NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except par values and per share data)
1. BUSINESS
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 — To Create and Inspire A Healthier Way of LifeTM and be the 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 70 countries worldwide.
The Company manufactures, markets, distributes and sells organic and natural products under brand names that are sold as “better-for-you” products, providing consumers with the opportunity to lead A Healthier Way of Life™. Hain Celestial is a leader in many organic and natural products categories, with many recognized brands in the various market categories it serves, including Almond Dream®, Bearitos®, Better Bean®, BluePrint®, Casbah®, Celestial Seasonings®, Clarks™, Coconut Dream®, Cully & Sully®, Danival®, DeBoles®, Earth’s Best®, Ella’s Kitchen®, Europe’s Best®, Farmhouse Fare™, Frank Cooper’s®, Gale’s®, Garden of Eatin’®, GG UniqueFiber®, Hain Pure Foods®, Hartley’s®, Health Valley®, Imagine®, Johnson’s Juice Co.™, Joya®, Lima®, Linda McCartney® (under license), MaraNatha®, Mary Berry (under license), Natumi®, New Covent Garden Soup Co.®, Orchard House®, Rice Dream®, Robertson’s®, Rudi’s Gluten-Free Bakery™, Rudi’s Organic Bakery®, Sensible Portions®, Spectrum® Organics, Soy Dream®, Sun-Pat®, Sunripe®, Terra®, The Greek Gods®, Walnut Acres®, Yorkshire Provender®, Yves Veggie Cuisine®and William’s™. The Company’s personal care products are marketed under the Alba Botanica®, Avalon Organics®, Earth’s Best®, JASON®, Live Clean® and Queen Helene® brands.
The Company’s strategy is to focus on simplifying the Company’s portfolio and reinvigorating profitable sales growth through discontinuing uneconomic investment, realigning resources to coincide with individual brand roles, reducing unproductive stock-keeping units (“SKUs”) and brands, and reassessing current pricing architecture. As part of this initiative, the Company reviewed its product portfolio within North America and divided it into “Get Bigger” and “Get Better” brand categories.
The Company’s “Get Bigger” brands represent its strongest brands with higher margins, which compete in categories with strong growth. In order to capitalize on the potential of these brands, the Company began reallocating resources to optimize assortment and increase share of distribution. In addition, the Company will increase its marketing and innovation investments.
The Company’s “Get Better” brands are the brands in which the Company is primarily focused on simplification and expansion of profit. Some of these are low margin, non-strategic brands that add complexity with minimal benefit to the Company’s operations. Accordingly, in fiscal 2019, the Company initiated a SKU rationalization, which included the elimination of approximately 350 low velocity SKUs. The elimination of these SKUs is expected to impact sales growth in the current fiscal year, but is expected to result in expanded profits and a remaining set of core SKUs that will maintain their shelf space in the store.
As part of the Company’s overall strategy, the Company may seek to dispose of businesses and brands that are less profitable or are otherwise less of a strategic fit within our core portfolio. Accordingly, the Company divested of all of its operations of the Hain Pure Protein reportable segment and WestSoy® tofu, seitan and tempeh businesses in the United States in fiscal 2019, the entities comprising its Tilda operating segment and certain other assets of the Tilda business in August 2019 and its Arrowhead Mills® and SunSpire® brands in October 2019.
Productivity and Transformation Costs
As part of the Company’s historical strategic review, it focused on a productivity initiative, which it called “Project Terra.” A key component of this project was the identification of global cost savings and the removal of complexity from the business. In fiscal 2019, the Company announced a new transformation initiative, of which one aspect is to identify additional areas of productivity savings to support sustainable profitable performance.
Productivity and transformation costs include costs, such as consulting and severance costs, relating to streamlining the Company’s manufacturing plants, co-packers and supply chain, eliminating served categories or brands within those categories, and product rationalization initiatives which are aimed at eliminating slow moving SKUs.
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 titled, "Agreement relating to the sale and purchase of the Tilda Group Entities and certain other assets" (the “Sale and Purchase Agreement”).
On February 15, 2019, the Company completed the sale of substantially all of the assets used primarily for the Plainville Farms business, a component of the Company’s Hain Pure Protein Corporation (“HPPC”) operating segment. On June 28, 2019, the Company completed the sale of the remainder of HPPC and Empire Kosher which included the FreeBird and Empire Kosher businesses. These dispositions were undertaken to reduce complexity in the Company’s operations and simplify the Company’s brand portfolio, in addition to allowing additional flexibility to focus on opportunities for growth and innovation in the Company’s more profitable and faster growing core businesses. Collectively, these dispositions were reported in the aggregate as the Hain Pure Protein reportable segment.
These dispositions represented strategic shifts that had a major impact on the Company’s operations and financial results and therefore, the Company is presenting the operating results and cash flows of the Tilda operating segment and the Hain Pure Protein reportable segment within discontinued operations in the current and prior periods. The assets and liabilities of the Tilda operating segment are presented as assets and liabilities of discontinued operations in the Consolidated Balance Sheet as of June 30, 2019. See Note 5, Discontinued Operations, for additional information.
Change in Reportable Segments
Historically, the Company had three reportable segments: United States, United Kingdom and Rest of World. Effective July 1, 2019, the Company reassessed its segment reporting structure and as a result, the Canada and Hain Ventures operating segments, which were included within the Rest of World reportable segment, were moved to the United States reportable segment and renamed the North America reportable segment. Additionally, the Europe operating segment, which was included in the Rest of World reportable segment, was combined with the United Kingdom reportable segment and renamed the International reportable segment. Accordingly, the Company now operates under two reportable segments: North America and International. Prior period segment information contained herein has been adjusted to reflect the Company’s new operating and reporting structure. See Note 17, Segment Information, for additional information.
2. BASIS 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 loss 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, 2019 (the “Form 10-K”). The amounts as of and for the periods ended June 30, 2019 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 three and six months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. Please refer to the Notes to the Consolidated Financial Statements as of June 30, 2019 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.
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.
Leases
Effective July 1, 2019, arrangements containing leases are evaluated as an operating or finance lease at lease inception. For operating leases, the Company recognizes an operating right-of-use ("ROU") asset and operating lease liability at lease commencement based on the present value of lease payments over the lease term.
With the exception of certain finance leases, an implicit rate of return is not readily determinable for the Company's leases. For these leases, an incremental borrowing rate is used in determining the present value of lease payments, and is calculated based on information available at the lease commencement date. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest the Company would have to pay to borrow funds on a collateralized basis over a similar term. The Company references market yield curves which are risk-adjusted to approximate a collateralized rate in the currency of the lease. These rates are updated on a quarterly basis for measurement of new lease obligations.
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Leases with an initial term of 12 months or less are not recognized on the Company's balance sheet. The Company has elected to separate lease and non-lease components.
Recently Adopted Accounting Pronouncements
The Company adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), effective July 1, 2019, using a modified retrospective approach. As permitted by the new guidance, the Company elected the package of practical expedients, which among other things, allowed historical lease classification to be carried forward.
