NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except par values and per share data)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
The Hain Celestial Group, Inc., a Delaware corporation, and its subsidiaries (collectively, 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 Life
TM
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
80
countries worldwide.
With a proven track record of strategic growth and profitability, 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
TM
. 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
®
, Arrowhead Mills
®
, Bearitos
®
, Better Bean
TM
, BluePrint
®
, Celestial Seasonings
®
, Coconut Dream
®
, Cully & Sully
®
, Danival
®
, DeBoles
®
, Earth’s Best
®
, Ella’s Kitchen
®
, Empire
®
, Europe’s Best
®
, Farmhouse Fare
®
, Frank Cooper’s
®
, FreeBird
®
, Gale’s
®
, Garden of Eatin’
®
, GG UniqueFiber
TM
, Hain Pure Foods
®
, Hartley’s
®
, Health Valley
®
, Imagine
®
, Johnson’s Juice Co.
®
, Joya
®
, Kosher Valley
®
, Lima
®
, Linda McCartney’s
®
(under license), MaraNatha
®
, Natumi
®
, New Covent Garden Soup Co.
®
, Plainville Farms
®
, Rice Dream
®
, Robertson’s
®
, Rudi’s Gluten-Free Bakery
®
, Rudi’s Organic Bakery
®
, Sensible Portions
®
, Spectrum Organics
®
, Soy Dream
®
, Sun-Pat
®
, SunSpire
®
, Terra
®
, The Greek Gods
®
, Tilda
®
, Walnut Acres
®
, WestSoy
®
, Yorkshire Provender
TM
and Yves Veggie Cuisine
®
. The Company’s personal care products are marketed under the Alba Botanica
®
, Avalon Organics
®
, Earth’s Best
®
, JASON
®
, Live Clean
®
and Queen Helene
®
brands.
During fiscal year 2016, the Company commenced a strategic review, which it called “Project Terra,” that resulted in the Company redefining its core platforms, starting with the United States segment, for future growth based upon consumer trends to create and inspire A Healthier Way of Life™. In addition, beginning in fiscal year 2017, the Company launched Cultivate Ventures (“Cultivate”), a venture unit with a threefold purpose: (i) to strategically invest in the Company’s smaller brands in high potential categories such as BluePrint
®
cold-pressed juices, SunSpire
®
chocolates and DeBoles
®
pasta by giving those products a dedicated, creative focus for refresh and relaunch; (ii) to incubate small acquisitions until they reach the scale for the Company’s core platforms; and (iii) to invest in concepts, products and technology that focus on health and wellness. Cultivate also includes Tilda
®
and Yves Veggie Cuisine
®
, which are global brands that have a growing presence in the United States. See Note 17,
Segment
Information
, for information on the Company’s operating and reportable segments and the effect the formation of Cultivate had thereon.
Basis of Presentation
The Company’s 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 exercises significant influence, but which it does not control, are accounted for under the equity method of accounting. As such, consolidated net income includes the Company’s equity in the current earnings or losses of such companies.
Unless otherwise indicated, references in these consolidated financial statements to
2017
,
2016
and
2015
or “fiscal”
2017
,
2016
and
2015
or other years refer to our fiscal year ended June 30 of that respective year and references to
2018
or “fiscal”
2018
refer to our fiscal year ending
June 30, 2018
.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year presentation.
Use of Estimates
The financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The accounting principles we use require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting periods presented. These estimates include, among others, revenue recognition, trade promotions and sales incentives, valuation of accounts and chargeback receivables, accounting for acquisitions, valuation of long-lived assets, goodwill and intangible assets, stock-based compensation, and valuation allowances for deferred tax assets. We believe in the quality and reasonableness of our critical accounting estimates; however, materially different amounts may be reported under different conditions or using assumptions different from those that we have consistently applied.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include cash in banks, commercial paper and deposits with financial institutions that can be liquidated without prior notice or penalty. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Revenue Recognition
Sales are recognized when the earnings process is complete, which occurs when the product is shipped in accordance with the terms of agreements, title and risk of loss transfers to the customer, collection is probable and pricing is fixed or determinable. Net sales includes shipping and handling charges billed to the customer and are reported net of discounts, trade promotions and sales incentives, consumer coupon programs and other costs, including estimated allowances for returns, allowances and discounts associated with aged or potentially unsalable product, and prompt pay discounts.
During the fourth quarter of fiscal 2016, the Company identified the practice of granting additional concessions to certain distributors in the United States and commenced an internal accounting review in order to (i) determine whether the revenue associated with those concessions was accounted for in the correct period and (ii) evaluate its internal control over financial reporting. The Audit Committee of the Company’s Board of Directors separately conducted an independent review of these matters and retained independent counsel to assist in their review. On November 16, 2016, the Company announced that the independent review of the Audit Committee was completed and that the review found no evidence of intentional wrongdoing in connection with the preparation of the Company’s financial statements.
Management’s accounting review included consideration of certain side agreements and concessions provided to distributors in the United States in fiscal 2015 and 2016, including payment terms beyond the customer’s standard terms, rights of return of product and post-sale concessions, most of which were associated with sales that occurred at the end of the quarter. It had been the Company’s policy to record revenue related to these distributors when title of the product transfers to the distributor. The Company concluded that its historical accounting policy for these distributors was appropriate as the sales price is fixed or determinable at the time ownership transfers to these distributors, based on the Company’s ability to make a reasonable estimate of future returns and certain concessions at the time of shipment.
Trade Promotions and Sales Incentives
Trade promotions and sales incentives include price discounts, slotting fees, in-store display incentives, cooperative advertising programs, new product introduction fees and coupons and are used to support sales of the Company’s products. These incentives are deducted from our net sales to determine reported net sales. The recognition of expense for these programs involves the use of judgment related to performance and redemption estimates. Differences between estimated expense and actual redemptions are normally insignificant and recognized as a change in estimate in the period such change occurs.
Trade Promotions
. Accruals for trade promotions are recorded primarily at the time a product is sold to the customer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorization process for deductions taken by a customer from amounts otherwise due to the Company.
Coupon Redemption
. Coupon redemption costs are accrued in the period in which the coupons are offered, based on estimates of redemption rates that are developed by management. Management estimates are based on recommendations from independent coupon redemption clearing-houses as well as on historical information. Should actual redemption rates vary from amounts estimated, adjustments to accruals may be required.
Valuation of Accounts and Chargebacks Receivable and Concentration of Credit Risk
The Company routinely performs credit evaluations on existing and new customers. The Company applies reserves for delinquent or uncollectible trade receivables based on a specific identification methodology and also applies an additional reserve based on the experience the Company has with its trade receivables aging categories. Credit losses have been within the Company’s expectations in recent years. While one of the Company’s customers represented approximately
11%
and
10%
of trade receivables balances as of
June 30, 2017
and
2016
, the Company believes there is no significant or unusual credit exposure at this time.
Based on cash collection history and other statistical analysis, the Company estimates the amount of unauthorized deductions customers have taken that we expect will be collected and repaid in the near future and records a chargeback receivable. Differences between estimated collectible receivables and actual collections are recognized in earnings in the period such differences are determined.
During the fiscal years ended
June 30, 2017
,
2016
and
2015
, sales to one customer and its affiliates approximated
10%
of consolidated net sales. Sales to a second customer and its affiliates approximated
9%
,
10%
and
11%
during the fiscal years ended
June 30, 2017
,
2016
, and
2015
, respectively.
In addition, cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally these deposits may be redeemed upon demand.
Inventory
Inventory is valued at the lower of cost or market, utilizing the first-in, first-out method. The Company provides write-downs for finished goods expected to become non-saleable due to age and specifically identifies and provides for slow moving or obsolete raw ingredients and packaging.
Property, Plant and Equipment
Property, plant and equipment is carried at cost and depreciated or amortized on a straight-line basis over the estimated useful lives or lease term (for leasehold improvements), whichever is shorter. The Company believes the useful lives assigned to our property, plant and equipment are within ranges generally used in consumer products manufacturing and distribution businesses. The Company’s manufacturing plants and distribution centers, and their related assets, are reviewed when impairment indicators are present by analyzing underlying cash flow projections. The Company believes no impairment of the carrying value of such assets exists other than what is disclosed in Note 6,
Property, Plant and Equipment, Net
. Ordinary repairs and maintenance costs are expensed as incurred. The Company utilizes the following ranges of asset lives:
|
|
|
|
Buildings and improvements
|
|
10 - 40 years
|
Machinery and equipment
|
|
3 - 20 years
|
Furniture and fixtures
|
|
3 - 15 years
|
Leasehold improvements are amortized over the shorter of the respective initial lease term or the estimated useful life of the assets, and generally range from
3
to
15
years.
Goodwill and Other Indefinite-Lived Intangible Assets
Goodwill and other intangible assets with indefinite useful lives are not amortized but rather are tested at least annually for impairment, or when circumstances indicate that the carrying amount of the asset may not be recoverable. The Company performs its annual test for impairment at the beginning of the fourth quarter of its fiscal year.
Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all reporting units and perform a two-step quantitative impairment test. The impairment test for goodwill requires the Company to compare the fair value of a reporting unit to its carrying value, including goodwill. The Company uses a blended analysis of a discounted cash flow model and a market valuation approach to determine the fair values of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the Company would then compare the carrying value of the goodwill to its implied fair value in order to determine the amount of the impairment, if any.
Indefinite-lived intangible assets are tested for impairment by comparing the fair value of the asset to the carrying value. Fair value is determined based on a relief from royalty method that include significant management assumptions such as revenue growth rates, weighted average cost of capital, and assumed royalty rates. If the fair value is less than the carrying value, the asset is reduced to fair value.
See Note 7,
Goodwill and Other Intangible Assets
, for information on goodwill and intangibles impairment charges.
Cost of Sales
Included in cost of sales are the cost of products sold, including the costs of raw materials and labor and overhead required to produce the products, warehousing, distribution, supply chain costs, as well as costs associated with shipping and handling of our inventory.
Foreign Currency Translation and Remeasurement
The assets and liabilities of international operations are translated at the exchange rates in effect at the balance sheet date. Revenue and expense accounts are translated at the monthly average exchange rates. Adjustments arising from the translation of the foreign currency financial statements of the Company's international operations are reported as a component of Accumulated other comprehensive loss in the Company’s consolidated balance sheets. Gains and losses arising from intercompany foreign currency transactions that are of a long-term nature are reported in the same manner as translation adjustments.
Gains and losses arising from intercompany foreign currency transactions that are not of a long-term nature and certain transactions of the Company’s subsidiaries which are denominated in currencies other than the subsidiaries’ functional currency are recognized as incurred in Other (income)/expense, net in the Consolidated Statements of Income.
Gain on Recovery of Insurance Proceeds
On October 25, 2014, a fire occurred at our Tilda rice milling facility in the United Kingdom. As a result, the Company recognized a gain of
$9,752
, representing the excess of the insurance proceeds over the net book value of fixed assets destroyed in the fire. As of
June 30, 2016
, the Company recorded a receivable of
$4,234
, representing the final settlement of the claim. The receivable is included in “Prepaid Expenses and Other Current Assets” on the Company’s Consolidated Balance Sheet, and the amount was collected in the first quarter of fiscal 2017. The milling facility was fully functional at the end of the third quarter of fiscal 2016.
Selling, General and Administrative Expenses
Included in selling, general and administrative expenses are advertising costs, promotion costs not paid directly to the Company’s customers, salary and related benefit costs of the Company’s employees in the finance, human resources, information technology, legal, sales and marketing functions, facility related costs of the Company’s administrative functions, research and development costs, and costs paid to consultants and third party providers for related services.
