Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________ 
FORM 10-Q
___________________________________________ 
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2018
or
¨
Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
for the transition period from                      to                     
Commission File No. 0-22818
___________________________________________ 
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12683705&doc=13
THE HAIN CELESTIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
___________________________________________ 
 
 
 
Delaware
 
22-3240619
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
1111 Marcus Avenue
Lake Success, New York
 
11042
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (516) 587-5000
___________________________________________ 


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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     
Yes  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
 
 
 
 
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  ý

As of February 1, 2019, there were 104,118,392 shares outstanding of the registrant’s Common Stock, par value $.01 per share.


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THE HAIN CELESTIAL GROUP, INC.
Index
  
 
Part I - Financial Information
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Part II - Other Information
 
 
 
 
Items 3, 4 and 5 are not applicable

 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 
 
 

 

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Cautionary Note Regarding Forward Looking Information

This Quarterly Report on Form 10-Q for the quarter ended December 31, 2018 (the “Form 10-Q”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, relating to our business and financial outlook, which are based on our current beliefs, assumptions, expectations, estimates, forecasts and projections about future events only as of the date of this Quarterly Report on Form 10-Q, and are not statements of historical fact. We make such forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

Many of our forward-looking statements include discussions of trends and anticipated developments under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as the use of “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “intends,” “predicts,” “potential,” or “continue” and similar expressions, or the negative of those expressions. These forward-looking statements include, among other things, our beliefs or expectations relating to our business strategy, growth strategy, market price, brand portfolio and product performance, the seasonality of our business, our results of operations and financial condition, enhancing internal controls and remediating material weaknesses. These forward-looking statements are not guarantees of our future performance and involve risks, uncertainties, estimates and assumptions that are difficult to predict. Therefore, our actual outcomes and results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to further update any such statement to reflect new information, the occurrence of future events or circumstances or otherwise.

The forward-looking statements in this filing do not constitute guarantees or promises of future performance. Factors that could cause or contribute to such differences may include, but are not limited to, the impact of competitive products, changes to the competitive environment, changes to consumer preferences, our ability to manage our supply chain effectively, changes in raw materials, freight, commodity costs and fuel, consolidation of customers, reliance on independent distributors, general economic and financial market conditions, risks associated with our international sales and operations, our ability to execute and realize cost savings initiatives, including, but not limited to, cost reduction initiatives under Project Terra and stock-keeping unit (“SKU”) rationalization plans, the identification and remediation of material weaknesses in our internal controls over financial reporting, our ability to manage our financial reporting and internal control system processes, potential liabilities due to legal claims, government investigations and other regulatory enforcement actions, costs incurred due to pending and future litigation, the availability of key personnel and changes in management team, potential liability if our products cause illness or physical harm, impairments in the carrying value of goodwill or other intangible assets, our ability to identify and complete acquisitions or divestitures and integrate acquisitions, the availability of organic and natural ingredients, the reputation of our brands, risks relating to the protection of intellectual property, cybersecurity risks, unanticipated expenditures and other risks described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018 under the heading “Risk Factors” and Part II, Item 1A, “Risk Factors” set forth herein, as well as in other reports that we file in the future.




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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND JUNE 30, 2018
(In thousands, except par values)
 
December 31,
 
June 30,
 
2018
 
2018
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
38,158

 
$
106,557

Restricted cash
34,304

 

Accounts receivable, less allowance for doubtful accounts of $498 and $1,828, respectively
240,520

 
252,708

Inventories
402,724

 
391,525

Prepaid expenses and other current assets
56,393

 
59,946

Current assets of discontinued operations
179,327

 
240,851

Total current assets
951,426

 
1,051,587

Property, plant and equipment, net
320,036

 
310,172

Goodwill
1,008,787

 
1,024,136

Trademarks and other intangible assets, net
473,534

 
510,387

Investments and joint ventures
19,318

 
20,725

Other assets
30,390

 
29,667

Total assets
$
2,803,491

 
$
2,946,674

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
209,869

 
$
229,993

Accrued expenses and other current liabilities
159,588

 
116,001

Current portion of long-term debt
35,566

 
26,605

Current liabilities of discontinued operations
34,306

 
49,846

Total current liabilities
439,329

 
422,445

Long-term debt, less current portion
692,128

 
687,501

Deferred income taxes
65,245

 
86,909

Other noncurrent liabilities
15,846

 
12,770

Total liabilities
1,212,548

 
1,209,625

Commitments and contingencies (Note 16)

 

Stockholders’ equity:
 
 
 
Preferred stock - $.01 par value, authorized 5,000 shares; issued and outstanding: none

 

Common stock - $.01 par value, authorized 150,000 shares; issued: 108,691 and 108,422 shares, respectively; outstanding: 104,107 and 103,952 shares, respectively
1,087

 
1,084

Additional paid-in capital
1,150,239

 
1,148,196

Retained earnings
774,405

 
878,516

Accumulated other comprehensive loss
(225,359
)
 
(184,240
)
 
1,700,372

 
1,843,556

Less: Treasury stock, at cost, 4,584 and 4,470 shares, respectively
(109,429
)
 
(106,507
)
Total stockholders’ equity
1,590,943

 
1,737,049

Total liabilities and stockholders’ equity
$
2,803,491

 
$
2,946,674

See notes to consolidated financial statements.

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THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2018 AND 2017
(In thousands, except per share amounts) 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018

2017
 
2018

2017
Net sales
$
584,156


$
616,232


$
1,144,989


$
1,205,451

Cost of sales
469,883


482,282


931,122


948,113

Gross profit
114,273

 
133,950

 
213,867

 
257,338

Selling, general and administrative expenses
85,387


86,444


167,644


172,525

Amortization of acquired intangibles
3,860


4,572


7,765


9,146

Project Terra costs and other
9,872


4,069


20,205


8,919

Chief Executive Officer Succession Plan expense, net
10,148

 

 
29,701

 

Accounting review and remediation costs, net of insurance proceeds
920


4,451


4,334


3,093

Long-lived asset and intangibles impairment
19,473


3,449


23,709


3,449

Operating (loss) income
(15,387
)
 
30,965

 
(39,491
)
 
60,206

Interest and other financing expense, net
8,817


6,479


16,522


12,761

Other expense/(income), net
373

 
(760
)
 
973

 
(3,887
)
(Loss) income from continuing operations before income taxes and equity in net loss (income) of equity-method investees
(24,577
)
 
25,246

 
(56,986
)
 
51,332

Provision (benefit) for income taxes
4,690


(17,690
)

(4,793
)

(10,206
)
Equity in net loss (income) of equity-method investees
11


(194
)

186


(205
)
Net (loss) income from continuing operations
$
(29,278
)
 
$
43,130

 
$
(52,379
)
 
$
61,743

Net (loss) income from discontinued operations, net of tax
(37,223
)
 
3,973

 
(51,547
)
 
5,206

Net (loss) income
$
(66,501
)
 
$
47,103

 
$
(103,926
)
 
$
66,949

 
 
 
 
 
 
 
 
Net (loss) income per common share:
 
 
 
 
 
 
 
Basic net (loss) income per common share from continuing operations
$
(0.28
)
 
$
0.42

 
$
(0.50
)
 
$
0.59

Basic net (loss) income per common share from discontinued operations
(0.36
)
 
0.04

 
(0.50
)
 
0.05

Basic net (loss) income per common share
$
(0.64
)
 
$
0.45

 
$
(1.00
)
 
$
0.65

 
 
 
 
 
 
 
 
Diluted net (loss) income per common share from continuing operations
$
(0.28
)
 
$
0.41

 
$
(0.50
)
 
$
0.59

Diluted net (loss) income per common share from discontinued operations
(0.36
)
 
0.04

 
(0.50
)
 
0.05

Diluted net (loss) income per common share
$
(0.64
)
 
$
0.45

 
$
(1.00
)
 
$
0.64

 
 
 
 
 
 
 
 
Shares used in the calculation of net (loss) income per common share:
 
 
 
 
 
 
 
Basic
104,056


103,837


104,009


103,773

Diluted
104,056


104,440


104,009


104,379

See notes to consolidated financial statements.