Excluding Tilda, adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities as of July 1, 2019 of $87,414 and $92,982, respectively, with the difference largely due to prepaid and deferred rent that were reclassified to the ROU asset value. In addition, the Company recorded a cumulative-effect adjustment to opening retained earnings of $439 at adoption for the impairment of an abandoned ROU asset for a manufacturing facility in the United Kingdom that was previously impaired and the remaining lease payments were accounted for under ASC Topic 420, Exit or Disposal Obligations. The standard did not materially affect the Company’s consolidated net income (loss) or cash flows. See Note 8, Leases, for further details.
Recently Issued Accounting Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected versus incurred credit losses for most financial assets. The new guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurement by removing, modifying or adding certain disclosures. The new guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amended guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.
3. FORMER CHIEF EXECUTIVE OFFICER SUCCESSION PLAN
On June 24, 2018, the Company entered into a CEO succession plan, whereby the Company’s former CEO, Irwin D. Simon, agreed to terminate his employment with the Company upon the hiring of a new CEO (the “Succession Agreement”). The Succession Agreement provided Mr. Simon with a cash separation payment of $34,295 payable in a single lump sum and cash benefits continuation costs of $208. These costs were recognized from June 24, 2018 through November 4, 2018, at which time the Company’s new CEO, Mark L. Schiller, commenced his employment. Expense recognized in connection with these payments was $9,080 and $33,051 in the three and six months ended December 31, 2018. The cash separation payment was paid on May 6, 2019. Additionally, the Succession Agreement allowed for acceleration of vesting of all service-based awards outstanding at the termination of Mr. Simon’s employment. In connection with these accelerations, the Company recognized additional stock-based compensation expense of $429 ratably through November 4, 2018, of which $117 was recognized in the three months ended December 31, 2018. The aforementioned impacts were recorded in Chief Executive Officer Succession Plan expense, net in the Consolidated Statements of Operations.
As further discussed in Note 13, Stock-based Compensation and Incentive Performance Plans, in the three months ended September 30, 2018, the Company’s Compensation Committee determined that no awards would be paid or vested pursuant to the 2016-2018 LTIP. Accordingly, the Company recorded a benefit of $5,065 associated with the reversal of previously accrued amounts under the net sales portion of the 2016-2018 LTIP associated with Mr. Simon.
On October 26, 2018, the Company and Mr. Simon entered into a consulting agreement (the “Consulting Agreement”) in order to, among other things, assist Mr. Schiller with his transition as the Company’s incoming CEO. The term of the Consulting Agreement commenced on November 5, 2018 and continued until February 5, 2019. Mr. Simon received an aggregate consulting fee of $975 as compensation for his services during the consulting term, of which $650 was recognized in the Consolidated Statements of Operations as a component of “Chief Executive Officer Succession Plan expense, net” in the three and six months ended December 31, 2018.
4. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per share:
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Three Months Ended December 31,
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Six Months Ended December 31,
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2019
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2018
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2019
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2018
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Numerator:
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Net income (loss) from continuing operations
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$
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1,852
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$
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(31,787)
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$
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(3,101)
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$
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(54,874)
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Net loss from discontinued operations, net of tax
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(2,816)
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(34,714)
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(104,884)
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(49,052)
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Net loss
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$
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(964)
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$
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(66,501)
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$
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(107,985)
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$
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(103,926)
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Denominator:
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Basic weighted average shares outstanding
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104,318
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104,056
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104,272
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104,009
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Effect of dilutive stock options, unvested restricted stock and unvested restricted share units
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301
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—
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—
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—
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Diluted weighted average shares outstanding
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104,619
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104,056
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104,272
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104,009
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Basic net income (loss) per common share:
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Continuing operations
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$
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0.02
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$
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(0.31)
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$
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(0.03)
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$
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(0.53)
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Discontinued operations
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(0.03)
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(0.33)
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(1.01)
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(0.47)
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Basic net loss per common share
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$
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(0.01)
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$
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(0.64)
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$
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(1.04)
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$
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(1.00)
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Diluted net income (loss) per common share:
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Continuing operations
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$
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0.02
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$
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(0.31)
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$
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(0.03)
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$
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(0.53)
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Discontinued operations
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(0.03)
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(0.33)
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(1.01)
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(0.47)
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Diluted net loss per common share
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$
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(0.01)
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$
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(0.64)
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$
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(1.04)
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$
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(1.00)
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Basic net income (loss) per share excludes the dilutive effects of stock options, unvested restricted stock and unvested restricted share units.
Due to our net losses in the six months ended December 31, 2019 and the three and six months ended December 31, 2018, all common stock equivalents such as stock options and unvested restricted stock awards have been excluded from the computation of diluted net loss per common share because the effect would have been anti-dilutive to the computations in each period.
There were 485 and 498 restricted stock awards and stock options excluded from our calculation of diluted net income (loss) per share for the three months ended December 31, 2019 and 2018, respectively, as such awards were anti-dilutive. Additionally, there were 2,550 and 1,152 stock-based awards excluded for the three months ended December 31, 2019 and 2018, 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 689 and 464 restricted stock awards and stock options excluded from our calculation of diluted net loss per share for the six months ended December 31, 2019 and 2018, respectively, as such awards were anti-dilutive. Additionally, there were 2,745 and 710 stock-based awards excluded for the six months ended December 31, 2019 and 2018, respectively, as such awards were contingently issuable based on market or performance conditions, and such conditions had not been achieved during the respective periods.
Share Repurchase Program
On June 21, 2017, the Company's Board of Directors authorized the repurchase of up to $250,000 of the Company’s issued and outstanding common stock. Repurchases may be made from time to time in the open market, pursuant to pre-set trading plans, in private transactions or otherwise. The 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, including the Company’s historical strategy of pursuing accretive acquisitions. As of December 31, 2019, the Company had not repurchased any shares under this program and had $250,000 of remaining capacity under the share repurchase program.
5. DISCONTINUED OPERATIONS
Sale of Tilda Business
On August 27, 2019, the Company and the Purchaser entered into, and consummated the transactions contemplated by the Sale and Purchase Agreement. Under the Sale and Purchase Agreement, the Company sold the entities comprising its Tilda operating segment (the “Tilda Group Entities”) and certain other assets of the Tilda business to the Purchaser for an aggregate price of $342,000 in cash, subject to customary post-closing adjustments based on the balance sheets of the Tilda business. The other assets sold in the transaction consisted of raw materials, consumables, packaging, and finished and unfinished goods related to the Tilda business held by other Company entities that are not Tilda Group Entities. In January 2020, the Company and the Purchaser agreed to fully resolve all matters relating to post-closing adjustments to the sale price, resulting in a final aggregate sale price of $341,800. The Company used the proceeds from the sale to pay down the remaining outstanding borrowings under its term loan and a portion of its revolving credit facility.
The Sale and Purchase Agreement contains representations, warranties and covenants that are customary for a transaction of this nature. The Company also entered into certain ancillary agreements with the Purchaser and certain of the Tilda Group Entities in connection with the Sale and Purchase Agreement, including a transitional services agreement (the "TSA") pursuant to which the Company and the Purchaser provide transitional services to one another, and business transfer agreements pursuant to which the applicable Tilda Group Entities will transfer certain non-Tilda assets and liabilities in India and the United Arab Emirates to subsidiaries of the Company to be formed in those countries. Additionally, the Company will distribute certain Tilda products in the United States, Canada and Europe through the expiration of the TSA.