Research and Development Costs
Research and development costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated financial statements. Research and development costs amounted to
$10,149
in fiscal
2017
,
$11,354
in fiscal
2016
and
$10,271
in fiscal
2015
, consisting primarily of personnel related costs. The Company’s research and development expenditures do not include the expenditures on such activities undertaken by co-packers and suppliers who develop numerous products on behalf of the Company and on their own initiative with the expectation that the Company will accept their new product ideas and market them under the Company’s brands.
Advertising Costs
Advertising costs, which are included in selling, general and administrative expenses, amounted to
$33,053
in fiscal
2017
,
$26,968
in fiscal
2016
and
$26,061
in fiscal
2015
. Such costs are expensed as incurred.
Income Taxes
The Company follows the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities at enacted rates in effect in the years
in which the differences are expected to reverse. Valuation allowances are provided for deferred tax assets to the extent it is more likely than not that deferred tax assets will not be recoverable against future taxable income.
The Company recognizes liabilities for uncertain tax positions based on a two-step process prescribed by the authoritative guidance. The first step requires the Company to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, the Company must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires the Company to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates the uncertain tax positions each period based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Depending on the jurisdiction, such a change in recognition or measurement may result in the recognition of a tax benefit or an additional charge to the tax provision in the period. The Company records interest and penalties in the provision for income taxes.
Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. At June 30,
2017
and
2016
, the Company had
$21,800
and
$20,706
, respectively, invested in money market funds, which are classified as cash equivalents. At
June 30, 2017
and
2016
, the carrying values of financial instruments such as accounts receivable, accounts payable, accrued expenses and other current liabilities, as well as borrowings under our credit facility and other borrowings, approximated fair value based upon either the short-term maturities or market interest rates of these instruments.
Derivative Instruments
The Company utilizes derivative instruments, principally foreign exchange forward contracts, to manage certain exposures to changes in foreign exchange rates. The Company’s contracts are hedges for transactions with notional balances and periods consistent with the related exposures and do not constitute investments independent of these exposures. These contracts, which are designated and documented as cash flow hedges, qualify for hedge accounting treatment in accordance with ASC 815,
Derivatives and Hedging
. Exposure to counterparty credit risk is considered low because these agreements have been entered into with high quality financial institutions.
All derivative instruments are recognized on the balance sheet at fair value. The effective portion of changes in the fair value of derivative instruments that qualify for hedge accounting treatment are recognized in stockholders’ equity as a component of Accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings as a component of Other (Income)/Expense, net.
Stock-Based Compensation
The Company has employee and director stock-based compensation plans. The fair value of employee stock options is determined on the date of grant using the Black-Scholes option pricing model. The Company has used historical volatility in its estimate of expected volatility. The expected life represents the period of time (in years) for which the options granted are expected to be outstanding. The risk-free interest rate is based on the United States Treasury yield curve. The fair value of restricted stock awards is equal to the market value of the Company’s common stock on the date of grant or is estimated using a Monte Carlo simulation if the award contains a market condition.
The fair value of stock-based compensation awards is recognized as an expense over the vesting period using the straight-line method. For awards that contain a market condition, expense is recognized over the derived service period using a Monte Carlo simulation model. For restricted stock awards which include performance criteria, compensation expense is recorded when the achievement of the performance criteria is probable and is recognized over the performance and vesting service periods. Compensation expense is recognized for only that portion of stock based awards that are expected to vest. Therefore, estimated forfeiture rates that are derived from historical employee termination activity are applied to reduce the amount of compensation expense recognized. If the actual forfeitures differ from the estimate, additional adjustments to compensation expense may be required in future periods.
The Company receives an income tax deduction in certain tax jurisdictions for restricted stock grants when they vest and for stock options exercised by employees equal to the excess of the market value of our common stock on the date of exercise over the option price. Excess tax benefits (tax benefits resulting from tax deductions in excess of compensation cost recognized) are classified as a cash flow provided by financing activities in the accompanying Consolidated Statements of Cash Flows.
Valuation of Long-Lived Assets
The Company periodically evaluates the carrying value of long-lived assets, other than goodwill and intangible assets with indefinite lives, held and used in the business when events and circumstances occur indicating that the carrying amount of the asset may not be recoverable. An impairment test is performed when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. Once such impairment test is performed, a loss is recognized based on the amount, if any, by which the carrying value exceeds the estimated fair value for assets to be held and used.
See Note 6,
Property, Plant and Equipment
,
Net
for information on long-lived asset impairment charges.
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock.
Recently Issued Accounting Pronouncements Not Yet Effective
In May 2017, the FASB (“Financial Accounting Standards Board”) issued Accounting Standards Update (“ASU”) 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance is effective for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2017-09.
In February 2017, the FASB issued ASU 2017-05,
Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
. The ASU was issued to clarify the scope of the previous standard and to add guidance for partial sales of nonfinancial assets. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2017-05.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350)
. The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairments tests in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2017-04.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2017-01.
In October 2016, the FASB issued ASU 2016-17
, Consolidation (Topic 810): Interests Held through Related Parties that are Under Common Control
. ASU 2016-17 changes how a reporting entity considers indirect interests held by related parties under common control when evaluating whether it is the primary beneficiary of a variable interest entity (“VIE”). ASU 2016-17 is effective on a retrospective basis for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The adoption of the provisions of ASU 2016-17 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. Currently, U.S. GAAP prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard is effective for public companies
in fiscal years beginning after December 15, 2017. Early adoption is permitted. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
The Company is currently evaluating the potential effects of adopting the provisions of ASU 2016-16.
In August 2016, the FASB issued ASU 2016-15
, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the Emerging Issues Task Force).
ASU 2016-15 provides guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance must be applied retrospectively to all periods presented but may be applied prospectively if retrospective application would be impracticable. The new standard is effective for public companies in fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2016-15.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses
, which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, companies will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, companies will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than as reductions in the amortized cost of the securities. Companies will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. Companies will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This standard is effective for years beginning after December 15, 2019, and interim periods therein. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2016-13.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees’ maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. The standard will be effective for the first interim period within annual periods beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2016-09.
In March 2016, the FASB issued ASU 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
. ASU 2016-07 eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The equity method investor is required to add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. ASU 2016-07 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of the provisions of ASU 2016-07 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
In March 2016, the FASB issued ASU 2016-05,
Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
. Under ASU 2016-05, the novation of a derivative contract (i.e., a change in the counterparty) in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship. The hedge accounting relationship could continue uninterrupted if all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty to the derivative contract is considered. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. Entities may apply the guidance prospectively or on a modified retrospective basis. The adoption of the provisions of ASU 2016-05 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
In February 2016, the FASB issued ASU 2016-02,
Leases
. ASU 2016-02 revises accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term in the balance sheet. The standard is effective for the first interim and annual periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2016-02.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
ASU 2016-01 requires that most equity investments be measured at fair value, with
subsequent changes in fair value recognized in net income. The pronouncement also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. ASU 2016-01 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2016-01.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory.
ASU 2015-11 requires inventory measured using any method other than last-in, first out or the retail inventory method to be subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016 and for interim periods within such annual period. Early application is permitted. The Company is currently evaluating the potential effects of adopting the provisions of ASU 2015-11.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606).
Under ASU 2014-09, an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Subsequent to the issuance of ASU 2014-09, the FASB has issued various additional ASUs clarifying and amending this new revenue guidance. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services and are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. The Company is currently evaluating the provisions of ASU No. 2014-09 and assessing the impact on its financial statements. As part of our assessment work-to-date, we have formed an implementation work team, begun training on the new ASU’s revenue recognition model and are beginning to review our customer contracts. We are also evaluating the impact of the new standard on certain common practices currently employed by the Company and by other manufacturers of consumer products, such as slotting fees, co-operative advertising, rebates and other pricing allowances, merchandising funds and consumer coupons. We have not yet determined if the full retrospective or modified retrospective method will be applied.
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
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|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
67,430
|
|
|
$
|
47,429
|
|
|
$
|
164,962
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Basic weighted average shares outstanding
|
103,611
|
|
|
103,135
|
|
|
101,703
|
|
Effect of dilutive stock options, unvested restricted stock and
unvested restricted share units
|
637
|
|
|
1,048
|
|
|
1,718
|
|
Diluted weighted average shares outstanding
|
104,248
|
|
|
104,183
|
|
|
103,421
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.65
|
|
|
$
|
0.46
|
|
|
$
|
1.62
|
|
Diluted
|
$
|
0.65
|
|
|
$
|
0.46
|
|
|
$
|
1.60
|
|
Basic earnings per share excludes the dilutive effects of stock options, unvested restricted stock and unvested restricted share units. Diluted earnings per share includes the dilutive effects of common stock equivalents such as stock options and unvested restricted stock awards. The Company used income from continuing operations as the control number in determining whether potential common shares were dilutive or anti-dilutive. The same number of potential common shares used in computing the diluted per share amount from continuing operations was also used in computing the diluted per share amounts from discontinued operations even if those amounts were anti-dilutive.
There were
271
,
282
and
107
stock based awards excluded from our diluted earnings per share calculations for the fiscal years ended
June 30, 2017
,
2016
and
2015
, respectively, as such awards were contingently issuable based on market or performance
conditions, and such conditions had not been achieved during the respective periods. Additionally,
12
restricted stock awards were excluded from our diluted earnings per share calculation for the fiscal year ended
June 30, 2017
, as such awards were antidilutive. There were
no
antidilutive awards excluded from our diluted earnings per share calculations for the fiscal years ended
June 30, 2016
and
2015
.
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. The Company did not repurchase any shares under this program in fiscal 2017, and accordingly, as of the end of fiscal 2017, we had
$250,000
of remaining capacity under our share repurchase program.
4. ACQUISITIONS
The Company accounts for acquisitions in accordance with ASC 805,
Business Combinations
. The results of operations of the acquisitions have been included in the consolidated results from their respective dates of acquisition. The purchase price of each acquisition is allocated to the tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. Acquisitions may include contingent consideration, the fair value of which is estimated on the acquisition date as the present value of the expected contingent payments, determined using weighted probabilities of possible payments. The fair values assigned to identifiable intangible assets acquired were determined primarily by using an income approach which was based on assumptions and estimates made by management. Significant assumptions utilized in the income approach were based on company specific information and projections which are not observable in the market and are thus considered Level 3 measurements as defined by authoritative guidance. The excess of the purchase price over the fair value of the identified assets and liabilities has been recorded as goodwill.
The costs related to all acquisitions have been expensed as incurred and are included in “Acquisition related expenses, restructuring and integration charges” in the Consolidated Statements of Income. Acquisition-related costs of
$2,035
,
$3,724
and
$5,731
were expensed in the fiscal years ended June 30,
2017
,
2016
and
2015
, respectively. The expenses incurred primarily related to professional fees and other transaction related costs associated with our recent acquisitions.
Fiscal 2017
On June 19, 2017, the Company acquired Sonmundo, Inc. d/b/a The Better Bean Company (“Better Bean”), which offers prepared beans and bean-based dips sold in refrigerated tubs under the Better Bean
TM
brand. Consideration for the transaction consisted of cash, net of cash acquired, totaling
$3,434
. Additionally, contingent consideration of up to a maximum of
$4,000
is payable based on the achievement of specified operating results over the
three
year period following the closing date. Better Bean is included in our Cultivate operating segment, which is part of Rest of World. Net sales and income before income taxes attributable to the Better Bean acquisition and included in our consolidated results were less than
1%
of consolidated results.
