UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
FORM 10-K
___________________________________________
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
For the fiscal year ended June 30 , 2022
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
___________________________________________
(Exact name of registrant as specified in its charter)
___________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
Registrant’s telephone number, including area code: (516 ) 587-5000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________________
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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.
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).
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.
| ☒ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the
closing price of the registrant’s common stock, as quoted by The Nasdaq Stock Market LLC on December 31, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, was $3,875,927,081 .
As of August 18, 2022, there were 89,299,252 shares outstanding of the registrant’s Common Stock, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
THE HAIN CELESTIAL GROUP, INC.
Table of Contents
| Page | ||||||||
| PART I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Item 9C. | ||||||||
| PART III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
2
Forward-Looking Statements
This Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (the “Form 10-K”) contains forward-looking statements within the meaning of safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of The Hain Celestial Group, Inc. (collectively with its subsidiaries, the “Company,” “Hain Celestial,” “we,” “us” or “our”) may differ materially from those expressed or implied by such forward-looking statements. The words “believe,” “expect,” “anticipate,” “may,” “should,” “plan,” “intend,” “potential,” “will” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include, among other things, our beliefs or expectations relating to our future performance, results of operations and financial condition; foreign exchange rates; our strategic initiatives, business strategy, supply chain, brand portfolio, pricing actions and product performance; current or future macroeconomic trends; and future corporate acquisitions or dispositions.
Risks and uncertainties that may cause actual results to differ materially from forward-looking statements include: challenges and uncertainty resulting from the impact of competition; our ability to manage our supply chain effectively; input cost inflation; supply chain disruptions, cybersecurity risks and other risks arising from the Russia-Ukraine war; disruption of operations at our manufacturing facilities; reliance on independent contract manufacturers; challenges and uncertainty resulting from the COVID-19 pandemic; changes to consumer preferences; customer concentration; reliance on independent distributors; the availability of natural and organic ingredients; risks associated with our international sales and operations; risks associated with outsourcing arrangements; our ability to execute our cost reduction initiatives and related strategic initiatives; our ability to identify and complete acquisitions or divestitures and our level of success in integrating acquisitions; our reliance on independent certification for a number of our products; the reputation of our Company and our brands; our ability to use and protect trademarks; general economic conditions; foreign currency exchange risk; the United Kingdom’s exit from the European Union; cybersecurity incidents; disruptions to information technology systems; the impact of climate change; liabilities, claims or regulatory change with respect to environmental matters; potential liability if our products cause illness or physical harm; the highly regulated environment in which we operate; pending and future litigation; compliance with data privacy laws; compliance with our credit agreement; the discontinuation of LIBOR; our ability to issue preferred stock; the adequacy of our insurance coverage; impairments in the carrying value of goodwill or other intangible assets; and other risks and matters described in Part I, Item 1A, “Risk Factors” and elsewhere in this Form 10-K as well as in other reports that we file in the future.
We undertake no obligation to update forward-looking statements to reflect actual results or changes in assumptions or circumstances, except as required by applicable law.
3
PART I
THE HAIN CELESTIAL GROUP, INC.
Item 1. Business
Overview
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. The Company continues to be a 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 75 countries worldwide.
The Company manufactures, markets, distributes and sells organic and natural products providing consumers with the opportunity to lead A Healthier Way of Life®. The Company’s food and beverage brands include Celestial Seasonings®, Clarks™, Cully & Sully®, Earth’s Best®, Ella’s Kitchen®, Frank Cooper’s®, Garden of Eatin’®, Hartley’s®, Health Valley®, Imagine®, Joya®, Lima®, Linda McCartney’s® (under license), MaraNatha®, Natumi®, New Covent Garden Soup Co.®, ParmCrisps®, Robertson’s®, Rose’s® (under license), Sensible Portions®, Spectrum®, Sun-Pat®, Terra®, The Greek Gods®, Thinsters®, Yorkshire Provender® and Yves Veggie Cuisine®. The Company’s personal care brands include Alba Botanica®, Avalon Organics®, JASON®, Live Clean®, and Queen Helene®.
Acquisition
On December 28, 2021, the Company acquired all outstanding stock of Proven Brands, Inc. (and its subsidiary That's How We Roll LLC) and KTB Foods Inc., collectively doing business as "That's How We Roll" ("THWR"), the producer and marketer of ParmCrisps® and Thinsters®. See Note 4, Acquisitions and Dispositions, for details.
Discontinued Operations
The Company completed the sale of the former Tilda operating segment and the Hain Pure Protein reportable segment; these dispositions represented strategic shifts that had a major impact on the Company’s operations and financial results. Accordingly, the Company is presenting the operating results and cash flows of the Tilda operating segment and the Hain Pure Protein reportable segment within discontinued operations in the prior periods (see Note 4, Acquisitions and Dispositions, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K). All footnotes exclude discontinued operations unless otherwise noted.
Environmental, Social and Governance
We are focused on growing our business sustainably by delivering long-term value for our customers, suppliers, stockholders, employees and the communities where we live and work. As part of our vision to maximize stakeholder value, we are committed to incorporating environmental, social and related governance (“ESG”) principles into our business strategies and organizational culture. The “Healthier Way” framework (Healthier Planet, Products, and People) set out in our most recent ESG Report (available at hain.com/company/impact) provides our guiding principles for ESG initiatives.
