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HAIN > SEC Filings for HAIN > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for HAIN CELESTIAL GROUP INC


10-May-2013

Quarterly Report


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 March 31, 2013 Condensed Consolidated Financial Statements and the related Notes contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2012. Forward-looking statements in this review are qualified by the cautionary statement included in this review under the sub-heading, "Note Regarding Forward Looking Information," below. Operating results for the Company's private-label chilled ready meals and sandwich businesses, including the Daily BreadTM brand name, in the United Kingdom, have been reclassified as discontinued operations for all periods presented.

Overview
We manufacture, market, distribute and sell natural and organic products under brand names which are sold as "better-for-you," providing consumers with the opportunity to lead A Healthier Way of LifeTM. We are a leader in many natural food and personal care products categories, with an extensive portfolio of well-known brands. Our operations are organized and managed by geography, and are comprised of four operating segments: United States, United Kingdom, Canada and Europe. Our business strategy is to integrate the brands in each of our segments under one management team and employ uniform marketing, sales and distribution strategies where possible. We market our products through a combination of direct sales personnel, brokers and distributors. We believe that our direct sales personnel combined with brokers and distributors provide an effective means of reaching a broad and diverse customer base. Our products are sold to specialty and natural food distributors, supermarkets, natural food stores, mass-market retailers, e-tailers, food service channels and club stores. We manufacture domestically and internationally and our products are sold in more than 50 countries.
We have acquired numerous brands since our formation and we intend to seek future growth through internal expansion as well as the acquisition of complementary brands. We consider the acquisition of natural and organic food and personal care products companies or product lines an integral part of our business strategy. We believe that by integrating our various brands, we will continue to achieve economies of scale and enhanced market penetration. We seek to capitalize on the equity of our brands and the distribution achieved through each of our acquired businesses with strategic introductions of new products that complement existing lines to enhance revenues and margins. We believe our continuing investments in the operational performance of our business units and our focused execution on cost containment, productivity, cash flow and margin enhancement positions us to offer innovative new products with healthful attributes and enables us to build on the foundation of our long-term strategy of sustainable growth. We are committed to creating and promoting A Healthier Way of LifeTM for the benefit of consumers, our customers, shareholders and employees.
The global economic environment has been uncertain and challenging and we expect that to continue. With the recent acquisitions we have made, a larger proportion of our sales take place outside of the United States. A deterioration in economic conditions in the areas in which we operate may have an adverse impact on our sales volumes and profitability. Our results are dependent on a number of factors impacting consumer confidence and spending, including but not limited to, general economic and business conditions and wage and employment levels. In the United States, we have experienced increased consumer consumption in recent years, which we expect to continue to support with expanded distribution, efficient use of promotional allowances and the introduction of innovative new products. In the United Kingdom, with the recent acquisition of the UK Ambient Grocery Brands and with the upcoming commencement of a long-term program with a major retailer, we have undertaken an evaluation of and implemented a program to discontinue certain of our sales which do not meet our profitability objectives. Energy and commodity prices continue to be volatile and we have experienced increases in select input costs. We expect that higher input costs will continue to affect future periods. We have taken, and will continue to take, measures to mitigate the impact of these challenging conditions and input cost increases with improvements in operating efficiencies, cost savings initiatives and price increases to our customers.

Recent Developments
On May 2, 2013, we acquired Ella's Kitchen Group Limited ("Ella's"), a manufacturer and distributor of premium organic baby food under the Ella's Kitchen® brand and the first company to offer baby food in convenient flexible pouches. Ella's offers a range of 80 branded organic baby food products principally in the United Kingdom, the United States and Scandinavia. Ella's will operate as part of the Company's United States operating segment. Consideration in the transaction consisted of cash totaling £39.3 million (approximately $61.1 million at the transaction date exchange rate) and 687,779 shares of the Company's common stock valued at $45.1 million. The acquired business generated sales of approximately $70 million in calendar year 2012.


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On December 21, 2012, we acquired the assets and business of Zoe Sakoutis LLC, d/b/a BluePrint Cleanse ("BluePrint"), a nationally recognized leader in the raw juice category based in New York City, for $24.7 million, including $15.2 million in cash (which remains subject to a working capital adjustment) and 174,267 shares of the Company's common stock, valued at $9.5 million. Additionally, contingent consideration is payable based upon the achievement of specified operating results during the two annual periods ending December 31, 2013 and 2014. The BluePrint® brand, which is part of our United States operating segment, expands our product offerings into a new category.