On April 28, 2017, the Company acquired The Yorkshire Provender Limited (“Yorkshire Provender”), a producer of premium branded soups based in North Yorkshire in the United Kingdom. Yorkshire Provender supplies leading retailers, on-the-go food outlets and food service providers in the United Kingdom. Consideration for the transaction consisted of cash, net of cash acquired, totaling
£12,465
(approximately
$16,110
at the transaction date exchange rate). Additionally, contingent consideration of up to a maximum of
£1,500
is payable based on the achievement of specified operating results at the end of the
three
year period following the closing date. Yorkshire Provender is included in our United Kingdom operating and reportable segment. Net sales and income before income taxes attributable to Yorkshire Provender and included in our consolidated results were less than
1%
of consolidated results.
The fair values assigned to identifiable intangible assets acquired were based on assumptions and estimates made by management. Identifiable intangible assets acquired consisted of customer relationships valued at
$7,045
with a weighted average estimated useful life of
14
years and trade names valued at
$3,673
with indefinite lives. The acquisition resulted in goodwill, which represents the future economic benefits expected to arise that could not be individually identified and separately recognized, including use of the Company’s existing infrastructure to expand sales of the acquired business’ products and to expand sales of the Company’s existing products into new regions. The goodwill recorded as a result of these acquisitions is not expected to be deductible for tax purposes.
Fiscal 2016
On December 21, 2015, the Company acquired Orchard House Foods Limited (“Orchard House”), a leader in pre-cut fresh fruit, juices, fruit desserts and ingredients with facilities in Corby and Gateshead in the United Kingdom. Orchard House supplies leading retailers, on-the-go food outlets, food service providers and manufacturers in the United Kingdom. Consideration for the transaction consisted of cash, net of cash acquired, totaling
£76,923
(approximately
$114,113
at the transaction date exchange rate). The acquisition was funded with borrowings under the Credit Agreement (as defined in Note 9,
Debt and Borrowings
). Additionally, contingent consideration of up to
£3,000
was potentially payable to the sellers based on the outcome of a review by the Competition and Markets Authority (“CMA”) in the United Kingdom. As a result of this review, the Company agreed to divest certain portions of its own-label juice business in the fourth quarter of fiscal 2016. On September 15,
2016
, the contingent consideration obligation referenced above was settled in the amount of
£1,500
. Orchard House is included in the United Kingdom operating and reportable segment. Net sales and income before income taxes attributable to the Orchard House acquisition and included in our consolidated results were
$88,580
and
$4,622
, respectively, for the fiscal year ended June 30, 2016.
On July 24, 2015, the Company acquired Formatio Beratungs- und Beteiligungs GmbH and its subsidiaries (“Mona”), a leader in plant-based foods and beverages with facilities in Germany and Austria. Mona offers a wide range of organic and natural products under the Joya
®
and Happy
®
brands, including soy, oat, rice and nut based drinks as well as plant-based yogurts, desserts, creamers, tofu and private label products, sold to leading retailers in Europe, primarily in Austria and Germany and eastern European countries. Consideration for the transaction consisted of cash, net of cash acquired, totaling
€22,753
(approximately
$24,948
at the transaction date exchange rate) and
240
shares of the Company’s common stock valued at
$16,308
. Also included in the acquisition was the assumption of net debt totaling
€16,252
. The cash portion of the purchase price was funded with borrowings under our Credit Agreement. Mona is included in the Europe operating segment which is part of Rest of World. Net sales and income before income taxes attributable to the Mona acquisition and included in our consolidated results were
$58,767
and
$3,464
, respectively, for the fiscal year ended June 30, 2016.
The fair values assigned to identifiable intangible assets acquired were based on assumptions and estimates made by management. Identifiable intangible assets acquired consisted of customer relationships valued at
$58,726
with a weighted average estimated useful life of
15
years and trade names valued at
$10,965
with indefinite lives. The acquisition resulted in goodwill, which represents the future economic benefits expected to arise that could not be individually identified and separately recognized, including use of the Company’s existing infrastructure to expand sales of the acquired business’ products and to expand sales of the Company’s existing products into new regions. The goodwill recorded as a result of these acquisitions is not expected to be deductible for tax purposes.
The following table provides unaudited pro forma results of continuing operations for the fiscal years ended June 30, 2016 and 2015, as if the acquisitions of Orchard House, Mona, Hain Pure Protein Corporation (“HPPC”), Belvedere International, Inc. (“Belvedere”), and EK Holdings, Inc. (“Empire”) had been completed at the beginning of fiscal 2015 (see below for acquisitions that occurred in fiscal 2015). The information has been provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by the Company for the periods presented or that will be achieved by the combined company in the future. The pro forma information has been adjusted to give effect to items that are directly attributable to the transactions and are expected to have a continuing impact on the combined results.
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2016
|
|
2015
|
Net sales from continuing operations
|
$
|
2,973,872
|
|
|
$
|
2,947,536
|
|
Net income from continuing operations
|
$
|
51,270
|
|
|
$
|
177,435
|
|
Net income per common share from continuing operations - diluted
|
$
|
0.49
|
|
|
$
|
1.71
|
|
Fiscal 2015
On July 17, 2014, the Company acquired the remaining
51.3%
of HPPC that it did not already own, at which point HPPC became a wholly-owned subsidiary. HPPC processes, markets and distributes antibiotic-free, organic and other poultry products. HPPC held a
19%
interest in Empire, which grows, processes and sells kosher poultry and other products. Consideration in the transaction consisted of cash totaling
$20,310
, net of cash acquired, and
463
shares of the Company’s common stock valued at
$19,690
. The cash consideration paid was funded with then-existing cash balances. Additionally, HPPC’s existing bank borrowings were repaid on September 30, 2014 with proceeds from borrowings under the Credit Agreement . The carrying amount of the pre-existing
48.7%
investment in HPPC as of June 30, 2014 was
$29,327
. Due to the acquisition of the remaining
51.3%
of HPPC, the Company adjusted the carrying amount of its pre-existing investment to its fair value. This resulted in a gain of
$6,747
recorded in “Gain on sale of business” in the Consolidated Statements of Income. HPPC is its own operating segment which is part of the Hain Pure
Protein reportable segment. Net sales and income before income taxes attributable to the HPPC acquisition and included in our consolidated results were
$290,593
and
$26,649
respectively, for the fiscal year ended June 30, 2015.
On February 20, 2015, the Company acquired Belvedere, a leader in health and beauty care products including the Live Clean
®
brand with approximately
200
baby, body and hair care products as well as several mass market brands sold primarily in Canada and manufactured in a company facility in Mississauga, Ontario, Canada. Consideration in the transaction consisted of cash totaling
C$17,454
(
$13,988
at the transaction date exchange rate), net of cash acquired, which included debt that was repaid at closing, and was funded with then-existing cash balances. Additionally, contingent consideration of up to a maximum of
C$4,000
was payable based on the achievement of specified operating results during the
two
consecutive
one
-year periods following the closing date. In both the fourth quarter of fiscal
2017
and 2016, the Company paid
C$2,000
in settlement of the Belvedere contingent consideration obligation. Belvedere is included in our Canada operating segment, which is part of Rest of World. Net sales and income before income taxes attributable to the Belvedere acquisition and included in our consolidated results were less than
1%
of consolidated results.
On March 4, 2015, the Company acquired the remaining
81%
of Empire that it did not already own, at which point Empire became a wholly-owned subsidiary. Consideration in the transaction consisted of cash totaling
$57,595
, net of cash acquired, which included debt that was repaid at closing. The acquisition was funded with borrowings under the Credit Agreement. The carrying amount of the pre-existing
19%
investment in Empire as of March 4, 2015 was
$6,864
. Due to the acquisition of the remaining
81%
of Empire, the Company adjusted the carrying amount of its pre-existing investment to its fair value. This resulted in a gain of
$2,922
recorded in “Gain on sale of business” in the Consolidated Statements of Income. Empire is its own operating segment which is part of the Hain Pure Protein reportable segment. Net sales and income before income taxes attributable to the Empire acquisition and included in our consolidated results were
$46,604
and
$4,752
respectively, for the fiscal year ended June 30, 2015.
The fair values assigned to identifiable intangible assets acquired were based on assumptions and estimates made by management. Identifiable intangible assets acquired consisted of customer relationships valued at
$15,903
with a weighted average estimated useful life of
11 years
, a patent valued at
$1,700
with an estimated life of
9 years
, and trade names valued at
$43,747
with indefinite lives. The acquisition resulted in goodwill, which represents the future economic benefits expected to arise that could not be individually identified and separately recognized, including use of the Company’s existing infrastructure to expand sales of the acquired business’ products. The goodwill recorded as a result of these acquisitions is not expected to be deductible for tax purposes.
The following table provides unaudited pro forma results of continuing operations for the fiscal years ended
June 30, 2015
, as if the acquisitions completed in fiscal
2015
(HPPC, Belvedere and Empire) had been completed at the beginning of fiscal year
2015
. The information has been provided for illustrative purposes only and does not purport to be indicative of the actual results that would have been achieved by the Company for the periods presented or that will be achieved by the combined company in the future. The pro forma information has been adjusted to give effect to items that are directly attributable to the transactions and are expected to have a continuing impact on the combined results, which include amortization expense associated with acquired identifiable intangible assets and the impact of reversing our previously recorded equity in HPPC’s net income as prior to the date of acquisition, HPPC was accounted for under the equity-method of accounting.
|
|
|
|
|
|
Fiscal Year Ended June 30, 2015
|
Net sales from continuing operations
|
$
|
2,718,466
|
|
Net income from continuing operations
|
$
|
168,196
|
|
Net income per common share from continuing operations - diluted
|
$
|
1.63
|
|
5. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
Finished goods
|
$
|
264,148
|
|
|
$
|
238,184
|
|
Raw materials, work-in-progress and packaging
|
163,160
|
|
|
170,380
|
|
|
$
|
427,308
|
|
|
$
|
408,564
|
|
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
June 30,
2016
|
Land
|
$
|
33,930
|
|
|
$
|
35,825
|
|
Buildings and improvements
|
116,723
|
|
|
102,086
|
|
Machinery and equipment
|
350,689
|
|
|
358,362
|
|
Computer hardware and software
|
51,486
|
|
|
48,829
|
|
Furniture and fixtures
|
15,993
|
|
|
14,165
|
|
Leasehold improvements
|
29,296
|
|
|
28,471
|
|
Construction in progress
|
16,119
|
|
|
14,495
|
|
|
614,236
|
|
|
602,233
|
|
Less: Accumulated depreciation and amortization
|
243,725
|
|
|
212,392
|
|
|
$
|
370,511
|
|
|
$
|
389,841
|
|
Depreciation and amortization expense for the fiscal years ended
June 30, 2017
,
2016
, and
2015
was
$40,824
,
$38,124
and
$32,293
, respectively.
In the fourth quarter of fiscal 2017, the Company determined that it was more likely than not that certain fixed assets at one of its manufacturing facilities in the United Kingdom would be sold or otherwise disposed of before the end of their estimated useful lives due to the Company’s decision to exit its own-label chilled desserts business over the next twelve months. As such, the Company recorded a
$23,712
non-cash impairment charge related to the long-lived assets associated with the own-label chilled desserts business to their estimated fair values, which was equal to its salvage value. Additionally, the Company recorded a
$2,661
non-cash impairment charge related to fixed assets in the United States.
