complaint”).
On August 10, 2017, the District Court granted the parties' stipulation to consolidate the Barnes Complaint, the Silva Complaint and the Merenstein Complaint 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 “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 was rendered on the motion to dismiss the Amended Complaint in the Consolidated Securities Action, described above.
On March 29, 2019, the District Court in the Consolidated Securities Action granted Defendants’ motion, dismissing the Amended Complaint in its entirety, without
prejudice to replead. Co-Lead Plaintiffs in the Consolidated Securities Action filed the Second Amended Complaint on May 6, 2019. The parties to the Consolidated Stockholder Class and Derivative Action agreed to continue the stay of Defendants’ time to answer, move, or otherwise respond to the consolidated amended complaint through 30 days after a decision on Defendants' motion to dismiss the Second Amended Complaint in the Consolidated Securities Action.
On April 6, 2020, the District Court granted Defendants’ motion to dismiss the Second Amended Complaint in the Consolidated Securities Action, with prejudice. Pursuant to the terms of the stay, Defendants in the Consolidated Stockholder Class and Derivative Action had until May 6, 2020 to
answer, move, or otherwise respond to the complaint in this matter. This deadline was extended, and Defendants moved to dismiss the Consolidated Stockholder Class and Derivative Action Complaint on June 23, 2020, with Plaintiffs’ opposition due August 7, 2020.
On July 24, 2020, Plaintiffs made a stockholder litigation demand on the current Board containing overlapping factual allegations to those set forth in the Consolidated Stockholder Class and Derivative Action. On August 10, 2020, the District Court vacated the briefing schedule on Defendants’ pending motion to dismiss in order to give the Board of Directors time to consider the demand. On each of September 8 and October
8, 2020, the District Court extended its stay of any applicable deadlines for 30 days to give the Board of Directors additional time to complete its evaluation of the demand. On November 3, 2020, Plaintiffs were informed that the Board of Directors had finished investigating and resolved, among other things, that the demand should be rejected. On November 6, 2020, Plaintiffs and Defendants notified the District Court that Plaintiffs were evaluating the rejection of the demand, sought certain additional information and were assessing next steps, and requested that the District Court extend the stay for an additional 30 days, to on or around December 7, 2020. The Parties then filed a number of additional joint status reports, requesting that the District Court continue the stay of applicable deadlines through December
30, 2021. In light of the Second Circuit vacating the District Court’s judgment in the Consolidated Securities Action referenced above and remanding the case for further proceedings, the Parties submitted a joint status report on December 29, 2021 requesting that the District Court continue the temporary stay pending the District Court’s reconsideration of the Defendants’ motion to dismiss the Second Amended Complaint in the Consolidated Securities Action. The District Court has extended the temporary stay through December 30, 2022.
Baby Food Litigation
Since February 2021, a large number of consumer class actions have been brought
against the Company alleging that the Company’s Earth’s Best baby food products (the “Products”) contain unsafe and undisclosed levels of various naturally occurring heavy metals, namely lead, arsenic, cadmium and mercury. There are currently i29 active lawsuits, which generally allege that the Company violated various state consumer
protection laws and make other state and common law warranty and unjust enrichment claims related to the alleged failure to disclose the presence of these metals and that consumers would have allegedly either not purchased the Products or would have paid less for them had the Company made adequate disclosures. These putative class actions seek to certify a nationwide class of consumers as well as various state subclasses. One of the consumer class actions (Kathryn Gavula, et al. v. Beech-Nut Nutrition Co., et al.) filed in the U.S. District Court for the District of Oregon alleges that the Company violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”) by conspiring
with other baby food manufacturers to conceal the presence of these heavy metals in our respective products. These actions have been filed against all of the major baby food manufacturers in federal courts across the country. The U.S. Judicial Panel on Multidistrict Litigation (“JPML”) declined a request to centralize all of the consumer class action lawsuits against all of the baby food manufacturers into a single multidistrict proceeding, and all but one of these cases against the Company have now been transferred and consolidated in the U.S. District Court for the Eastern District of New York into a proceeding captioned In re Hain Celestial Heavy Metals Baby Food Litigation, Case No. 2:21-cv-678 (the "Consolidated Proceeding"). The Court appointed interim class counsel for Plaintiffs in the Consolidated
Proceeding, and Plaintiffs filed a Consolidated Amended Class Action Complaint on March 18, 2022. The Company intends to file a motion to dismiss the Consolidated Amended Class Action Complaint, but no briefing schedule has been set. One consumer class action is pending in New York Supreme Court, Nassau County. The Company has moved to stay or transfer this case to the Consolidated Proceeding and that motion is pending. The Company denies the allegations in these lawsuits and contends that its baby foods are safe and properly labeled.
The claims raised in these lawsuits were brought in
the wake of a highly publicized report issued by the U.S. House of Representatives Subcommittee on Economic and Consumer Policy on Oversight and Reform, dated February 4, 2021 (the “House Report”), addressing the presence of heavy metals in baby foods made by certain manufacturers, including the Company. Since the publishing of the House Report, the Company has also received information requests with respect to the advertising and quality of its baby foods from certain governmental authorities, as such authorities investigate the claims made in the House Report. The Company is fully cooperating with these requests and is providing documents and other requested
information. The Company has been named in one civil government enforcement action, State of New Mexico ex rel. Balderas v. Nurture, Inc., et al., which was filed by the New Mexico Attorney General against the Company and several other manufacturers based on the alleged presence of heavy metals in their baby food products. The Company and several other manufacturers moved to dismiss the New Mexico Attorney General’s lawsuit, which motion the Court denied. The Company filed its answer to the New Mexico Attorney General’s amended complaint on April
23, 2022. The Company denies the New Mexico Attorney General’s allegations and maintains that its baby foods are safe, properly labeled, and compliant with New Mexico law.