During the third quarter of fiscal 2012, the Company made the decision to sell its private-label chilled ready meals ("CRM") business in the United Kingdom, which was acquired in October 2011 as part of the acquisition of the Daniels Group ("Daniels"). The sale of the CRM business was completed on August 20, 2012. Additionally, during the fourth quarter of fiscal 2012, the Company made the decision to dispose of its sandwich operations, including the Daily BreadTM brand name in the United Kingdom. The disposal of the sandwich business was completed on November 1, 2012 and resulted in an exchange of businesses with the other party, whereby the Company acquired the fresh prepared fruit products business of Superior Food Limited in the United Kingdom in exchange for the Company's sandwich business and a cash payment of £1.0 million (approximately $1.6 million at the transaction date exchange rate). Operating results for the CRM business, which have been included in the Company's consolidated financial statements for the period subsequent to the October 2011 acquisition, and the sandwich business have been classified as discontinued operations for all periods presented.

On October 27, 2012, the Company completed the acquisition of a portfolio of market-leading packaged grocery brands including Hartley's®, Sun-Pat®, Gale's®, Robertson's® and Frank Cooper's®, together with the manufacturing facility in Cambridgeshire, United Kingdom (the "UK Ambient Grocery Brands") from Premier Foods plc. The product offerings acquired include jams, fruit spreads and jelly, peanut butter, honey and marmalade. Consideration in the transaction consisted of £170 million in cash (approximately $273.7 million at the transaction date exchange rate) and 836,426 shares of the Company's common stock valued at $48.1 million, and is subject to a working capital adjustment. The cash portion of the consideration was funded with borrowings under our Credit Agreement. We believe this acquisition further expands our business in the United Kingdom and helps position the new expanded business as a top food and beverage supplier in the United Kingdom.

Results of Operations

THREE MONTHS ENDED MARCH 31, 2013

Net Sales
Net sales for the three months ended March 31, 2013 were $456.1 million, an increase of $80.3 million, or 21.4%, from net sales of $375.8 million for the three months ended March 31, 2012.

The net sales increase primarily resulted from an increase in sales of $21.3 million in the United States from improved consumption, expanded distribution and the acquisition of BluePrint in the second quarter of the current fiscal year, as well as an increase of $53.2 million in the United Kingdom primarily due to the acquisition of the UK Ambient Grocery Brands in the second quarter of the current fiscal year. Refer to the Segment Results section for additional discussion.

Gross Profit
Gross profit for the three months ended March 31, 2013 was $126.2 million, an increase of $21.5 million, or 20.5%, from gross profit of $104.7 million in last year's quarter. Gross profit for the three months ended March 31, 2013 was 27.7% of net sales compared to 27.9% of net sales in the prior year quarter. Our gross profit percentage was impacted by the margin impact related to the inclusion of the UK Ambient Grocery Brands (which operates at slightly lower relative margins) and increases in certain input costs, which were partially offset by the benefit from a favorable mix of product sales and productivity improvements.

Selling, General and Administrative Expenses Selling, general and administrative expenses were $73.2 million for the three months ended March 31, 2013, an increase of $10.7 million, or 17.1%, from $62.5 million in last year's quarter. Selling, general and administrative expenses have increased primarily as a result of the costs brought on by the businesses we acquired, including higher amortization expense related to identified intangible assets. In addition, the Company recorded an expense of $2.0 million in the current quarter related to pending litigation. Selling, general and administrative expenses as a percentage of net sales was 16.1% in the third quarter of the current fiscal year and 16.6% in last year's third quarter, a decrease of 50 basis points primarily related to the inclusion of the UK Ambient Grocery Brands which operate with lower relative expenses, as well as the integration of certain functions in the United Kingdom into the Daniels operations and our continued focus on leveraging our existing expense base.


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Acquisition Related Expenses and Integration Charges We incurred acquisition and integration related expenses aggregating $1.9 million for the three months ended March 31, 2013, which were primarily related to the ongoing integration activities of certain functions in the United Kingdom into the Daniels operations. We incurred acquisition and integration related expenses aggregating $0.5 million for the three months ended March 31, 2012, which was primarily related to the acquisition of Daniels.

