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HAIN > SEC Filings for HAIN > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for HAIN CELESTIAL GROUP INC

Form 10-Q for HAIN CELESTIAL GROUP INC


12-Nov-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 September 30, 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, 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 (the "CRM business") 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 our goal is to continue to grow both organically as well as through 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 also seek to broaden the distribution of our key brands across all sales channels. 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 and timely 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 remains challenging. 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 future success will depend in part on our ability to manage continued global economic or political uncertainty, particularly in our significant geographic markets.
As a consumer products company, we rely on continued demand for our brands and products. 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, our use of promotional allowances and programs, expanded distribution and introduction of innovative new products has helped to increase consumer consumption of our brands in recent years. In the United Kingdom, our recent acquisition of the UK Ambient Grocery Brands provides us with the opportunity to introduce more of our existing brands into this market. We have also begun to introduce a number of new products under these brands, broadening our UK portfolio. Generally, 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.


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Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2013

Consolidated Results

Net Sales
Net sales for the three months ended September 30, 2013 were $477.5 million, an increase of $117.7 million, or 32.7%, from net sales of $359.8 million for the three months ended September 30, 2012.

The sales increase primarily resulted from an increase in sales of $59.3 million in the United States due to the impact of prior year acquisitions (which were completed subsequent to the first quarter of the prior fiscal year), increased consumption and expanded distribution, and an increase in sales of $56.0 million in the United Kingdom primarily due to the acquisition of the UK Ambient Grocery Brands in the second quarter of the prior fiscal year. Changes in foreign currency exchange rates did not significantly impact net sales. Refer to the Segment Results section for additional discussion.

Gross Profit
Gross profit for the three months ended September 30, 2013 was $119.1 million as compared to gross profit of $95.2 million in last year's first quarter. Gross margin for the three months ended September 30, 2013 was 24.9% of net sales compared to 26.5% of net sales in the prior year first quarter. The change in gross margin percentage resulted from a change in the mix of product sales, including the mix of sales by operating segment, and increased costs associated with the start-up of our non-dairy facility in Europe. Sales made by the United Kingdom segment, which includes the UK Ambient Grocery Brands in the current year's quarter, and which operates at lower relative gross margins, represented approximately 24% of consolidated sales as compared to 16% in the prior year's first quarter.

Selling, General and Administrative Expenses Selling, general and administrative expenses were $73.6 million, an increase of $13.9 million, or 23.3%, in the three months ended September 30, 2013 from $59.7 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. Selling, general and administrative expenses as a percentage of net sales was 15.4% in the three months ended September 30, 2013 and 16.6% in the prior year quarter, a decrease of 120 basis points primarily related to the inclusion of the UK Ambient Grocery Brands in the current quarter which, along with the Daniels business, operates with lower relative expenses. Additionally, the decrease was attributable to achieving additional operating leverage on our SG&A infrastructure as a result of higher sales volume.

Amortization of acquired intangibles
Amortization of acquired intangibles was $3.5 million, an increase of $0.8 million, or 31.7%, in the three months ended September 30, 2013 from $2.6 million in the prior year quarter. The increase is due to the Company's prior year acquisitions, all of which were completed subsequent to the first quarter of the prior fiscal year.

Acquisition Related Expenses, Restructuring and Integration Charges We incurred acquisition, restructuring and integration related expenses aggregating $2.3 million in the three months ended September 30, 2013, which are primarily related to professional fees associated with our recently completed acquisitions as well as restructuring and integration charges related to the ongoing integration activities of certain functions in the United Kingdom and United States resulting from the Company's recent acquisitions.
We incurred acquisition related expenses aggregating $0.6 million for the three months ended September 30, 2012, which were primarily related to the acquisition of the UK Ambient Grocery Brands.

Operating Income
Operating income for the three months ended September 30, 2013 was $39.8 million, an increase of $7.5 million, or 23.2%, from $32.3 million in the three months ended September 30, 2012. The increase in operating income resulted primarily from the increased sales and gross profit. Operating income as a percentage of net sales was 8.3% in the first quarter of fiscal 2014 compared with 9.0% in the first quarter of fiscal 2013. The change in operating income percentage is attributable to the items described above.


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Interest and Other Expenses, net
Interest and other expenses, net (which includes foreign currency gains and losses) were $3.9 million for both the first quarters of fiscal 2014 and fiscal 2013. Net interest expense totaled $5.6 million for the first quarter of fiscal 2014, 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 the first quarter of fiscal 2013 was $4.0 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 recent acquisitions. Other expenses, net, was a gain of $1.7 million for the first quarter of fiscal 2014 compared to a gain of $0.1 million for the comparable quarter of fiscal 2013. The net gain recorded in the current quarter is primarily due to unrealized foreign currency gains associated with the remeasurement of foreign currency denominated intercompany balances.

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 three months ended September 30, 2013 and 2012 was $35.8 million and $28.4 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 and effective tax rate was $8.8 million and 24.4% in the first quarter of fiscal 2014, respectively, compared to $7.9 million and 27.7% in the comparable quarter of fiscal 2013, respectively. The effective tax rate in the first quarter of fiscal 2014 was lower than the prior year primarily as a result of a reduction in the carrying value of net deferred tax liabilities of $3,777 resulting from further reductions in the statutory tax rate in the United Kingdom enacted in the first quarter of fiscal 2014. This was partially offset by an increase in the reserve for unrecognized tax benefits of $550 relating to an additional estimated liability associated with the ongoing IRS audit.
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 the mix of taxable income by jurisdiction and 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.

Equity in Earnings of Equity-Method Investees Our equity in the net income from our joint venture investments for the three months ended September 30, 2013 was $0.6 million compared to a loss of $0.7 million for the three months ended September 30, 2012. In the current quarter, HHO recorded a nominal profit, while our share of the earnings of HPP increased to $0.5 million. The loss recorded in the prior year quarter was primarily related to losses incurred by HHO from their infant formula business, which was discontinued in the fourth quarter of fiscal 2013.

Income From Continuing Operations
Income from continuing operations for the three months ended September 30, 2013 and 2012 was $27.7 million and $19.8 million, or $0.57 and $0.42 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 September 30, 2012 was $3.4 million. Net sales and operating loss reported within discontinued operations was $12.2 million and $0.4 million, respectively, during the three months ended September 30, 2012. We recorded a loss on the sale of the CRM business of $3.1 million during this period. As the sales of the businesses were completed in the prior fiscal year, there are no amounts reported as discontinued operations for the three months ended September 30, 2013.


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