In addition to the consumer class actions discussed above, the Company is currently named in ifive lawsuits in state and federal
courts alleging some form of personal injury from the ingestion of the Company’s Products, purportedly due to unsafe and undisclosed levels of various naturally occurring heavy metals. iThree of these lawsuits name multiple plaintiffs alleging claims of physical injuries. These lawsuits generally allege injuries related to neurological development disorders such as autism and attention deficit hyperactivity disorder. The
Company denies that its Products led to any of these injuries and will defend the cases vigorously.
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.
With respect to all litigation and related matters, the Company records a liability when the Company believes it is probable that a liability has been incurred and the amount can be reasonably estimated. For the matters
disclosed in this note, if the Company determines that a liability is probable and the loss can be reasonably estimated, the Company discloses the liability recorded. As of the end of the period covered by this report, the Company has not recorded a liability for any of the matters disclosed in this note. It is possible that some matters could require the Company to pay damages, incur other costs or establish accruals in amounts that could not be reasonably estimated as of the end of the period covered by this report.
18. iSEGMENT
INFORMATION
Our organization structure consists of two geographic based reportable segments: North America and International. Our North America reportable segment consists of the United States and Canada as operating segments. Our International reportable segment is comprised of ithree operating segments: United Kingdom, Ella’s Kitchen UK and Europe. This structure is in line with how our Chief Operating Decision Maker (“CODM”) assesses our performance and allocates resources.
We
use segment net sales and operating income to evaluate performance and to allocate resources. We believe these measures are most relevant in order to analyze segment results and trends. Segment operating income excludes certain general corporate expenses (which are a component of selling, general and administrative expenses), impairment and acquisition related expenses, restructuring, integration and other charges.
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.
(a)
In addition to general Corporate and Other expenses as described above, for the three and nine months ended March 31, 2022, Corporate and Other included $i218 and $i3,228
of Productivity and transformation costs, respectively. For the three and nine months ended March 31, 2021, Corporate and Other included $i2,804 and $i6,343
of Productivity and transformation costs, respectively.
The Company's net sales by product category(1) are as follows:
(1)The
Turbocharge brands are made up of plant-based meat and non-dairy beverages as well as snacks. The Targeted Investment brands are made up of tea, baby, yogurt, and personal care. The Fuel brands are made up of pantry brands in categories such as soup, cooking oils and nut butters.The Simplify brands include all other brands.
The Company’s long-lived assets, which represent net property, plant and equipment and operating lease right-of-use assets, were as follows by geographic area:
On April 15, 2021, the Company completed the divestiture of its North America non-dairy beverages brands, Dream® and WestSoy®, for $i31,320. The purchaser in this transaction was SunOpta Inc. (“SunOpta”). The non-employee
chair of the Company's Board of Directors is also the chair of the board of SunOpta.
SunOpta is also one of the Company’s suppliers, for which the Company incurred expenses in the ordinary course of business. The Company incurred expenses of $i247
and $i3,649 in the three months ended March 31, 2022 and 2021, respectively, to SunOpta and affiliated entities. For the nine months ended March 31, 2022 and 2021, the
Company incurred expenses of $i467 and $i12,806,
respectively, to SunOpta and affiliated entities.
On November 9, 2021, the Company entered into a share repurchase agreement with Engaged Capital Co-Invest VI, LP, Engaged Capital Co-Invest VI-B, LP, Engaged Capital Co-Invest VI-C, LP, Engaged Capital Co-Invest VI-D, LP and Engaged Capital Co-Invest VI-E, LP (collectively, the “Selling Stockholders”), which are affiliates of Engaged Capital, LLC, pursuant to which the Company agreed to repurchase, directly from the Selling Stockholders, i1,700
shares of the Company’s common stock for $i45.00 per share (the "Share Repurchase"), which equals the price at which the Underwriter (as defined below) purchased shares from the Selling Stockholders, net of underwriting commissions and discounts, in an underwritten public offering that launched on November 10, 2021, whereby the Selling
Stockholders sold certain other shares of common stock (the “Offering”). In connection with the Offering, on November 10, 2021, the Company entered into an underwriting agreement with Morgan Stanley & Co. LLC, as underwriter (the “Underwriter”), and the Selling Stockholders. The Share Repurchase and the Offering were completed on November 15, 2021. The aggregate price paid by the Company for the Share Repurchase was $i76,500
(see Note 3, Earnings per Share), which the Company funded with borrowings under the Credit Agreement. The Company did not receive any proceeds from the Offering. The Founder and Chief Investment Officer of Engaged Capital, LLC is a member of the Company's Board of Directors.
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 March 31, 2022 contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 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.
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. 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 A Healthier Way of Life®. Hain Celestial's food
and beverage brands include Celestial Seasonings®, Clarks™, Cully & Sully®, Earth’s Best®, Ella’s Kitchen®, Frank Cooper’s®, Garden of Eatin’®, Hain Pure Foods®, Hartley’s®, Health Valley®, Imagine®, Joya®, Lima®, Linda McCartney's® (under license), MaraNatha®, Natumi®,
New Covent Garden Soup Co.®, ParmCrisps®,Robertson’s®, Rose's® (under license), Sensible Portions®, Spectrum®, Sun-Pat®, Terra®, The Greek Gods®, Thinsters®, Yorkshire Provender® and Yves Veggie Cuisine®. Hain Celestial’s personal care brands include Alba Botanica®, Avalon Organics®,
JASON®, Live Clean®, and Queen Helene®.
Our previous strategy, which we refer to as Hain 2.0, was executed under four key pillars—(1) simplify our portfolio; (2) strengthen our capabilities; (3) expand profit margins and cash flow; and (4) reinvigorate profitable topline growth. This strategy 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 have migrated from a strategy focused on rejuvenating North 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, Targeted Investment, and Fuel:
•The Turbocharge brands are leading-share brands in very high-growth categories. The Turbocharge brands are made up of plant-based meat and non-dairy beverages as well as snacks. Our meat and dairy alternatives are concentrated outside the United States, while the snacks businesses include brands both within the 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 and Targeted Investment categories. Fuel brands are made up of premium pantry brands with scale, in categories such as soup, cooking oils and nut butters.