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THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2018 AND 2017
(In thousands)

 
Three Months Ended
 
December 31, 2018
 
December 31, 2017
 
Pre-tax
amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax
amount
 
Tax (expense) benefit
 
After-tax amount
Net (loss) income
 
 
 
 
$
(66,501
)
 
 
 
 
 
$
47,103

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(27,948
)
 
$

 
(27,948
)
 
$
8,336

 
$

 
8,336

Change in deferred gains (losses) on cash flow hedging instruments

 

 

 

 

 

Change in unrealized gain (loss) on equity investment

 

 

 
8

 
(3
)
 
5

Total other comprehensive (loss) income
$
(27,948
)
 
$

 
$
(27,948
)
 
$
8,344

 
$
(3
)
 
$
8,341

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive (loss) income
 
 
 
 
$
(94,449
)
 
 
 
 
 
$
55,444

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
December 31, 2018
 
December 31, 2017
 
Pre-tax
amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax
amount
 
Tax (expense) benefit
 
After-tax amount
Net (loss) income
 
 
 
 
$
(103,926
)
 
 
 
 
 
$
66,949

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(41,467
)
 
$

 
(41,467
)
 
$
42,197

 
$

 
42,197

Change in deferred (losses) gains on cash flow hedging instruments

 

 

 
(82
)
 
15

 
(67
)
Change in unrealized loss on equity investment

 

 

 
(2
)
 

 
(2
)
Total other comprehensive (loss) income
$
(41,467
)
 
$

 
$
(41,467
)
 
$
42,113

 
$
15

 
$
42,128

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive (loss) income
 
 
 
 
$
(145,393
)
 
 
 
 
 
$
109,077

 
 
 
 
 
 
 
 
 
 
 
 
See notes to consolidated financial statements.

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THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2018
(In thousands, except par values)

 
Common Stock
 
Additional
 
 
 
 
 
 
 
Accumulated
Other
 
 
 
 
 
Amount
 
Paid-in
 
Retained
 
Treasury Stock
 
Comprehensive
 
 
 
Shares
 
at $.01
 
Capital
 
Earnings
 
Shares
 
Amount
 
(Loss) Income
 
Total
Balance at June 30, 2018
108,422

 
$
1,084

 
$
1,148,196

 
$
878,516

 
4,470

 
$
(106,507
)
 
$
(184,240
)
 
$
1,737,049

Net loss

 

 

 
(103,926
)
 

 

 

 
(103,926
)
Cumulative effect of adoption of ASU 2016-01


 


 


 
(348
)
 


 


 
348

 

Cumulative effect of adoption of ASU 2014-09
 
 
 
 
 
 
163

 


 


 
 
 
163

Other comprehensive loss


 


 


 


 


 


 
(41,467
)
 
(41,467
)
Issuance of common stock pursuant to stock-based compensation plans
269

 
3

 
(3
)
 

 

 

 

 

Shares withheld for payment of employee payroll taxes due on shares issued under stock-based compensation plans


 


 


 


 
114

 
(2,922
)
 


 
(2,922
)
Stock-based compensation expense

 

 
2,046

 

 

 

 

 
2,046

Balance at December 31, 2018
108,691

 
$
1,087

 
$
1,150,239

 
$
774,405

 
4,584

 
$
(109,429
)
 
$
(225,359
)
 
$
1,590,943

See notes to consolidated financial statements.


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THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2018 AND 2017
(In thousands)
 
Six Months Ended December 31,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net (loss) income
$
(103,926
)
 
$
66,949

Net (loss) income from discontinued operations
(51,547
)
 
5,206

Net (loss) income from continuing operations
(52,379
)
 
61,743

 
 
 
 
Adjustments to reconcile net (loss) income from continuing operations to net cash (used in) provided by operating activities from continuing operations:
 
 
 
Depreciation and amortization
28,106

 
30,065

Deferred income taxes
(22,790
)
 
(28,808
)
Chief Executive Officer Succession Plan expense, net
29,272

 

Equity in net loss (income) of equity-method investees
186

 
(205
)
Stock-based compensation, net
1,994

 
7,322

Long-lived asset and intangibles impairment
23,709

 
3,449

Other non-cash items, net
1,285

 
(1,760
)
Increase (decrease) in cash attributable to changes in operating assets and liabilities:
 
 
 
Accounts receivable
6,583

 
(16,077
)
Inventories
(17,472
)
 
(63,131
)
Other current assets
(1,765
)
 
(3,889
)
Other assets and liabilities
4,616

 
5,259

Accounts payable and accrued expenses
(2,358
)
 
34,422

Net cash (used in) provided by operating activities - continuing operations
(1,013
)
 
28,390

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(41,539
)
 
(24,685
)
Acquisitions of businesses, net of cash acquired

 
(13,064
)
Other
3,863

 

Net cash used in investing activities - continuing operations
(37,676
)
 
(37,749
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Borrowings under bank revolving credit facility
150,000

 
35,000

Repayments under bank revolving credit facility
(137,646
)
 
(35,000
)
Repayments under term loan
(7,500
)
 

Funding of discontinued operations entities
(3,996
)
 
(12,758
)
Borrowings of other debt, net
8,627

 
13,912

Shares withheld for payment of employee payroll taxes
(2,922
)
 
(6,685
)
Net cash provided by (used in) financing activities - continuing operations
6,563

 
(5,531
)
 
 
 
 
Effect of exchange rate changes on cash
(1,969
)
 
3,765

 
 
 
 
CASH FLOWS FROM DISCONTINUED OPERATIONS
 
 
 
Cash used in operating activities
(1,850
)
 
(2,964
)
Cash used in investing activities
(2,931
)
 
(6,342
)
Cash provided by financing activities
3,901

 
12,655

Net cash flows (used in) provided by discontinued operations
(880
)
 
3,349

 
 
 
 
Net decrease in cash and cash equivalents and restricted cash
(34,975
)
 
(7,776
)
Cash and cash equivalents at beginning of period
113,018

 
146,992

Cash and cash equivalents and restricted cash at end of period
$
78,043

 
$
139,216

Less: cash and cash equivalents of discontinued operations
(5,581
)
 
(13,285
)
Cash and cash equivalents and restricted cash of continuing operations at end of period
$
72,462

 
$
125,931

See notes to consolidated financial statements.

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THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, except par values and per share data)

1.    BUSINESS

The Hain Celestial Group, Inc., a Delaware corporation (collectively, along with its subsidiaries, the “Company,” and herein referred to as “Hain Celestial,” “we,” “us” and “our”), was founded in 1993 and is headquartered in Lake Success, New York. The Company’s mission has continued to evolve since its founding, with health and wellness being the core tenet — To Create and Inspire A Healthier Way of LifeTM and be the leading marketer, manufacturer and seller of organic and natural, “better-for-you” products by anticipating and exceeding consumer expectations in providing quality, innovation, value and convenience. The Company is committed to growing sustainably while continuing to implement environmentally sound business practices and manufacturing processes. Hain Celestial sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, drug and convenience stores in over 80 countries worldwide.

The Company manufactures, markets, distributes and sells organic and natural products under brand names that are sold as “better-for-you” products, providing consumers with the opportunity to lead A Healthier Way of Life™.  Hain Celestial is a leader in many organic and natural products categories, with many recognized brands in the various market categories it serves, including Almond Dream®, Arrowhead Mills®, Bearitos®, Better Bean®, BluePrint®, Casbah®, Celestial Seasonings®, Clarks™, Coconut Dream®, Cully & Sully®, Danival®, DeBoles®, Earth’s Best®, Ella’s Kitchen®, Europe’s Best®, Farmhouse Fare™, Frank Cooper’s®, Gale’s®, Garden of Eatin’®, GG UniqueFiber®, Hain Pure Foods®, Hartley’s®, Health Valley®, Imagine®, Johnson’s Juice Co.™, Joya®, Lima®, Linda McCartney® (under license), MaraNatha®, Mary Berry (under license), Natumi®, New Covent Garden Soup Co.®, Orchard House®, Rice Dream®, Robertson’s®, Rudi’s Gluten-Free Bakery™, Rudi’s Organic Bakery®, Sensible Portions®, Spectrum®, Soy Dream®, Sun-Pat®, Sunripe®, SunSpire®, Terra®, The Greek Gods®, Tilda®, Walnut Acres®, WestSoy®, Yorkshire Provender®, Yves Veggie Cuisine®and William’s™. The Company’s personal care products are marketed under the Alba Botanica®, Avalon Organics®, Earth’s Best®, JASON®, Live Clean® and Queen Helene® brands.

2.    BASIS OF PRESENTATION

The Company’s unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP. The amounts as of and for the periods ended June 30, 2018 are derived from the Company’s audited annual financial statements. The unaudited consolidated financial statements reflect all normal recurring adjustments which, in management’s opinion, are necessary for a fair presentation for interim periods. Operating results for the three and six months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2019. Please refer to the Notes to the Consolidated Financial Statements as of June 30, 2018 and for the fiscal year then ended included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (the “Form 10-K”) for information not included in these condensed notes.

The Company is presenting the operating results and cash flows of the Hain Pure Protein reportable segment within discontinued operations in the current and prior periods. The assets and liabilities of the Hain Pure Protein reportable segment are presented as assets and liabilities of discontinued operations in the Consolidated Balance Sheets for all periods presented.

All amounts in the unaudited consolidated financial statements, notes and tables have been rounded to the nearest thousand, except par values and per share amounts, unless otherwise indicated.