The disposition of the Tilda operating segment represented a strategic shift that had a major impact on the Company’s operations and financial results and has been accounted for as discontinued operations.
The following table presents the major classes of Tilda’s results within “Net loss from discontinued operations, net of tax” in our Consolidated Statements of Operations:
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Three Months Ended December 31,
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Six Months Ended December 31,
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2019
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2018
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2019
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2018
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Net sales
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$
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2,667
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$
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50,590
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$
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30,399
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$
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92,945
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Cost of sales
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2,496
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37,668
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26,648
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69,337
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Gross profit
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171
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12,922
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3,751
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23,608
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Selling, general and administrative expense
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246
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6,892
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5,185
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13,172
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Other expense
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824
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537
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1,172
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1,083
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Interest expense(1)
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—
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3,391
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2,432
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6,782
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Translation loss(2)
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—
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—
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95,120
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—
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Loss (gain) on sale of discontinued operations
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3,752
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—
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(10,170)
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—
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Net (loss) income from discontinued operations before income taxes
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(4,651)
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2,102
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(89,988)
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2,571
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(Benefit) provision for income taxes(3)
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(1,835)
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(407)
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13,865
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|
76
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Net (loss) income from discontinued operations, net of tax
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$
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(2,816)
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$
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2,509
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$
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(103,853)
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$
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2,495
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(1) Interest expense was allocated to discontinued operations based on borrowings repaid with proceeds from the sale of Tilda.
(2) At the completion of the sale of Tilda, the Company reclassified $95,120 of related cumulative translation losses from Accumulated other comprehensive loss to discontinued operations, net of tax.
(3) Includes a tax (benefit) provision related to the tax gain on the sale of Tilda of $(1,250) and $15,250 for the three and six months ended December 31, 2019, respectively.
Assets and liabilities of discontinued operations associated with Tilda presented in the Consolidated Balance Sheets as of June 30, 2019 are included in the following table:
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June 30,
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ASSETS
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2019
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Cash and cash equivalents
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$
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8,509
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Accounts receivable, less allowance for doubtful accounts
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26,955
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Inventories
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65,546
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Prepaid expenses and other current assets
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9,038
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Total current assets of discontinued operations(1)
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110,048
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Property, plant and equipment, net
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40,516
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Goodwill
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133,098
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Trademarks and other intangible assets, net
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84,925
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Other assets
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628
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Total noncurrent assets of discontinued operations(1)
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|
259,167
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Total assets of discontinued operations
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$
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369,215
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LIABILITIES
|
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Accounts payable
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$
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18,341
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Accrued expenses and other current liabilities
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|
4,675
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Current portion of long-term debt
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8,687
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Total current liabilities of discontinued operations(1)
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31,703
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Deferred tax liabilities
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17,153
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Other noncurrent liabilities
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|
208
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Total noncurrent liabilities of discontinued operations(1)
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|
17,361
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Total liabilities of discontinued operations(1)
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|
$
|
49,064
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(1) Assets and liabilities from discontinued operations were classified as current and noncurrent at June 30, 2019 as they did not meet the held-for-sale criteria.
Sale of Hain Pure Protein Reportable Segment
In March 2018, the Company’s Board of Directors approved a plan to sell all of the operations of the HPPC operating segment, which included the Plainville Farms and FreeBird businesses, and the EK Holdings, Inc. (“Empire Kosher” or “Empire”) operating segment, which were reported in the aggregate as the Hain Pure Protein reportable segment. Collectively, these dispositions represented a strategic shift that had a major impact on the Company’s operations and financial results and have been accounted for as discontinued operations.
The Company is presenting the operating results and cash flows of Hain Pure Protein within discontinued operations in the current and prior periods.
Sale of Plainville Farms Business
On February 15, 2019, the Company completed the sale of substantially all of the assets used primarily for the Plainville Farms business (a component of HPPC), which included $25,000 in cash to the purchaser, for a nominal purchase price. In addition, the purchaser assumed the current liabilities of the Plainville Farms business as of the closing date. As a condition to consummating the sale, the Company entered into a Contingent Funding and Earnout Agreement, which provided for the issuance by the Company of an irrevocable stand-by letter of credit (the “Letter of Credit”) of $10,000 which expires nineteen months after issuance. As of June 30, 2019, the purchaser has fully drawn against the Letter of Credit. The Company is entitled to receive an earnout not to exceed, in the aggregate, 120% of the maximum amount that the purchaser draws on the Letter of Credit at any point from the date of issuance through the expiration of the Letter of Credit. Earnout payments are based on a specified percentage of annual free cash flow achieved for all fiscal years ending on or prior to June 30, 2026. If a subsequent change in control of the Plainville Farms business occurs prior to June 30, 2026, the purchaser will pay the Company 120% of the difference between the amount drawn on the Letter of Credit less the sum of all earnout payments made prior to such time up to the net proceeds received by the purchaser. At December 31, 2019, the Company had not recorded an asset associated with the earnout.
Sale of HPPC and Empire Kosher
On June 28, 2019, the Company completed the sale of the remainder of HPPC and EK Holdings, which included the FreeBird and Empire Kosher businesses. The purchase price, net of estimated customary adjustments based on the closing balance sheet of HPPC, was $77,714. The Company is in the process of finalizing the closing adjustments. The Company used the proceeds from the sale to pay down a portion of its outstanding borrowings under its term loan.
The following table presents the major classes of Hain Pure Protein’s results within “Net loss from discontinued operations, net of tax” in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
2019
|
|
2018
|
|
Net sales
|
$
|
—
|
|
|
$
|
147,181
|
|
$
|
—
|
|
|
$
|
260,720
|
|
|
Cost of sales
|
—
|
|
|
144,682
|
|
—
|
|
|
267,796
|
|
|
Gross profit (loss)
|
—
|
|
|
2,499
|
|
—
|
|
|
(7,076)
|
|
|
Selling, general and administrative expense
|
—
|
|
|
4,750
|
|
—
|
|
|
8,992
|
|
|
Asset impairments
|
—
|
|
|
54,946
|
|
—
|
|
|
57,904
|
|
|
Other expense
|
—
|
|
|
2,478
|
|
—
|
|
|
5,195
|
|
|
Loss on sale of discontinued operations(1)
|
—
|
|
|
—
|
|
1,424
|
|
|
—
|
|
|
Net loss from discontinued operations before income taxes
|
—
|
|
|
(59,675)
|
|
(1,424)
|
|
|
(79,167)
|
|
|
Benefit for income taxes
|
—
|
|
|
(22,452)
|
|
(393)
|
|
|
(27,620)
|
|
|
Net loss from discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
(37,223)
|
|
$
|
(1,031)
|
|
|
$
|
(51,547)
|
|
(1) Primarily relates to preliminary closing balance sheet adjustments.
There were no assets or liabilities from discontinued operations associated with Hain Pure Protein at December 31, 2019 or June 30, 2019.
6. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
June 30,
2019
|
|
Finished goods
|
$
|
192,587
|
|
|
$
|
199,754
|
|
|
Raw materials, work-in-progress and packaging
|
90,540
|
|
|
99,587
|
|
|
|
$
|
283,127
|
|
|
$
|
299,341
|
|
At each period end, inventory is reviewed to ensure that it is recorded at the lower of cost or net realizable value. During the six months ended December 31, 2019 and the fiscal year ended June 30, 2019, the Company recorded inventory write-downs of $3,916 and $12,381, respectively, in connection with the discontinuance of slow moving SKUs as part of a product rationalization initiative.
7. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
June 30,
2019
|
|
Land
|
$
|
14,323
|
|
|
$
|
14,240
|
|
|
Buildings and improvements
|
84,883
|
|
|
83,151
|
|
|
Machinery and equipment
|
290,712
|
|
|
274,554
|
|
|
Computer hardware and software
|
59,889
|
|
|
48,984
|
|
|
Furniture and fixtures
|
19,074
|
|
|
17,325
|
|
|
Leasehold improvements
|
42,026
|
|
|
32,264
|
|
|
Construction in progress
|
14,345
|
|
|
35,786
|
|
|
|
525,252
|
|
|
506,304
|
|
|
Less: accumulated depreciation and amortization
|
226,694
|
|
|
218,459
|
|
|
|
$
|
298,558
|
|
|
$
|
287,845
|
|
Depreciation and amortization expense for the three months ended December 31, 2019 and 2018 was $8,024 and $6,757, respectively. Such expense for the six months ended December 31, 2019 and 2018 was $15,729 and $14,230, respectively.
In the six months ended December 31, 2018, the Company recorded $5,275 of non-cash impairment charges primarily related to the Company’s decision to consolidate manufacturing of certain fruit-based products in the United Kingdom. Additionally, the Company recorded a $534 non-cash impairment charge to write down the value of certain machinery and equipment used to manufacture certain slow moving SKUs in the United States that were discontinued. There were no impairment charges recorded during the six months ended December 31, 2019.
8. LEASES
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. A limited number of lease agreements include rental payments adjusted periodically for inflation.
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.
The components of lease expenses for the three and six months ended December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
December 31, 2019
|
|
December 31, 2019
|
|
Operating lease expenses
|
$
|
4,800
|
|
|
$
|
9,489
|
|
|
Finance lease expenses:
|
|
|
|
|
Amortization of ROU assets
|
168
|
|
|
448
|
|
|
Interest on lease liabilities
|
20
|
|
|
41
|
|
|
Total finance lease expenses
|
188
|
|
|
489
|
|
|
Variable lease expenses
|
381
|
|
|
1,240
|
|
|
Short-term lease expenses
|
419
|
|
|
859
|
|
|
Total lease expenses
|
$
|
5,788
|
|
|
$
|
12,077
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
|
|
Classification
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
|
Operating lease ROU assets
|
|
Operating lease right of use assets
|
|
$
|
83,845
|
|
|
Finance lease ROU assets, net
|
|
Property, plant and equipment, net
|
|
1,267
|
|
Total leased assets
|
|
|
|
$
|
85,112
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Current
|
|
|
|
|
|
Operating
|
|
Accrued expenses and other current liabilities
|
|
$
|
13,567
|
|
|
Finance
|
|
Current portion of long-term debt
|
|
442
|
|
Non-current
|
|
|
|
|
|
Operating
|
|
Operating lease liabilities, noncurrent portion
|
|
76,726
|
|
|
Finance
|
|
Long-term debt, less current portion
|
|
412
|
|
Total lease liabilities
|
|
|
|
$
|
91,147
|
|
Additional information related to leases is as follows:
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
December 31, 2019
|
|
Supplemental cash flow information
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
$
|
8,113
|
|
|
Operating cash flows from finance leases
|
$
|
12
|
|
|
Financing cash flows from finance leases
|
$
|
244
|
|
|
Right-of-use assets obtained in exchange for lease obligations (a):
|
|
|
Operating leases
|
$
|
92,640
|
|
|
Finance leases
|
$
|
1,131
|
|
|
Weighted average remaining lease term:
|
|
|
Operating leases
|
8.6 years
|
|
Finance leases
|
2.4 years
|
|
Weighted average discount rate:
|
|
|
Operating leases
|
2.7
|
%
|
|
Finance leases
|
3.1
|
%
|
(a) Right-of-use assets obtained in exchange for lease obligations includes the impact of the adoption of ASU 2016-02 effective July 1, 2019 (see Note 2) and leases which commenced, were modified or terminated during the six months ended December 31, 2019.
Maturities of lease liabilities as of December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Operating leases
|
|
Finance leases
|
|
Total
|
|
2020 (remainder of year)
|
$
|
7,555
|
|
|
$
|
238
|
|
|
|
$
|
7,793
|
|
|
2021
|
|
15,258
|
|
369
|
|
15,627
|
|
|
2022
|
|
12,987
|
|
184
|
|
13,171
|
|
|
2023
|
|
11,994
|
|
54
|
|
12,048
|
|
|
2024
|
|
10,191
|
|
27
|
|
10,218
|
|
|
Thereafter
|
44,398
|
|
6
|
|
44,404
|
|
|
Total lease payments
|
102,383
|
|
878
|
|
103,261
|
|
Less: Imputed interest
|
12,090
|
|
24
|
|
12,114
|
|
|
Total lease liabilities
|
$
|
90,293
|
|
|
$
|
854
|
|
|
$
|
91,147
|
|
The aggregate minimum future lease payments for operating leases at June 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2020
|
|
$
|
19,426
|
|
|
2021
|
|
16,584
|
|
2022
|
|
14,218
|
|
2023
|
|
13,221
|
|
2024
|
|
11,041
|
|
Thereafter
|
|
44,452
|
|
|
|
$
|
118,942
|
|
At December 31, 2019, the Company had additional leases that had not yet commenced. Obligations under these leases are not material.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table provides the changes in the carrying value of goodwill by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
International
|
|
Total
|
|
Balance as of June 30, 2019 (a)
|
$
|
612,590
|
|
|
$
|
263,291
|
|
|
$
|
875,881
|
|
|
|
|
|
|
|
|
|
Divestiture
|
(4,357)
|
|
|
—
|
|
|
(4,357)
|
|
|
|
|
|
|
|
|
|
Translation and other adjustments, net
|
(32)
|
|
|
8,213
|
|
|
8,181
|
|
|
Balance as of December 31, 2019 (a)
|
$
|
608,201
|
|
|
$
|
271,504
|
|
|
$
|
879,705
|
|
(a) The total carrying value of goodwill is reflected net of $134,277 of accumulated impairment charges, of which $97,358 related to the Company’s United Kingdom operating segment, $29,219 related to the Company’s Europe operating segment and $7,700 related to the Company’s former Hain Ventures operating segment, whose goodwill and accumulated impairment charges were reallocated within the North America reportable segment to the United States and Canada operating segments on a relative fair value basis.