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.
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, driven by well-publicized industry-wide inflation, supply chain and labor challenges.
Russia-Ukraine War
Although
we have no material assets in Russia, Belarus or Ukraine, our supply chain was adversely impacted by the Russia-Ukraine war during the three months ended March 31, 2022, and we continue to face other challenges and risks arising from the war. In particular, the war has added significant costs to existing inflationary pressures through increased fuel and raw material prices and labor costs. Further, beyond increased costs, labor challenges and other factors have led to supply chain disruptions. While, to date, we have been able to identify replacement raw materials where necessary, we have incurred increased costs in doing so. For example, the supply of sunflower oil has become constrained, compelling us to identify and procure alternative oils. The war has also negatively impacted consumer sentiment, particularly in Europe, with some consumers shifting to lower-priced products, which has somewhat affected demand for our
products. Additionally, we face increased cybersecurity risks, as companies based in the United States and its allied countries have become targets of malicious cyber activity. While we are continuing to monitor and manage the impacts of the war on our business, the extent to which the Russia-Ukraine war and the related economic impact may affect our financial condition or results of operations remains uncertain.
Acquisition
On December 28, 2021, the Company acquired all outstanding stock of Proven Brands, Inc. (and its subsidiary That's How We Roll LLC) and KTB Foods Inc., collectively doing business as "That's How We Roll" ("THWR"), the producer and marketer of ParmCrisps®
and Thinsters®. The acquisition of these two fast-growing, better-for-you brands deepens the Company's position in the snacking category and represents a significant step in establishing the Company as a high-growth, global healthy food company. See Note 4, Acquisitions and Dispositions, in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Qfor additional details.
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 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.
The following table compares our results of operations, including as a percentage of net sales, on a consolidated basis, for the three months ended March 31, 2022 and 2021 (amounts in thousands, other than per share data and percentages, which may not add due to rounding):
Income from continuing operations before income taxes and equity in net loss (income) of equity-method investees
32,652
6.5%
45,981
9.3%
(13,329)
(29.0)%
Provision
for income taxes
7,738
1.5%
11,797
2.4%
(4,059)
(34.4)%
Equity in net loss (income) of equity-method investees
383
0.1%
(70)
—%
453
*
Net
income
$
24,531
4.9%
$
34,254
7.0%
$
(9,723)
(28.4)%
Adjusted
EBITDA
$
58,669
11.7%
$
73,752
15.0%
$
(15,083)
(20.5)%
Diluted
net income per common share
$
0.27
$
0.34
$
(0.07)
(20.6)%
* Percentage is not meaningful due to one or more numbers being negative.
Net Sales
Net sales for the three months ended
March 31, 2022 were $502.9 million, an increase of $10.3 million, or 2.1%, as compared to $492.6 million in the three months ended March 31, 2021. On a constant currency basis, adjusted for the impact of acquisitions, divestitures and discontinued brands, net sales increased approximately $7.2 million, or 1.5%, from the prior year quarter driven by growth in the North America reportable segment offset by a decline in the International reportable segment. Further details of changes in net sales by segment are provided below in the Segment Results section.
Gross Profit
Gross profit for the three months ended March 31,
2022 was $115.7 million, a decrease of $14.2 million, or 10.9%, as compared to the prior year quarter. Additionally, gross profit margin of 23.0% was lower when compared with the prior year quarter. The decrease in gross profit was driven primarily by the International reportable segment, mainly due to lower net sales in the United Kingdom and Europe operating segments, as well as higher energy and supply chain costs when compared to the prior year period, partially offset by higher net sales in the Ella's Kitchen UK operating segment. The North America reportable segment also had a decrease in gross profit mainly due to inflationary and supply chain challenges, such as continued industry-wide distribution and warehousing cost pressures driven by labor shortages, freight carrier availability and other freight cost issues, as well as lower net sales in the Canada operating segment when compared with the prior year period.
Selling, general and administrative expenses were $75.8 million for the three months ended March 31, 2022, an increase of $1.4 million, or 1.9%, from $74.3 million for the prior year quarter. The increase was primarily driven by the North America reportable segment offset in part by the International reportable segment and Corporate and Other. The United States operating segment accounted for the increase in the North America reportable segment due to the acquisition of THWR. The increase was partially offset by a decrease in people-related expenses as well as efficiencies gained from the Company's productivity and transformation
initiatives.
Amortization of Acquired Intangible Assets
Amortization of acquired intangibles was $3.1 million for the three months ended March 31, 2022, an increase of $1.0 million from $2.1 million in the prior year quarter due to the acquisition of THWR in the current fiscal year, partially offset by lower amortization expense in the current year period as a result of prior year dispositions that occurred in the later part of fiscal 2021.
Productivity and Transformation Costs
Productivity and transformation costs were $1.7 million for the three months ended March 31,
2022, a decrease of $2.8 million from $4.5 million in the prior year quarter. The decrease was primarily due to reduced spending related to productivity and transformation initiatives as the current transformation effort approaches its conclusion.
Operating Income
Operating income for the three months ended March 31, 2022 was $35.2 million compared to $49.6 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 $3.2 million for the three months ended March 31,
2022, an increase of $1.2 million, or 58.8%, from $2.0 million in the prior year quarter. The increase resulted primarily from a higher outstanding debt balance driven primarily by the acquisition of THWR in the prior quarter as well as share repurchase activity. 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) Expense, Net
Other income, net totaled $0.7 million for the three months ended March 31, 2022, compared to other expense, net totaling $1.6 million in the prior year quarter. The change to income from expense was primarily attributable to a loss on the sale of the Fruit business,
which occurred in the prior year quarter with no comparable loss in the current year quarter.
Income from Continuing Operations Before Income Taxes and Equity in Net Loss (Income) of Equity-Method Investees
Income from continuing operations before income taxes and equity in net loss (income) of our equity-method investees for the three months ended March 31, 2022 was $32.7 million compared to $46.0 million in the prior year quarter. The decrease 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 $7.7 million for the three months ended March 31, 2022 compared to an income tax expense of $11.8 million in the prior year quarter.