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Newly Adopted Accounting Pronouncements

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance outlines a single, comprehensive model for accounting for revenue from contracts with customers, providing a single five-step model to be applied to all revenue transactions. The guidance also requires improved disclosures to assist users of the financial statements to better understand the nature, amount, timing and uncertainty of revenue that is recognized. Subsequent to the issuance of ASU 2014-09, the FASB issued various additional ASUs clarifying and amending this new revenue guidance. The Company adopted the new revenue standard on July 1, 2018 using the modified retrospective transition method. The adoption did not materially impact our results of operations or financial position, and, as a result, comparisons of revenues and operating profit between periods were not materially affected by the adoption of ASU 2014-09. The Company recorded a net increase to beginning retained earnings of $163 on July 1, 2018 due to the cumulative impact of adopting ASU 2014-09. Additionally, as our products exhibit similar economic characteristics, are sold through similar channels to similar customers and are recognized at a point in time, we have concluded that the Company’s segment disclosures in Note 17, Segment Information, are indicative of the level of revenue disaggregation required under ASU 2014-09.

ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10)
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. We adopted ASU 2016‑01 in the three months ended September 30, 2018, which resulted in a net decrease to beginning retained earnings of $348 on July 1, 2018, representing the accumulated unrealized losses (net of tax) reported in accumulated other comprehensive income (loss) for available for sale equity securities on June 30, 2018. We will no longer classify equity investments as trading or available for sale and will no longer recognize unrealized holding gains and losses on equity securities previously classified as available for sale in other comprehensive income (loss) as a result of adoption of ASU 2016-01.

ASU 2017-09, Compensation-Stock Compensation (Topic 718)
In May 2017, the FASB issued 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. The Company adopted the provisions of ASU 2017-09 as of July 1, 2018. There was no impact on the Company's consolidated financial statements resulting from the adoption of this guidance.

ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business

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. The Company adopted this guidance on July 1, 2018. There was no impact on the Company's consolidated financial statements resulting from the adoption of this guidance.

ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. U.S. GAAP historically prohibited recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset was 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. The amendments are required to 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 adopted this guidance on July 1, 2018. There was no impact on the Company's consolidated financial statements resulting from the adoption of this guidance.


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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)

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. The Company adopted this guidance on July 1, 2018. There was no impact on the Company's consolidated financial statements resulting from the adoption of this guidance.

Recently Issued Accounting Pronouncements Not Yet Effective

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). The amendments in this update replace most of the existing U.S. GAAP lease accounting guidance in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The ASU requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB approved amendments to create an optional transition method that will provide an option to use the effective date of ASC 842 as the date of initial application of the transition. Under the new transition method, a reporting entity would initially apply the new lease requirements at the effective date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, continue to report comparative periods presented in the financial statements in the period of adoption in accordance with current U.S. GAAP (i.e., ASC 840, Leases) and provide the required disclosures under ASC 840 for all periods presented under current U.S. GAAP. We will adopt the standard effective July 1, 2019.

As part of the Company’s assessment work to-date, the Company has formed an implementation work team to perform a comprehensive evaluation of the impact of the adoption of this guidance, which includes assessing the Company’s lease portfolio, the impact to business processes and internal controls over financial reporting and the related disclosure requirements. Additionally, the Company is implementing lease accounting software to assist in the quantification of the expected impact on the Consolidated Balance Sheet and to facilitate the calculations of the related accounting entries and disclosures, as well as to facilitate accounting, presentation and disclosure for all leases after the initial date of application under the new standard.

While the Company is continuing to assess all potential impacts of the standard, the most significant impact relates to the recognition of new right-of-use assets and lease liabilities on the balance sheet for manufacturing, warehouse and office space operating leases. We believe that all of these leases will continue to be classified as operating leases under the new standard. We expect the accounting for capital leases to remain substantially unchanged.

Refer to Note 2, Summary of Significant Accounting Policies and Practices, in the Notes to the Consolidated Financial Statements as of June 30, 2018 and for the fiscal year then ended included in the Form 10-K for a detailed discussion on additional recently issued accounting pronouncements not yet adopted by the Company. There has been no change to the statements made in the Form 10-K as of the date of filing of this Form 10-Q.

3.    CHIEF EXECUTIVE OFFICER SUCCESSION PLAN

On June 24, 2018, the Company entered into a Chief Executive Officer (“CEO”) Succession Agreement (the “Agreement”), whereby the the Company’s former CEO, Irwin D. Simon, agreed to terminate his employment with the Company upon the hiring of a new CEO.

On October 26, 2018, the Company’s Board of Directors appointed Mark L. Schiller as President and CEO, succeeding Mr. Simon. In connection with the appointment, on October 26, 2018, the Company and Mr. Schiller entered into an employment agreement, which was approved by the Board, with Mr. Schiller’s employment commencing on November 5, 2018. Accordingly, Mr. Simon’s employment with the Company terminated on November 4, 2018.


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Cash Separation Payments

The Agreement provides Mr. Simon with a cash separation payment of $34,295 payable in a single lump sum and cash benefit continuation costs of $208. These costs were recognized from June 24, 2018 through November 4, 2018. Expense recognized in connection with the agreement were $9,080 and $33,051 in the three and six months ended December 31, 2018, respectively, and are included in the Consolidated Statement of Operations as a component of “Chief Executive Officer Succession Plan expense, net.” As of December 31, 2018, the total cash separation payment was held in a rabbi trust, which has been classified as restricted cash and included in accrued expenses and other current liabilities in the Consolidated Balance Sheet. The cash separation payment will be paid during the current fiscal year.

Consulting Agreement

On October 26, 2018, the Company and Mr. Simon entered into a Consulting Agreement (the “Consulting Agreement”) in order to, among other things, assist Mr. Schiller with his transition as the Company’s incoming CEO. The term of the Consulting Agreement commenced on November 5, 2018 and continued until February 5, 2019. Mr. Simon is entitled to receive an aggregate consulting fee of $975 as compensation for his services during the consulting term, of which $650 was recognized in the Consolidated Statement of Operations as a component of “Chief Executive Officer Succession Plan expense, net” in the three and six months ended December 31, 2018.

4.    EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net (loss) earnings per share:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018

2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net (loss) income from continuing operations
$
(29,278
)
 
$
43,130

 
$
(52,379
)
 
$
61,743

Net (loss) income from discontinued operations, net of tax
(37,223
)
 
3,973

 
(51,547
)
 
5,206

Net (loss) income
$
(66,501
)
 
$
47,103

 
$
(103,926
)
 
$
66,949

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic weighted average shares outstanding
104,056

 
103,837

 
104,009

 
103,773

Effect of dilutive stock options, unvested restricted stock and unvested restricted share units

 
603

 

 
606

Diluted weighted average shares outstanding
104,056

 
104,440

 
104,009

 
104,379

 
 
 
 
 
 
 
 
Basic net (loss) income per common share:
 
 
 
 
 
 
 
Continuing operations
$
(0.28
)
 
$
0.42

 
$
(0.50
)
 
$
0.59

Discontinued operations
(0.36
)
 
0.04

 
(0.50
)
 
0.05

Basic net (loss) income per common share
$
(0.64
)
 
$
0.45

 
$
(1.00
)
 
$
0.65

 
 
 
 
 
 
 
 
Diluted net (loss) income per common share:
 
 
 
 
 
 
 
Continuing operations
$
(0.28
)
 
$
0.41

 
$
(0.50
)
 
$
0.59

Discontinued operations
(0.36
)
 
0.04

 
(0.50
)
 
0.05

Diluted net (loss) income per common share
$
(0.64
)
 
$
0.45

 
$
(1.00
)
 
$
0.64


Basic net (loss) income per share excludes the dilutive effects of stock options, unvested restricted stock and unvested restricted share units. Due to our net loss in three and six months ended December 31, 2018, all common stock equivalents such as stock options and unvested restricted stock awards have been excluded from the computation of diluted net loss per share because the effect would have been anti-dilutive to the computations.  Diluted earnings per share in the three and six months ended December 31, 2017 includes the dilutive effects of common stock equivalents such as stock options and unvested restricted stock awards.
 

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There were 1,152 and 567 stock-based awards excluded from our diluted earnings per share calculations for the three and six months ended December 31, 2018 and 2017, respectively, as such awards were contingently issuable based on market or performance conditions, and such conditions had not been achieved during the respective periods.

There were 388 restricted stock awards excluded from our diluted loss per share calculation for the three and six months ended December 31, 2018 as such awards were anti-dilutive. Anti-dilutive restricted stock awards excluded from our diluted earnings per share calculation for the three and six months ended December 31, 2017 were de minimis.

There were 111 potential shares of common stock issuable upon exercise of stock options excluded from diluted loss per share computations for the three and six months ended December 31, 2018, as they were anti-dilutive. No such awards were excluded for the three and six months ended December 31, 2017.

Share Repurchase Program

On June 21, 2017, the Company's Board of Directors authorized the repurchase of up to $250,000 of the Company’s issued and outstanding common stock. Repurchases may be made from time to time in the open market, pursuant to pre-set trading plans, in private transactions or otherwise. The authorization does not have a stated expiration date. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations, including the Company’s historical strategy of pursuing accretive acquisitions. As of December 31, 2018, the Company had not repurchased any shares under this program and had $250,000 of remaining capacity under the share repurchase program.