Our ESG Reports and the other information available at hain.com/company/impact are not, and shall not be deemed to be, a part of this Form 10-K or incorporated into any of our other filings made with the Securities and Exchange Commission (the “SEC”).
Human Capital Resources
As of June 30, 2022, we had approximately 3,078 employees, with approximately 49% located in North America and approximately 51% located outside of North America. Approximately 65% of our employees in North America and approximately 60% of our employees outside of North America were based in our production facilities. Substantially all of our employees are full-time, permanent employees.
4
Our employees are critical to our success. The following programs, initiatives and principles encompass some of the human capital objectives and measures that we focus on in managing our business and in seeking to attract and retain a talented workforce.
Our Culture and Our Vision, Mission and Values
Our culture is shaped by our vision, mission and values. Our vision is to inspire healthier living for all. To achieve this aspiration, our mission is to build enduring health and wellness brands that are known and loved by consumers and enrich the lives of employees and all of our stakeholders. We live by our values of teamwork, integrity and entrepreneurship – we think and act with a broad company perspective, we do the right thing, and we think in an innovative way and challenge the status quo.
Diversity and Inclusion
People have always been our greatest asset. They are the very heart of our Company, and we believe everyone should feel encouraged, respected and welcomed in our workplace.
Diversity and inclusion drives success, and we believe that our employees’ diverse backgrounds and experiences are essential to helping us all to continue to thrive internally and deliver innovative products to our customers. We promote fairness by practicing equal opportunity in all decisions about hiring, compensation, training, promotions and every other aspect of employment.
We maintain a Diversity & Inclusion (“D&I”) Council in North America to create and foster a workplace that reflects and contributes to the diverse, global communities in which we do business. We are continuing to work to build our D&I efforts into recruitment, retention and internal mobility.
As of June 30, 2022, our global workforce was 59% male and 41% female. In the United States, on an employee self-reported basis, the racial/ethnic composition of our workforce was approximately 42% Hispanic or Latino, 38% White, 12% Black or African American, 5% Asian and 3% other. We make additional workforce demographic data available at hain.com/impact. The information available at hain.com/impact is not a part of this Form 10-K or incorporated into any of our other filings made with the SEC.
Employee Health and Safety
Employee safety is always front and center. We invest in the health, safety, development and well-being of our employees. In an effort to ensure workplace safety, we train employees on how to follow our detailed, written safety standards and procedures, and the law, and to watch for and report anything potentially harmful. Our safety key performance indicators are reviewed weekly, monthly and annually to ensure quick feedback and to address safety issues as soon as they arise.
Learning and Development
We offer a number of programs that help our employees progress in their careers. These programs include access to online learning and development tools as well as many additional local initiatives across our global locations to support employees on their career paths and develop leadership qualities and career skills in our global workforce.
Benefits
Our employee benefits vary by region but generally include:
•Medical, Dental, and Vision Benefits;
•Retirement Savings and Pension Plans;
•Commuter Benefits;
•Wellness Initiatives;
•Tuition Reimbursement; and
•Paid Parental Leave including births, adoptions or placements of foster children.
Employee Satisfaction and Engagement
We aim to foster a culture of open communications and have implemented a global systematic employee engagement process in which employees are surveyed periodically. Our Executive Leadership Team regularly reviews the results and considers and implements action items to address areas that need improvement. We have additional regional programs and policies in place to
5
encourage open communications with management and Human Resources about employees’ ideas, concerns and how they are doing.
Products
Our brand portfolio focuses on growing global brands in categories where we believe we have the most potential. We continuously evaluate our existing products for quality, taste, nutritional value and cost and make improvements where possible. Conversely, we discontinue products or stock keeping units (“SKUs”) when sales of those items do not warrant further production. The categories we have identified are called Turbocharge, Targeted Investment, Fuel and Simplify:
•The Turbocharge brands are leading-share brands in what we believe to be very high-growth categories. The Turbocharge brands are made up of snacks as well as plant-based meat and non-dairy beverages. Our snacks businesses include brands both within the United States and in our International segment (“International”), while our meat and dairy alternatives businesses are concentrated outside the United States. Our snack products include a variety of potato, root vegetable and other exotic vegetable chips, straws, tortilla chips, whole grain chips, pita chips and puffs. The Turbocharge brands accounted for approximately 39% of our consolidated net sales in fiscal 2022, 36% in fiscal 2021 and 32% in fiscal 2020.
•The Targeted Investment brands are made up of leading-share brands in lower-growth categories. To date, we have demonstrated our ability to drive market share and reinvigorate these categories, and we expect that we can continue to do this in the future. The Targeted Investment brands are made up of tea, baby, yogurt, and personal care products. The Targeted Investment brands accounted for approximately 35% of our consolidated net sales in fiscal 2022, 34% in fiscal 2021 and 32% in fiscal 2020.
•The Fuel brands are stable brands that will be leveraged to fuel investment in the Turbocharge and Targeted Investment categories. Fuel brands are made up of premium pantry brands with scale, in categories such as soup, cooking oils and nut butters. The Fuel brands accounted for approximately 21% of our consolidated net sales in fiscal 2022, 20% in fiscal 2021 and 19% in fiscal 2020.
•The Simplify brands are subscale declining businesses that we believe have limited long-term potential for the Company, and therefore will be managed for profit until they are potentially divested, likely over the course of the next several years. Simplify brands accounted for approximately 5% of our consolidated net sales in fiscal 2022, 10% in fiscal 2021 and 17% in fiscal 2020.