In fiscal 2016, the Company recorded a
$3,476
non-cash impairment charge related to long-lived assets associated with the divestiture of certain portions of its own-label juice business in connection with its acquisition of Orchard House in the United Kingdom and
$1,004
in fiscal 2015 related to leasehold improvements due to the relocation of our New York based BluePrint manufacturing facility.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table shows the changes in the carrying amount of goodwill by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
United Kingdom
|
|
Hain Pure Protein
|
|
Rest of World
|
|
Total
|
Balance as of June 30, 2015 (a):
|
$
|
610,745
|
|
|
$
|
420,721
|
|
|
$
|
41,970
|
|
|
$
|
62,242
|
|
|
$
|
1,135,678
|
|
Acquisitions
|
—
|
|
|
57,019
|
|
|
(881)
|
|
|
20,674
|
|
|
76,812
|
|
Impairment charge
|
—
|
|
|
(84,548
|
)
|
|
—
|
|
|
—
|
|
|
(84,548
|
)
|
Translation and other adjustments, net
|
(5,043
|
)
|
|
(60,631
|
)
|
|
—
|
|
|
(1,932
|
)
|
|
(67,606
|
)
|
Balance as of June 30, 2016 (b):
|
605,702
|
|
|
332,561
|
|
|
41,089
|
|
|
80,984
|
|
|
1,060,336
|
|
Acquisitions
|
3,083
|
|
|
6,962
|
|
|
—
|
|
|
—
|
|
|
10,045
|
|
Reallocation of goodwill between reporting units
|
(16,377
|
)
|
|
—
|
|
|
—
|
|
|
16,377
|
|
|
—
|
|
Translation and other adjustments, net
|
(992
|
)
|
|
(10,388
|
)
|
|
—
|
|
|
980
|
|
|
(10,400
|
)
|
Balance as of June 30, 2017 (b):
|
$
|
591,416
|
|
|
$
|
329,135
|
|
|
$
|
41,089
|
|
|
$
|
98,341
|
|
|
$
|
1,059,981
|
|
(a) The total carrying value of goodwill is reflected net of
$42,029
of accumulated impairment charges, of which
$12,810
related to the Company’s United Kingdom operating segment and
$29,219
related to the Company’s Europe operating segment.
(b) The total carrying value of goodwill is reflected net of
$126,577
of accumulated impairment charges, of which
$97,358
related to the Company’s United Kingdom operating segment and
$29,219
related to the Company’s Europe operating segment.
The Company completed its annual goodwill impairment analysis in the fourth quarter of fiscal 2017, in conjunction with its budgeting and forecasting process for fiscal year 2018, and concluded that no indicators of impairment existed at any of its reporting units except for its Hain Daniels reporting unit, which is included in the United Kingdom segment. Based on the step one analysis performed, the Company concluded that the fair value of the Hain Daniels reporting unit was below its carrying value, indicating that the second step of the impairment test was necessary. Under the second step, the carrying value of the Hain Daniels reporting unit’s goodwill was compared to the implied fair value of that goodwill. The implied fair value of goodwill was determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill. As a result of the allocation, less value was attributed to the other identifiable tangible and intangible assets, and the residual fair value of goodwill exceeded its carrying value by
20%
. Accordingly,
no
goodwill impairment was recognized.
As indicators of impairment existed within the Hain Daniels reporting unit, the Company performed an assessment of the recoverability for other long-lived assets, such as property, plant and equipment and finite-lived intangibles assets, namely customer relationships. The Company performed an assessment of the recoverability in accordance with the general valuation requirements set forth under ASC Topic 360 -
Accounting for the Impairment of Long-Lived Assets
. The result of this assessment indicated that no impairment existed for these assets.
For the fiscal year ended June 30, 2016, the Company recognized a goodwill impairment charge of
$82,614
in its Hain Daniels reporting unit primarily as a result of lowered projected long-term revenue growth rates and profitability levels resulting from increased competition, changes in market trends and the mix of products sold. Additionally, a goodwill impairment charge of
$1,934
was recognized during the fiscal year ended June 30, 2016 related to the divestiture of certain portions of the Company’s own-label juice business in connection with the Orchard House acquisition, which was sold in the first quarter of fiscal 2017. See Note 4,
Acquisitions
, for details.
Additions during the fiscal year ended
June 30, 2017
were due to the acquisitions of Better Bean and Yorkshire Provender on June 19, 2017 and April 28, 2017, respectively. The additions during fiscal year ended June 30, 2016 were due to the acquisitions of Orchard House and Mona on December 21, 2015 and July 24, 2015, respectively.
Other Intangible Assets
The following table sets forth balance sheet information for intangible assets, excluding goodwill, subject to amortization and intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
Non-amortized intangible assets:
|
|
|
|
Trademarks and tradenames (a)
|
$
|
424,817
|
|
|
$
|
441,140
|
|
Amortized intangible assets:
|
|
|
|
Other intangibles
|
247,712
|
|
|
245,040
|
|
Less: accumulated amortization
|
(99,261
|
)
|
|
(81,393
|
)
|
Net carrying amount
|
$
|
573,268
|
|
|
$
|
604,787
|
|
(a) The gross carrying value of trademarks and tradenames is reflected net of
$60,202
and
$46,123
of accumulated impairment charges for the fiscal years ended
June 30, 2017
and
2016
, respectively.
Indefinite-lived intangible assets, which are not amortized, consist primarily of acquired trade names and trademarks. Indefinite-lived intangible assets are evaluated on an annual basis in conjunction with the Company’s evaluation of goodwill. In assessing fair value, the Company utilizes a “relief from royalty” methodology. This approach involves two steps: (i) estimating the royalty rates for each trademark and (ii) applying these royalty rates to a projected net sales stream and discounting the resulting cash flows to determine fair value. If the carrying value of the indefinite-lived intangible assets exceeds the fair value of the asset, the carrying value is written down to fair value in the period identified. The result of this assessment for the year ended
June 30, 2017
indicated that the fair value of certain of the Company’s tradenames was below their carrying value, and therefore an impairment charge of
$14,079
(
$7,579
in the United Kingdom segment and
$6,500
in the United States segment) was recognized during the fiscal year ended
June 30, 2017
. During the fiscal year ended June 30, 2016, an impairment charge of
$39,724
(
$20,932
in the United Kingdom segment and
$18,792
in the United States segment) related to certain of the Company’s tradenames was recognized. There were
no
impairment charges recorded in fiscal 2015 related to indefinite-lived intangible assets.
Amortizable intangible assets, which are deemed to have a finite life, primarily consist of customer relationships and are being amortized over their estimated useful lives of
3
to
25
years. Amortization expense included in continuing operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Amortization of intangible assets
|
$
|
18,402
|
|
|
$
|
18,869
|
|
|
$
|
17,846
|
|
Expected amortization expense over the next five fiscal years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ending June 30,
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
Estimated amortization expense
|
$
|
18,385
|
|
|
$
|
16,129
|
|
|
$
|
14,748
|
|
|
$
|
14,306
|
|
|
$
|
14,210
|
|
The weighted average remaining amortization period of amortized intangible assets is
10.3 years
.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
June 30, 2016
|
Payroll, employee benefits and other administrative accruals
|
$
|
70,740
|
|
|
$
|
43,774
|
|
Freight and warehousing accruals
|
20,294
|
|
|
16,007
|
|
Selling and marketing related accruals
|
9,785
|
|
|
9,826
|
|
Other accruals
|
7,695
|
|
|
9,196
|
|
|
$
|
108,514
|
|
|
$
|
78,803
|
|
9. DEBT AND BORROWINGS
Debt and borrowings consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
June 30,
2016
|
Credit Agreement borrowings payable to banks
|
$
|
733,715
|
|
|
$
|
827,860
|
|
Tilda short-term borrowing arrangements
|
7,761
|
|
|
19,121
|
|
Other borrowings
|
8,672
|
|
|
15,703
|
|
|
750,148
|
|
|
862,684
|
|
Short-term borrowings and current portion of long-term debt
|
9,844
|
|
|
26,513
|
|
Long-term debt, less current portion
|
$
|
740,304
|
|
|
$
|
836,171
|
|
Credit Agreement
On December 12, 2014, the Company entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) which provides for a
$1,000,000
unsecured revolving credit facility which may be increased by an additional uncommitted
$350,000
, provided certain conditions are met. The Credit Agreement expires in
December 2019
. 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 usual and customary for facilities of its type, which 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, such as maintaining a consolidated interest coverage ratio (as defined in the Credit Agreement) of no less than
4.0
to 1.0 and a consolidated leverage
ratio (as defined in the Credit Agreement) of no more than
3.5
to 1.0. The consolidated leverage ratio is subject to a step-up to
4.0
to 1.0 for the four full fiscal quarters following an acquisition. Obligations under the Credit Agreement are guaranteed by certain existing and future domestic subsidiaries of the Company. As of
June 30, 2017
, there were
$733,715
of borrowings and
$6,180
of letters of credit outstanding under the Credit Agreement and
$260,105
available, and the Company was in compliance with all associated covenants.
The 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
1.70%
per annum; or (b) the Base Rate, as defined in the Credit Agreement, plus a rate ranging from
0.00%
to
0.70%
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 Credit Agreement. Swing line loans and Global Swing Line loans denominated in United States 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 Credit Agreement at
June 30, 2017
was
2.93%
. Additionally, the Credit Agreement contains a Commitment Fee, as defined in the Credit Agreement, on the amount unused under the Credit Agreement ranging from
0.20%
to
0.30%
per annum. Such Commitment Fee is determined in accordance with a leverage-based pricing grid, as set forth in the Credit Agreement.
Tilda Short-Term Borrowing Arrangements
Tilda maintains short-term borrowing arrangements primarily used to fund the purchase of rice from India and other countries. The maximum borrowings permitted under all such arrangements are
£52,000
. Outstanding borrowings are collateralized by the current assets of Tilda, typically have
six
-month terms and bear interest at variable rates typically based on LIBOR plus a margin (weighted average interest rate of approximately
2.7%
at
June 30, 2017
).
Other Borrowings
Other borrowings primarily relate to a cash pool facility in Europe. The cash pool facility provides our Europe operating segment with sufficient liquidity to support the Company’s growth objectives within this segment. The maximum borrowings permitted under the cash pool arrangement are
€12,500
. Outstanding borrowings bear interest at variable rates typically based on EURIBOR plus a margin of
1.1%
(weighted average interest rate of approximately
1.1%
at
June 30, 2017
).
Maturities of all debt instruments at
June 30, 2017
, are as follows:
|
|
|
|
|
|
Due in Fiscal Year
|
|
Amount
|
2018
|
|
$
|
9,844
|
|
2019
|
|
1,829
|
|
2020
|
|
735,865
|
|
2021
|
|
1,891
|
|
2022
|
|
426
|
|
Thereafter
|
|
293
|
|
|
|
$
|
750,148
|
|
Interest paid during the fiscal years ended
June 30, 2017
,
2016
and
2015
amounted to
$18,873
,
$24,288
and
$22,865
, respectively.