5. DISCONTINUED OPERATIONS

In March 2018, the Company’s Board of Directors approved a plan to sell all of the operations of the Hain Pure Protein Corporation (“HPPC”) and EK Holdings, Inc. (“Empire”) operating segments, which are reported in the aggregate as the Hain Pure Protein reportable segment. Collectively, these planned dispositions represent a strategic shift that will have a major impact on the Company’s operations and financial results and have been accounted for as discontinued operations. The Company is actively marketing the sale of Hain Pure Protein, and a sale is anticipated to occur within twelve months of the Board of Directors’ approval, which occurred in March 2018.
The Company is presenting the operating results and cash flows of Hain Pure Protein within discontinued operations in the current and prior periods. The assets and liabilities of Hain Pure Protein are presented as assets and liabilities of discontinued operations in the Consolidated Balance Sheets for all periods presented.

The following table presents the major classes of Hain Pure Protein’s line items constituting the “Net (loss) income from discontinued operations, net of tax” in our Consolidated Statements of Operations:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018
 
2017
 
2018
 
2017
Net sales
$
147,181

 
$
158,972

 
$
260,720

 
$
278,029

Cost of sales
144,682

 
148,651

 
267,796

 
259,493

Gross profit (loss)
2,499

 
10,321

 
(7,076
)
 
18,536

Selling, general and administrative expense
4,750

 
3,928

 
8,992

 
8,568

Asset impairments
54,946

 

 
57,904

 

Other expense
2,478

 
1,099

 
5,195

 
2,455

Net (loss) income from discontinued operations before income taxes
(59,675
)
 
5,294

 
(79,167
)
 
7,513

(Benefit) provision for income taxes
(22,452
)
 
1,321

 
(27,620
)
 
2,307

Net (loss) income from discontinued operations, net of tax
$
(37,223
)
 
$
3,973

 
$
(51,547
)
 
$
5,206





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Assets and liabilities of discontinued operations presented in the Consolidated Balance Sheets as of December 31, 2018 and June 30, 2018 are included in the following table:

 
December 31,
 
June 30,
Assets
2018
 
2018
Cash and cash equivalents
$
5,581

 
$
6,461

Accounts receivable, less allowance for doubtful accounts
20,966

 
21,616

Inventories
82,841

 
105,359

Prepaid expenses and other current assets
6,229

 
5,604

Property, plant and equipment, net
86,801

 
83,776

Goodwill
41,089

 
41,089

Trademarks and other intangible assets, net
51,029

 
51,029

Other assets
4,649

 
4,381

Deferred tax assets (3)
16,510

 

Impairments of long-lived assets held for sale(2)
(136,368
)
 
(78,464
)
Current assets of discontinued operations(1)
$
179,327

 
$
240,851

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
23,873

 
$
31,762

Accrued expenses and other current liabilities
10,355

 
6,880

Deferred tax liabilities (3)

 
11,111

Other noncurrent liabilities
78

 
93

Current liabilities of discontinued operations(1)
$
34,306

 
$
49,846


(1) The assets and liabilities of Hain Pure Protein are classified as current on the December 31, 2018 and June 30, 2018 Consolidated Balance Sheets because it is probable that the sale will occur within twelve months of the Board of Directors’ approval.

(2) In the three months ended June 30, 2018, results for HPPC (which comprises the Plainville Farms and FreeBird brands) were below our projections.  The fourth quarter results, as well as negative market conditions in the sector, required the Company to reduce the internal projections for the business, which resulted in the Company lowering the projected long-term growth rate and profitability levels for HPPC. Accordingly, the updated projections indicated that the fair value of the HPPC business was below carrying value. As a result, in the three months ended June 30, 2018, the Company recorded a reserve of $78,464 to adjust the carrying value of Hain Pure Protein to its fair value, less its cost to sell primarily related to the Plainville Farms business. In the first quarter of the current fiscal year, the Company increased the reserve to adjust the carrying value of Hain Pure Protein by an additional $2,958. In the three months ended December 31, 2018, the Company recorded an additional reserve of $54,946, primarily related to the Plainville Farms business, as well as unfavorable market conditions that continued to negatively impact the Hain Pure Protein reportable segment.

(3) The change in deferred taxes from June 30, 2018 to December 31, 2018 was the result of the reversal of the $12,250 million deferred tax liability previously recorded related to Hain Pure Protein being classified as held for sale. In addition, deferred taxes were impacted by the tax effect of current period book losses as well as the deferred tax benefit arising from asset impairment charges.

6.    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

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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 “Project Terra costs and other” in the Consolidated Statements of Operations. Acquisition-related costs for the three and six months ended December 31, 2018 were de minimis. Acquisition-related costs of $215 and $329 were expensed in the three and six months ended December 31, 2017, respectively. The expenses incurred primarily related to professional fees and other transaction-related costs associated with our recent acquisitions.

Fiscal 2019

There were no acquisitions completed in the six months ended December 31, 2018.

Fiscal 2018

On December 1, 2017, the Company acquired Clarks UK Limited, (“Clarks”), a leading maple syrup and natural sweetener brand in the United Kingdom. Clarks produces natural sweeteners under the ClarksTM brand, including maple syrup, honey and carob, date and agave syrups, which are sold in leading retailers and used by food service and industrial customers in the United Kingdom. Consideration for the transaction, inclusive of a subsequent working capital adjustment, consisted of cash, net of cash acquired, totaling £9,179 (approximately $12,368 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 over the 18-month period following completion of the acquisition. Clarks is included in our United Kingdom operating segment. Net sales and income before income taxes attributable to the Clarks acquisition included in our consolidated results represented less than 1% of our consolidated results.


7.    INVENTORIES

Inventories consisted of the following:
 
December 31,
2018
 
June 30,
2018
Finished goods
$
236,310

 
$
231,926

Raw materials, work-in-progress and packaging
166,414

 
159,599

 
$
402,724

 
$
391,525



8.    PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net consisted of the following:
 
December 31,
2018
 
June 30,
2018
Land
$
27,668

 
$
28,378

Buildings and improvements
89,340

 
83,289

Machinery and equipment
306,903

 
323,348

Computer hardware and software
55,802

 
54,092

Furniture and fixtures
18,090

 
17,894

Leasehold improvements
30,927

 
31,519

Construction in progress
28,532

 
17,280

 
557,262

 
555,800

Less: Accumulated depreciation and amortization
237,226

 
245,628

 
$
320,036

 
$
310,172


Depreciation and amortization expense for the three months ended December 31, 2018 and 2017 was $7,735 and $8,083, respectively. Such expense for the six months ended December 31, 2018 and 2017 was $16,184 and $16,368, respectively.


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In the six months ended December 31, 2018, the Company recorded $5,275 of non-cash impairment charges primarily related to the Company’s decision to consolidate manufacturing of certain fruit-based products in the United Kingdom.
Additionally, in the second quarter of fiscal 2019, the Company recorded a $534 non-cash impairment charge to write down the value of certain machinery and equipment used to manufacture certain slow moving SKUs in the United States that were discontinued.

9.    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
 
Rest of World
 
Total
Balance as of June 30, 2018 (a)
$
552,814

 
$
377,163

 
$
94,159

 
$
1,024,136

  Translation and other adjustments, net

 
(13,086
)
 
(2,263
)
 
(15,349
)
Balance as of December 31, 2018 (a)
$
552,814

 
$
364,077

 
$
91,896

 
$
1,008,787


(a) The total carrying value of goodwill is reflected net of $134,277 of accumulated impairment charges, of which $97,358 related to the Company’s United Kingdom operating segment, $29,219 related to the Company’s Europe operating segment and $7,700 related to the Company’s Hain Ventures operating segment (formerly known as the Cultivate Ventures operating segment).

Beginning in the third quarter of fiscal 2018, operations of Hain Pure Protein have been classified as discontinued operations as discussed in Note 5, Discontinued Operations. Therefore, goodwill associated with Hain Pure Protein is presented as assets of discontinued operations in the Consolidated Financial Statements.

The Company performs its annual test for goodwill and indefinite lived intangible asset impairment as of the first day of the fourth quarter of its fiscal year. In addition, if and when events or circumstances change that would more likely than not reduce the fair value of any of its reporting units or indefinite-life intangible assets below their carrying value, an interim test is performed.
During the three months ended December 31, 2018, the Company updated the forecasted operating results for each of its reporting units based on the most recent financial results. The updated forecasts reflected lower projected short-term revenue growth and profitability than previously expected, primarily in its United States segment. In connection with the preparation of the Consolidated Financial Statements for the period ended December 31, 2018, the Company assessed qualitative and quantitative factors, which included sensitivity analyses, and concluded that it is more likely than not that the fair value of its reporting units exceeds its carrying amount.  The Company will continue to monitor impairment indicators and financial results in future periods.