The effective income tax rate from continuing operations was an expense of 23.7% and 25.7% for the three months ended March 31, 2022 and 2021, respectively. The effective income tax rate from continuing operations for the three months ended March 31, 2022 was impacted by deductions related to stock-based compensation and the finalization of fiscal year 2021 income tax returns. The effective income tax rate from continuing operations for the three months ended March 31,
2021 was impacted by various discrete items including the finalization of fiscal year 2020 U.S. income tax returns.
Equity in Net Loss (Income) of Equity-Method Investees
Our equity in net loss (income) from our equity-method investments for the three months ended March 31, 2022 was a loss of $0.4 million and income of $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
Net income for the three months ended March 31, 2022 was $24.5 million, or $0.27 per diluted share, compared to $34.3 million, or $0.34 per diluted share, in the prior year quarter. The decrease was attributable to the factors noted above.
Adjusted EBITDA
Our Adjusted EBITDA was $58.7 million and $73.8 million for the three months ended March 31, 2022 and 2021, 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 March 31, 2022 and 2021:
(dollars
in thousands)
North America
International
Corporate and Other
Consolidated
Net sales
Three months ended 3/31/22
$
325,742
$
177,197
$
—
$
502,939
Three
months ended 3/31/21
287,500
205,104
—
492,604
$ change
$
38,242
$
(27,907)
n/a
$
10,335
%
change
13.3
%
(13.6)
%
n/a
2.1
%
Operating income (loss)
Three
months ended 3/31/22
$
28,526
$
18,303
$
(11,665)
$
35,164
Three months ended 3/31/21
39,492
26,774
(16,689)
49,577
$
change
$
(10,966)
$
(8,471)
$
5,024
$
(14,413)
% change
(27.8)
%
(31.6)
%
(30.1)
%
(29.1)
%
Operating
income margin
Three months ended 3/31/22
8.8
%
10.3
%
n/a
7.0
%
Three months ended 3/31/21
13.7
%
13.1
%
n/a
10.1
%
North
America
Our net sales in the North America reportable segment for the three months ended March 31, 2022 were $325.7 million, an increase of $38.2 million, or 13.3%, from net sales of $287.5 million in the prior year quarter. On a constant currency basis, adjusted for the impact of an acquisition, net sales increased by 8.5%. In the United States operating segment, adjusted sales were higher compared to the prior year quarter mainly due to stronger sales in snacks, baby, personal care and other product categories. In the Canada operating segment, adjusted sales decreased compared to the prior year quarter primarily due to lower sales in personal care product categories. Operating income in North America for the three months ended March 31, 2022
was $28.5 million, a decrease of $11.0 million from $39.5 million in the prior year quarter. The decrease in operating income was mainly driven by inflationary and supply chain challenges, such as continued industry-wide distribution and warehousing cost pressures driven by labor shortages, freight carrier availability and other freight cost issues, as well as lower net sales in the Canada operating segment when compared with the prior year quarter.
Our net
sales in the International reportable segment for the three months ended March 31, 2022 were $177.2 million, a decrease of $27.9 million, or 13.6%, from net sales of $205.1 million in the prior year quarter. Foreign exchange and divestitures reduced net sales for the three months ended March 31, 2022. On a constant currency basis, adjusted for the impact of divestitures, net sales decreased 8.2% from the prior year quarter primarily due to a decline in sales in the Europe and United Kingdom operating segments, partially offset by an increase in sales in the Ella's Kitchen UK operating segment. The net sales decrease in the Europe operating segment was primarily due to the loss of a large non-dairy co-manufacturing customer. The net sales decrease in the United Kingdom was due to lower sales in plant-based, soup and puddings
resulting from lower total store sales and the impact of shipment halts during the price increase negotiations with certain customers. The net sales increase in the Ella's Kitchen UK operating segment was due to higher sales coming out of the COVID-19 pandemic, since Ella's Kitchen UK sales were negatively impacted in the prior year quarter due to a slow-down in consumer demand for baby food as a result of the COVID-19 pandemic stay-at-home requirements and sales pull back in the second quarter of the prior year due to Brexit (e.g. the sales were made the second quarter of the prior year rather than the third quarter of the prior year). Operating income in our International reportable segment for the three months ended March 31, 2022 was $18.3 million, a decrease of $8.5 million from operating income of $26.8 million for the three months ended March 31,
2021. Operating income was lower in the current quarter when compared to the prior year quarter mainly due to lower gross profit resulting from a decline in sales, as well as higher energy and supply chain costs.
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 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, acquisition and divestiture transaction costs, facilities, and other items which benefit the Company as a whole. Our operating loss in Corporate and Other for the three months ended March 31, 2022 was $11.7 million, a decrease of $5.0 million, from operating loss of $16.7 million for the three months ended March 31, 2021. This change was primarily due to lower employee-related expenses, partially offset by higher baby food litigation expenses.
Refer to Note 18, Segment Information, in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form
10-Q.
The following table compares our results of operations, including
as a percentage of net sales, on a consolidated basis, for the nine months ended March 31, 2022 and 2021 (amounts in thousands, other than per share data and percentages, which may not add due to rounding):
Income
from continuing operations before income taxes and equity in net loss of equity-method investees
95,630
6.7%
59,846
3.9%
35,784
59.8%
Provision for income taxes
19,425
1.4%
33,197
2.2%
(13,772)
(41.5)%
Equity
in net loss of equity-method investments
1,374
0.1%
1,025
0.1%
349
34.0%
Net income from continuing operations
$
74,831
5.2%
$
25,624
1.7%
$
49,207
192.0%
Net
income from discontinued operations, net of tax
—
—%
11,255
0.7%
(11,255)
(100.0)%
Net income
$
74,831
5.2%
$
36,879
2.4%
$
37,952
102.9%
Adjusted
EBITDA
165,249
11.5%
190,838
12.6%
$
(25,589)
(13.4)%
Diluted net income per common share from continuing operations
$
0.79
$
0.25
$
0.54
216.0%
Diluted
net income per common share from discontinued operations
$
—
0.11
(0.11)
(100.0)%
Diluted net income per common share
$
0.79
$
0.36
$
0.43
119.4%
*
Percentage is not meaningful due to one or more numbers being negative.