10. INCOME TAXES
The components of income (loss) before income taxes and equity in earnings of equity-method investees were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
$
|
49,046
|
|
|
$
|
158,025
|
|
|
$
|
170,884
|
|
Foreign
|
40,097
|
|
|
(39,617
|
)
|
|
41,985
|
|
Total
|
$
|
89,143
|
|
|
$
|
118,408
|
|
|
$
|
212,869
|
|
The provision (benefit) for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
14,448
|
|
|
$
|
21,304
|
|
|
$
|
32,910
|
|
State and local
|
2,966
|
|
|
1,798
|
|
|
8,311
|
|
Foreign
|
14,884
|
|
|
14,737
|
|
|
9,981
|
|
|
32,298
|
|
|
37,839
|
|
|
51,202
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(3,199
|
)
|
|
30,711
|
|
|
(912
|
)
|
State and local
|
961
|
|
|
5,017
|
|
|
(1,069
|
)
|
Foreign
|
(8,218
|
)
|
|
(2,635
|
)
|
|
(686
|
)
|
|
(10,456
|
)
|
|
33,093
|
|
|
(2,667
|
)
|
Total
|
$
|
21,842
|
|
|
$
|
70,932
|
|
|
$
|
48,535
|
|
For the fiscal year ended June 30, 2017, the Company received net cash income tax refunds of
$2,900
. Cash paid for income taxes, net of refunds, during the fiscal years ended June 30, 2016 and 2015 amounted to
$44,225
and
$47,317
, respectively.
The reconciliation of the U.S. federal statutory rate to our effective rate on income before provision for income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
2015
|
|
%
|
Expected United States federal income tax at statutory rate
|
$
|
31,200
|
|
|
35.0
|
%
|
|
$
|
41,443
|
|
|
35.0
|
%
|
|
$
|
74,504
|
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
3,034
|
|
|
3.4
|
%
|
|
5,447
|
|
|
4.6
|
%
|
|
4,795
|
|
|
2.2
|
%
|
Domestic manufacturing deduction
|
(1,691
|
)
|
|
(1.9
|
)%
|
|
(1,233
|
)
|
|
(1.0
|
)%
|
|
(1,210
|
)
|
|
(0.6
|
)%
|
Foreign income at different rates
|
(6,539
|
)
|
|
(7.3
|
)%
|
|
(4,051
|
)
|
|
(3.4
|
)%
|
|
(9,515
|
)
|
|
(4.5
|
)%
|
Impairment of goodwill and intangibles
|
—
|
|
|
—
|
%
|
—
|
|
23,172
|
|
—
|
|
19.6
|
%
|
|
—
|
|
|
—
|
%
|
Change in valuation allowance
|
(60
|
)
|
|
(0.1
|
)%
|
|
5,067
|
|
|
4.3
|
%
|
|
963
|
|
|
0.5
|
%
|
Corporate tax reorganization
|
—
|
|
|
—
|
%
|
|
(4,173
|
)
|
|
(3.5
|
)%
|
|
(20,670
|
)
|
|
(9.7
|
)%
|
Unrealized foreign exchange losses
|
807
|
|
|
0.9
|
%
|
|
7,056
|
|
|
6.0
|
%
|
|
—
|
|
|
—
|
%
|
Change in reserves for uncertain tax positions
|
(4,417
|
)
|
|
(5.0
|
)%
|
|
1,448
|
|
|
1.2
|
%
|
|
(635
|
)
|
|
(0.3
|
)%
|
Non-taxable gains on acquisition of pre-existing ownership interests in HPPC and Empire
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
(2,793
|
)
|
|
(1.3
|
)%
|
Reduction of deferred tax liabilities resulting from change in United Kingdom tax rate
|
(1,841
|
)
|
|
(2.1
|
)%
|
|
(4,942
|
)
|
|
(4.2
|
)%
|
|
—
|
|
|
—
|
%
|
Other
|
1,349
|
|
|
1.6
|
%
|
|
1,698
|
|
|
1.3
|
%
|
|
3,096
|
|
|
1.5
|
%
|
Provision for income taxes
|
$
|
21,842
|
|
|
24.5
|
%
|
|
$
|
70,932
|
|
|
59.9
|
%
|
|
$
|
48,535
|
|
|
22.8
|
%
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
Noncurrent deferred tax assets/(liabilities):
|
|
|
|
Basis difference on inventory
|
$
|
10,933
|
|
|
$
|
11,232
|
|
Reserves not currently deductible
|
23,757
|
|
|
17,652
|
|
Basis difference on intangible assets
|
(145,558
|
)
|
|
(145,673
|
)
|
Basis difference on property and equipment
|
(20,137
|
)
|
|
(25,933
|
)
|
Other comprehensive income
|
(768
|
)
|
|
(4,623
|
)
|
Net operating loss and tax credit carryforwards
|
22,197
|
|
|
25,340
|
|
Stock based compensation
|
3,996
|
|
|
4,632
|
|
Other
|
(616
|
)
|
|
1,176
|
|
Valuation allowances
|
(14,850
|
)
|
|
(15,310
|
)
|
Noncurrent deferred tax liabilities, net
|
(121,046
|
)
|
|
(131,507
|
)
|
|
|
|
|
Total net deferred tax liabilities
|
$
|
(121,046
|
)
|
|
$
|
(131,507
|
)
|
|
|
(1)
|
The June 30, 2017 balance sheet includes
$429
of non-current deferred tax assets in Other Assets.
|
At
June 30, 2017
and
2016
, the Company had U.S. federal net operating loss (“NOL”) carryforwards of approximately
$33,177
and
$38,433
, respectively, the majority of which will not expire until 2033. Certain of these federal loss carryforwards are subject to Internal Revenue Code Section 382 which imposes limitations on utilization following certain changes in ownership of the entity generating the loss carryforward. We had foreign NOL carryforwards of approximately
$43,306
and
$42,573
in the same respective years, the majority of which are indefinite lived.
At
June 30, 2017
and
2016
, the Company had U.S. federal foreign tax credit carryforwards of approximately
$877
. These credit carryforwards have various expiration dates through 2020.
As of
June 30, 2017
, the Company has not provided for deferred taxes on the excess of financial reporting over the tax basis of investments in certain foreign subsidiaries in the amount of
$156,405
as the Company plans to reinvest such earnings indefinitely outside the United States. If these earnings were repatriated in the future, additional income and withholding tax expense would be incurred. Due to complexities in the laws of the U.S. and foreign jurisdictions and the assumptions that would have to be made, it is not practicable to estimate the total amount of income taxes that would have to be provided on such earnings.
As required by the authoritative guidance on accounting for income taxes, the Company evaluates the realizability of deferred tax assets on a jurisdictional basis at each reporting date. Accounting for income taxes requires that a valuation allowance be established when it is more likely than not that all or a portion of the deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence indicating that the deferred tax assets are not more likely than not realizable, we establish a valuation allowance. We have recorded valuation allowances in the amounts of
$14,850
and
$15,310
at
June 30, 2017
and
2016
, respectively.
The changes in valuation allowances against deferred income tax assets were as follows:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
2016
|
Balance at beginning of year
|
$
|
15,310
|
|
|
$
|
10,926
|
|
Additions charged to income tax expense
|
1,862
|
|
|
7,484
|
|
Reductions credited to income tax expense
|
(1,922
|
)
|
|
(2,417
|
)
|
Currency translation adjustments
|
(400
|
)
|
|
(683
|
)
|
Balance at end of year
|
$
|
14,850
|
|
|
$
|
15,310
|
|
Unrecognized tax benefits activity, including interest and penalties, is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
16,019
|
|
|
$
|
10,759
|
|
|
$
|
11,058
|
|
Additions based on tax positions related to the current year
|
217
|
|
|
4,276
|
|
|
1,089
|
|
Additions based on tax positions related to prior years
|
—
|
|
|
1,404
|
|
|
202
|
|
Reductions due to lapse in statute of limitations and settlements
|
(4,634
|
)
|
|
(420
|
)
|
|
(1,590
|
)
|
Balance at end of year
|
$
|
11,602
|
|
|
$
|
16,019
|
|
|
$
|
10,759
|
|
As of
June 30, 2017
, the Company had
$11,602
of unrecognized tax benefits, of which
$6,409
represents the amount that, if recognized, would impact the effective tax rate in future periods. As of June 30, 2016 and 2015, the Company had
$16,019
and
$10,759
, respectively, of unrecognized tax benefits of which
$10,826
and
$9,375
, respectively, would impact the effective income tax rate in future periods. Accrued liabilities for interest and penalties were
$460
and
$650
at
June 30, 2017
and
2016
, respectively. Interest and penalties (expense and/or benefit) are recorded as a component of the provision (benefit) for income taxes in the consolidated financial statements. The Company believes that it is reasonably possible that its unrecognized tax benefits could decrease by
$3,754
by June 30, 2018 due to settlements and expirations of statutes of limitations, all of which would reduce the income tax provision for continuing operations.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and several foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to fiscal 2014. However, to the extent we generated NOLs or tax credits in closed tax years, future use of the NOL or tax credit carry forward balance would be subject to examination within the relevant statute of limitations for the year in which utilized. The Company is no longer subject to tax examinations in the United Kingdom for years prior to fiscal 2014. Given the uncertainty regarding when tax authorities will complete their examinations and the possible outcomes of their examinations, a current estimate of the range of reasonably possible significant increases or decreases of income tax that may occur within the next twelve months cannot be made. Although there are various tax audits currently ongoing, the Company does not believe the ultimate outcome of such audits will have a material impact on the Company’s consolidated financial statements.
11. STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue “blank check” preferred stock of up to
5,000
shares with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered to issue, without stockholder approval, preferred stock with dividends, liquidation, conversion, voting or other rights which could decrease the amount of earnings and assets available for distribution to holders of the Company’s Common Stock. At June 30,
2017
and
2016
,
no
preferred stock was issued or outstanding.
Common Stock Issued
See Note 4,
Acquisitions
, for details surrounding issuance of the Company’s common stock in connection with recent acquisitions.
Accumulated Other Comprehensive Loss
The following tables present the changes in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
2016
|
Foreign currency translation adjustments:
|
|
|
|
Other comprehensive loss before reclassifications
(1)
|
$
|
(22,951
|
)
|
|
$
|
(129,874
|
)
|
Deferred gains/(losses) on cash flow hedging instruments:
|
|
|
|
Other comprehensive income before reclassifications
|
196
|
|
|
4,666
|
|
Amounts reclassified into income
(2)
|
(575
|
)
|
|
(5,193
|
)
|
Unrealized gain on available for sale investment:
|
|
|
|
Other comprehensive loss before reclassifications
|
(51
|
)
|
|
(79
|
)
|
Amounts reclassified into income
(3)
|
13
|
|
|
—
|
|
Net change in accumulated other comprehensive loss
|
$
|
(23,368
|
)
|
|
$
|
(130,480
|
)
|
|
|
(1)
|
Foreign currency translation adjustments included intra-entity foreign currency transactions that were of a long-term investment nature of
$18,385
and
$107,221
for the fiscal years ended
June 30, 2017
and
2016
,
respectively.
|
|
|
(2)
|
Amounts reclassified into income for deferred gains on cash flow hedging instruments are recorded in “Cost of sales” in the Consolidated Statements of Income and, before taxes, were
$1,233
and
$6,788
for the fiscal years ended
June 30, 2017
and
2016
, respectively.
|
|
|
(3)
|
Amounts reclassified into income for gains on sale of available for sale investments were based on the average cost of the shares held (See Note 13, Investments and Joint Ventures). Such amounts are recorded in “Other (income)/expense, net” in the Consolidated Statements of Income and was
$21
before taxes for the fiscal year ended
June 30, 2017
. There were
no
amounts reclassified into income for the fiscal year ended June 30,
2016
.
|
12. STOCK BASED COMPENSATION AND INCENTIVE PERFORMANCE PLANS
The Company has
two
shareholder-approved plans, the Amended and Restated 2002 Long-Term Incentive and Stock Award Plan and the 2000 Directors Stock 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.