We refer to the Turbocharge brands and Targeted Investment brands together as our Growth brands.
Seasonality
Certain of our product lines have seasonal fluctuations in demand. Hot tea, hot-eating desserts and soup sales are stronger in colder months, while sales of snack foods, sunscreen and certain of our personal care products are stronger in the warmer months. As such, our results of operations and our cash flows for any particular quarter are not indicative of the results we expect for the full year, and our historical seasonality may not be indicative of future quarterly results of operations. In recent years, net sales and diluted earnings per share in the first fiscal quarter have typically been the lowest of our four quarters.
Working Capital
For information relating to our cash flows from operations and working capital items, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.
Segments
Our organization structure consists of two geographic based reportable segments: North America and International. Our North America reportable segment consists of the United States and Canada as operating segments. The International reportable segment is made of three operating segments: United Kingdom, Ella’s Kitchen UK and Europe. This structure is in line with how our Chief Operating Decision Maker assesses our performance and allocates resources.
We use segment net sales and operating income to evaluate performance and to allocate resources. We believe these measures are most relevant in order to analyze segment results and trends. Segment operating income excludes certain general corporate
6
expenses (which are a component of selling, general and administrative expenses), impairment and acquisition related expenses, restructuring, integration and other charges.
The following table presents the Company’s net sales by reportable segment for the fiscal years ended June 30, 2022, 2021 and 2020 (amounts in thousands, other than percentages):
| Fiscal Year Ended June 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||
| North America | $ | 1,163,132 | 61 | % | $ | 1,104,128 | 56 | % | $ | 1,171,478 | 57 | % | ||||||||||||||
| International | 728,661 | 39 | % | 866,174 | 44 | % | 882,425 | 43 | % | |||||||||||||||||
| Total | $ | 1,891,793 | 100 | % | $ | 1,970,302 | 100 | % | $ | 2,053,903 | 100 | % | ||||||||||||||
North America Segment:
United States
Our products are sold throughout the United States. Our customer base consists principally of specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, drug and convenience stores. Our products are sold through a combination of direct salespeople, brokers and distributors. We believe that our direct salespeople combined with brokers and distributors provide an effective means of reaching a broad and diverse customer base. Brokers act as agents for us within designated territories and receive commissions. A portion of our direct sales force is organized into dedicated teams to serve our significant customers.
A significant portion of the products marketed by us are sold through independent distributors. Food distributors purchase products from us for resale to retailers.
The brands sold by the United States operating segment include:
Turbocharge
The Turbocharge brands are leading-share brands in what we believe to be very high-growth categories and they include snacks. Our snack food products include Sensible Portions® snack products including Garden Veggie Straws®, Garden Veggie Chips and Apple Straws®, Terra® varieties of root vegetable chips, potato chips, and other exotic vegetable chips, Garden of Eatin’® tortilla chips, and ParmCrisps®.
Targeted Investment
The Targeted Investment brands are made up of leading-share brands in lower-growth categories and they include tea, baby food, yogurt, and personal care.
Our tea products are marketed under the Celestial Seasonings® brand and include more than 100 varieties of herbal, green, black, wellness, rooibos and chai teas, with well-known names and products such as Sleepytime®, Lemon Zinger®, Red Zinger®, Cinnamon Apple Spice, Bengal Spice®, Country Peach Passion® and Tea Well®.
Baby food products include infant and toddler formula, infant cereals, jarred baby food, baby food pouches, snacks and frozen toddler and kids’ foods under the Earth’s Best® and Earth’s Best Sesame Street (under license) brands.
Yogurt products include The Greek Gods® Greek-style yogurt products.
Our personal care products include hand, skin, hair and oral care products, sun care products and deodorants under the Alba Botanica®, Avalon Organics®, JASON® and Queen Helene® brands.
Fuel and Simplify
The Fuel brands are stable brands that will be leveraged to fuel investment in the Turbocharge and Targeted Investment categories. Fuel brands are made up of premium pantry brands with scale, in categories such as soup, cooking oils and nut butters. The Simplify brands are subscale declining businesses that have limited long-term potential for the Company, and therefore will be managed for profit until they are potentially divested, likely over the course of the next several years. Fuel and Simplify brands include the following: Spectrum® culinary oils, vinegars and condiments, Spectrum Essentials® nutritional oils
7
and supplements, MaraNatha® nut butters, Imagine® broths, soups and gravies, Hain Pure Foods® condiments, Health Valley® cereal bars and soups, and Hollywood® oils.
Canada
Our products are sold throughout Canada. Our customer base consists principally of grocery supermarkets, mass merchandisers, club stores, natural food distributors, personal care distributors, drug store chains and food service distributors. Our products are sold through our own retail direct sales force. We also utilize third-party brokers who receive commissions and sell to food service and retail customers. We utilize a third-party merchandising team for retail execution. As in the United States, a portion of the products marketed by us are sold through independent distributors.
The brands sold in our Canada operating segment include Yves Veggie Cuisine® refrigerated and frozen meat-alternative products, vegetables and lentils, Earth’s Best® infant formula, MaraNatha® nut butters, Spectrum® cooking and culinary oils, Imagine® aseptic soups, The Greek Gods® Greek-style yogurt and Robertson’s® marmalades. Other food brands include Celestial Seasonings® teas, Terra® chips and Sensible Portions® snack products. Our personal care products include skin, hair and oral care products, sun care products and deodorants under the Alba Botanica®, Avalon Organics®, JASON®, and Live Clean® brands.