Other Intangible Assets

The following table sets forth Consolidated Balance Sheet information for intangible assets, excluding goodwill, subject to amortization and intangible assets not subject to amortization:
 
December 31,
2018
 
June 30,
2018
Non-amortized intangible assets:
 
 
 
Trademarks and tradenames (a)
$
360,321

 
$
385,609

Amortized intangible assets:
 
 
 
Other intangibles
232,997

 
239,323

Less: accumulated amortization
(119,784
)
 
(114,545
)
Net carrying amount
$
473,534

 
$
510,387


(a) The gross carrying value of trademarks and tradenames is reflected net of $83,734 and $65,834 of accumulated impairment charges at December 31, 2018 and at June 30, 2018, respectively.

Indefinite-lived intangible assets, which are not amortized, consist primarily of acquired tradenames and trademarks. Indefinite-lived intangible assets are evaluated on an annual basis in conjunction with the Company’s evaluation of goodwill, or on an interim

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basis if and when events or circumstances change that would more likely than not reduce the fair value of any of its indefinite-life intangible assets below their carrying value. 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 asset exceeds the fair value of the asset, the carrying value is written down to fair value in the period identified. During the three months ended December 31, 2018, the Company determined that an indicator of impairment existed in certain of the Company’s indefinite-lived tradenames. The result of this assessment for the second quarter of fiscal 2019 indicated that the fair value of certain of the Company’s tradenames was below their carrying value, and therefore an impairment charge of $17,900 was recognized ($11,300 in the United States segment, $2,787 in the United Kingdom segment, $3,813 in the Rest of World). During the fiscal year ended June 30, 2018, an impairment charge of $5,632 ($5,100 in the Rest of World and $532 in the United Kingdom segment) related to certain of the Company’s tradenames was recognized.
Amortized intangible assets, which are deemed to have a finite life, primarily consist of customer relationships and are amortized over their estimated useful lives of 3 to 25 years. Amortization expense included in continuing operations was as follows:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018
 
2017
 
2018
 
2017
Amortization of acquired intangibles
$
3,860

 
$
4,572

 
$
7,765

 
$
9,146


10.    DEBT AND BORROWINGS

Debt and borrowings consisted of the following:
 
December 31,
2018
 
June 30,
2018
Unsecured revolving credit facility
$
414,266

 
$
401,852

Term loan
288,750

 
296,250

Less: Unamortized issuance costs
(617
)
 
(692
)
Tilda short-term borrowing arrangements
18,725

 
9,338

Other borrowings
6,570

 
7,358

 
727,694

 
714,106

Short-term borrowings and current portion of long-term debt
35,566

 
26,605

Long-term debt, less current portion
$
692,128

 
$
687,501


Credit Agreement

On February 6, 2018, the Company entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a $1,000,000 unsecured revolving credit facility through February 6, 2023 and provides for a $300,000 term loan. Under the Credit Agreement, the credit facility may be increased by an additional uncommitted $400,000, provided certain conditions are met.

Borrowings under the Credit Agreement may be used to provide working capital, finance capital expenditures and permitted acquisitions, refinance certain existing indebtedness and for other lawful corporate purposes. The Credit Agreement provides for multicurrency borrowings in Euros, Pounds Sterling and Canadian Dollars as well as other currencies which may be designated. In addition, certain wholly-owned foreign subsidiaries of the Company may be designated as co-borrowers. The Credit Agreement contains restrictive covenants, which are usual and customary for facilities of its type, and include, with specified exceptions, limitations on the Company’s ability to engage in certain business activities, incur debt, have liens, make capital expenditures, pay dividends or make other distributions, enter into affiliate transactions, consolidate, merge or acquire or dispose of assets, and make certain investments, acquisitions and loans. The Credit Agreement also requires the Company to satisfy certain financial covenants, 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 December 31, 2018, there were $414,266 and $288,750 of borrowings outstanding under the unsecured revolving credit facility and term loan, respectively, and $9,698 letters of credit outstanding under the Credit Agreement. On November 7, 2018, the Company amended the Credit Agreement to modify the calculation of the consolidated leverage ratio related to costs associated with CEO succession as well as the Project Terra cost reduction programs. On February 6, 2019 the Company entered into an amendment to the Credit Agreement,

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whereby its allowable consolidated leverage ratio increased to no more than 4.0 to 1.0 as of December 31, 2018 and no more than 3.75 to 1.0 as of March 31, 2019 and June 30, 2019. The consolidated leverage ratio returns to 3.5 to 1.0 beginning in the period ending September 30, 2019. As of December 31, 2018, $576,036 is available under the Credit Agreement, and the Company was in compliance with all associated covenants, as amended.

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 U.S. dollars will bear interest at the Base Rate plus the Applicable Rate, and Global Swing Line loans denominated in foreign currencies shall bear interest based on the overnight Eurocurrency Rate for loans denominated in such currency plus the Applicable Rate. The weighted average interest rate on outstanding borrowings under the Credit Agreement at December 31, 2018 was 4.10%. 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, and such Commitment Fee is determined in accordance with a leverage-based pricing grid. The aforementioned February 6, 2019 amendment to the Credit Agreement also includes a provision whereby if the Company’s consolidated leverage ratio equals or exceeds 3.5 as of December 31, 2018, March 31, 2019 or June 30, 2019, the loans will bear interest at rates based on (a) the Eurocurrency rate, as defined in the Credit Agreement, plus a rate of 1.90%; or (b) the Base Rate, as defined in the Credit Agreement, plus a rate of 0.90%, and will be subject to a 0.35% Commitment Fee on the unused amounts under the Credit Agreement.

The term loan has required installment payments due on the last day of each fiscal quarter commencing June 30, 2018 in an amount equal to $3,750 and can be prepaid in whole or in part without premium or penalty.

Tilda Short-Term Borrowing Arrangements

Tilda, a component of our United Kingdom reportable segment, 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 4.16% at December 31, 2018). As of December 31, 2018 and June 30, 2018, there were $18,725 and $9,338 of borrowings under these arrangements, respectively.


11.    INCOME TAXES

In general, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. In the first quarter of fiscal 2019, the Company used an estimated annual effective tax rate to calculate its provision for income taxes. The Company calculated its effective tax rate on a discrete basis for the six months ended December 31, 2018 due to significant variations in the relationship between tax expense and projected pre-tax income. The Company’s effective tax rate may change from period-to-period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes and tax audit settlements.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation pursuant to the Tax Cuts and Jobs Act (the “Tax Act”), which significantly revised the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs (e.g., interest expense and executive compensation), among other things.

Due to the complexities involved in accounting for the Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 required that the Company include in its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined. Pursuant to SAB 118, the Company was allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of December 31, 2018, the Company finalized its accounting for the income tax effects of the Tax Act and recorded an additional expense of $8,205 related to its transition tax liability. The net increase in the transition tax was due to the finalization of our earnings and profits study for our foreign subsidiaries. The adjustment of the Company’s provisional tax expense was recorded as a change in estimate in accordance with SAB No. 118. Despite the completion of the Company’s accounting for the Tax Act under SAB 118, many aspects of the law remain unclear, and we expect ongoing guidance to be issued at both the federal and state levels. The Company will continue to monitor and assess the impact of any new developments.


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The Tax Act also includes a provision to tax global intangible low-taxed income (“GILTI”) of foreign subsidiaries. The FASB Staff Q&A Topic No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election either to recognize deferred taxes for temporary differences that are expected to reverse as GILTI in future years or provide for the tax expense related to GILTI resulting from those items in the year the tax is incurred. We have elected to recognize the resulting tax on GILTI as a period expense in the period the tax is incurred. We have computed the impact on our effective tax rate on a discrete basis. The actual tax expense we record for GILTI may differ from this estimate.

The effective income tax rate from continuing operations was expense of 19.1% and a benefit of 70.1% for the three months ended December 31, 2018 and December 31, 2017, respectively. The effective income tax rate from continuing operations was a benefit of 8.4% and 19.9% for the six months ended December 31, 2018 and December 31, 2017, respectively. The effective income tax rate from continuing operations for the three and six months ended December 31, 2018 was impacted by provisions in the Tax Act including GILTI, finalization of the transition tax liability, and limitations on the deductibility of executive compensation. The effective income tax rate was also impacted by the geographical mix of earnings and state taxes. The effective rate for the three and six months ended December 31, 2017 was primarily impacted by the enactment of the Tax Act on December 22, 2017, specifically the revalue of net deferred tax liabilities to the enacted 21% tax rate, inclusion of the transition tax liability estimate and deductibility of executive officers’ compensation.