2002 Long-Term Incentive and Stock Award Plan, as amended
In November 2002, our stockholders approved the 2002 Long-Term Incentive and Stock Award Plan. An aggregate of
3,200
shares of common stock were originally reserved for issuance under this plan. At various Annual Meetings of Stockholders, including the 2014 Annual Meeting, the plan was amended to increase the number of shares issuable to
31,500
shares. The plan provides for the granting of stock options, stock appreciation rights, restricted stock, restricted share units, performance shares, performance share units and other equity awards to employees, directors and consultants. Awards denominated in shares of common stock other than options and stock appreciation rights will be counted against the available share limit as two and seven hundredths shares for every one share covered by such award. All of the options granted to date under the plan have been incentive or non-qualified stock options providing for the exercise price equal to the fair market price at the date of grant. Stock option awards granted under the plan expire
seven years
after the date of grant. Options and other stock-based awards vest in accordance with provisions set forth in the applicable award agreements. No awards shall be granted under this plan after November 20, 2024.
There were
no
options granted under this plan in fiscal years
2017
,
2016
or
2015
.
There were
195
,
498
and
440
shares of restricted stock and restricted share units granted under this plan during fiscal years
2017
,
2016
and
2015
, respectively. Included in these grants during fiscal years
2016
and
2015
were
366
and
365
, respectively, of restricted stock and restricted share units granted under the Company’s long-term incentive programs, of which
284
and
109
, respectively, are subject to the achievement of minimum performance goals established under those programs (see “Long-term Incentive Plan,” in this Note 12) or market conditions.
At
June 30, 2017
,
988
unvested restricted stock and restricted share units were outstanding under this plan, and there were
11,523
shares available for grant under this plan. At
June 30, 2017
, there were
no
options outstanding under this plan.
2000 Directors Stock Plan, as amended
In May 2000, our stockholders approved the 2000 Directors Stock Plan. The plan originally provided for the granting of stock options to non-employee directors to purchase up to an aggregate of
1,500
shares of our common stock. In December 2003, the plan was amended to increase the number of shares issuable to
1,900
shares. In March 2009, the plan was amended to permit the granting of restricted stock, restricted share units and dividend equivalents and was renamed. All of the options granted to date under this plan have been non-qualified stock options providing for the exercise price equal to the fair market price at the date of grant. Stock option awards granted under the plan expire
seven years
after the date of grant. No awards shall be granted under this plan after December 1, 2015.
There were
no
options granted under this plan in fiscal years
2017
,
2016
, or
2015
.
There were
no
shares of restricted stock granted under this plan during fiscal years
2017
and
2016
. During fiscal year
2015
,
20
shares of restricted stock were granted under this plan. At
June 30, 2017
,
4
unvested restricted shares were outstanding, and there will be no further restricted shares or options granted under this plan.
Other Plans
At
June 30, 2017
, there were
122
options outstanding that were granted under the prior Celestial Seasonings plan.
Although no further awards can be granted under the 2000 Directors Stock Plan, as amended, or the prior Celestial Seasonings plan, the options and restricted stock outstanding continue in accordance with the terms of the respective plans and grants.
There were
12,643
shares of common stock reserved for future issuance in connection with stock-based awards as of
June 30, 2017
.
Compensation cost and related income tax benefits recognized in the Consolidated Statements of Income for stock based compensation plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Compensation cost (included in selling, general and administrative expense)
|
$
|
9,658
|
|
|
$
|
12,688
|
|
|
$
|
12,197
|
|
Related income tax benefit
|
$
|
3,622
|
|
|
$
|
4,758
|
|
|
$
|
4,695
|
|
Stock Options
A summary of the stock option activity for the three fiscal years ended
June 30
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Weighted
Average
Exercise
Price
|
|
2016
|
|
Weighted
Average
Exercise
Price
|
|
2015
|
|
Weighted
Average
Exercise
Price
|
Outstanding at beginning of year
|
342
|
|
|
$
|
6.66
|
|
|
1,249
|
|
|
$
|
6.12
|
|
|
2,674
|
|
|
$
|
9.83
|
|
Exercised
|
(220
|
)
|
|
$
|
9.10
|
|
|
(907
|
)
|
|
$
|
5.91
|
|
|
(1,425
|
)
|
|
$
|
13.08
|
|
Outstanding at end of year
|
122
|
|
|
$
|
2.26
|
|
|
342
|
|
|
$
|
6.66
|
|
|
1,249
|
|
|
$
|
6.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
122
|
|
|
$
|
2.26
|
|
|
342
|
|
|
$
|
6.66
|
|
|
1,249
|
|
|
$
|
6.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Intrinsic value of options exercised
|
$
|
6,507
|
|
|
$
|
27,147
|
|
|
$
|
62,213
|
|
Cash received from stock option exercises
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,643
|
|
Tax benefit recognized from stock option exercises
|
$
|
2,538
|
|
|
$
|
10,587
|
|
|
$
|
24,213
|
|
For options outstanding and exercisable at
June 30, 2017
, the aggregate intrinsic value (the difference between the closing stock price on the last day of trading in the year and the exercise price) was
$4,458
, and the weighted average remaining contractual life was
14.0 years
. At
June 30, 2017
, there was
no
unrecognized compensation expense related to stock option awards.
Restricted Stock
Awards of restricted stock may be either grants of restricted stock or restricted share units that are issued at no cost to the recipient. For restricted stock grants, at the date of grant the recipient has all rights of a stockholder, subject to certain restrictions on transferability and a risk of forfeiture. For restricted share units, legal ownership of the shares is not transferred to the employee until the unit vests. Restricted stock and restricted share unit grants vest in accordance with provisions set forth in the applicable award agreements, which may include performance criteria for certain grants. The compensation cost of these awards is determined using the fair market value of the Company’s common stock on the date of the grant. Compensation expense for restricted stock awards with a service condition is recognized on a straight-line basis over the vesting term. Compensation expense for restricted stock awards with a performance condition is recorded when the achievement of the performance criteria is probable and is recognized over the performance and vesting service periods.
A summary of the restricted stock and restricted share units activity for the three fiscal years ended
June 30
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Weighted
Average
Grant
Date Fair
Value
(per share)
|
|
2016
|
|
Weighted
Average
Grant
Date Fair
Value
(per share)
|
|
2015
|
|
Weighted
Average
Grant
Date Fair
Value
(per share)
|
Non-vested restricted stock and restricted share units - beginning of year
|
1,121
|
|
|
$28.24
|
|
1,145
|
|
|
$32.30
|
|
1,259
|
|
|
$25.44
|
Granted
|
195
|
|
|
$33.68
|
|
416
|
|
|
$24.54
|
|
311
|
|
|
$54.11
|
Vested
|
(290
|
)
|
|
$33.89
|
|
(408
|
)
|
|
$35.13
|
|
(402
|
)
|
|
$26.86
|
Forfeited
|
(34
|
)
|
|
$29.88
|
|
(32
|
)
|
|
$45.83
|
|
(23
|
)
|
|
$40.65
|
Non-vested restricted stock and restricted share units - end of year
|
992
|
|
|
$27.59
|
|
1,121
|
|
|
$28.24
|
|
1,145
|
|
|
$32.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2017
|
|
2016
|
|
2015
|
Fair value of restricted stock and restricted share units granted
|
$
|
6,567
|
|
|
$
|
10,203
|
|
|
$
|
16,462
|
|
Fair value of shares vested
|
$
|
9,866
|
|
|
$
|
18,917
|
|
|
$
|
21,481
|
|
Tax benefit recognized from restricted shares vesting
|
$
|
3,768
|
|
|
$
|
7,139
|
|
|
$
|
8,364
|
|
On July 3, 2012, the Company entered into a Restricted Stock Agreement (the “Agreement”) with Irwin D. Simon, the Company’s Chairman, President and Chief Executive Officer. The Agreement provides for a grant of
800
shares of restricted stock (the “Shares”), the vesting of which is both market and time-based. The market condition is satisfied in increments of
200
Shares upon the Company’s common stock achieving
four
share price targets. On the last day of any
forty-five
consecutive trading day period during which the average closing price of the Company’s common stock on the Nasdaq Global Select Market equals or exceeds the following prices:
$31.25
,
$36.25
,
$41.25
and
$50.00
, respectively, the market condition for each increment of
200
Shares will be satisfied. The market conditions were required to be satisfied prior to June 30, 2017. Once each market condition has been satisfied, a tranche of
200
Shares will vest in equal amounts annually over a
five
-year period. Except in the case of a change of control, termination without cause, death or disability (each as defined in Mr. Simon’s Employment Agreement), the unvested Shares are subject to forfeiture unless Mr. Simon remains employed through the applicable market and time vesting periods. The grant date fair value for each tranche was separately estimated based on a Monte Carlo simulation that calculated the likelihood of goal attainment and the time frame most likely for goal attainment. The total grant date fair value of the Shares was estimated to be
$16,151
, which was expected to be recognized over a weighted-average period of approximately
4.0 years
. On September 28, 2012, August 27, 2013, December 13, 2013 and October 22, 2014, the
four
respective market conditions were satisfied. As such, the
four
tranches of
200
Shares each are expected to vest in equal amounts over the
five
-year period commencing on the first anniversary of the date the market condition for the respective tranche was satisfied.
At
June 30, 2017
,
$12,117
of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards, inclusive of the Shares, was expected to be recognized over a weighted-average period of approximately
1.9 years
.
Long-Term Incentive Plan
The Company maintains a long-term incentive program (the “LTI Plan”). The LTI Plan currently consists of a
two
-year performance-based long-term incentive plan (the “2015-2016 LTIP”) and a
three
-year performance-based long-term incentive plan (the “2016-2018 LTIP”) that provide for a combination of equity grants and performance awards that can be earned over the respective performance period. Participants in the LTI Plans include the Company’s executive officers, including the Chief Executive Officer, and certain other key executives.
The Compensation Committee administers the LTI Plans and is responsible for, among other items, establishing the target values of awards to participants and selecting the specific performance factors for such awards. The Compensation Committee determines the specific payout to the participants. Such awards may be paid in cash and/or unrestricted shares of the Company’s common stock at the discretion of the Compensation Committee, provided that any such stock-based awards shall be issued pursuant to and be subject to the terms and conditions of the Amended and Restated 2002 Long-Term Incentive and Stock Award Plan, as in effect and as amended from time to time.
Upon the adoption of the 2015-2016 LTIP, the Compensation Committee granted an initial award to each participant in the form of equity-based instruments (restricted stock or restricted share units), for a portion of the individual target awards (the “Initial Equity Grants”). These Initial Equity Grants are subject to time vesting requirements, and a portion are also subject to the achievement of minimum performance goals. The 2015-2016 LTIP awards contain an additional year of time-based vesting. The Initial Equity Grants are expensed over the respective vesting periods on a straight-line basis. The payment of the actual awards earned at the end of the applicable performance period, if any, will be reduced by the value of the Initial Equity Grants.