International Segment:
United Kingdom
In the United Kingdom, our products include soups, plant-based and meat-free products, as well as ambient products such as jams, fruit spreads, jellies, honey, marmalades, nut butters, sweeteners, syrups and dessert sauces.
The products sold by our United Kingdom operating segment include New Covent Garden Soup Co.® and Yorkshire Provender® chilled soups, private label and Farmhouse Fare™ hot-eating desserts, Linda McCartney’s® (under license) chilled and frozen plant-based meals, Hartley’s® jams, fruit spreads and jellies, Sun-Pat® nut butters, Clarks™ natural sweeteners and Robertson’s®, Frank Cooper’s® and Rose’s® (under license) marmalades. We also provide a comprehensive range of private label products to many retailers, convenience stores and food service providers in the following categories: fresh soup, chilled desserts, meat-free meals and ambient grocery products.
Our products are principally sold throughout the United Kingdom and Ireland, but are also sold in other parts of the world. Our customer base consists principally of retailers, convenience stores, food service providers, business to business, natural food and ethnic specialty distributors, club stores and wholesalers.
Ella’s Kitchen UK
Ella's Kitchen UK is a manufacturer and distributor of premium organic infant and toddler foods under the Ella's Kitchen® brand. Our products are mostly sold in grocery stores and organic food stores throughout the United Kingdom and Europe.
Europe
Our products sold by the Europe operating segment include, among others, products sold under the Joya®, Lima® and Natumi® brands. The Lima® brand includes a wide range of organic products such as soy sauce, plant-based beverages and grain cakes, as well as grains, pasta, cereals, miso, snacks, sweeteners, spreads, soups and condiments. Our Natumi® brand includes plant-based beverages, including rice, soy, oat and spelt. Our Joya® brand includes soy, oat, rice and nut-based drinks as well as plant-based yogurts, desserts, creamers and tofu. We also sell our Hartley’s® jams, fruit spreads and jellies, Terra® varieties of root vegetable and potato chips, Celestial Seasonings® teas, Linda McCartney’s® (under license) chilled and frozen plant-based meals, Cully & Sully® chilled soups and ready meals, and private label products in Europe.
Our products are sold in grocery stores and organic food stores throughout Europe, the Middle East and India. Our products are sold using our own direct sales force and local distributors.
Customers
Walmart Inc. and its affiliates together accounted for approximately 15%, 11% and 12% of our consolidated sales for the fiscal years ended June 30, 2022, 2021 and 2020, respectively, which were primarily related to the United States, Canada and United Kingdom operating segments. No other customer accounted for at least 10% of our net sales in any of the past three fiscal years.
8
Foreign Operations
We sell our products to customers in more than 75 countries. Sales outside of the United States represented approximately 45%, 52% and 51% of our consolidated net sales in fiscal 2022, 2021 and 2020, respectively.
Marketing
We aim to meet the consumer at multiple points in their journey, both pre-shop and during purchase, both in-store and online. We use a combination of trade and consumer advertising and promotion. Trade advertising and promotion includes placement fees, cooperative advertising, feature advertising in distribution catalogs and in-store merchandising in prominent and secondary locations.
Consumer advertising and promotion is used to build brand awareness and equity, drive trial to bring in new consumers and increase consumption. Paid social and digital advertising and public relations programs are the main drivers of brand awareness. Trial and conversion tactics include, but are not limited to, product search on Google and e-commerce sites, digital coupons, product sampling, direct mail and e-consumer relationship programs. Additionally, brand specific websites and social media pages are used to engage consumers with lifestyle, product and usage information related to specific brands.
We also utilize partnerships to help create awareness and advocacy. We partner with various influencers to help increase brand reach and relevance. For example, one of our personal care brands, Alba Botanica®, had a full year partnership with USA Olympic and World Tour Surfer, Caroline Marks. Also, our Earth’s Best® brand has an agreement with PBS Kids and Sesame Workshop in the United States, leveraging popular characters for on and off packaging communications.
New Product Initiatives Through Research and Development
Innovation, including new product development, is a key component of our growth strategy. We continuously seek to understand our consumers and develop products that address their desire for organic, natural and better-for-you alternatives to conventional packaged foods and personal care products. We have a demonstrated track record of extending our product offerings into other product categories. A team of professional product developers, including microbiologists, nutritionists, food scientists, chefs and chemists, work to develop products to meet changing consumer needs. Our research and development staff incorporates product ideas from all areas of our business in order to formulate new products. In addition to developing new products, the research and development staff routinely reformulates and improves existing products based on advances in ingredients, packaging and technology. In addition to our Company-sponsored research and development activities, in order to quickly and economically introduce our new products to market, we may partner with contract manufacturers that make our products according to our formulas or other specifications. The Company also partners with certain customers from time to time on exclusive customer initiatives. The Company’s research and development expenditures do not include the expenditures on such activities undertaken by co-packers and suppliers who develop numerous products on behalf of the Company and on their own initiative with the expectation that the Company will accept their new product ideas and market them under the Company’s brands.
Production
Manufacturing
During fiscal 2022, 2021 and 2020, approximately 51%, 61% and 59%, respectively, of our revenue was derived from products manufactured at our own facilities.
