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HAIN > SEC Filings for HAIN > Form 10-K on 29-Aug-2013All Recent SEC Filings

Show all filings for HAIN CELESTIAL GROUP INC

Form 10-K for HAIN CELESTIAL GROUP INC


29-Aug-2013

Annual Report


Item 7. 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 June 30, 2013 Consolidated Financial Statements and the related Notes and "Item 1A. Risk Factors" contained in this Annual Report on Form 10-K for the fiscal year ended June 30, 2013. 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, are classified as discontinued operations for all periods presented.

Overview
We manufacture, market, distribute and sell organic and natural 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 several organic and natural products categories, with an extensive portfolio of well-known brands. Our operations are 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 organic and natural 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 commencement of a long-term program with a major retailer, we have 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 Kitchen"), 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 Kitchen offers a range of branded organic baby and toddler food products principally in the United Kingdom, the United States and Scandinavia. Ella's Kitchen's operations are included as part of the Company's United States operating segment. Consideration in the transaction consisted of cash totaling £37.6 million, net of cash acquired (approximately $58.4 million at the transaction date exchange rate) and 687,779 shares of the Company's common stock valued at $45.1 million.
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 cold-pressed juice category based in New York City, for $26.2 million, including $16.7 million


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in cash 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 had 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

FISCAL 2013 COMPARED TO FISCAL 2012

Consolidated Results

Net Sales
Net sales in fiscal 2013 were $1.73 billion, an increase of $356.4 million, or 25.9%, from net sales of $1.38 billion in fiscal 2012.

The sales increase primarily resulted from an increase in sales of $104.2 million in the United States from improved consumption, expanded distribution and the impact of current year acquisitions, and an increase in sales of $228.1 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 in fiscal 2013 was $474.9 million, an increase of $92.4 million, or 24.2%, from last year's gross profit of $382.5 million. Gross profit in fiscal 2013 was 27.4% of net sales compared to 27.8% of net sales for fiscal 2012. The change in gross profit percentage resulted from the mix of product sales, including the full year margin impact related to the inclusion of Daniels and the current year acquisition of the UK Ambient Grocery Brands which operate at slightly lower relative margins. In addition, we experienced generally higher input costs, offset partially by productivity initiatives and price increases.

Selling, General and Administrative Expenses Selling, general and administrative expenses were $274.8 million, an increase of $45.2 million, or 19.7%, in fiscal 2013 from $229.6 million in fiscal 2012. Selling, general and administrative expenses have increased primarily as a result of the costs brought on by the businesses we acquired. Selling, general and administrative expenses as a percentage of net sales was 15.8% in fiscal 2013 and 16.7% in fiscal 2012, a decrease of 90 basis points primarily related to the inclusion of Daniels and the UK Ambient Grocery Brands which operate with lower relative expenses and our continued focus on leveraging our existing expense base.


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Amortization of acquired intangibles
Amortization of acquired intangibles was $12.2 million, an increase of $4.2 million, or 51.8%, in fiscal 2013 from $8.0 million in fiscal 2012. The increase is due to the Company's current year acquisitions, as well as the full year impact of prior year acquisitions.

Acquisition Related Expenses, Restructuring and Integration Charges We incurred acquisition, restructuring and integration related expenses aggregating $13.6 million in the fiscal year ended June 30, 2013, which were primarily related to the acquisitions of the UK Ambient Grocery Brands, Ella's Kitchen and BluePrint, and to a lesser extent restructuring and integration charges related to the ongoing integration activities of certain functions in the United Kingdom into the Daniels operations. Additionally, we recorded contingent consideration expense related to BluePrint of $2.3 million based on our revised estimates of the fair value of the liability.
We incurred acquisition and integration related expenses aggregating $8.0 million in the fiscal year ended June 30, 2012, which were primarily related to the acquisition of Daniels. The charges were offset by a net reduction of expense of $14.6 million primarily representing the reversal of the carrying value of contingent consideration for the Daniels acquisition based on our revised estimate of fair value, offset partially by additional expense related to the settlement of the contingent consideration for the Sensible Portions acquisition.