The income tax benefit from discontinued operations was $22,452 and $27,620 for the three and six months ended December 31, 2018, while the income tax expense from discontinued operations was $1,321 and $2,307 for the three and six months ended December 31, 2017. The benefit for income taxes for the three and six months ended December 31, 2018 includes the reversal of the $12,250 deferred tax liability previously recorded related to Hain Pure Protein being classified as held for sale. In addition, the three and six month tax benefit is impacted by the tax effect of current period book losses as well as the deferred tax benefit arising from asset impairment charges.
                                                                                                                                                                                                                                                                                                              
12.     ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents the changes in accumulated other comprehensive (loss) income:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018
 
2017
 
2018
 
2017
Foreign currency translation adjustments:
 
 
 
 
 
 
 
Other comprehensive (loss) income before reclassifications (1)
$
(27,948
)
 
$
8,336

 
$
(41,467
)
 
$
42,197

Deferred gains/(losses) on cash flow hedging instruments:
 
 
 
 
 
 
 
Other comprehensive income before reclassifications

 

 

 
39

Amounts reclassified into income (2)

 

 

 
(106
)
Unrealized gain/(loss) on equity investment:
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications

 
5

 

 
(2
)
Net change in accumulated other comprehensive (loss) income
$
(27,948
)
 
$
8,341

 
$
(41,467
)
 
$
42,128


(1)
Foreign currency translation adjustments included intra-entity foreign currency transactions that were of a long-term investment nature and were a net loss of $313 and a net gain of $315 for the three months ended December 31, 2018 and 2017, respectively, and a net loss of $472 and a net gain of $1,066 for the six months ended December 31, 2018 and 2017, respectively.
(2)
Amounts reclassified into income for deferred gains/(losses) on cash flow hedging instruments are recorded in “Cost of sales” in the Consolidated Statements of Operations and, before taxes, were $132 for the six months ended December 31, 2017. There were no amounts reclassified into income for deferred gains/(losses) on cash flow hedging instruments for the three and six months ended December 31, 2018 and for the three months ended December 31, 2017.



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13.    STOCK-BASED COMPENSATION AND INCENTIVE PERFORMANCE PLANS

The Company has two stockholder-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.

Compensation cost and related income tax benefits recognized in the Consolidated Statements of Operations for stock-based compensation plans were as follows:
  
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018

2017
 
2018
 
2017
Selling, general and administrative expense
$
1,774


$
4,158

 
$
1,565


$
7,322

Chief Executive Officer Succession Plan expense, net
117

 

 
429

 

Discontinued operations
20

 

 
52

 

Total compensation cost recognized for stock-based compensation plans
$
1,911

 
$
4,158

 
$
2,046

 
$
7,322

Related income tax benefit
$
256

 
$
1,187

 
$
295

 
$
2,421


In the six months ended December 31, 2018, the Company recorded a benefit of $1,867 related to the reversal of expense associated with the TSR Grant under the 2017-2019 LTIP, as defined and discussed further below.

Stock Options

A summary of the stock option activity for the six months ended December 31, 2018 is as follows:
 
Number of Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Contractual
Life (years)
 
Aggregate
Intrinsic Value
Options outstanding and exercisable at June 30, 2018
122

 
$
2.26

 
 
 
 
Exercised

 

 
 
 
 
Options outstanding and exercisable at December 31, 2018
122

 
$
2.26

 
12.5
 
$
1,658


At December 31, 2018, there was no unrecognized compensation expense related to stock option awards.

Restricted Stock

A summary of the restricted stock and restricted share unit activity for the six months ended December 31, 2018 is as follows:
 
Number of Shares
and Units
 
Weighted
Average Grant
Date Fair 
Value (per share)
Non-vested restricted stock, restricted share units, and performance units at June 30, 2018
1,057

 
$
22.29

Granted (1)
1,147

 
$
8.79

Vested(2)
(269
)
 
$
25.80

Forfeited (3)
(284
)
 
$
16.73

Non-vested restricted stock, restricted share units, and performance units at December 31, 2018
1,651

 
$
13.29

(1) Includes 1,050 performance share units granted to Mr. Schiller in connection with his Inducement Award, as described further below, and 79 time-based restricted shares granted to Mr. Schiller that vest over three years.
(2) Includes the vesting of 172 shares associated with Irwin D. Simon, the Company’s former CEO, 88 of which were accelerated in connection with the CEO Succession Agreement.
(3) Includes the cancellation of 223 shares of performance stock unit awards previously granted in connection with the 2016-2018 LTIP, as further discussed below.


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Six Months Ended December 31,
 
2018
 
2017
Fair value of restricted stock and restricted share units granted
$
10,073

 
$
14,595

Fair value of shares vested
$
6,938

 
$
14,238

Tax benefit recognized from restricted shares vesting
$
2,561

 
$
4,887


At December 31, 2018, $15,107 of unrecognized stock-based compensation expense, net of estimated forfeitures, related to non-vested restricted stock awards was expected to be recognized over a weighted-average period of approximately 2.7 years.

Long-Term Incentive Plan

The Company maintains a long-term incentive program (the “LTI Plan”). The LTI Plan currently consists of two performance-based long-term incentive plans (the “2016-2018 LTIP” and the “2017-2019 LTIP”) that provide for performance equity awards that can be earned over the respective three-year performance period. Participants in the LTI Plan include certain of the Company’s executive officers and other key executives.

The Compensation Committee administers the LTI Plan and is responsible for, among other items, selecting the specific performance measures for awards and setting the target performance required to receive an award after the completion of the performance period. 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.

2016-2018 and 2017-2019 LTIP

Upon adoption of the 2016-2018 LTIP and 2017-2019 LTIP, the Compensation Committee granted performance stock 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 and from July 1, 2017 to June 30, 2019 (the “TSR Grant”), respectively. 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 and 2017-2019 LTIP is based on the Company’s achievement of specified net sales growth targets over the respective three-year period. If the targets are achieved, the award in connection with the 2017-2019 LTIP may be paid only in unrestricted shares of the Company’s common stock.

During the six months ended December 31, 2018, in connection with the 2016-2018 LTIP, for the three-year performance period of July 1, 2015 through June 30, 2018, the Compensation Committee determined that the adjusted operating income goal required to be met for Section 162(m) funding was not achieved and determined that no awards would be paid or vested pursuant to the 2016-2018 LTIP. Accordingly, all performance stock unit awards previously granted in connection with the relative TSR portion of the award were forfeited, and amounts accrued relating to the net sales portion of the award were reversed. As such, in the six months ended December 31, 2018, the Company recorded a benefit of $6,482 associated with the reversal of previously accrued amounts under the net sales portion of the 2016-2018 LTIP, of which $5,065 was recorded in Chief Executive Officer Succession Plan expense, net on the Consolidated Statement of Operations.

In connection with the 2017-2019 LTIP, in the six months ended December 31, 2018, the Company determined that the achievement of the adjusted operating income goal required to be met for Section 162(m) funding was not probable. Accordingly, during the six months ended December 31, 2018, the Company recorded benefits of $1,129 and $1,867 associated with the reversal of previously accrued amounts under the portions of the 2017-2019 LTIP that were dependent on the achievement of pre-determined performance measures of net sales and relative TSR, respectively.

Inducement Grant

On November 6, 2018, Mr. Schiller received an award of 1,050 performance-stock units intended to represent the total three-year long-term incentive opportunity that would have been made in fiscal years 2019 – 2021 (the “PSUs”). The PSUs will vest pursuant to the achievement of pre-established three-year compound annual TSR levels. The number of shares actually issued will range from zero to 1,050. No PSUs will vest if the 3-Year compound annual TSR is below 15%.



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The number of PSUs expected to be earned, based upon the achievement of the TSR market condition, is factored into the grant date Monte Carlo valuation. Compensation expense is recognized on a straight-line basis over the three-year service period, regardless of the eventual number of PSUs that are earned based upon the market condition, provided Mr. Schiller remains an employee at the end of the three-year period. Compensation expense is reversed if at any time during the three-year service period Mr. Schiller is no longer an employee, subject to certain termination and change in control eligibility provisions. These PSUs are subject to a holding period of one year after the vesting date. As such, an illiquidity discount was applied to the grant date fair value. The total grant date fair value of the award was estimated to be $7,571, or $7.21 per share.

Total compensation cost related to this award recognized in the three and six months ended December 31, 2018 was $386.

14.    INVESTMENTS

Equity method investment

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 of Chop’t. During fiscal 2018, the Company’s ownership interest was reduced to 13.4% due to the distribution of additional ownership interests. Further ownership interest distributions could potentially dilute the Company’s ownership interest to as low as 11.9%. At December 31, 2018 and June 30, 2018, the carrying value of the Company’s investment in Chop’t was $15,000 and $15,524, respectively, and is included in the Consolidated Balance Sheets as a component of “Investments and joint ventures.”