Our North America reportable segment operates the following manufacturing facilities:
•Boulder, Colorado, which produces Celestial Seasonings® teas;
•Mountville, Pennsylvania, which produces Sensible Portions® and Terra® snack products;
•Bell, California, which produces Alba Botanica®, Avalon Organics®, and JASON® personal care products;
•Lancaster, Pennsylvania, which produces snack products;
•York, Pennsylvania, which produces ParmCrisps®;
•Trenton, Ontario, which produces Yves Veggie Cuisine® plant-based products;
•Vancouver, British Columbia, which produces Yves Veggie Cuisine® plant-based products; and
•Mississauga, Ontario, which produces our Live Clean® and other personal care products.
9
Our International reportable segment operates the following manufacturing facilities:
•Histon, England, which produces our ambient grocery products including Hartley’s®, Frank Cooper’s®, Robertson’s® and Clarks™;
•Grimsby, England, which produces our New Covent Garden Soup Co.® and Yorkshire Provender® chilled soups;
•Clitheroe, England, which produces our private label and Farmhouse FareTM hot-eating desserts;
•Fakenham, England, which produces Linda McCartney’s® (under license) meat-free frozen and chilled foods;
•Troisdorf, Germany, which produces Natumi®, Lima®, Joya® and other plant-based beverages and private label products;
•Oberwart, Austria, which produces our Lima® and Joya® plant-based foods and beverages, creamers, cooking creams and private label products; and
•Schwerin, Germany, which also produces our Lima® and Joya® plant-based foods and beverages and private label products.
See “Item 2: Properties” of this Form 10-K for more information on the manufacturing facilities that we operate.
Contract Manufacturers
In addition to the products manufactured in our own facilities, independent third-party contract manufacturers, who are referred to in our industry as co-manufacturers or co-packers, manufacture many of our products. In general, utilizing co-packers provides us with the flexibility to produce a large variety of products and the ability to enter new categories quickly and economically. Our contract manufacturers have been selected based on their production capabilities, capitalization and their specific product category expertise, and we expect to continue to partner with them to improve and expand our product offerings. During fiscal 2022, 2021 and 2020, approximately 49%, 39% and 41%, respectively, of our sales were derived from products manufactured by co-packers. We require that our co-packers comply with all applicable regulations and our quality and food safety program requirements, and compliance is verified through auditing and other activities. Additionally, the co-packers are required to ensure our products are manufactured in accordance with our finished goods specifications to ensure we meet customer expectations.
Suppliers of Ingredients and Packaging
Agricultural commodities and ingredients, including vegetables, fruits, oils, grains, beans, nuts, tea and herbs, spices, and dairy products, are the principal inputs used in our food and beverage products. Plant-based surfactants, glycerin and alcohols are the main inputs used in our personal care products. Our primary packaging supplies are cartons, pouches, printed film, paper, paperboard and jars. We strive to maintain a global supplier base that provides innovative ideas and sustainable packaging alternatives.
Our raw materials and packaging materials are obtained from various suppliers around the world. The Company works with its suppliers to ensure the quality and safety of their ingredients and that such ingredients meet our specifications and comply with applicable regulations. These assurances are supported by our purchasing contracts, supplier expectations manual, supplier code of conduct, and technical assessments, including questionnaires, scientific data, certifications, affidavits, certificates of analysis and analytical testing, where required. Our purchasers and quality team visit major suppliers around the world to procure competitively priced, quality ingredients that meet our specifications.
We maintain long-term relationships with many of our suppliers. Purchase arrangements with ingredient suppliers are generally made annually. Purchases are made through purchase orders or contracts, and price, delivery terms and product specifications vary.
Agricultural commodities and ingredients are subject to price volatility which can be caused by a variety of factors. Our input costs began to increase significantly beginning in the latter part of fiscal 2021. That inflationary environment extended in fiscal 2022, and we expect the inflationary environment to continue throughout fiscal 2023. We attempt to mitigate the input price volatility by negotiating and entering into purchase arrangements with our suppliers and by adjusting the sale price of our products.
Competition
We operate in a highly competitive environment. Our products compete with both large conventional packaged goods companies and natural and organic packaged foods companies. Many of these competitors enjoy significantly greater resources. Large conventional packaged foods competitors include Campbell Soup Company, Conagra Brands, Inc., Danone S.A., General Mills, Inc., The Hershey Company, The J.M. Smucker Company, Kellogg Company, Mondelez International, Inc., Nestle S.A.,
10
PepsiCo, Inc. and Unilever PLC. Large conventional personal care products companies with whom we compete include, but are not limited to, The Clorox Company, Colgate-Palmolive Company, Johnson & Johnson, The Procter & Gamble Company, S. C. Johnson & Son, Inc. and Unilever PLC. Certain of these large conventional packaged foods and personal care companies compete with us by selling both conventional products and natural and/or organic products. In addition to these competitors, in each of our categories we compete with many regional and small, local niche brands. Given limited retailer shelf space and merchandising events, competitors actively support their respective brands with marketing, advertising and promotional spending. In addition, most retailers market similar items under their own private label, which compete for the same shelf space.
Competitive factors in the packaged foods industry include product quality and taste, brand awareness and loyalty, product variety, interesting or unique product names, product packaging and package design, shelf space, reputation, price, advertising, promotion and nutritional claims.