Net Sales
Net sales for the nine months ended March 31, 2022 were $1,434.8 million, a decrease of $84.9 million, or 5.6%, as compared to $1,519.6 million in the nine months ended March 31, 2021. On a constant currency basis, adjusted for the impact of acquisitions, divestitures and discontinued brands, net sales decreased approximately $4.3 million, or 0.3%, from the prior comparable period driven by the International reportable segment, partially offset by the North America reportable segment. Further details of changes in net sales by segment are provided below in the Segment
Results section.
Gross profit for the nine months ended March 31, 2022 was $338.4 million, a decrease of $40.6 million, or 10.7%, as compared to the prior year comparable period. Gross profit margin was 23.6% of net sales, compared to 24.9% in the prior year comparable period. The decrease in gross profit was driven primarily by the North America reportable segment as a result of both the United States and Canada operating segments which
were impacted by higher costs associated with inflationary and supply chain challenges, such as continued industry-wide distribution and warehousing cost pressures driven by labor shortages, freight carrier availability and other freight cost issues. Additionally, the decrease in gross profit was due to lower net sales in the Canada operating segment when compared with the prior year period. The International reportable segment gross profit also decreased due to both the United Kingdom and Europe operating segments partially offset by increased gross profit in the Ella's Kitchen UK operating segment. The decrease in gross profit in the Europe and United Kingdom operating segments was due to lower net sales and higher delivery and warehousing costs while the increased gross profit in the Ella's Kitchen UK operating segment was due to higher net sales than the prior year period due to a slow-down in consumer demand for baby food in the prior year period as a result of
the COVID-19 pandemic stay-at-home requirements which negatively impacted prior year net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $229.9 million for the nine months ended March 31, 2022, a decrease of $8.6 million, or 3.6%, from $238.5 million for the prior year comparable period. The decrease was driven by a decrease in the International and North America reportable segments, partially offset by an increase in Corporate and Other as a result of higher transaction costs incurred in fiscal year 2022 including costs related to the acquisition of THWR, advisory costs related to the divestiture by affiliates of Engaged Capital, LLC of their shares of the
Company's common stock, as well as higher litigation expenses related to the baby food litigation described in Note 17, Commitments and Contingencies. The decrease in the International reportable segment was primarily due to (1) the sale of the Fruit business in the third quarter of the prior year with no comparable selling, general and administrative expenses in the current year, (2) lower broker commissions in the Europe operating segment, and (3) lower people-related expenses. The decrease in the North America reportable segment was primarily due to lower people-related expenses.
Amortization of Acquired Intangible Assets
Amortization of acquired intangibles was $7.3 million for the nine months ended March 31,
2022, an increase of $0.5 million from $6.8 million in the prior year comparable period due to the acquisition of THWR in the current fiscal year, partially offset by lower amortization in the current year period as a result of prior year dispositions that occurred in the later part of fiscal 2021.
Productivity and Transformation Costs
Productivity and transformation costs were $8.4 million for the nine months ended March 31, 2022, a decrease of $2.4 million from $10.9 million in the prior year comparable period. The decrease was primarily due to reduced spending related to productivity and transformation initiatives as the current transformation effort approaches its conclusion.
Long-lived
Asset and Intangibles Impairment
During the nine months ended March 31, 2022, the Company recognized a pre-tax impairment charge of $0.3 million related to a facility in the United Kingdom. During the nine months ended March 31, 2021, the Company recognized a pre-tax impairment charge of $57.7 million primarily related to a reduction in the carrying value to the estimated fair value, less costs to sell, for the United Kingdom fruit business (see Note 4, Acquisitions and Dispositions, in the Notes to the Consolidated
Financial Statements included in Part I, Item 1 of this Form 10-Q).
Operating Income
Operating income for the nine months ended March 31, 2022 was $92.7 million compared to $65.8 million in the prior year comparable period as a result of the items described above.
Interest and other financing
expense, net totaled $7.7 million for the nine months ended March 31, 2022, an increase of $0.9 million, or 12.5%, from $6.8 million in the prior year comparable period. The increase resulted primarily due to higher outstanding debt balances driven primarily by the THWR acquisition and share repurchase activity, partially offset by lower variable interest rates applied to borrowings outstanding under the Company's 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 $10.6 million for the nine months ended March 31, 2022, compared to $0.9 million in the prior year comparable period. The increase in income was primarily attributable to the gain on sale of assets related to the sale of undeveloped land plots in Boulder, Colorado resulting in a gain of $8.7 million with no comparable gain in the prior year period.
Income from Continuing Operations Before Income Taxes and Equity in Net Loss of Equity-Method Investees
Income from continuing operations before income taxes and equity in net loss of our equity-method investees for the nine months ended March 31, 2022 was income of $95.6 million compared to $59.8 million in the prior year comparable period. 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 $19.4 million for the nine months endedMarch 31, 2022 compared to $33.2 million in the prior year comparable period.
The effective income tax rate from continuing operations was an expense of 20.3% and 55.5% for the nine months ended March 31, 2022 and 2021,
respectively. The effective income tax rate from continuing operations for the nine months ended March 31, 2022 was impacted by the reversal of uncertain tax position accruals based on filing and approval of certain elections by taxing authorities, deductions related to stock-based compensation, non-deductible transaction costs related to acquisition of THWR, the reversal of a valuation allowance due to the utilization of a capital loss carryover, and the finalization of fiscal year 2021 U.S. income tax returns. The effective income tax rate from continuing operations for the nine months ended March 31, 2021 was negatively impacted by various discrete items including the tax impact of the United Kingdom fruit business reserve, the legal entity reorganization and the U.K. rate change.