Upon adoption of the 2016-2018 LTIP, the Compensation Committee granted performance units to each participant, the achievement of which is dependent upon a defined calculation of relative total shareholder return over the period from July 1, 2015 to June 30, 2018 (the “TSR Grant”). The grant date fair value for these awards was separately estimated based on a Monte Carlo simulation that calculated the likelihood of goal attainment. Each performance unit translates into
one
unit of common stock. The TSR grant represents half of each participant’s target award. The other half of the 2016-2018 LTIP is based on the Company’s achievement of specified net sales growth targets over this
three
-year period and, if achieved, may be paid in cash and/or unrestricted shares of the Company’s common stock at the discretion of the Compensation Committee.
In October 2015, although the target values previously set under the LTI Plan covering 2014 and 2015 fiscal years (the “2014-2015 LTIP”) were fully achieved, the Compensation Committee exercised its discretion to reduce the awards due to the challenges faced by the Company in connection with the nut butter voluntary recall during fiscal year 2015. After deducting the value of the Initial Equity Grants, the reduced awards to participants related to the 2014-2015 LTIP totaled
$4,400
(which were settled by the issuance of
82
unrestricted shares of the Company’s common stock in October 2015).
The Company has recorded expense (in addition to the stock based compensation expense associated with the Initial Equity Grants and the TSR Grant) of
$4,044
and
$4,967
, for the fiscal years ended
June 30, 2017
and
2015
, respectively, related to the LTI plans. In the fiscal year ended June 30,
2016
, the Company recorded a reversal of expense of
$2,037
related to the LTI plans.
13. INVESTMENTS AND JOINT VENTURES
Equity method investments
In October 2009, the Company formed a joint venture, Hutchison Hain Organic Holdings Limited (“HHO”), with Hutchison China Meditech Ltd. (“Chi-Med”), a majority-owned subsidiary of CK Hutchison Holdings Limited, to market and distribute certain of the Company’s brands in Hong Kong, China and other surrounding markets. Voting control of the joint venture is shared equally between the Company and Chi-Med, although, in the event of a deadlock, Chi-Med has the ability to cast the deciding vote, and therefore, the investment is being accounted for under the equity method of accounting. At
June 30, 2017
and
June 30, 2016
, the carrying value of the Company’s
50.0%
investment in and advances to HHO were
$1,629
and
$1,729
, respectively, and are included in the Consolidated Balance Sheet as a component of “Investments and joint ventures.”
On October 27, 2015, the Company acquired a
14.9%
interest in Chop’t Creative Salad Company LLC (“Chop’t”). Chop’t develops and operates fast-casual, fresh salad restaurants in the Northeast and Mid-Atlantic United States. Chop’t markets and sells certain of the Company’s branded products and provides consumer insight and feedback. The investment is being accounted for as an equity method investment due to the Company’s representation on the Board of Directors. At
June 30, 2017
and
June 30, 2016
, the carrying value of the Company’s investment in Chop’t was
$16,487
and
$17,448
, respectively, and is included in the Consolidated Balance Sheet as a component of “Investments and joint ventures.” The Company’s current ownership percentage may be diluted in the future to
11.9%
, pending the distribution of additional ownership interests.
Available-For-Sale Securities
The Company has a less than
1%
equity ownership interest in Yeo Hiap Seng Limited (“YHS”), a Singapore-based natural food and beverage company listed on the Singapore Exchange, which is accounted for as an available-for-sale security. The Company sold
102
of its YHS shares during the fiscal year ended
June 30, 2017
, which resulted in a pre-tax loss of
$21
on the sales, and is recognized as a component of “Other (income)/expense, net.”
No
shares were sold during the fiscal year ended
June 30, 2016
. The remaining shares held at
June 30, 2017
totaled
933
. The fair value of these shares held was
$882
(cost basis of
$1,164
) at
June 30, 2017
and
$1,067
(cost basis of
$1,291
) at
June 30, 2016
and is included in “Investments and joint ventures,” with the related unrealized gain or loss, net of tax, included in “Accumulated other comprehensive loss” in the Consolidated Balance Sheet. The company concluded that the decline in its YHS investment below its cost basis is temporary and, accordingly, has not recognized a loss in the Consolidated Statements of Operations. In making this determination, the company considered its intent and ability to hold the investment until the cost is recovered, the financial condition and near-term prospects of YHS, the magnitude of the loss compared to the investment’s cost, and publicly available information about the industry and geographic region in which YHS operates.
14. 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 by level within the fair value hierarchy assets and liabilities measured at fair value on a recurring basis as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
21,800
|
|
|
$
|
21,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency contracts
|
99
|
|
|
—
|
|
|
99
|
|
|
—
|
|
Available for sale securities
|
882
|
|
|
882
|
|
|
—
|
|
|
—
|
|
|
$
|
22,781
|
|
|
$
|
22,682
|
|
|
$
|
99
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Forward foreign currency contracts
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
—
|
|
Contingent consideration, noncurrent
|
2,656
|
|
|
—
|
|
|
—
|
|
|
2,656
|
|
Total
|
$
|
2,709
|
|
|
$
|
—
|
|
|
$
|
53
|
|
|
$
|
2,656
|
|
The following table presents by level within the fair value hierarchy assets and liabilities measured at fair value on a recurring basis as of
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
Significant
other
observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
20,706
|
|
|
$
|
20,706
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward foreign currency contracts
|
531
|
|
|
—
|
|
|
531
|
|
|
—
|
|
Available for sale securities
|
1,067
|
|
|
1,067
|
|
|
—
|
|
|
—
|
|
|
$
|
22,304
|
|
|
$
|
21,773
|
|
|
$
|
531
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration, current
|
3,553
|
|
|
—
|
|
|
—
|
|
|
3,553
|
|
Total
|
$
|
3,553
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,553
|
|
Available for sale securities consist of the Company’s investment in YHS (see Note 13,
Investments and Joint Ventures
). 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.
The Company estimates the original fair value of the contingent consideration as the present value of the expected contingent payments, determined using the weighted probabilities of the possible payments. The Company reassesses the fair value of contingent payments on a periodic basis. Although the Company believes its estimates and assumptions are reasonable, different assumptions, including those regarding the operating results of the respective businesses, or changes in the future may result in different estimated amounts.
In connection with the acquisition of Belvedere in February 2015, payment of a portion of the respective purchase price was contingent upon the achievement of certain operating results. Contingent consideration of up to a maximum of
C$4,000
related to the Belvedere acquisition was payable based on the achievement of specified operating results during the
two
consecutive
one
-year periods following the closing date. In both the fourth quarter of fiscal
2017
and 2016, the Company paid
C$2,000
in each quarter in settlement of the Belvedere contingent consideration obligation.
In connection with the acquisition of Orchard House during fiscal 2016, contingent consideration of up to
£3,000
was potentially payable to the sellers based on the outcome of a review by the CMA in the United Kingdom. As a result of this review, the Company agreed to divest certain portions of its own-label juice business in the fourth quarter of fiscal 2016, and on September 15,
2016
, the Company settled the contingent consideration related to this acquisition for
£1,500
.
In connection with the acquisitions of Better Bean and Yorkshire Provender during fiscal 2017, payments of a portion of the respective purchase prices were contingent upon the achievement of certain operating results. Contingent consideration of up to a maximum of
$4,000
related to the Better Bean acquisition is payable based on the achievement of specified operating results over the
three
years following the closing date. Contingent consideration of up to a maximum of
£1,500
related to the Yorkshire Provender acquisition is payable based on the achievement of specified operating results at the end of the
three
year period following the closing date.
The following table summarizes the Level 3 activity:
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended June 30,
|
|
2017
|
|
2016
|
Balance at beginning of year
|
$
|
3,553
|
|
|
$
|
1,636
|
|
Fair value of initial contingent consideration
|
2,652
|
|
|
2,225
|
|
Contingent consideration adjustments
|
526
|
|
|
1,511
|
|
Contingent consideration paid
|
(3,969
|
)
|
|
(1,547
|
)
|
Translation adjustment
|
(106
|
)
|
|
(272
|
)
|
Balance at end of year
|
$
|
2,656
|
|
|
$
|
3,553
|
|
The change in fair value of contingent consideration is included in acquisition related expenses, restructuring and integration charges in the Company’s Consolidated Statement of Income.
There were no transfers of financial instruments between the three levels of fair value hierarchy during the fiscal years ended
June 30, 2017
or
2016
.
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 9,
Debt and Borrowings
).
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. To reduce that risk, the Company may enter into certain derivative financial instruments, when available on a cost-effective basis, to manage such risk. Certain derivative instruments are designated at inception as hedges and measured for effectiveness both at inception and on an ongoing basis. Derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings. Derivative financial instruments are not used for speculative purposes.
The Company utilizes foreign currency contracts to hedge forecasted transactions, including intercompany transactions, on certain foreign currencies and designates these derivative instruments as foreign currency cash flow hedges when appropriate. The notional and fair value amounts of the Company’s cash flow hedges at
June 30, 2017
were
$1,828
and
$84
of net assets, respectively. There were
$6,000
of notional amount and
$531
of net assets of cash flow hedges at
June 30, 2016
. 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 Sheet. For these derivatives, which qualify as hedges of probable forecasted cash flows, the effective portion of changes
in fair value is temporarily reported in accumulated other comprehensive income and recognized in earnings when the hedged item affects earnings. These foreign exchange contracts have maturities over the next
two months
.
The Company assesses effectiveness at the inception of the hedge 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 income and is included in current period results. 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 fiscal years ended
June 30, 2017
and
2016
.
There were
$6,114
of notional amount and
$38
of net liabilities of derivatives not designated as hedges as of
June 30, 2017
.
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 in the fiscal years ended June 30, 2017 and 2016.
15. COMMITMENTS AND CONTINGENCIES
Lease commitments and rent expense
The Company leases office, manufacturing and warehouse space. These leases provide for additional payments of real estate taxes and other operating expenses over a base period amount.
The aggregate minimum future lease payments for these operating leases at
June 30, 2017
are as follows:
|
|
|
|
|
Fiscal Year
|
|
2018
|
$
|
18,771
|
|
2019
|
14,831
|
|
2020
|
12,615
|
|
2021
|
9,401
|
|
2022
|
8,516
|
|
Thereafter
|
37,702
|
|
|
$
|
101,836
|
|
Rent expense charged to operations for the fiscal years ended
June 30, 2017
,
2016
and
2015
was
$34,028
,
$33,803
and
$29,560
, respectively.
Off Balance Sheet Arrangements
At
June 30, 2017
, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K that have had, or are likely to have, a material current or future effect on our consolidated financial statements.
Legal Proceedings
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. On August 4, 2017, Co-Lead Plaintiffs in the Consolidated Securities Action filed an amended complaint 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 names as defendants the Company and certain of its current and former officers (collectively, the “Defendants”) and asserts 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. On August 9, 2017, the Court approved the Defendants’ proposed briefing schedule and ordered that the Defendants move to dismiss the Amended Complaint by October 3, 2017.
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 Board of Directors and certain 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 Board of Directors and certain 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 allege 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, and the parties agreed to stay the Consolidated Derivative Action until November 2, 2017.
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 Board of Directors and certain 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 Board of Directors and certain officers of the Company. The complaint alleges that the Company’s directors and certain 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 alleges 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.
On August 10, 2017, the court granted the parties stipulation to consolidate the Barnes Compliant, the Silva Complaint and the Merenstein Compliant 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. The parties agreed that the defendants in the Stockholder Class and Derivative Action shall have
60
days to answer or otherwise move to dismiss after the plaintiffs file a consolidated complaint with the court or designate an already filed complaint as the operative complaint.