Trademarks
We believe that brand awareness is a significant component in a consumer’s decision to purchase one product over another in the highly competitive consumer packaged goods industry. We generally register our trademarks and brand names in the United States, Canada, the European Union, and the United Kingdom and/or other foreign countries depending on the area of distribution of the applicable products. We intend to keep these filings current and seek protection for new trademarks to the extent consistent with business needs. We monitor trademark registers worldwide and take action to enforce our rights as we deem appropriate. We believe that our trademarks are significant to the marketing and sale of our products and that the inability to utilize certain of these names and marks, and/or the inability to prevent third parties from using similar names or marks, could have a material adverse effect on our business.
We also market products under brands licensed under trademark license agreements, including Linda McCartney’s®, Rose’s®, the Sesame Street name and logo and other Sesame Workshop intellectual property on certain of our Earth’s Best® products, as well as the Paddington Bear image on certain of our Robertson’s® products.
Government Regulation
We are subject to extensive regulations in the United States by federal, state and local government authorities. In the United States, the federal agencies governing the manufacture, marketing and distribution of our products include, among others, the Federal Trade Commission (“FTC”), the United States Food & Drug Administration (“FDA”), the United States Department of Agriculture (“USDA”), the United States Environmental Protection Agency (“EPA”) and the Occupational Safety and Health Administration (“OSHA”). Under various statutes, these agencies prescribe and establish, among other things, the requirements and standards for quality, safety and representation of our products to the consumer in labeling and advertising.
Internationally, we are subject to the laws and regulatory authorities of the foreign jurisdictions in which we manufacture and sell our products, including the Canadian Food Inspection Agency, Health Canada, Food Standards Agency in the United Kingdom, and the European Food Safety Authority.
Quality Control
We utilize a comprehensive product safety and quality management program, which employs strict manufacturing procedures, expert technical knowledge on food safety science, employee training, ongoing process innovation, use of quality ingredients and both internal and independent auditing.
In the United States, each of our own food manufacturing facilities has a Food Safety Plan (“FSP”), which focuses on preventing food safety risks and is compliant with the requirements set forth under the Food Safety and Modernization Act (“FSMA”). In addition, each such facility has at least one Preventive Controls Qualified Individual (“PCQI”) who has successfully completed training in the development and application of risk-based preventive controls at least equivalent to that received under a standardized curriculum recognized by the FDA.
We conduct audits of our contract manufacturers to address topics such as allergen control; ingredient, packaging and product specifications; and sanitation. Under FSMA, each of our contract manufacturers is required to have a FSP, a Hazard Analysis Critical Control Plant (“HACCP”) plan or a hazard analysis critical control points plan that identifies critical pathways for contaminants and mandates control measures that must be used to prevent, eliminate or reduce relevant food-borne hazards.
Independent Certifications
11
Substantially all of our Hain-owned manufacturing sites and a significant number of our contract manufacturers are certified against a recognized standard such as the Global Food Safety Initiative (“GFSI”), which includes Safe Quality Foods (“SQF”) and British Retail Consortium (“BRC”), or ISO 9001 Quality Management Systems and ISO 22716 GMP Cosmetic and Personal Care. All facilities where our food products are manufactured are GFSI compliant. These standards are integrated product safety and quality management protocols designed specifically for the food and personal care sectors and offer a comprehensive methodology to manage product safety and quality. Certification provides an independent and external validation that a product, process or service complies with applicable regulations and standards.
In the United States, our organic products are certified in accordance with the USDA’s National Organic Program through Quality Assurance International (“QAI”), a third-party certifying agency. For products marketed as organic outside of the United States, we use accredited certifying agencies to ensure compliance with country-specific government regulations for selling organic products or reciprocity, where available.
Many of our products are certified kosher under the supervision of accredited agencies including The Union of Orthodox Jewish Congregations and “KOF-K” Kosher Supervision.
We also work with other non-governmental organizations such as NSF International, which developed the NSF/ANSI 305 Standard for Personal Care Products Containing Organic Ingredients and provides third-party certification through QAI for certain of our personal care products. In addition, we work with other nongovernmental organizations such as the Gluten Free Intolerance Group, Fair Trade USA, Environmental Working Group, The Skin Cancer Foundation, Coalition for Consumer Information on Cosmetics/Leaping Bunny, The Roundtable on Sustainable Palm Oil and the Non-GMO Project.
Company Website and Available Information
The following information can be found, free of charge, in the “Investor Relations” section of our corporate website at ir.hain.com:
•our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC;
•our policies related to corporate governance, including our Code of Business Conduct and Ethics (“Code of Ethics”) applying to our directors, officers and employees (including our principal executive officer and principal financial and accounting officers) that we have adopted to meet the requirements set forth in the rules and regulations of the SEC and The Nasdaq Stock Market LLC; and
•the charters of the Audit, Compensation, Corporate Governance and Nominating, and Strategy Committees of our Board of Directors.
If the Company ever were to amend or waive any provision of its Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, the Company intends to satisfy its disclosure obligations, if any, with respect to any such waiver or amendment by posting such information on its website set forth above rather than by filing a Current Report on Form 8-K.
The Company may use its website as a distribution channel of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s investor relations website at ir.hain.com. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting “E-mail Alerts” under the "IR Resources" section of our investor relations website. Information on the Company’s website is not incorporated by reference herein and is not a part of this Form 10-K.
Item 1A. Risk Factors
Our business, operations and financial condition are subject to various risks and uncertainties. The most significant of these risks include those described below; however, there may be additional risks and uncertainties not presently known to us or that we currently consider immaterial. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. These risk factors should be read in conjunction with the other information in this Annual Report on Form 10-K and in the other documents that we file from time to time with the SEC.