Equity
in Net Loss of Equity-Method Investees
Our equity in net loss from our equity-method investments for the nine months ended March 31, 2022 was $1.4 million compared to $1.0 million in the prior year comparable period. 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 from Continuing Operations
Net income from continuing operations for the nine months ended March 31, 2022 was $74.8 million, or $0.79 per diluted share, compared to net income of $25.6 million, or $0.25 per diluted share, for the nine
months ended March 31, 2021. The change was attributable to the factors noted above.
Net Income from Discontinued Operations, Net of Tax
Net income from discontinued operations, net of tax, for the nine months ended March 31, 2021 was $11.3 million, or $0.11 per diluted share. During the nine months ended March 31, 2021, the Company recognized an $11.3 million adjustment to the Tilda business primarily related to the recognition of a deferred tax benefit. There was no comparable line item for the nine months ended March 31, 2022.
See
Note 4, Acquisitions and 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 for the nine months ended March 31, 2022 was $74.8 million, or $0.79 per diluted share, compared to $36.9 million, or $0.36 per diluted share, in the prior year comparable period. The change was attributable to the factors noted above.
Adjusted
EBITDA
Our Adjusted EBITDA was $165.2 million and $190.8 million for the nine months ended March 31, 2022 and 2021, 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 nine months ended March 31, 2022 and 2021:
(dollars in thousands)
North America
International
Corporate and Other
Consolidated
Net
sales
Nine months ended 3/31/22
$
866,281
$
568,502
$
—
$
1,434,783
Nine
months ended 3/31/21
850,780
668,869
—
1,519,649
$ change
$
15,501
$
(100,367)
n/a
$
(84,866)
%
change
1.8
%
(15.0)
%
n/a
(5.6)
%
Operating income (loss)
Nine
months ended 3/31/22
$
72,530
$
69,740
$
(49,538)
$
92,732
Nine months ended 3/31/21
105,188
8,144
(47,518)
65,814
$
change
$
(32,658)
$
61,596
$
(2,020)
$
26,918
% change
(31.0)
%
756.3
%
4.3
%
40.9
%
Operating
income margin
Nine months ended 3/31/22
8.4
%
12.3
%
n/a
6.5
%
Nine months ended 3/31/21
12.4
%
1.2
%
n/a
4.3
%
North
America
Our net sales in the North America reportable segment for the nine months ended March 31, 2022 were $866.3 million, an increase of $15.5 million, or 1.8%, from net sales of $850.8 million in the prior year comparable period. On a constant currency basis, adjusted for the impact of acquisitions, divestitures and discontinued brands, net sales increased by 2.6% due to increased sales in the United States operating segment as a result of stronger sales in certain snack products and baby food in the current year period partially offset by decreased sales in the Canada operating segment. Operating income in North America for the nine months ended March 31, 2022 was $72.5 million, a decrease of $32.7 million from $105.2 million in the prior year comparable period.
The decrease was mainly driven by higher cost of goods sold in the United States operating segment largely because of inflationary and supply chain challenges, such as continued industry-wide distribution and warehousing cost pressures driven by labor shortages, freight carrier availability and other freight cost issues; and lower sales in the Canada operating segment, partially offset by lower selling, general and administrative expenses in both the United States and Canada operating segments. Lower selling, general and administrative expenses were mainly due to lower marketing and people-related expense.
Our net sales in the International reportable segment for the nine months ended March 31, 2022 were $568.5 million, a decrease of $100.4 million, or 15.0%, from net sales of $668.9 million in the prior year comparable period. On a constant currency basis, adjusted for the impact of divestitures and discontinued brands, net sales decreased 4.4% from the prior year comparable period mainly due to lower sales in the Europe and United Kingdom operating segments, partially offset by higher sales in the Ella's Kitchen UK operating segment. Ella's Kitchen UK net sales improved during the nine months ended March 31, 2022 compared to the prior year period due to a slow-down in consumer demand for baby food in the prior year period as a result of the
COVID-19 pandemic stay-at-home requirements which negatively impacted prior year net sales. Operating income in our International reportable segment for the nine months ended March 31, 2022 was $69.7 million, an increase of $61.6 million from operating income of $8.1 million for the nine months ended March 31, 2021. The increase mainly reflected non-recurring charges associated with the fruit business impairment that was recognized in the prior year period. In addition, the International reportable segment incurred lower selling, general and administrative expenses for the reasons noted above.
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 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, acquisition and divestiture transaction costs, facilities, and other items which benefit the Company as a whole. Our operating expenses in Corporate and Other for the nine months ended March 31, 2022 were $49.5 million, an increase of $2.0 million, from $47.5 million in the prior year period. This change was primarily related to higher transaction costs incurred
in fiscal year 2022 including costs related to the acquisition of THWR and advisory costs related to the divestiture by affiliates of Engaged Capital, LLC of their shares of the Company's common stock, as well as higher litigation expenses related to the baby food litigation described in Note 17, Commitments and Contingencies, partially offset by lower employee-related expenses.
Refer to Note 18, Segment Information, in the Notes to the 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 (as defined below). We believe that our cash flows from operations and borrowing capacity under our Credit Agreement will be adequate to meet anticipated operating and other expenditures for the foreseeable future.
Amended and Restated Credit Agreement
On December 22, 2021, the Company refinanced its revolving credit facility by entering into a Fourth Amended and Restated Credit Agreement (the “Credit Agreement”).
The Credit Agreement provides for senior secured financing of $1,100.0 million in the aggregate, consisting of (1) $300.0 million in aggregate principal amount of term loans (the "Term Loans") and (2) an $800.0 million senior secured revolving credit facility (which includes borrowing capacity available for letters of credit, and is comprised of a $440.0 million U.S. revolving credit facility and $360.0 million global revolving credit facility) (the "Revolver"). Both the Revolver and the Term Loans mature on December 22, 2026.