SEC Investigation
As previously disclosed, the Company voluntarily contacted the SEC in August 2016 to advise it of the Company’s delay in the filing of its periodic reports and the performance of the independent review conducted by the Audit Committee. The Company has continued to provide information to the SEC on an ongoing basis, including, among other things, the results of the independent review of the Audit Committee as well as other information pertaining to its internal accounting review relating to revenue recognition. On January 31, 2017, the SEC issued a subpoena to the Company seeking documents relevant to its investigation. The Company is in the process of responding to the SEC’s requests for information and intends to cooperate fully with the SEC.
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.
16. DEFINED CONTRIBUTION PLANS
We have a 401(k) Employee Retirement Plan (the “Plan”) to provide retirement benefits for eligible employees. All full-time employees of the Company and its wholly-owned domestic subsidiaries are eligible to participate upon completion of
30
days of service. On an annual basis, we may, in our sole discretion, make certain matching contributions. For the fiscal years ended
June 30, 2017
,
2016
and
2015
, we made contributions to the Plan of
$1,367
,
$1,236
and
$1,090
, respectively.
In addition, certain of our international subsidiaries maintain separate defined contribution plans for their employees, however the amounts are not significant to the consolidated financial statements.
17. SEGMENT INFORMATION
Prior to July 1, 2016, the Company’s operations were managed in
seven
operating segments: the United States, United Kingdom,
Tilda, Hain Pure Protein Corporation (“HPPC”), EK Holdings, Inc. (“Empire”), Canada and Europe. The United States operating segment was also a reportable segment. The United Kingdom and Tilda operating segments were reported in the aggregate as “United Kingdom”, while HPPC and Empire were reported in the aggregate as “Hain Pure Protein,” and Canada and Europe were combined and reported as “Rest of World.”
Effective July 1, 2016, due to changes to the Company’s internal management and reporting structure resulting from the formation of Cultivate, certain brands previously included within the United States operating segment were moved to a new operating segment called Cultivate. As a result, the Company is now managed in
eight
operating segments: the United States (excluding Cultivate), United Kingdom, Tilda, HPPC, Empire, Canada, Europe and Cultivate. The United States, excluding Cultivate, is its own reportable segment. Cultivate is now combined with Canada and Europe and reported within Rest of World. There were no changes to the United Kingdom and Hain Pure Protein reportable segments. The prior period segment information contained below has been adjusted to reflect the Company’s new operating and reporting structure. See Note 1,
Description of Business and Basis of Presentation
, for additional details surrounding the formation of Cultivate.
Net sales and operating income are the primary measures used by the Company’s Chief Operating Decision Maker (“CODM”) to evaluate segment operating performance and to decide how to allocate resources to segments. The CODM is the Company’s Chief Executive Officer. 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, acquisition related expenses, restructuring and integration charges, impairment charges, and accounting review 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. Assets are reviewed by the CODM on a consolidated basis and therefore are not reported by operating segment.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Net Sales:
(1)
|
|
|
|
|
|
|
United States
|
|
$
|
1,191,262
|
|
|
$
|
1,249,123
|
|
|
$
|
1,253,156
|
|
United Kingdom
|
|
768,301
|
|
|
774,877
|
|
|
722,830
|
|
Hain Pure Protein
|
|
509,606
|
|
|
492,510
|
|
|
337,197
|
|
Rest of World
|
|
383,942
|
|
|
368,864
|
|
|
296,430
|
|
|
|
$
|
2,853,111
|
|
|
$
|
2,885,374
|
|
|
$
|
2,609,613
|
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
|
United States
|
|
$
|
157,506
|
|
|
$
|
203,481
|
|
|
$
|
180,937
|
|
United Kingdom
|
|
39,749
|
|
|
56,000
|
|
|
44,985
|
|
Hain Pure Protein
|
|
1,382
|
|
|
31,558
|
|
|
28,685
|
|
Rest of World
|
|
32,010
|
|
|
27,898
|
|
|
22,327
|
|
|
|
230,647
|
|
|
318,937
|
|
|
276,934
|
|
Corporate and Other
(2)
|
|
(119,842
|
)
|
|
(168,577
|
)
|
|
(43,072
|
)
|
|
|
$
|
110,805
|
|
|
$
|
150,360
|
|
|
$
|
233,862
|
|
|
|
(1)
|
One of our customers accounted for approximately
10%
of our consolidated net sales for the fiscal years ended
June 30, 2017
,
2016
and
2015
, respectively, which were primarily related to the United States and United Kingdom segments. A second customer accounted for approximately,
9%
,
10%
and
11%
of our consolidated net sales for the fiscal years ended
June 30, 2017
,
2016
and
2015
, respectively, which were primarily related to the United States segment.
|
|
|
(2)
|
Corporate and Other includes
$10,388
,
$12,065
and
$7,244
of acquisition related expenses, restructuring and integration charges for the fiscal years ended
June 30, 2017
,
2016
and
2015
, respectively. Corporate and Other also includes an impairment charge of
$14,079
(
$7,579
related to the United Kingdom segment and
$6,500
related to the United States segment) related to certain of the Company’s tradenames, a
$26,373
impairment charge primarily related to long-lived assets associated with the exit of certain portions of our own-label chilled desserts business in the United Kingdom segment and
$29,562
of accounting review costs for the fiscal year ended
June 30, 2017
. Additionally, Corporate and Other includes goodwill impairment charges of
$84,548
for the fiscal year ended
June 30, 2016
related to the United Kingdom segment, an impairment charge of
$39,724
(
$20,932
related to the United Kingdom segment and
$18,792
related to the United States segment) related to certain of the Company’s tradenames and a
$3,476
impairment charge related to long-lived assets associated with the
divestiture of certain portions of our own-label juice business in the United Kingdom. Lastly, Corporate and Other includes a long-lived asset impairment charge of
$1,004
related to leasehold improvements due to the relocation of our New York based BluePrint manufacturing facility for the fiscal year ended June 30,
2015
.
|
The Company’s net sales by product category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
Grocery
|
|
$
|
1,743,860
|
|
|
$
|
1,800,640
|
|
|
$
|
1,724,675
|
|
Poultry/Protein
|
|
509,606
|
|
|
492,510
|
|
|
337,197
|
|
Snacks
|
|
312,784
|
|
|
307,797
|
|
|
291,719
|
|
Personal Care
|
|
176,408
|
|
|
171,669
|
|
|
135,627
|
|
Tea
|
|
110,453
|
|
|
112,758
|
|
|
120,395
|
|
Total
|
|
$
|
2,853,111
|
|
|
$
|
2,885,374
|
|
|
$
|
2,609,613
|
|
The Company’s net sales by geographic region, which are generally based on the location of the Company’s subsidiary, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended June 30,
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
1,677,294
|
|
|
$
|
1,729,751
|
|
|
$
|
1,582,553
|
|
United Kingdom
|
|
851,757
|
|
|
859,183
|
|
|
803,470
|
|
All Other
|
|
324,060
|
|
|
296,440
|
|
|
223,590
|
|
Total
|
|
$
|
2,853,111
|
|
|
$
|
2,885,374
|
|
|
$
|
2,609,613
|
|
The Company’s long-lived assets, which primarily represent net property, plant and equipment, by geographic region are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended June 30,
|
|
|
2017
|
|
2016
|
United States
|
|
$
|
194,348
|
|
|
$
|
193,192
|
|
United Kingdom
|
|
165,396
|
|
|
196,271
|
|
All Other
|
|
63,330
|
|
|
53,260
|
|
Total
|
|
$
|
423,074
|
|
|
$
|
442,723
|
|
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the Company’s consolidated quarterly results of operations is as follows. The sum of the net income per share from continuing operations for each of the four quarters may not equal the net income per share for the full year, as presented, due to rounding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
2017
|
|
March 31, 2017
|
|
December 31, 2016
|
|
September 30, 2016
|
Net sales
|
$
|
725,085
|
|
|
$
|
706,563
|
|
|
$
|
739,999
|
|
|
$
|
681,464
|
|
Gross profit
|
$
|
149,719
|
|
|
$
|
143,393
|
|
|
$
|
138,393
|
|
|
$
|
109,867
|
|
Operating income
|
$
|
8,587
|
|
|
$
|
47,067
|
|
|
$
|
41,400
|
|
|
$
|
13,751
|
|
Income before income taxes and equity in earnings of equity-method investees
|
$
|
2,749
|
|
|
$
|
39,556
|
|
|
$
|
37,656
|
|
|
$
|
9,182
|
|
Net income
|
$
|
313
|
|
|
$
|
31,328
|
|
|
$
|
27,185
|
|
|
$
|
8,604
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
0.30
|
|
|
$
|
0.26
|
|
|
$
|
0.08
|
|
Diluted
|
$
|
—
|
|
|
$
|
0.30
|
|
|
$
|
0.26
|
|
|
$
|
0.08
|
|
The quarter ended
June 30, 2017
was impacted by impairment charges of
$14,079
(
$10,733
net of tax) related to indefinite-lived intangible assets (tradenames), as well as a
$26,373
(
$20,877
net of tax) impairment charge primarily related to long-lived assets associated with the exit of certain portions of our own-label chilled desserts business in the United Kingdom. Additionally, the quarter ended
June 30, 2017
was impacted by
$9,473
(
$6,773
net of tax) related to professional fees associated with our internal accounting review.
The quarters ended March 31, 2017, December 31, 2016 and September 30, 2016 were impacted by
$7,124
(
$5,029
net of tax),
$7,005
(
$5,050
net of tax), and
$5,960
(
$4,112
net of tax), respectively, related to professional fees associated with our internal accounting review.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
2016
|
|
March 31, 2016
|
|
December 31, 2015
|
|
September 30, 2015
|
Net sales
|
$
|
737,547
|
|
|
$
|
736,663
|
|
|
$
|
743,437
|
|
|
$
|
667,727
|
|
Gross profit
|
$
|
150,081
|
|
|
$
|
159,908
|
|
|
$
|
166,261
|
|
|
$
|
137,881
|
|
Operating income (loss)
|
$
|
(65,138
|
)
|
|
$
|
71,148
|
|
|
$
|
90,078
|
|
|
$
|
54,272
|
|
Income/(loss) before income taxes and equity in earnings of equity-method investees
|
$
|
(77,572
|
)
|
|
$
|
72,863
|
|
|
$
|
80,713
|
|
|
$
|
42,404
|
|
Net income (loss)
|
$
|
(88,597
|
)
|
|
$
|
48,788
|
|
|
$
|
58,080
|
|
|
$
|
29,158
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.86
|
)
|
|
$
|
0.47
|
|
|
$
|
0.56
|
|
|
$
|
0.28
|
|
Diluted
|
$
|
(0.86
|
)
|
|
$
|
0.47
|
|
|
$
|
0.56
|
|
|
$
|
0.28
|
|
The quarter ended June 30, 2016 was impacted by goodwill impairment charges recorded of
$84,548
in the United Kingdom, impairment charges of
$39,724
(
$30,772
net of tax) related to indefinite-lived intangible assets (tradenames), as well as a
$3,476
(
$2,855
net of tax) impairment charge related to long-lived assets associated with the divestiture of certain portions of our own-label juice business in connection with our acquisition of Orchard House in the United Kingdom.
The quarter ended March 31, 2016 was impacted by a
$9,013
(
$6,231
net of tax) gain on fire insurance recovery as a result of fixed assets purchased with insurance proceeds that exceeded the net book value of fixed assets destroyed in the fire that occurred at our Tilda rice milling facility in the second quarter of fiscal 2015.