Risks Related to Our Business, Operations and Industry
12
Our markets are highly competitive.
We operate in highly competitive geographic and product markets. Numerous brands and products compete for limited retailer shelf space, where competition is based on product quality, brand recognition, brand loyalty, price, product innovation, promotional activity, availability and taste among other things. Retailers also market competitive products under their own private labels, which are generally sold at lower prices and compete with some of our products.
Some of our markets are dominated by multinational corporations with greater resources and more substantial operations than us. We may not be able to successfully compete for sales to distributors or retailers that purchase from larger competitors that have greater financial, managerial, sales and technical resources. Conventional food companies, including but not limited to Campbell Soup Company, Conagra Brands, Inc., Danone S. A., General Mills, Inc., The Hershey Company, The J.M. Smucker Company, Kellogg Company, Mondelez International, Inc., Nestle S.A., PepsiCo, Inc. and Unilever PLC, and conventional personal care products companies, including but not limited to The Clorox Company, Colgate-Palmolive Company, Johnson & Johnson, The Procter & Gamble Company, S. C. Johnson & Son, Inc. and Unilever PLC, may be able to use their resources and scale to respond to competitive pressures and changes in consumer preferences by introducing new products or reformulating their existing products, reducing prices or increasing promotional activities. We also compete with other organic and natural packaged food brands and companies, which may be more innovative and able to bring new products to market faster and may be better able to quickly exploit and serve niche markets. As a result of this competition, retailers may take actions that negatively affect us. Consequently, we may need to increase our marketing, advertising and promotional spending to protect our existing market share, which may result in an adverse impact on our profitability.
If we do not manage our supply chain effectively or if there are disruptions in our supply chain, our business and results of operations may be adversely affected.
The success of our business depends, in part, on maintaining a strong sourcing and manufacturing platform and efficient distribution channels. The inability of any supplier of raw materials, independent contract manufacturer or third-party distributor to deliver or perform for us in a timely or cost-effective manner could cause our operating costs to increase and our profit margins to decrease, especially as it relates to our products that have a short shelf life. We must continuously monitor our inventory and product mix against forecasted demand or risk having inadequate supplies to meet consumer demand as well as having too much inventory on hand that may reach its expiration date and become unsaleable.
We must also manage our third-party distribution, warehouse and transportation providers to ensure they are able to support the efficient distribution of our products to retailers. A disruption in transportation services could result in an inability to supply materials to our or our co-manufacturers’ facilities or finished products to our distribution centers or customers. Activity at third-party distribution centers could be disrupted by a number of factors, including labor issues, failure to meet customer standards, natural disasters or financial issues affecting the third-party providers. In particular, the Russia-Ukraine war and recent labor market shortages impacting our industry have created operating challenges in making our products available to customers and consumers, and such challenges may persist. See “The Russia-Ukraine war could continue to cause challenges and create risks for our business.”
If we are unable to manage our supply chain efficiently and ensure that our products are available to meet consumer demand and customer orders, our sales and profitability could be materially adversely impacted.
Our future results of operations may be adversely affected by input cost inflation.
Many aspects of our business have been, and may continue to be, directly affected by volatile commodity costs and other inflationary pressures. Our input costs began to increase significantly beginning in the latter part of fiscal 2021. That inflationary environment extended through fiscal 2022, and we expect the inflationary environment to continue throughout fiscal 2023.
Agricultural commodities and ingredients are subject to price volatility which can be caused by commodity market fluctuations, crop yields, seasonal cycles, weather conditions, temperature extremes and natural disasters (including due to the effects of climate change), pest and disease problems, changes in currency exchange rates, imbalances between supply and demand, and government programs and policies among other factors. Volatile fuel costs translate into unpredictable costs for the products and services we receive from our third-party providers including, but not limited to, distribution costs for our products and packaging costs.
13
While we seek to offset increased input costs with a combination of price increases to our customers, purchasing strategies, cost savings initiatives and operating efficiencies, we may be unable to fully offset our increased costs or unable to do so in a timely manner. If we are unable to fully offset such cost increases, our financial results could be materially adversely affected.
The Russia-Ukraine war could continue to cause challenges and create risks for our business.
Although we have no material assets in Russia, Belarus or Ukraine, our supply chain has been, and may continue to be, adversely impacted by the Russia-Ukraine war, and we continue to face other challenges and risks arising from the war. In particular, the war has added significant costs to existing inflationary pressures through increased fuel and raw material prices and labor costs. Further, beyond increased costs, labor challenges and other factors have led to supply chain disruptions. While, to date, we have been able to identify replacement raw materials where necessary, we have incurred increased costs in doing so. For example, the supply of sunflower oil has become constrained, compelling us to identify and procure alternative oils. The war has also negatively impacted consumer sentiment, particularly in Europe, with some consumers shifting to lower-priced products, which has affected demand for our products. Additionally, we face increased cybersecurity risks, as companies based in the United States and its allied countries have become targets of malicious cyber activity. Although we are continuing to monitor and manage the impacts of the war on our business, the war and the related economic impact could continue to have a material adverse effect on our business and operating results.
Disruption or loss of operations at one or more of our manufacturing facilities could harm our business.