Operating Income
Operating income for the three months ended March 31, 2013 was $51.1 million, an increase of $9.4 million, or 22.6%, from $41.6 million for the three months ended March 31, 2012. The increase in operating income resulted primarily from the increased sales and gross profit. Operating income as a percentage of net sales was 11.2% in the third quarter of fiscal 2013 compared with 11.1% in last year's third quarter. The increase in operating income percentage is attributable to the continued leverage of the Company's existing expense base, offset partially by the increase in acquisition and integration charges in the current period as discussed above.

Interest and Other Expenses, net
Interest and other expenses, net (which includes foreign currency gains and losses) were $7.9 million for the three months ended March 31, 2013 compared to $4.2 million for the three months ended March 31, 2012. Net interest expense totaled $5.2 million for the three months ended March 31, 2013, which includes interest on the $150 million of 5.98% senior notes outstanding, interest related to borrowings under our revolving credit agreement, amortization of deferred financing costs and certain other interest charges, offset partially by interest income earned on cash equivalents. Net interest expense for the three months ended March 31, 2012 was $4.4 million. The increase in interest expense primarily resulted from higher average borrowings under our revolving credit facility, the net proceeds of which were used to purchase the UK Ambient Grocery Brands and BluePrint during the second quarter of the current fiscal year. Other expenses, net, for the three months ended March 31, 2013 included $1.9 million of net unrealized losses due to the remeasurement of foreign currency denominated intercompany balances related to the finance costs of acquisitions in the United Kingdom.

Income Before Income Taxes and Equity in Earnings of Equity-Method Investees Income before income taxes and equity in earnings of our equity-method investees for the three months ended March 31, 2013 and 2012 was $43.1 million and $37.4 million, respectively. The increase was due to the items discussed above.

Income Taxes
The provision for income taxes includes federal, foreign, state and local income taxes. Our income tax expense was $1.6 million for the three months ended March 31, 2013 compared to $12.6 million for the three months ended March 31, 2012. Our effective income tax rate from continuing operations was 3.7% of pre-tax income in the third quarter of fiscal 2013 compared to 33.8% in the prior year's third quarter.
The effective tax rate for the three months ended March 31, 2013 was lower than the comparable period of the prior year primarily as a result of an income tax benefit of $13.2 million recorded in the current quarter related to a United States worthless stock tax deduction for our investment in one of our United Kingdom subsidiaries. The effective income tax rate also differed from the U.S. federal statutory rate due to the change in mix of income between jurisdictions as well as the impact of state and local income taxes. There were no material changes in unrecognized tax benefits during the third quarter of fiscal 2013.

Equity in Earnings of Equity-Method Investees Our equity in the net income from our joint venture investments for the three months ended March 31, 2013 was $293 thousand compared to $28 thousand for the three months ended March 31, 2012. The income in the current and prior quarters relates to the income from HPP, offset partially by losses from HHO as they continue to develop the Asian markets for our products.

Income From Continuing Operations
Income from continuing operations for the three months ended March 31, 2013 and 2012 was $41.8 million and $24.8 million, or $0.87 and $0.54 per diluted share, respectively. The increase was attributable to the factors noted above.

Discontinued Operations
Our loss from discontinued operations for the three months ended March 31, 2013 was $1.1 million compared to $0.7 million for the three months ended March 31, 2012. The loss in the current quarter relates to the revised estimate of final proceeds to be received for the sale of the CRM business. There were no sales or operating income/loss included within discontinued operations


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for the three months ended March 31, 2013 as the businesses were disposed prior to the current quarter. Net sales and operating loss included within discontinued operations during the three months ended March 31, 2012 was $24.5 million and $0.9 million, respectively.

Segment Results

The following table provides a summary of net sales and operating income by reportable segment for the three months ended March 31, 2013 and 2012.

Our operations are organized and managed by geography, and are comprised of four operating segments: United States, United Kingdom, Canada and Europe. The United States and the United Kingdom are currently reportable segments, while Canada and Europe do not currently meet the quantitative thresholds for reporting and are therefore combined and reported as "Rest of World." The Corporate category consists of expenses related to the Company's centralized administrative function which do not specifically relate to an operating segment. Such Corporate expenses are comprised mainly of the compensation and related expenses of certain of the Company's senior executive officers and other selected employees who perform duties related to our entire enterprise, as well as expenses for certain professional fees, facilities, and other items which benefit the Company as a whole. Additionally, acquisition related expenses and restructuring charges are included in Corporate and other. Refer to Note 16, Segment Information, for additional details.

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