During fiscal 2019, the Company’s reporting units were Hain Pure Personal Care, Grocery and Snacks and Celestial Tea in the United States reportable segment, Hain Daniels, Ella’s Kitchen and Tilda in the United Kingdom reportable segment and Hain Canada, Hain Europe and Hain Ventures within the Rest of World reportable segment. As discussed in Note 17, Segment Information, effective July 1, 2019, the Company changed its segment reporting structure due to changes in how the Company’s Chief Operating Decision Maker (“CODM”) assesses the Company’s performance and allocates resources as a result of a change in the Company’s strategy. In connection with these changes, the Company’s reporting units now consist of the United States (as a single reporting unit) and Hain Canada within the North America reportable segment and Hain Daniels, Ella’s Kitchen, Tilda (prior to its sale on August 27, 2019) and Hain Europe within the International reportable segment. The brands constituting the Hain Ventures reporting unit were combined within the United States and Hain Canada reporting units, and its goodwill was reallocated to the United States and Canada operating segments on a relative fair value basis. The Company completed an assessment for potential impairment of the goodwill both prior and subsequent to the aforementioned changes and determined that no impairment indicators were present.
On October 7, 2019, the Company completed the divestiture of its Arrowhead and Sunspire businesses, components of the United States reporting unit, for a purchase price of $13,347 following post-closing adjustments, recognizing a loss on sale of $1,783 during the three and six months ended December 31, 2019. Goodwill of $4,357 was assigned to the divested businesses on a relative fair value basis. An interim impairment analysis was performed for the United States reporting unit both before and after the sale, noting no impairment indicators were present.
Beginning in the three months ended September 30, 2019, operations of Tilda have been classified as discontinued operations as discussed in Note 5, Discontinued Operations. Therefore, goodwill associated with Tilda is presented as Assets of discontinued operations in the consolidated financial statements.
Other Intangible Assets
The following table includes the gross carrying amount and accumulated amortization, where applicable, for intangible assets, excluding goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
June 30,
2019
|
|
Non-amortized intangible assets:
|
|
|
|
|
Trademarks and tradenames (a)
|
$
|
293,362
|
|
|
$
|
291,199
|
|
|
Amortized intangible assets:
|
|
|
|
|
Other intangibles
|
209,568
|
|
|
204,630
|
|
|
Less: accumulated amortization
|
(124,134)
|
|
|
(115,543)
|
|
|
Net carrying amount
|
$
|
378,796
|
|
|
$
|
380,286
|
|
(a) The gross carrying value of trademarks and tradenames is reflected net of $85,623 and $83,734 of accumulated impairment charges as of December 31, 2019 and June 30, 2019, respectively.
During the three months ended December 31, 2019 and 2018, the Company determined that indicators of impairment existed in certain of the Company’s indefinite-lived tradenames. The Company performed interim impairment analyses during the respective periods, and determined that the fair value of certain of the Company’s tradenames was below their carrying value. During the three months ended December 31, 2019, an impairment charge of $1,889 was recognized in the North America segment. During the three months ended December 31, 2018, an impairment charge of $17,900 was recognized ($15,113 in the North America segment and $2,787 in the International segment).
Amortized intangible assets, which are deemed to have a finite life, primarily consist of customer relationships and are amortized over their estimated useful lives of 3 to 25 years. Amortization expense included in continuing operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Amortization of acquired intangibles
|
$
|
3,189
|
|
|
$
|
3,322
|
|
|
$
|
6,272
|
|
|
$
|
6,681
|
|
10. DEBT AND BORROWINGS
Debt and borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
June 30,
2019
|
|
Revolving credit facility
|
$
|
321,700
|
|
|
$
|
420,575
|
|
|
Term loan
|
—
|
|
|
206,250
|
|
|
Less: Unamortized issuance costs
|
—
|
|
|
(1,022)
|
|
|
Other borrowings
|
4,551
|
|
|
4,966
|
|
|
|
326,251
|
|
|
630,769
|
|
|
Short-term borrowings and current portion of long-term debt
|
1,387
|
|
|
17,232
|
|
|
Long-term debt, less current portion
|
$
|
324,864
|
|
|
$
|
613,537
|
|
Credit Agreement
On February 6, 2018, the Company entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a $1,000,000 revolving credit facility through February 6, 2023 and provides for a $300,000 term loan. Under the Credit Agreement, the revolving credit facility may be increased by an additional uncommitted $400,000, provided certain conditions are met.
Borrowings under the Credit Agreement may be used to provide working capital, finance capital expenditures and permitted acquisitions, refinance certain existing indebtedness and for other lawful corporate purposes. The Credit Agreement provides for multicurrency borrowings in euros, pounds sterling and Canadian dollars as well as other currencies which may be designated. In addition, certain wholly-owned foreign subsidiaries of the Company may be designated as co-borrowers. The Credit Agreement contains restrictive covenants, which are usual and customary for facilities of its type, and include, with specified exceptions, limitations on the Company’s ability to engage in certain business activities, incur debt, have liens, make capital expenditures, pay dividends or make other distributions, enter into affiliate transactions, consolidate, merge or acquire or dispose of assets, and make certain investments, acquisitions and loans. The Credit Agreement also requires the Company to satisfy certain financial covenants. Obligations under the Credit Agreement are guaranteed by certain existing and future domestic subsidiaries of the Company. As of December 31, 2019, there were $321,700 of borrowings outstanding under the revolving credit facility and $9,698 letters of credit outstanding under the Credit Agreement. In the six months ended December 31, 2019, the Company used the proceeds from the sale of Tilda, net of transaction costs, to prepay the entire principal amount of term loan outstanding under its credit facility and to partially pay down its revolving credit facility. In connection with the prepayment, the Company wrote off unamortized deferred debt issuance costs of $973, recorded in Interest and other financing expense, net in the Consolidated Statements of Operations.
On May 8, 2019, the Company entered into the Third Amendment to the Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”), whereby, among other things, its allowable consolidated leverage ratio (as defined in the Credit
Agreement) and interest coverage ratio (as defined in the Credit Agreement) were adjusted. The Company’s allowable consolidated leverage ratio is no more than 4.75 to 1.0 from March 31, 2019 to December 31, 2019, no more than 4.50 to 1.0 at March 31, 2020, no more than 4.0 to 1.0 at June 30, 2020 and no more than 3.75 to 1.0 on September 30, 2020 and thereafter. Additionally, the Company’s required consolidated interest coverage ratio is no less than 3.0 to 1 through March 31, 2020, no less than 3.75 to 1 through March 31, 2021 and no less than 4.0 to 1 thereafter.
The Amended Credit Agreement also required that the Company and the subsidiary guarantors enter into a Security and Pledge Agreement pursuant to which all of the obligations under the Amended Credit Agreement are secured by liens on assets of the Company and its material domestic subsidiaries, including stock of each of their direct subsidiaries and intellectual property, subject to agreed upon exceptions.
As of December 31, 2019, $668,602 was available under the Amended Credit Agreement, and the Company was in compliance with all associated covenants, as amended by the Amended Credit Agreement.