Our cash and cash equivalents balance decreased $18.1 million at March 31, 2022 to $57.8 million as compared to $75.9 million at June 30, 2021. Our working capital from continuing operations was $273.6
million at March 31, 2022, a decrease of $11.1 million from $284.7 million at the end of fiscal 2021. Additionally, our total debt increased by $604.5 million at March 31, 2022 to $835.5 million as compared to $231.0 million at June 30, 2021 as a result of increased net borrowings to support the THWR acquisition and the share repurchases carried out during the period. As of March 31, 2022, $253.1 million was available under the Credit Agreement as compared to $763.6 million available as of June 30, 2021under the predecessor agreement to the Credit Agreement. The
Company was in compliance with all covenants at March 31, 2022.
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, Middle East and India. As of March 31, 2022, substantially all of the total cash balance from continuing operations was held outside of the United States. It is our current intent to indefinitely reinvest our remaining foreign earnings outside the United States.
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of March 31, 2022, all of our investments were expected to mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. Cash provided by (used in) operating, investing and financing activities is summarized below.
Nine
Months Ended March 31,
Change in
(amounts in thousands)
2022
2021
Dollars
Cash flows provided by (used in):
Operating activities from continuing operations
$
99,186
$
146,517
$
(47,331)
Investing
activities from continuing operations
(284,271)
(25,968)
(258,303)
Financing activities from continuing operations
172,858
(110,956)
283,814
Effect of exchange rate changes on cash from continuing
operations
(5,836)
5,650
(11,486)
Net (decrease) increase in cash and cash equivalents
$
(18,063)
$
15,243
$
(33,306)
Cash
provided by operating activities from continuing operations was $99.2 million for the nine months ended March 31, 2022, a decrease of $47.3 million from cash provided by operating activities from continuing operations of $146.5 million in the prior year period. This decrease versus the prior period resulted primarily from a reduction of $18.1 million in net income adjusted for non-cash charges in the current period and lower cash generation of $29.2 million from our working capital accounts which was mainly due to a refund of $53.8 million received by the Company in the prior year from Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").
Cash used in investing activities from continuing operations
was $284.3 million for the nine months ended March 31, 2022, an increase of $258.3 million from $26.0 million in the prior year period primarily due to the acquisition of THWR in the current year, partially offset by $10.8 million in proceeds from the sale of assets in the current year, which was primarily related to the sale of undeveloped land plots in Boulder, Colorado.
Cash provided by financing activities from continuing operations was $172.9 million for the nine months ended March 31, 2022, an increase in cash provided of $283.8 million compared to $111.0 million of cash used in the prior year period. The increase in cash provided by financing activities was primarily
due to higher borrowings under the Credit Agreement to finance the THWR acquisition, partially offset by higher repayments under the revolver, higher share repurchases and payment of shares withheld for employee payroll taxes during the nine months ended March 31, 2022.
Operating Free Cash Flow from Continuing Operations
Our operating free cash flow from continuing operations was $65.2 million for the nine months ended March 31, 2022, a decrease of $28.2 million from $93.5 million in the nine months ended March 31, 2021. This decrease versus prior year resulted primarily from a decrease in cash flow from operations of $47.3 million driven
by the reasons explained above. Additionally, the decrease was due to a $19.1 million reduction in property, plant and equipment purchases in the current period. See the Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures following the discussion of our results of operations for definitions and a reconciliation from our net cash provided by operating activities from continuing operations to operating free cash flow from continuing operations.
Share Repurchase Program
In June 2017, August 2021 and January 2022, the Company’s Board of Directors authorized the repurchase of up to $250.0 million, $300.0 million and $200.0 million of the
Company’s issued and outstanding common stock, respectively. Repurchases may be made from time to time in the open market, pursuant to pre-set trading plans, in private transactions or otherwise. The 2017 and 2021 authorizations have been fully utilized. The current 2022 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. In November 2021, the Company entered into a share repurchase agreement with affiliates of Engaged Capital, LLC (collectively, the “Selling Stockholders”), pursuant to which the Company repurchased 1.7 million shares directly from
the Selling Stockholders at a price of $45.00 per share. During the nine months ended March 31, 2022, the Company repurchased 10.1 million shares under the repurchase program, inclusive of the shares repurchased from the Selling Stockholders, for a total of $395.8 million, excluding commissions, at an average price of $39.09 per share. As of March 31, 2022, the Company had $186.6 million of remaining authorization under the share repurchase program. During the nine months
ended March 31, 2021, the Company repurchased 2.4 million shares under the repurchase program for a total of $80.3 million, excluding commissions, at an average price of $33.33 per share.
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 believe the non-U.S. GAAP measure provides useful information to investors and any additional purposes for which our management and Board of Directors use 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.
Net Sales - 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.
Net Sales - Acquisitions, Divestitures and Discontinued Brands
We also exclude the impact of acquisitions, divestitures and discontinued brands when comparing net sales to
prior periods, which results in the presentation of certain non-U.S. GAAP financial measures. The Company's management believes that excluding the impact of acquisitions, divestitures and discontinued brands when presenting period-over-period results of net sales aids in comparability.