Operating Income
Operating income in fiscal 2013 was $174.3 million, an increase of $22.8 million, or 15.0%, from $151.5 million in fiscal 2012. The increase in operating income resulted primarily from the increased sales and gross profit. Operating income as a percentage of net sales was 10.0% in fiscal 2013 compared with 11.0% in fiscal 2012. The change in operating income percentage is attributable to the increase in acquisition related expenses recorded during fiscal 2013, as described above.

Interest and Other Expenses, net
Interest and other expenses, net (which includes foreign currency gains and losses) were $20.5 million for fiscal 2013 compared to $17.3 million for fiscal 2012. Net interest expense totaled $19.4 million in fiscal 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 in fiscal 2012 was $15.8 million. The increase in interest expense primarily resulted from higher average borrowings under our revolving credit facility, the proceeds of which were used to fund the current year acquisitions, as well as an increase in amortization of deferred financing costs associated with amending our Credit Agreement in the first quarter of fiscal 2013. Other expenses, net, decreased to $1.1 million for fiscal 2013 from $1.5 million for fiscal 2012, principally related to realized gains on the forward purchases of British Pounds Sterling to fund the acquisitions of the UK Ambient Grocery Brands and Ella's Kitchen.

Income Before Income Taxes and Equity in Earnings of Equity-Method Investees Income before income taxes and equity in the after tax earnings of our equity-method investees for the fiscal years ended June 30, 2013 and 2012 was $153.8 million and $134.2 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 $34.3 million in fiscal 2013 compared to $41.2 million in fiscal 2012. Our effective income tax rate from continuing operations was 22.3% of pre-tax income in fiscal 2013 compared to 30.7% in fiscal 2012. The effective tax rate in fiscal 2013 was lower than the prior year primarily as a result of an income tax benefit of $13.2 million recorded in the current period related to a United States worthless stock tax deduction for our investment in one of our United Kingdom subsidiaries and to a lesser extent the shift in the mix of taxable income to the United Kingdom's lower tax rate jurisdiction due to our recent acquisitions.
The effective rate for each period differs from the federal statutory rate primarily due to the items noted previously as well as the effect of state and local income taxes. Our effective tax rate may change from quarter to quarter 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.


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Equity in Earnings of Equity-Method Investees Our equity in the net income from our joint venture investments for the fiscal year ended June 30, 2013 was $0.3 million compared to $1.1 million for the fiscal year ended June 30, 2012. The decrease is primarily related to increased losses incurred by HHO during fiscal 2013 as they classified their infant formula business as a discontinued operation in the fourth quarter of fiscal 2013, resulting in additional charges. Our equity in the earnings of HPP were $2.2 million in fiscal 2013 and $2.4 million in fiscal 2012.

Income From Continuing Operations
Income from continuing operations for the fiscal years ended June 30, 2013 and 2012 was $119.8 million and $94.2 million, or $2.52 and $2.05 per diluted share, respectively. The increase was attributable to the factors noted above.

Discontinued Operations
Our loss from discontinued operations for the fiscal year ended June 30, 2013 was $5.1 million compared to a loss of $15.0 million for the fiscal year ended June 30, 2012. Net sales reported within discontinued operations was $15.3 million and $73.7 million during fiscal 2013 and fiscal 2012, respectively. The decrease in sales primarily relates to the disposal of the CRM business on August 20, 2012. The operating loss included within discontinued operations was $1.2 million and $16.8 million for the respective periods. The operating loss for fiscal 2012 includes non-cash impairment and other non-recurring charges totaling $14.9 million related to the write-down of certain long-lived assets based on their estimated fair value. In addition, during fiscal 2013 we recorded a $4.2 million loss on disposal of the CRM business.