The Amended Credit Agreement provides that loans will bear interest at rates based on (a) the Eurocurrency Rate, as defined in the Credit Agreement, plus a rate ranging from 0.875% to 2.50% per annum; or (b) the Base Rate, as defined in the Credit Agreement, plus a rate ranging from 0.00% to 1.50% 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 Amended 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 the overnight Eurocurrency Rate for loans denominated in such currency plus the Applicable Rate. The weighted average interest rate on outstanding borrowings under the Amended Credit Agreement at December 31, 2019 was 3.12%. Additionally, the Amended Credit Agreement contains a Commitment Fee, as defined in the Amended Credit Agreement, on the amount unused under the Amended Credit Agreement ranging from 0.20% to 0.45% per annum, and such Commitment Fee is determined in accordance with a leverage-based pricing grid.
11. INCOME TAXES
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. The Company calculated its tax rate on a discrete basis for the six months ended December 31, 2018 due to significant variations in the relationship between tax expense and projected pre-tax income. 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 expense of 31.8% and 19.1% for the three months ended December 31, 2019 and 2018, respectively. The effective income tax rate from continuing operations was expense of 25.0% and a benefit of 8.2% for the six months ended December 31, 2019 and 2018, respectively. The effective income tax rates from continuing operations in all periods were impacted by provisions in the Tax Cuts and Jobs Act (the "Tax Act"), primarily related to Global Intangible Low Taxed Income and limitations on the deductibility of executive compensation. The effective income tax rates in each period were also impacted by the geographical mix of earnings and state valuation allowance. During the three months ended December 31, 2018, the Company finalized its accounting for income tax effects of the Tax Act and recorded additional expense related to its transition tax liability.
The income tax from discontinued operations was a benefit of $1,835 and expense of $13,472 for the three and six months ended December 31, 2019, respectively, while the income tax benefit from discontinued operations was $22,859 and $27,544 for the three and six months ended December 31, 2018, respectively. The expense for income taxes for the six months ended December 31, 2019 was impacted by $15,250 of tax related to the tax gain on the sale of the Tilda Group Entities. The benefit from income taxes for the three and six months ended December 31, 2018 includes the reversal of the $12,250 deferred tax liability previously recorded related to Hain Pure Protein being classified as held-for-sale. Additionally, the three and six month tax benefit is impacted by the tax effect of current period book losses as well as deferred tax benefit arising from asset impairment charges.
12. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications (1)
|
$
|
48,655
|
|
|
$
|
(27,948)
|
|
|
$
|
9,713
|
|
|
$
|
(41,467)
|
|
|
Amounts reclassified into income (2)
|
—
|
|
|
—
|
|
|
95,120
|
|
|
—
|
|
|
Deferred gains (losses) on cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified into income (3)
|
42
|
|
|
—
|
|
|
(26)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in accumulated other comprehensive loss
|
$
|
48,697
|
|
|
$
|
(27,948)
|
|
|
$
|
104,807
|
|
|
$
|
(41,467)
|
|
(1) Foreign currency translation adjustments included intra-entity foreign currency transactions that were of a long-term investment nature and were net gains of $613 and net losses of $313 for the three months ended December 31, 2019 and 2018, respectively, and net losses of $250 and $472 for the six months ended December 31, 2019 and 2018, respectively.
(2) 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. At the completion of the sale of Tilda, the Company reclassified $95,120 of translation losses from accumulated comprehensive loss to the Company’s results of discontinued operations.
(3) Amounts reclassified into income for deferred gains (losses) on cash flow hedging instruments are recorded in Cost of sales in the Consolidated Statements of Operations and, before taxes, were $52 and $(26) in the three and six months ended December 31, 2019, respectively. There were no amounts reclassified into income in the three and six months ended December 31, 2018.
13. STOCK-BASED COMPENSATION AND INCENTIVE PERFORMANCE PLANS
The Company has one stockholder approved plan, the Amended and Restated 2002 Long-Term Incentive and Stock Award Plan, under which the Company’s officers, senior management, other key employees, consultants and directors may be granted options to purchase the Company’s common stock or other forms of equity-based awards. The Company also grants shares under its 2019 Equity Inducement Award Program to induce selected individuals to become employees of the Company. The Company maintains a long-term incentive program (the “LTI Plan”). As of December 31, 2019, the LTI Plan consisted of two performance-based long-term incentive plans (the “2018-2020 LTIP” and “2019-2021 LTIP”) that provide for performance equity awards that can be earned over defined performance periods. As of December 31, 2018, the Company maintained the 2017-2019 LTIP in addition to a 2016-2018 LTIP that provided for performance equity awards that could have been earned over a three-year performance period. 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.
Compensation cost and related income tax benefits recognized in the Consolidated Statements of Operations for stock-based compensation plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Selling, general and administrative expense
|
$
|
3,083
|
|
|
$
|
1,776
|
|
|
$
|
5,820
|
|
|
$
|
1,562
|
|
|
Chief Executive Officer Succession Plan expense, net
|
—
|
|
|
117
|
|
|
—
|
|
|
429
|
|
|
Discontinued operations
|
—
|
|
|
18
|
|
|
544
|
|
|
55
|
|
|
Total compensation cost recognized for stock-based compensation plans
|
$
|
3,083
|
|
|
$
|
1,911
|
|
|
$
|
6,364
|
|
|
$
|
2,046
|
|
|
Related income tax benefit
|
$
|
297
|
|
|
$
|
256
|
|
|
$
|
670
|
|
|
$
|
295
|
|
During the six months ended December 31, 2018, the Company determined that the achievement of the adjusted operating income goals required to be met for Section 162(m) funding were not probable and therefore no awards would be paid or vested
pursuant to the 2016-2018 LTIP and 2017-2019 LTIP. As such, in the six months ended December 31, 2018, the Company recorded a benefit of $9,478 associated with the reversal of previously accrued amounts for awards under these plans that were dependent on the achievement of pre-determined performance measures. Of this amount, $5,065 was recorded in Chief Executive Officer Succession Plan expense, net, and $4,413 was recorded to Selling, general and administration expense (including $1,867 of stock-based compensation expense).
Restricted Stock
A summary of the restricted stock and restricted share unit activity for the six months ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
and Units
|
|
Weighted
Average Grant
Date Fair
Value (per share)
|
|
Non-vested restricted stock, restricted share units, and performance units outstanding at June 30, 2019
|
2,729
|
|
|
$
|
12.94
|
|
|
Granted
|
486
|
|
|
$
|
18.43
|
|
|
Vested
|
(188)
|
|
|
$
|
23.31
|
|
|
Forfeited
|
(1,094)
|
|
|
$
|
7.89
|
|
|
Non-vested restricted stock, restricted share units, and performance units outstanding at December 31, 2019
|
1,933
|
|
|
$
|
15.48
|
|
At December 31, 2019 and June 30, 2019, the table above includes a total of 1,318 and 1,964 shares, respectively, that represent the target number of shares that may be earned under non-vested performance equity awards that are eligible to vest at 300% of target depending on the achievement of pre-defined performance criteria. Additionally, at December 31, 2019 and June 30, 2019, the table above includes a total of 29 and 42 shares, respectively, that represent the target number of shares that may be earned under non-vested performance equity awards that are eligible to vest at 150% of target depending on the achievement of pre-defined performance criteria.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31,
|
|
|
|
|
2019
|
|
2018
|
|
Fair value of restricted stock and restricted share units granted
|
$
|
8,963
|
|
|
$
|
10,073
|
|
|
Fair value of shares vested
|
$
|
4,276
|
|
|
$
|
6,938
|
|
|
Tax (benefit) expense recognized from restricted shares vesting
|
$
|
(58)
|
|
|
$
|
2,561
|
|
At December 31, 2019, there was $20,957 of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards which is expected to be recognized over a weighted average period of 1.8 years.