Net sales adjusted for
divestitures and discontinued brands - Nine months ended March 31, 2021
$
816,244
$
593,358
$
1,409,602
Net sales growth (decline)
1.8
%
(15.0)
%
(5.6)
%
Impact
of acquisitions, divestitures and discontinued brands
1.1
%
10.8
%
5.5
%
Impact of foreign currency exchange
(0.3)
%
(0.2)
%
(0.2)
%
Net sales growth (decline) on a constant
currency basis adjusted for acquisitions, divestitures and discontinued brands
2.6
%
(4.4)
%
(0.3)
%
Adjusted EBITDA
Adjusted EBITDA is defined as net income before net interest expense, income taxes, depreciation and amortization, equity in net loss (income)
of equity-method investees, stock-based compensation, net, unrealized currency gains and losses, litigation and related costs, plant closure related costs, net, productivity and transformation costs, warehouse and manufacturing consolidation and other costs, costs associated with acquisitions, divestitures and other transactions, gains or losses on sales of assets and businesses, inventory write-downs, impairment of long-lived assets and intangibles and other 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 income to Adjusted EBITDA is as follows:
Three Months Ended March 31,
Nine
Months Ended March 31,
(amounts in thousands)
2022
2021
2022
2021
Net income
$
24,531
$
34,254
$
74,831
$
36,879
Net
income from discontinued operations, net of tax
—
—
—
11,255
Net income from continuing operations
$
24,531
$
34,254
$
74,831
$
25,624
Depreciation
and amortization
12,638
12,814
34,396
37,768
Equity in net loss (income) of equity-method investees
383
(70)
1,374
1,025
Interest
expense, net
2,846
1,327
5,677
4,781
Provision for income taxes
7,738
11,797
19,425
33,197
Stock-based
compensation, net
3,846
3,698
12,289
11,888
Unrealized currency (gains) losses
(594)
442
(2,097)
(535)
Litigation
and related costs
Litigation expenses
2,005
644
5,585
644
Proceeds from insurance claim
—
(592)
(196)
(592)
Restructuring
activities
Plant closure related costs, net
82
21
895
17
Productivity and transformation costs
1,626
3,813
7,077
8,952
Warehouse/manufacturing
consolidation and other costs
94
3,598
2,632
7,313
Acquisitions, divestitures and other
Transaction and integration costs, net
3,419
102
12,151
1,476
Loss
(gain) on sale of assets
55
—
(9,047)
—
Loss on sale of businesses
—
1,904
1,293
Impairment charges
Inventory
write-down
—
—
(46)
311
Long-lived asset and intangibles impairment
—
—
303
57,676
Adjusted
EBITDA
$
58,669
$
73,752
$
165,249
$
190,838
Operating Free Cash Flow from Continuing Operations
In our internal evaluations, we use the non-U.S. GAAP financial measure “Operating Free Cash 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 purchases of property, plant and equipment (capital spending). 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 operating activities from continuing operations to Operating Free Cash flow from continuing operations is as follows:
Nine Months Ended March 31,
(amounts in thousands)
2022
2021
Net
cash provided by operating activities from continuing operations
$
99,186
$
146,517
Purchases of property, plant and equipment
(33,939)
(53,062)
Operating free cash flow from continuing operations
$
65,247
$
93,455
Off-Balance
Sheet Arrangements
At March 31, 2022, we did not have any off-balance sheet arrangements as defined in Item 303 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 chargeback receivable, valuation of long-lived assets, goodwill and intangible assets, stock-based compensation and valuation allowances for deferred tax assets. The application of each of these critical accounting policies and estimates 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, 2021, from which there have been no material changes.
Recent Accounting Pronouncements
Refer to Note 2, Basis of Presentation, in the Notes to the 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, hot-eating desserts and soup sales are stronger in colder months,
while sales of snack foods, sunscreen and certain of our personal care products are stronger in the warmer months. 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 from those addressed in the
Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021 during the nine months ended March 31, 2022. 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, 2021.
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. Consistent with guidance issued by the Securities and 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 is excluding an assessment of such internal controls of Proven Brands, Inc. (and its subsidiary That's How We Roll LLC) and KTB Foods Inc. (collectively doing business as "That's How We Roll" ("THWR")) from its evaluation of the effectiveness of the Company's disclosure controls and procedures. The Company acquired all outstanding stock of THWR on December 28, 2021.
THWR represented approximately 13.2% of the Company's consolidated total assets at March 31, 2022. THWR's net sales included in our consolidated results were i5.0% and i1.8%
for the three and nine months ended March 31, 2022. Based on this review, our CEO and CFO have concluded that the disclosure controls and procedures for the Company were effective as of March 31, 2022.
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 Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting that occurred during the three months ended March 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting except that, as reported above, on December 28, 2021, the Company acquired all outstanding stock of THWR. As a result, the Company is currently integrating THWR’s operations into its overall system of internal control over financial reporting and, if necessary, will make appropriate changes as it integrates THWR into the Company's overall internal control over financial reporting
process.
The information called for by this item is incorporated herein by reference to Note 17, Commitments and Contingencies,
in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Item 1A.Risk Factors
There have been no material changes from the discussion of the material factors that make an investment in the Company speculative or risky contained in the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the SEC on August
26, 2021.
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.
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
(1)
Includes shares surrendered for payment of employee payroll taxes due on shares issued under stock-based compensation plans and shares repurchased under share repurchase programs approved by the Board of Directors. See (2) below for further details.
(2) In June 2017, August 2021, and January 2022, the Company’s Board of Directors authorized the repurchase of up to $250 million, $300 million, and $200 million, respectively, of the Company’s issued and outstanding common stock. Share repurchases under the 2021 and 2022 authorizations commenced after the previous authorizations were fully utilized. Repurchases may be made from time to time in the open market, pursuant to preset trading plans, in private transactions or otherwise. The current 2022 authorization
does not have a stated expiration date. During the three months ended March 31, 2022, the Company repurchased 3.6 million shares under the repurchase program for a total of $130.4 million, excluding commissions, at an average price of $36.48 per share. As of March 31, 2022, the Company had $186.6 million of remaining authorization under the share repurchase program.
Item 5. Other Information
On
May 3, 2022, the Company’s Board of Directors eliminated the position of Executive Vice President and Chief Commercial Officer as part of a restructuring of the leadership of the Company’s Commercial organization. Accordingly, Christopher J. Boever, the Company’s current Executive Vice President and Chief Commercial Officer, is leaving the Company effective May 6, 2022. Mr. Boever’s responsibilities will be assumed by other executives within the Company’s
Commercial organization.
Mr. Boever is entitled to receive the cash severance that is payable under the terms of his existing offer letter upon a termination of his employment by the Company without cause, subject to his execution of a separation agreement and release of claims.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*Indicates management contract or compensatory plan or arrangement.
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.
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.