Segment Results

The following table provides a summary of net sales and operating income/(loss)
by reportable segment for the fiscal years ended June 30, 2013 and 2012:
(dollars in                                                                      Corporate and
thousands)              United States      United Kingdom     Rest of World        other (1)        Consolidated
Fiscal 2013 net
sales                  $    1,095,867     $      420,408     $      218,408     $          -       $  1,734,683
Fiscal 2012 net
sales                  $      991,626     $      192,352     $      194,269     $          -       $  1,378,247
% change - Fiscal
2013 vs. 2012                    10.5 %            118.6 %             12.4 %                              25.9 %

Fiscal 2013
operating
income(loss)           $      177,352     $       31,069     $       18,671     $    (52,780 )     $    174,312
Fiscal 2012
operating
income(loss)           $      149,791     $        9,690     $       13,347     $    (21,300 )     $    151,528
% change - Fiscal
2013 vs. 2012                    18.4 %            220.6 %             39.9 %                              15.0 %

Fiscal 2013
operating income
margin                           16.2 %              7.4 %              8.5 %                              10.0 %
Fiscal 2012
operating income
margin                           15.1 %              5.0 %              6.9 %                              11.0 %

(1) Includes $16,634 and $7,974 of acquisition related expenses, restructuring and integration charges for the fiscal years ended June 30, 2013 and 2012, respectively. Corporate and other also includes $2,336 of expense for the fiscal year ended June 30, 2013 and a reduction of expense of $14,627 for the fiscal year ended June 30, 2012 related to adjustments of the carrying value of contingent consideration.

The Rest of World consists of our Canada and Europe operating segments. 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, restructuring and integration charges are included in Corporate and other. Refer to Note 18, Segment Information, for additional details.
Our net sales in the United States in fiscal 2013 were $1.10 billion, an increase of $104.2 million, or 10.5%, from net sales of $991.6 million in fiscal 2012. The sales increase was directly related to continued improved consumption and expanded distribution with growth from many of our brands, including Earth's Best, Celestial Seasonings, MaraNatha, Spectrum, The Greek Gods,


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Garden of Eatin', Alba Botanica and JASON, and to a lesser extent the current year acquisitions of BluePrint and Ella's Kitchen. Operating income in the United States in fiscal 2013 was $177.4 million, an increase of $27.6 million, or 18.4%, from operating income of $149.8 million in fiscal 2012. Operating income as a percentage of net sales in the United States increased to 16.2% from 15.1% during these periods. The improvement primarily resulted from the continued leverage of the Company's expense base, price increases and productivity improvements, offset partially by higher input costs and amortization expense on acquired intangible assets. Additionally, sales in the United States were impacted by the shift in sales responsibilities in Canada for the Sensible Portions brand to the Company's Canadian operations in fiscal year 2013, which accounted for approximately $10.9 million included in United States sales for fiscal 2012.
Our net sales in the United Kingdom in fiscal 2013 were $420.4 million, an increase of $228.1 million, or 118.6%, from net sales of $192.4 million in fiscal 2012. The sales increase was primarily a result of the acquisition of the UK Ambient Grocery Brands in the second quarter of fiscal 2013 and to a lesser extent the full year impact of the acquisition of Daniels during the second quarter of fiscal 2012. Operating income in the United Kingdom in fiscal 2013 was $31.1 million, an increase of $21.4 million, from $9.7 million in fiscal 2012. The increase was also due to the aforementioned acquisitions. Our net sales in the Rest of World were $218.4 million in fiscal 2013, and increase of $24.1 million, or 12.4%, from fiscal 2012. The increase was primarily the result of increased sales in Canada due to expanded distribution, including the aforementioned shift in sales responsibilities for the Sensible Portions brand, and the acquisition of the Europe's Best brand in the second quarter of fiscal 2012. This increase was partially offset by an unfavorable impact of foreign currency exchange rates, which resulted in decreased sales of $3.4 million as compared to the prior fiscal year. Operating income as a percentage of net sales increased to 8.5% from 6.9%, reflecting the continued leveraging of the existing cost structure.

FISCAL 2012 COMPARED TO FISCAL 2011

Consolidated Results

Net Sales
Net sales in fiscal 2012 were $1.38 billion, an increase of $269.7 million, or 24.3%, from net sales of $1.11 billion in fiscal 2011.

The sales increase primarily resulted from an increase in sales of $81.5 million in the United States from improved consumption and expanded distribution as well as an increase of $153.1 million in the United Kingdom primarily due to the acquisition of Daniels in the second quarter of the current fiscal year. Refer to the Segment Results section for additional details.

