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HAIN > SEC Filings for HAIN > Form 10-Q on 10-Feb-2014All Recent SEC Filings

Show all filings for HAIN CELESTIAL GROUP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HAIN CELESTIAL GROUP INC


10-Feb-2014

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 December 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, 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 primarily 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 and geographies. 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 and provide innovation to 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. 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. 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. In addition, the acquisition of Tilda Limited ("Tilda") (see Recent Developments below) expands our worldwide product portfolio into the premium Basmati rice category along with other specialty rice products. We plan to grow the Tilda brand further using our existing distribution platform in the United States, Canada and Europe with Basmati and ready-to-heat rice product offerings. Additionally, Tilda's existing markets in the Middle East, Northern Africa and India provide us with the opportunity for expansion of our global brands into new markets.


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Recent Developments

On January 13, 2014, the Company acquired Tilda, a leading premium 100% branded Basmati and specialty rice products company. Tilda offers a range of over 60 dry rice and ready-to-heat branded products under the brand names Tilda®, Akash® and Abu Shmagh® to consumers in over 40 countries, principally in the United Kingdom, the Middle East and North Africa, Continental Europe, North America and India. Tilda generated approximately $190 million in net sales in calendar year 2013.

Consideration in the transaction consisted of cash totaling £107.0 million (approximately $176.3 million at the transaction date exchange rate), which is subject to certain adjustments, 1,646,173 shares of the Company's common stock valued at $150.6 million and a Vendor Loan Note for £20 million issued by the Company which is payable within one year following completion of the acquisition either in cash or Company shares at the Company's option. The cash consideration paid was funded with borrowings drawn under the Company's existing revolving credit facility.

Results of Operations

THREE MONTHS ENDED DECEMBER 31, 2013

Consolidated Results

Net Sales
Net sales for the three months ended December 31, 2013 were $534.9 million, an increase of $79.6 million, or 17.5%, from net sales of $455.3 million for the three months ended December 31, 2012. The sales increase primarily resulted from increases of $47.3 million in the United States and $25.9 million in the United Kingdom. Changes in prices and foreign currency exchange rates did not significantly impact consolidated net sales. Refer to the Segment Results section for additional discussion.

Gross Profit
Gross profit for the three months ended December 31, 2013 was $143.1 million as compared to gross profit of $130.8 million in last year's quarter. Gross margin for the three months ended December 31, 2013 was 26.7% of net sales compared to 28.7% of net sales in the prior year quarter. The change in gross margin percentage resulted from a change in the mix of product sales, increased input costs and increased costs associated with start-up activities in certain of our factories in Europe and the United Kingdom.

Selling, General and Administrative Expenses Selling, general and administrative expenses were $75.2 million, an increase of $2.3 million, or 3.2%, in the three months ended December 31, 2013 from $72.9 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 14.1% in the three months ended December 31, 2013 and 16.0% in the prior year quarter, a decrease of 190 basis points primarily 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 $3.6 million, an increase of $0.8 million, or 28.4%, in the three months ended December 31, 2013 from $2.8 million in the prior year quarter. The increase is due to the Company's prior year acquisitions, which were either completed during or subsequent to the second quarter of the prior fiscal year.

Acquisition Related Expenses, Restructuring and Integration Charges We incurred acquisition, restructuring and integration related expenses totaling $1.7 million in the three months ended December 31, 2013, which are primarily related to professional fees associated with our recently completed acquisitions as well as charges related to the ongoing restructuring and integration activities of certain functions in the United Kingdom and Europe. These expenses were offset by a net reduction in expense of $1.8 million related to the adjustment of the carrying value of our liability for contingent consideration related to previously completed acquisitions.
We incurred acquisition related expenses aggregating $3.8 million for the three months ended December 31, 2012, which were primarily related to the acquisitions of the UK Ambient Grocery Brands and BluePrint, and to a lesser extent ongoing integration activities in the United Kingdom.


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Operating Income
Operating income for the three months ended December 31, 2013 was $64.3 million, an increase of $13.1 million, or 25.5%, from $51.2 million in the three months ended December 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 12.0% in the second quarter of fiscal 2014 compared with 11.3% in the second quarter of fiscal 2013. The change in operating income percentage is attributable to the items described above.

Interest and Other Expenses, net
Interest and other expenses, net (which includes foreign currency gains and losses) were $6.0 million and $3.3 million for the second quarters of fiscal 2014 and fiscal 2013, respectively. Net interest expense totaled $5.6 million for the second 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 second quarter of fiscal 2013 was $4.7 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, were $0.3 million for the second quarter of fiscal 2014 compared to a gain of $1.4 million for the comparable quarter of fiscal 2013. The net gain recorded in the prior period quarter is primarily due to realized gains on the forward purchases of British Pounds Sterling to fund the acquisition of the UK Ambient Grocery brands.