15.    FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE

The Company’s financial assets and liabilities measured at fair value are required to be grouped in one of three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following table presents by level within the fair value hierarchy assets and liabilities measured at fair value on a recurring basis as of December 31, 2018: 
 
Total
 
Quoted
prices in
active
markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Rabbi trust investments
$
34,304

 
$
34,304

 
$

 
$

Forward foreign currency contracts
429

 

 
429

 

Equity investment
599

 
599

 

 

Contingent consideration, current
1,623

 

 

 
1,623

Total
$
36,955

 
$
34,903

 
$
429

 
$
1,623

Liabilities:
 
 
 
 
 
 
 
Forward foreign currency contracts
$
19

 
$

 
$
19

 
$

Contingent consideration, non-current
265

 

 

 
265

Total
$
284

 
$

 
$
19

 
$
265



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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, 2018:
 
Total
 
Quoted
prices in
active
markets
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
99

 
$
99

 
$

 
$

Forward foreign currency contracts
365

 

 
365

 

Equity investments
692

 
692

 

 

Total
$
1,156

 
$
791

 
$
365

 
$

Liabilities:
 
 
 
 
 
 
 
Forward foreign currency contracts
$
27

 
$

 
$
27

 
$

Contingent consideration, non-current
1,909

 

 

 
1,909

Total
$
1,936

 
$

 
$
27

 
$
1,909


The rabbi trust investments consist of cash and mutual funds whose fair value is based on quoted prices in active markets for identical assets, and are designated as Level 1 within the valuation hierarchy. The equity investment consists of the Company’s less than 1% investment in Yeo Hiap Seng Limited, a food and beverage manufacturer and distributor based in Singapore. Fair value is measured using the market approach based on quoted prices.  The Company utilizes the income approach to measure fair value for its foreign currency forward contracts.  The income approach uses pricing models that rely on market observable inputs such as yield curves, currency exchange rates and forward prices.

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.

The following table summarizes the Level 3 activity for the six months ended December 31, 2018.
        
Balance as of June 30, 2018
$
1,909

Contingent consideration adjustment (a)
48

Translation adjustment
(69
)
Balance as of December 31, 2018
$
1,888


(a) The change in the fair value of contingent consideration is included in “Project Terra costs and other” in the Company’s Consolidated Statements of Operations.

There were no transfers of financial instruments between the three levels of fair value hierarchy during the six months ended December 31, 2018 and December 31, 2017.

The carrying amount of cash and cash equivalents, accounts receivable, net, accounts payable and certain accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these financial instruments. The Company’s debt approximates fair value due to the debt bearing fluctuating market interest rates (See Note 10, Debt and Borrowings).

In addition to the instruments named above, the Company also makes fair value measurements in connection with its interim and annual goodwill and trade name impairment testing. These measurements fall into Level 3 of the fair value hierarchy (See Note 9, Goodwill and Other Intangible Assets).

Derivative Instruments

The Company primarily has exposure to changes in foreign currency exchange rates relating to certain anticipated cash flows and firm commitments from its international operations. The Company may enter into certain derivative financial instruments, when

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available on a cost-effective basis, to manage such risk. Derivative financial instruments are not used for speculative purposes. The fair value of these derivatives is included in prepaid expenses and other current assets and accrued expenses and other current liabilities in the Consolidated Balance Sheet. For derivative instruments that qualify as hedges of probable forecasted cash flows, the effective portion of changes in fair value is temporarily reported in accumulated other comprehensive income and recognized in earnings when the hedged item affects earnings. Fair value hedges and derivative instruments not designated as hedges are marked-to-market each reporting period with any unrealized gains or losses recognized in earnings.

Derivative instruments designated at inception as hedges are measured for 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 three and six months ended December 31, 2018 and December 31, 2017.

There were no cash flow hedges or fair value hedges outstanding as of December 31, 2018 and June 30, 2018.
 
The notional amounts of derivative foreign currency exchange contracts not designated as hedges at December 31, 2018 and June 30, 2018 were $48,093 and $20,986, respectively. The fair values of derivatives not designated as hedges at December 31, 2018 and June 30, 2018 were $410 and $338 of net assets, respectively.

Gains and losses related to both designated and non-designated foreign currency exchange contracts are recorded in the Company’s Consolidated Statements of Operations based upon the nature of the underlying hedged transaction and were not material for the three and six months ended December 31, 2018 and December 31, 2017.


16.    COMMITMENTS AND CONTINGENCIES

Securities Class Actions Filed in Federal Court

On August 17, 2016, three securities class action complaints were filed in the Eastern District of New York against the Company alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The three complaints are: (1) Flora v. The Hain Celestial Group, Inc., et al. (the “Flora Complaint”); (2) Lynn v. The Hain Celestial Group, Inc., et al. (the “Lynn Complaint”); and (3) Spadola v. The Hain Celestial Group, Inc., et al. (the “Spadola Complaint” and, together with the Flora and Lynn Complaints, the “Securities Complaints”).  On June 5, 2017, the court issued an order for consolidation, appointment of Co-Lead Plaintiffs and approval of selection of co-lead counsel.  Pursuant to this order, the Securities Complaints were consolidated under the caption In re The Hain Celestial Group, Inc. Securities Litigation (the “Consolidated Securities Action”), and Rosewood Funeral Home and Salamon Gimpel were appointed as Co-Lead Plaintiffs.  On June 21, 2017, the Company received notice that plaintiff Spadola voluntarily dismissed his claims without prejudice to his ability to participate in the Consolidated Securities Action as an absent class member.  The Co-Lead Plaintiffs in the Consolidated Securities Action filed a Consolidated Amended Complaint on August 4, 2017 and a Corrected Consolidated Amended Complaint on September 7, 2017 on behalf of a purported class consisting of all persons who purchased or otherwise acquired Hain Celestial securities between November 5, 2013 and February 10, 2017 (the “Amended Complaint”).  The Amended Complaint 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. Defendants filed a motion to dismiss on October 3, 2017. Co-Lead Plaintiffs filed an opposition on December 1, 2017, and Defendants filed the reply on January 16, 2018. On April 4, 2018, the Court requested additional briefing relating to certain aspects of Defendants’ motion to dismiss. In accordance with this request, Lead Plaintiffs submitted their supplemental brief on April 18, 2018, and Defendants submitted an opposition on May 2, 2018. Lead Plaintiffs filed a reply brief on May 9, 2018, and Defendants submitted a sur-reply on May 16, 2018.

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. 

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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. On November 2, 2017, the parties agreed to stay the Consolidated Derivative Action until April 11, 2018. On April 6, 2018, the parties filed a proposed stipulation agreeing to stay the Consolidated Derivative Action until October 4, 2018, which the Court granted on May 3, 2018. On October 9, 2018, the Court further stayed this matter until December 4, 2018 and on December 4, 2018 further stayed the matter until January 14, 2019. On January 14, 2019, the Court held a status conference and granted Plaintiffs leave to file an amended complaint by March 7, 2019, while continuing the stay as to all other aspects of the case. The Court scheduled a status conference for March 13, 2019.

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 (the “Merenstein Complaint”).

On August 10, 2017, the court granted the parties stipulation to consolidate the Barnes Complaint, the Silva Complaint and the Merenstein Complaint under the caption In re The Hain Celestial Group, Inc. Stockholder Class and Derivative Litigation (the “Consolidated Stockholder Class and Derivative Action”) and to appoint Robbins Arroyo LLP and Scott+Scott as Co-Lead Counsel, with the Law Offices of Thomas G. Amon as Liaison Counsel for Plaintiffs.   On September 14, 2017, a related complaint was filed under the caption Oliver v. Berke, et al. (the “Oliver Complaint”), and on October 6, 2017, the Oliver Complaint was consolidated with the Consolidated Stockholder Class and Derivative Action. The Plaintiffs filed their consolidated amended complaint under seal on October 26, 2017. On December 20, 2017, the parties agreed to stay Defendants’ time to answer, move, or otherwise respond to the consolidated amended complaint through and including 30 days after a decision is rendered on the motion to dismiss the Amended Complaint in the consolidated Securities Class Actions, described above.

Center for Environmental Health v. Save Mart Supermarkets, et.al., Superior Court of the State of California, Alameda County

On August 19, 2015, the Center for Environmental Health (“CEH”), a private enforcer, filed a complaint under the California Safe Drinking Water and Toxic Enforcement Act (the “Enforcement Act”) (commonly referred to as “Proposition 65”), naming various defendants, including the Company.  The complaint alleges that the Company is required to provide warnings for certain of its products for alleged exposure to the substance listed under the Enforcement Act as “acrylamide.”  The other defendants named in the action are five retailers and one distributor, all of which are named for the Company’s products at issue.  Acrylamide is a chemical that can form in some foods during high-temperature cooking processes, such as frying, roasting and baking.  The complaint seeks injunctive relief, civil penalties in the amount of $2,500 per day (unrounded) for each alleged violation, and CEH’s attorneys’ fees and costs.

On October 16, 2018, following a mediation on October 3, 2018, CEH and the Company executed a proposed consent judgment (“Consent Judgment”) to resolve the above-referenced action in its entirety.  The Consent Judgment sets acrylamide standards for potato- and sweet-potato based fried or baked snack foods.  The Consent Judgment requires the Company to pay total of $588 in non-contingent settlement payments.  In addition, the Consent Judgment sets a series of separate contingent payments if the Company exercises certain options in the future with respect to injunctive terms.  On December 18, 2018, the Court approved the Consent Judgment. Accordingly, the Consent Judgment is now in effect and binding on the parties.