Gross Profit
Gross profit in fiscal 2012 was $382.5 million, an increase of $62.6 million, or 19.6%, from last year's gross profit of $319.8 million. Gross profit in fiscal 2012 was 27.8% of net sales compared to 28.9% of net sales for fiscal 2011. The change in gross profit percentage resulted from the mix of product sales, including the margin impact related to the inclusion of Daniels which operates at slightly lower relative margins. In addition, we experienced generally higher input costs, offset partially by productivity and price increases.

Selling, General and Administrative Expenses Selling, general and administrative expenses were $229.6 million, an increase of $25.4 million, or 12.4%, in fiscal 2012 from $204.2 million in fiscal 2011. Selling, general and administrative expenses have increased primarily as a result of the costs brought on by the businesses we acquired, partially offset by savings resulting from the integration of the Sensible Portions brand operations. Selling, general and administrative expenses as a percentage of net sales was 16.7% in fiscal 2012 and 18.4% in fiscal 2011, a decrease of 170 basis points primarily related to the inclusion of Daniels which operates with lower relative expenses.

Amortization of acquired intangibles
Amortization of acquired intangibles was $8.0 million, an increase of $3.6 million, or 80.5%, in fiscal 2012 from $4.4 million in fiscal 2011. The increase is due to the Company's acquisitions completed in fiscal 2011.

Acquisition Related Expenses, Restructuring and Integration Charges We incurred acquisition and integration related expenses aggregating $8.0 million in the fiscal year ended June 30, 2012, which were primarily related to the acquisition of Daniels. The charges were offset by a net reduction of expense of $14.6 million primarily representing the reversal of the carrying value of contingent consideration for the Daniels acquisition based on our revised estimate of fair value, offset partially by additional expense related to the settlement of the contingent consideration for the Sensible Portions acquisition.


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We incurred acquisition and integration related expenses aggregating $3.5 million in the fiscal year ended June 30, 2011 related to the acquisitions of The Greek Gods greek-style yogurt brand, Danival and GG UniqueFiber and other acquisition and integration activities, which was offset by $4.2 million of net expense reduction related to adjustments in the carrying values of contingent consideration. We also incurred approximately $0.7 million of restructuring expenses, primarily related to the closing of a small non-dairy production facility in the United Kingdom.

Operating Income
Operating income in fiscal 2012 was $151.5 million, an increase of $40.4 million, or 36.3%, from $111.2 million in fiscal 2011. The increase in operating income resulted primarily from the increased sales and gross profit. Operating income as a percentage of net sales was 11.0% in fiscal 2012 compared with 10.0% in fiscal 2011. The change in operating income percentage is attributable to the decrease in acquisition related expenses (primarily due to the adjustment in the carrying value of contingent consideration) recorded during fiscal 2012, as described above.

Interest and Other Expenses, net
Interest and other expenses, net (which includes foreign currency gains and losses) were $17.3 million for fiscal 2012 compared to $12.2 million for fiscal 2011. Net interest expense totaled $15.8 million in fiscal 2012, 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 in fiscal 2011 was $14.1 million. The increase in interest expense primarily resulted from higher average borrowings under our revolving credit facility, the proceeds of which were used to purchase Daniels during the period, offset partially by a lower interest accretion on contingent consideration due to payments that were made during the first and second quarters of fiscal 2012.

Income Before Income Taxes and Equity in Earnings of Equity-Method Investees Income before income taxes and equity in the after tax earnings of our equity-method investees for the fiscal years ended June 30, 2012 and 2011 was $134.2 million and $98.9 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 $41.2 million in fiscal 2012 compared to $37.8 million in fiscal 2011. Our effective income tax rate from continuing operations was 30.7% of pre-tax income in fiscal 2012 compared to 38.2% in fiscal 2011. The effective tax rate in fiscal 2012 was lower than the prior year primarily as a result of reduced losses incurred in the United Kingdom and the acquisition of Daniels on October 25, 2011 and the increased income in its lower tax rate jurisdiction. The Company's tax rate in fiscal 2012 was also favorably impacted by the reduction of the carrying value of our liability for contingent consideration that was recorded in the fourth quarter, which did not have a corresponding tax impact, which was partially offset by an unfavorable impact of . . .

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