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 December 31, 2013 and 2012 was $58.4 million and $47.9 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 and effective tax rate was $19.7 million and 33.8% in the second quarter of fiscal 2014, respectively, compared to $16.3 million and 34.0% in the comparable quarter of fiscal 2013, respectively. The effective tax rate in the second quarter of fiscal 2014 was lower than the prior year primarily due to the increased income in the United Kingdom resulting from our recent acquisitions and their lower tax rate jurisdiction, offset partially by an adjustment of the fair value of contingent consideration, a portion of which is not tax deductible.
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 December 31, 2013 was $1.5 million compared to $0.6 million for the three months ended December 31, 2012. In the current quarter, HHO recorded a nominal profit, while our share of the earnings of HPP increased to $1.5 million. Our share of the earnings of HPP for the three months ended December 31, 2012 was $1.2 million, which was offset by 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 December 31, 2013 and 2012 was $40.1 million and $32.2 million, or $0.81 and $0.68 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 December 31, 2012 was $0.6 million. Net sales and operating loss reported within discontinued operations was $3.1 million and $0.7 million, respectively, during the three months ended December 31, 2012. As the sales of the businesses were completed in the prior fiscal year, there are no operating amounts reported as discontinued operations for the three months ended December 31, 2013. However, we recorded a gain on the sale of the CRM business of $1.1 million during the period as a result of the finalization of a working capital adjustment with the purchaser.


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Segment Results

The following table provides a summary of net sales and operating income/(loss)
by reportable segment for the three months ended December 31, 2013 and 2012:
(dollars in                                                                     Corporate and
thousands)              United States      United Kingdom     Rest of World       other (1)        Consolidated
Net sales - Three
months ended
12/31/13               $      327,725     $     146,051      $     61,103      $          -       $     534,879
Net sales - Three
months ended
12/31/12               $      280,415     $     120,167      $     54,737      $          -       $     455,319
% change                         16.9 %            21.5  %           11.6  %                               17.5 %

Operating income -
Three months ended
12/31/13               $       56,510     $      12,001      $      3,996      $     (8,194 )     $      64,313
Operating income -
Three months ended
12/31/12               $       47,582     $      12,076      $      4,268      $    (12,682 )     $      51,244
% change                         18.8 %            (0.6 )%           (6.4 )%                               25.5 %

Operating income
margin - Three
months ended
12/31/13                         17.2 %             8.2  %            6.5  %                               12.0 %
Operating income
margin - Three
months ended
12/31/12                         17.0 %            10.0  %            7.8  %                               11.3 %

(1) For the three months ended December 31, 2013 and 2012, Corporate and other includes a net reduction of expense of $18 (of which $102 of expense is recorded in cost of sales) and expenses of $3,775, respectively, for acquisition related expenses (credits), restructuring and integration charges.

Our operations are 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 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 16, Segment Information, for additional details.
Our net sales in the United States for the three months ended December 31, 2013 were $327.7 million, an increase of $47.3 million, or 16.9%, from net sales of $280.4 million for the three months ended December 31, 2012. The sales increase was due to the impact of the prior year acquisitions of BluePrint and Ella's Kitchen, which accounted for approximately 54% of the increase, increased consumption and expanded distribution with growth from many of our brands, including Earth's Best, Celestial Seasonings, Spectrum, MaraNatha, The Greek Gods, Garden of Eatin', and Jason. Operating income in the United States in the three months ended December 31, 2013 was $56.5 million, an increase of $8.9 million, or 18.8%, from operating income of $47.6 million in the three months ended December 31, 2012. Operating income as a percentage of net sales in the United States increased to 17.2% from 17.0% during these periods. The improvements in operating margin primarily resulted from continued increased operating leverage of the expense base resulting from increased sales volume, offset partially by increases in promotional activity and costs of certain raw materials.
Our net sales in the United Kingdom for the three months ended December 31, 2013 were $146.1 million, an increase of $25.9 million, or 21.5%, from net sales of $120.2 million for the three months ended December 31, 2012. The sales increase was primarily a result of the acquisition of the UK Ambient Grocery Brands, which occurred during the second quarter of fiscal 2013 and accounted for approximately 77% of the increase. Operating income in the United Kingdom in the three months ended December 31, 2013 was $12.0 million, a nominal decrease of $0.1 million, from $12.1 million in comparable quarter of fiscal 2013. The decrease in operating income margin was primarily due to a change in product mix and production inefficiencies, including those associated with the start-up of new lines at the Company's soup manufacturing facilities.