SEC Investigation

As previously disclosed, the Company voluntarily contacted the Securities and Exchange Commission (the “Commission”) 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.  On December 11, 2018, the Commission announced it had reached a settlement agreement with the Company and published its order instituting proceedings, which includes the settlement. The settlement fully resolves this matter, without any finding of intentional wrongdoing by the Company and without any monetary penalty, while noting the

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Company’s cooperation and prompt remedial acts.  The order and terms of the settlement relate to the Company’s previously disclosed material weaknesses in internal controls over financial reporting.

Other

In addition to the litigation described above, the Company is and may be a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position, cash flows or liquidity.

17.    SEGMENT INFORMATION

Beginning in the third quarter of fiscal 2018, the Hain Pure Protein operations were classified as discontinued operations as discussed in “Note 5, Discontinued Operations.” Therefore, segment information presented excludes the results of Hain Pure Protein. As a result, the Company is now managed in seven operating segments: the United States, United Kingdom, Tilda, Ella’s Kitchen UK, Europe, Canada and Hain Ventures (formerly known as Cultivate).

The prior period segment information contained below has been adjusted to reflect the Company’s revised operating and reporting structure.

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, certain Project Terra 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.


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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.
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018

2017
 
2018
 
2017
Net Sales:
 
 
 
 
 
 
 
United States
$
259,155

 
$
270,303

 
$
503,140

 
$
533,962

United Kingdom
225,338

 
238,201

 
443,915

 
460,646

Rest of World
99,663

 
107,728

 
197,934

 
210,843

 
$
584,156

 
$
616,232

 
$
1,144,989

 
$
1,205,451

 
 
 
 
 
 
 
 
Operating (Loss)/Income:
 
 
 
 
 
 
 
United States
$
7,180

 
$
21,861

 
$
9,350

 
$
42,722

United Kingdom
14,655

 
13,598

 
18,675

 
23,199

Rest of World
8,374

 
10,535

 
16,210

 
19,532

 
$
30,209

 
$
45,994

 
$
44,235

 
$
85,453

Corporate and Other (a)
(45,596
)
 
(15,029
)
 
(83,726
)
 
(25,247
)
 
$
(15,387
)
 
$
30,965

 
$
(39,491
)
 
$
60,206


(a) For the three months ended December 31, 2018, Corporate and Other includes $10,148 of Chief Executive Officer Succession Plan expense, net, $5,506 of Project Terra costs and other and $920 of accounting review and remediation costs. Corporate and Other for the three months ended December 31, 2018 also includes impairment charges of $17,900 ($11,300 related to the United States segment, $2,787 related to the United Kingdom segment and $3,813 in Rest of World) related to certain of the Company’s tradenames. For the three months ended December 31, 2017, Corporate and Other includes $641 of Project Terra costs and other $4,451 of accounting review and remediation costs.

For the six months ended December 31, 2018, Corporate and Other includes $29,701 of Chief Executive Officer Succession Plan expense, net, $13,483 of Project Terra costs and other and $4,334 of accounting review and remediation costs. Corporate and Other for the six months ended December 31, 2018 also includes impairment charges of $17,900 ($11,300 related to the United States segment, $2,787 related to the United Kingdom segment and $3,813 in Rest of World) related to certain of the Company’s tradenames. For the six months ended December 31, 2017, Corporate and Other included $3,254 of Project Terra costs and other and net expense of $3,093 of accounting review and remediation costs, net of insurance proceeds, consisting of $8,093 of costs incurred in the six months ended December 31, 2017 offset by insurance proceeds of $5,000.

The Company’s long-lived assets, which primarily represent net property, plant and equipment, by geographic area were as follows:
 
December 31,
2018
 
June 30,
2018
United States
$
108,930

 
$
99,650

United Kingdom
174,625

 
174,214

All Other
86,189

 
86,700

Total
$
369,744

 
$
360,564


The Company’s net sales by geographic region, which are generally based on the location of the Company’s subsidiary, were as follows:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2018
 
2017
 
2018
 
2017
United States
$
272,260

 
$
286,059

 
$
528,290

 
$
564,353

United Kingdom
225,338

 
238,201

 
443,915

 
460,646

All Other
86,558

 
91,972

 
172,784

 
180,452

Total
$
584,156

 
$
616,232

 
$
1,144,989

 
$
1,205,451


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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and the related Notes for the period ended December 31, 2018 thereto contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading “Cautionary Note Regarding Forward Looking Information” in the introduction of this Form 10-Q.

Overview

The Hain Celestial Group, Inc. (the “Company”), a Delaware corporation, was founded in 1993 and is headquartered in Lake Success, New York. The Company’s mission has continued to evolve since its founding, with health and wellness being the core tenet — To Create and Inspire A Healthier Way of LifeTM and be the leading marketer, manufacturer and seller of organic and natural, “better-for-you” products by anticipating and exceeding consumer expectations in providing quality, innovation, value and convenience. The Company is committed to growing sustainably while continuing to implement environmentally sound business practices and manufacturing processes.

The Company manufactures, markets, distributes and sells organic and natural products under brand names that are sold as “better-for-you” products, providing consumers with the opportunity to lead A Healthier Way of Life™.  Hain Celestial is a leader in many organic and natural products categories, with many recognized brands in the various market categories it serves, including Almond Dream®, Arrowhead Mills®, Bearitos®, Better Bean®, BluePrint®, Casbah®, Celestial Seasonings®, Clarks™, Coconut Dream®, Cully & Sully®, Danival®, DeBoles®, Earth’s Best®, Ella’s Kitchen®, Europe’s Best®, Farmhouse Fare™, Frank Cooper’s®, Gale’s®, Garden of Eatin’®, GG UniqueFiber®, Hain Pure Foods®, Hartley’s®, Health Valley®, Imagine®, Johnson’s Juice Co.™, Joya®, Lima®, Linda McCartney® (under license), MaraNatha®, Mary Berry (under license), Natumi®, New Covent Garden Soup Co.®, Orchard House®, Rice Dream®, Robertson’s®, Rudi’s Gluten-Free Bakery™, Rudi’s Organic Bakery®, Sensible Portions®, Spectrum® Organics, Soy Dream®, Sun-Pat®, Sunripe®, SunSpire®, Terra®, The Greek Gods®, Tilda®, Walnut Acres®, WestSoy®, Yorkshire Provender®, Yves Veggie Cuisine® and William’s™. The Company’s personal care products are marketed under the Alba Botanica®, Avalon Organics®, Earth’s Best®, JASON®, Live Clean® and Queen Helene® brands.

The Company 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.

Appointment of New CEO

On October 26, 2018, the Company’s Board of Directors appointed Mark L. Schiller as President and Chief Executive Officer, succeeding Irwin D. Simon. In connection with the appointment, on October 26, 2018, the Company and Mr. Schiller entered into an employment agreement, which was approved by the Board, with Mr. Schiller’s employment commencing on November 5, 2018. See Note 3, Chief Executive Officer Succession Plan, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information.

Discontinued Operations

In March 2018, the Company’s Board of Directors approved a plan to sell all of the operations of the Hain Pure Protein Corporation (“HPPC”) and EK Holdings, Inc. (“Empire”) operating segments, which are reported in the aggregate as the Hain Pure Protein reportable segment. These dispositions are being undertaken to reduce complexity in the Company’s operations and simplify the Company’s brand portfolio, in addition to allowing additional flexibility to focus on opportunities for growth and innovation in the Company’s more profitable core businesses.
Collectively, these dispositions represent a strategic shift that will have a major impact on the Company’s operations and financial results and have been accounted for as discontinued operations. See Note 5, Discontinued Operations, in the Notes to Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information on discontinued operations.
Project Terra

During fiscal 2016, the Company commenced a strategic review, referred to as “Project Terra,” of which a key initiative is the identification of global cost savings, as well as removing complexities from the business. Under this plan, the Company aims to achieve $350 million in global savings by fiscal 2020, a portion of which the Company intends to reinvest into its brands. This review includes streamlining the Company’s manufacturing plants, co-packers, and supply chain, in addition to product rationalization initiatives which are aimed at eliminating slow moving stock keeping units (“SKUs”).

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Comparison of Three Months Ended December 31, 2018 to Three Months Ended December 31, 2017

Consolidated Results

The following table compares our results of operations, including as a percentage of net sales, on a consolidated basis, for the three months ended December 31, 2018 and 2017 (amounts in thousands, other than percentages which may not add due to rounding):
 
Three Months Ended
 
Change in
 
December 31, 2018
 
December 31, 2017
 
Dollars
 
Percentage
Net sales
$
584,156

 
100.0%
 
$
616,232

 
100.0%
 
$
(32,076
)
 
(5.2)%
Cost of sales
469,883

 
80.4%
 
482,282

 
78.3%
 
(12,399
)
 
(2.6)%