Stock Options
A summary of the stock option activity for the six months ended December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Life (years)
|
|
Aggregate
Intrinsic Value
|
|
Options outstanding and exercisable at June 30, 2019
|
122
|
|
|
$
|
2.26
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Options outstanding and exercisable at December 31, 2019
|
122
|
|
|
$
|
2.26
|
|
|
11.5
|
|
$
|
2,890
|
|
At December 31, 2019, there was no unrecognized compensation expense related to stock option awards.
14. INVESTMENTS
On October 27, 2015, the Company acquired a minority equity interest in Chop’t Creative Salad Company LLC, predecessor to Chop't Holdings, LLC (“Chop’t”). Chop’t develops and operates fast-casual, fresh salad restaurants in the Northeast and Mid-Atlantic United States. The investment is being accounted for as an equity method investment due to the Company’s representation on the Board of Directors of Chop’t. At December 31, 2019 and June 30, 2019, the carrying value of the Company’s investment in Chop’t was $14,287 and $14,632, respectively, and is included in the Consolidated Balance Sheets as a component of Investments and joint ventures.
15. FINANCIAL 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).
The following table presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
3,006
|
|
|
$
|
3,006
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Forward foreign currency contracts
|
374
|
|
|
—
|
|
|
374
|
|
|
—
|
|
|
Equity investment
|
652
|
|
|
652
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
4,032
|
|
|
$
|
3,658
|
|
|
$
|
374
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Forward foreign currency contracts
|
$
|
709
|
|
|
$
|
—
|
|
|
$
|
709
|
|
|
$
|
—
|
|
|
Total
|
$
|
709
|
|
|
$
|
—
|
|
|
$
|
709
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The following table presents assets and liabilities measured at fair value on a recurring basis as of June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
44
|
|
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Forward foreign currency contracts
|
626
|
|
|
—
|
|
|
626
|
|
|
—
|
|
|
Equity investment
|
621
|
|
|
621
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
1,291
|
|
|
$
|
665
|
|
|
$
|
626
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Forward foreign currency contracts
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
103
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
103
|
|
|
$
|
—
|
|
The equity investment consists of the Company’s less than 1% 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.
At December 31, 2019 and June 30, 2019, the probability of payment related to existing contingent consideration arrangements was remote. Accordingly, no liability was recorded on the Consolidated Balance Sheets in either period.
There were no transfers of financial instruments between the three levels of fair value hierarchy during the six months ended December 31, 2019 and December 31, 2018.
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 10, Debt and Borrowings).
In addition to the instruments named above, the Company also makes fair value measurements in connection with its interim and annual goodwill and tradename impairment testing. These measurements fall into Level 3 of the fair value hierarchy (See Note 9, Goodwill and Other Intangible Assets).
Derivative Instruments
The Company primarily has exposure to changes in foreign currency exchange rates relating to certain anticipated cash flows and firm commitments from its international operations. The Company may enter into certain derivative financial instruments, when available on a cost-effective basis, to manage such risk. Derivative financial instruments are not used for speculative purposes. The fair value of these derivatives is included in Prepaid expenses and other current assets and Accrued expenses and other current liabilities in the Consolidated Balance Sheets. For derivative instruments that qualify as hedges of probable forecasted cash flows, the effective portion of changes in fair value is temporarily reported in Accumulated other comprehensive loss and recognized in earnings when the hedged item affects earnings. Fair value hedges and derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.
Derivative instruments designated as hedges at inception are measured for effectiveness at inception and on a quarterly basis. These assessments determine whether derivatives designated as qualifying hedges continue to be highly effective in offsetting changes in the cash flows of hedged items. Any ineffective portion of change in fair value is not deferred in Accumulated other comprehensive loss and is included in current period earnings. The Company will discontinue cash flow hedge accounting when the forecasted transaction is no longer probable of occurring on the originally forecasted date or when the hedge is no longer effective. There were no discontinued foreign exchange hedges for the three and six months ended December 31, 2019 and December 31, 2018.
The notional amount of cash flow hedges at December 31, 2019 and June 30, 2019 was $10,095 and $2,275, respectively. The fair value of cash flow hedges at December 31, 2019 and June 30, 2019 was $102 of net liabilities and $83 of net assets, respectively.
The notional amounts of foreign currency exchange contracts not designated as hedges at December 31, 2019 and June 30, 2019 were $58,746 and $41,845, respectively. The fair values of foreign currency exchange contracts not designated as hedges at December 31, 2019 and June 30, 2019 were $233 of net liabilities and $440 of net assets, respectively.
Gains and losses related to both designated and non-designated foreign currency exchange contracts are recorded in the Company’s Consolidated Statements of Operations based upon the nature of the underlying hedged transaction and were not material for the three and six months ended December 31, 2019 and December 31, 2018.
16. COMMITMENTS AND CONTINGENCIES
Securities Class Actions Filed in Federal Court
On August 17, 2016, three securities class action complaints were filed in the Eastern District of New York against the Company alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The three 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 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 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 names as defendants the Company and certain of its current and 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. Co-Lead Plaintiffs filed an opposition on August 5, 2019, and Defendants submitted a reply on September 3, 2019. This motion is fully briefed, and the parties await a decision.
Stockholder Derivative Complaints Filed in State Court
On September 16, 2016, a stockholder derivative complaint, Paperny v. Heyer, et al. (the “Paperny Complaint”), was filed in New York State Supreme Court in Nassau County against the former Board of Directors and certain former officers of the Company alleging breach of fiduciary duty, unjust enrichment, lack of oversight and corporate waste. On December 2, 2016 and December 29, 2016, two additional stockholder derivative complaints were filed in New York State Supreme Court in Nassau County against the former Board of Directors and certain former officers under the captions Scarola v. Simon (the “Scarola Complaint”) and Shakir v. Simon (the “Shakir Complaint” and, together with the Paperny Complaint and the Scarola Complaint, the “Derivative Complaints”), respectively. Both the Scarola Complaint and the Shakir Complaint alleged breach of fiduciary duty, lack of oversight and unjust enrichment. On February 16, 2017, the parties for the Derivative Complaints entered into a stipulation consolidating the matters under the caption In re The Hain Celestial Group (the “Consolidated Derivative Action”) in New York State Supreme Court in Nassau County, ordering the Shakir Complaint as the operative complaint. On November 2, 2017, the parties agreed to stay the Consolidated Derivative Action. Co-Lead Plaintiffs requested leave to file an amended consolidated complaint, and on January 14, 2019, the Court partially lifted the stay, ordering Co-Lead Plaintiffs to file their amended complaint by March 7, 2019. Co-Lead Plaintiffs filed a Verified Amended Shareholder Derivative Complaint on March 7, 2019. The Court continued the stay pending a decision on Defendants’ motion to dismiss in the Consolidated Securities Action (referenced above). After the Court in the Consolidated Securities Action dismissed the Amended Complaint, the Court in the Consolidated Derivative Action ordered Co-Lead Plaintiffs to file a second amended complaint no later than July 8, 2019. Co-Lead Plaintiffs filed a Verified Second Amended Shareholder Derivative Complaint on July 8, 2019 (the “Second Amended Derivative Complaint”). Defendants moved to dismiss the Second Amended Derivative Complaint on August 7, 2019. Co-Lead Plaintiffs filed an opposition to Defendants’ motion to dismiss, and Defendants submitted a reply on September 20, 2019. This motion is fully briefed, and the parties await a decision.