Table of Contents

Our net sales in the Rest of World were $61.1 million for the three months ended December 31, 2013, an increase of $6.4 million, or 11.6%, from the comparable quarter of fiscal 2013. The increase resulted from increased sales in Europe and to a lesser extent in Canada. Unfavorable foreign currency exchange rates resulted in reduced sales in Canada of $1.8 million as compared to the prior quarter, which was offset partially by increased sales of $1.4 million in Europe resulting from favorable exchange rates. Operating income as a percentage of net sales decreased to 6.5% from 7.8% primarily due to production start-up costs in our non-dairy beverage factory in Europe.

SIX MONTHS ENDED DECEMBER 31, 2013

Consolidated Results

Net Sales
Net sales for the six months ended December 31, 2013 were $1.01 billion, an increase of $197.2 million, or 24.2%, from net sales of $815.1 million for the six months ended December 31, 2012. The sales increase primarily resulted from increases of $106.7 million in the United States and $81.9 million in the United Kingdom. Changes in prices and foreign currency exchange rates did not significantly impact consolidated net sales. Refer to the Segment Results section for additional discussion.

Gross Profit
Gross profit for the six months ended December 31, 2013 was $262.2 million as compared to gross profit of $226.0 million in last year's period. Gross margin for the six months ended December 31, 2013 was 25.9% of net sales compared to 27.7% of net sales in the prior year period. The change in gross margin percentage resulted from a change in the mix of product sales, including the mix of sales by operating segment, increased input costs and increased costs associated with start-up activities in certain of our factories in Europe and the United Kingdom. Sales made by the United Kingdom segment, which operates at lower relative gross margins, represented approximately 25.7% of consolidated sales as compared to 21.9% in the prior year period.

Selling, General and Administrative Expenses Selling, general and administrative expenses were $148.8 million, an increase of $16.3 million, or 12.3%, in the six months ended December 31, 2013 from $132.6 million in last year's period. 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 14.7% in the six months ended December 31, 2013 and 16.3% in the prior year period, a decrease of 160 basis points primarily related to the inclusion of the UK Ambient Grocery Brands in the current period 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 $7.1 million, an increase of $1.6 million, or 30.0%, in the six months ended December 31, 2013 from $5.5 million in the prior year period. The increase is due to the Company's prior year acquisitions, which were either completed during or subsequent to the second quarter of the prior fiscal year.

Acquisition Related Expenses, Restructuring and Integration Charges We incurred acquisition, restructuring and integration related expenses aggregating $4.0 million in the six months ended December 31, 2013, which are primarily related to professional fees associated with our recently completed acquisitions as well as charges related to the ongoing restructuring and integration activities of certain functions in the United Kingdom and Europe, and to a lesser extent in the United States. These expenses were offset by a net reduction in expense of $1.8 million related to the adjustment of the carrying value of our liability for contingent consideration related to previously completed acquisitions.
We incurred acquisition related expenses aggregating $4.4 million for the six months ended December 31, 2012, which were primarily related to the acquisition of the UK Ambient Grocery Brands and BluePrint, and to a lesser extent ongoing integration activities int he United Kingdom.


Table of Contents

Operating Income
Operating income for the six months ended December 31, 2013 was $104.1 million, an increase of $20.6 million, or 24.6%, from $83.5 million in the six months ended December 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 10.3% in the first six months of fiscal 2014 compared with 10.2% in the first six months of fiscal 2013. The change in operating income percentage is attributable to the items described above.

Interest and Other Expenses, net
Interest and other expenses, net (which includes foreign currency gains and losses) were $9.9 million and $7.2 million for the six months ended December 31, 2013 and 2012, respectively. Net interest expense totaled $11.2 million for the first six months 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 six months of fiscal 2013 was $8.7 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 $1.3 million for the first six months of fiscal 2014 compared to a gain of $1.6 million for the comparable period of fiscal 2013. The net gain recorded in the current period is primarily due to unrealized foreign currency gains associated with the remeasurement of foreign currency denominated intercompany balances, while in the prior period was primarily due to realized gains on the forward purchases of British Pounds Sterling to fund the acquisition of the UK Ambient Grocery brands.

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 six months ended December 31, 2013 and 2012 was $94.2 million and $76.3 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 $28.5 million and 30.3% in the first six months of fiscal 2014, respectively, compared to $24.2 million and 31.7% in the comparable period of fiscal 2013, respectively. The effective tax rate in the first six months 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 as well as an adjustment of the fair value of contingent consideration, a portion of which is not tax deductible.
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 six months ended December 31, 2013 was $2.0 million compared to a loss of $0.1 million for the six months ended December 31, 2012. In the current period, HHO recorded a nominal profit, while our share of the earnings of HPP increased to $2.0 million. The loss recorded in the prior year period was primarily related to losses incurred by HHO from their infant formula business, which was discontinued in the fourth quarter of fiscal 2013, and which more than offset our share of the earnings of HPP of $1.1 million.

Income From Continuing Operations . . .

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