Additional Stockholder Class Action and Derivative Complaints Filed in Federal Court
On April 19, 2017 and April 26, 2017, two 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 Court granted an order to unseal this case and reveal Gary Merenstein as the plaintiff (the “Merenstein Complaint”).
On August 10, 2017, the 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 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 a 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. The stay is continued through 30 days after the Court rules on the motion to dismiss the Second Amended Complaint in the Consolidated Securities Action.
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. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position, cash flows or liquidity.
17. SEGMENT INFORMATION
Prior to July 1, 2019, the Company’s operations were managed in seven operating segments: the United States, United Kingdom, Tilda, Ella’s Kitchen UK, Europe, Canada and Hain Ventures. For segment reporting purposes, based on economic similarity as outlined within Accounting Standards Codification ("ASC") 280, Segment Reporting, the Company elected to combine the United Kingdom, Tilda and Ella’s Kitchen UK operating segments into one reportable segment known as United Kingdom. Additionally, the Canada, Europe and Hain Ventures operating segments were combined as the Rest of World reportable segment. Separately, the United States operating segment comprised its own reportable segment.
Effective July 1, 2019, the Company reassessed its segment reporting structure due to changes in how the Company’s CODM assesses the Company’s performance and allocates resources as a result of a change in the Company’s strategy, which includes creating synergies among the Company’s United States and Canada businesses, as well as among the Company’s international businesses in the United Kingdom and Europe. As a result, the Canada and Hain Ventures operating segments, which were included within the Rest of World reportable segment, were moved to the United States reportable segment and renamed the North America reportable segment. Additionally, the Europe operating segment, which was included in the Rest of World reportable segment, was combined with the United Kingdom reportable segment and renamed the International reportable segment. Accordingly, the Company now operates under two reportable segments: North America and International.
Prior period segment information has been adjusted to reflect the Company’s new operating and reporting structure. Additionally, the Tilda operating segment was classified as discontinued operations as discussed in Note 5, Discontinued Operations. Segment information presented herein excludes the results of Tilda for all periods presented.
Net sales and operating income are the primary measures used by the Company’s CODM to evaluate segment operating performance and to decide how to allocate resources to segments. The CODM is the Company’s CEO. Expenses related to certain centralized administration functions that are not specifically related to an operating segment are included in Corporate and Other. Corporate and Other 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 the entire enterprise, as well as expenses for certain professional fees, facilities and other items which benefit the Company as a whole. Additionally, certain Productivity and transformation costs are included in Corporate and Other. Expenses that are managed centrally, but can be attributed to a segment, such as employee benefits and certain facility costs, are allocated based on reasonable allocation methods. The Company’s CODM does not use segment asset information to allocate resources or to assess performance of the segments and therefore, total segment assets have not been disclosed.
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.
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Three Months Ended December 31,
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Six Months Ended December 31,
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2019
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2018
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2019
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2018
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Net Sales:
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North America
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$
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280,693
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$
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305,574
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$
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552,394
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$
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596,765
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International
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226,091
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227,992
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436,466
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455,279
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$
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506,784
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$
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533,566
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|
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$
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988,860
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$
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1,052,044
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Operating Income (Loss):
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North America
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$
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20,062
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$
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9,563
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$
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35,194
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$
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14,069
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International
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12,899
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15,153
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22,006
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20,813
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32,961
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|
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24,716
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$
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57,200
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|
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$
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34,882
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Corporate and Other (a)
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(23,770)
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(45,596)
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(45,554)
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(83,726)
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$
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9,191
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$
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(20,880)
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|
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$
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11,646
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$
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(48,844)
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(a) In addition to general Corporate and Other expenses as described above, for the three months ended December 31, 2019, Corporate and Other includes $9,835 of Productivity and transformation costs and tradename impairment charges of $1,889 (related to North America). For the three months ended December 31, 2018, Corporate and Other includes $10,148 of Chief Executive Officer Succession Plan expense, net, $5,506 of Productivity and transformation costs, $920 of accounting review and remediation costs, net of insurance proceeds, and tradename impairment charges of $17,900 ($15,113 related to North America; $2,787 related to International).
In addition to general Corporate and Other expenses as described above, for the six months ended December 31, 2019, Corporate and Other includes $20,570 of Productivity and transformation costs and tradename impairment charges of $1,889 (related to North America), partially offset by a benefit of $2,562 of proceeds from insurance claim. For the six months ended December 31, 2018, Corporate and Other includes $29,701 of Chief Executive Officer Succession Plan expense, net, $13,483 of Productivity and transformation costs, $4,334 of accounting review and remediation costs, net of insurance proceeds, and tradename impairment charges of $17,900 ($15,113 related to North America; $2,787 related to International).
The Company's net sales by product category are as follows:
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Three Months Ended December 31,
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Six Months Ended December 31,
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2019
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2018
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2019
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2018
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Grocery
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$
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357,972
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$
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380,497
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$
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707,774
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$
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763,094
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|
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Snacks
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72,274
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|
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72,298
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|
|
|
148,673
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|
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144,139
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Tea
|
39,045
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|
|
|
39,586
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|
|
|
60,483
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|
|
|
61,329
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|
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Personal Care
|
37,493
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|
|
|
41,185
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|
|
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71,930
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|
|
|
83,482
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|
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Total
|
$
|
506,784
|
|
|
|
$
|
533,566
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|
|
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$
|
988,860
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|
|
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$
|
1,052,044
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The Company’s net sales by geographic region, which are generally based on the location of the Company’s subsidiaries, were as follows:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
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Six Months Ended December 31,
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|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
United States
|
$
|
242,891
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|
|
$
|
270,925
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|
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$
|
479,225
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|
|
$
|
525,867
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United Kingdom
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171,014
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|
|
178,323
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|
|
332,595
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|
|
357,759
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All Other
|
92,879
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|
|
84,318
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|
|
177,040
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|
|
168,418
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Total
|
$
|
506,784
|
|
|
$
|
533,566
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|
|
$
|
988,860
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|
|
$
|
1,052,044
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|
The Company’s long-lived assets, which primarily represent net property, plant and equipment, by geographic area were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
June 30,
2019
|
|
United States
|
$
|
114,592
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|
|
$
|
115,866
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United Kingdom
|
143,215
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|
|
132,876
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All Other
|
87,149
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|
|
87,277
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|
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Total
|
$
|
344,956
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|
|
$
|
336,019
|
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