For the fiscal years ended June 30, 2022, 2021 and 2020, approximately 51%, 61% and 59%, respectively, of our sales were derived from products manufactured at our own manufacturing facilities. A disruption of or the loss of operations at one or more of these facilities, which may be caused by disease outbreaks or pandemics, labor issues, natural disasters or governmental actions, could delay or postpone production of our products, which could have a material adverse effect on our business, results of operations and financial condition. Recent labor market shortages have impacted, and may continue to impact, operations at our manufacturing facilities.
Loss of one or more of our independent contract manufacturers could adversely affect our business.
During fiscal 2022, 2021 and 2020, approximately 49%, 39% and 41%, respectively, of our sales were derived from products manufactured at independent contract manufacturers, or co-manufacturers. In some cases, an individual co-manufacturer may produce all of our requirements for a particular brand. We believe there are a limited number of competent, high-quality co-manufacturers in the industry, and many of our co-manufacturers produce products for other companies as well. Therefore, if we lose or need to change one or more co-manufacturers or fail to retain co-manufacturers for newly acquired or developed products or brands, production of our products may be delayed or postponed and/or the availability of some of our products may be reduced or eliminated, which could have a material adverse effect on our business, results of operations and financial condition.
The COVID-19 pandemic continues to have societal and economic effects that create challenges and uncertainty, and our business and operating results may be adversely affected if we do not manage our business effectively in response.
The COVID-19 pandemic continues to contribute to challenging and unprecedented conditions. The impacts of the pandemic could exacerbate conditions in our other risk factors noted in this Item 1A, “Risk Factors.” Challenges exacerbated by the ongoing effects of the pandemic include but are not limited to:
•manufacturing and supply chain challenges, including labor market shortages;
•a shifting demand environment as a result of changing consumer behaviors amid uncertain economic conditions; and
•increased costs of operating our business and managing our supply chain.
If we are unable to successfully manage our business through the continued challenges and uncertainty related to the COVID-19 pandemic, our business and operating results could be materially adversely affected.
Our growth and continued success depend upon consumer preferences for our products, which could change.
Our business is primarily focused on sales of organic, natural and “better-for-you” products which, if consumer demand for such categories were to decrease, could harm our business. During an economic downturn, factors such as increased unemployment, decreases in disposable income and declines in consumer confidence could cause a decrease in demand for our overall product set, particularly higher priced better-for-you products. As noted above, other factors can and have adversely impacted consumer demand for our products, including the Russia-Ukraine war, which has prompted consumers, particularly in
14
Europe to shift to lower-priced products, affecting demand for our products. While we continue to diversify our product offerings, developing new products entails risks, and demand for our products may not continue at current levels or increase in the future. The success of our innovation and product improvement effort is affected by our ability to anticipate changes in consumers’ preferences, the level of funding that can be made available, the technical capability of our research and development staff in developing, formulating and testing product prototypes, including complying with governmental regulations, and the success of our management in introducing the resulting improvements in a timely manner.
In addition, over the past several years, we have seen a shift in consumption towards the e-commerce channel and may see a more substantial shift in the future. Some products we sell via the e-commerce channel have lower margins than those sold in traditional brick and mortar retailers and present unique challenges in order fulfillment. If we are unsuccessful in implementing product improvements or introducing new products that satisfy the demands of consumers, our business could be harmed.
In addition, we have other product categories that are subject to evolving consumer preferences. Consumer demand could change based on a number of possible factors, including dietary habits and nutritional values, concerns regarding the health and environmental effects of ingredients and shifts in preference for various product attributes. A significant shift in consumer demand away from our products could reduce the sales of our brands or our market share, both of which could harm our business.
A significant percentage of our sales is concentrated among a small number of customers, and consolidation of customers or the loss of a significant customer could negatively impact our sales and profitability.
Our growth and continued success depend upon, among other things, our ability to maintain and increase sales volumes with existing customers, our ability to attract new customers, the financial condition of our customers and our ability to provide products that appeal to customers at the right price.
A significant percentage of our sales is concentrated among a small number of customers. For example, sales to Walmart Inc. and its affiliates approximated 15%, 11% and 12% of sales during the fiscal years ended June 30, 2022, 2021 and 2020, respectively. The loss of any large customer, the reduction of purchasing levels or the cancellation of any business from a large customer for an extended length of time could negatively impact our sales and profitability.
We rely on independent distributors for a substantial portion of our sales.
In our United States operating segment, we rely upon sales made by or through non-affiliated distributors to customers. Distributors purchase directly for their own account for resale. The loss of, or business disruption at, one or more of these distributors may harm our business. If we are required to obtain additional or alternative distribution agreements or arrangements in the future, we cannot be certain that we will be able to do so on satisfactory terms or in a timely manner. Our inability to enter into satisfactory distribution agreements may inhibit our ability to implement our business plan or to establish markets necessary to successfully expand the distribution of our products.
Our future results of operations may be adversely affected by the availability of natural and organic ingredients.
Our ability to ensure a continuing supply of natural and organic ingredients at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow natural and organic crops, climate conditions, increased demand for natural and organic ingredients by our competitors, changes in national and world economic conditions, currency fluctuations and forecasting adequate need of seasonal ingredients.
The natural and organic ingredients that we use in the production of our products (including, among others, vegetables, fruits, nuts and grains) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, water scarcity, temperature extremes, wildfires, frosts, earthquakes and pestilences. Natural disasters and adverse weather conditions can lower crop yields and reduce crop size and crop quality, which in turn could reduce our supplies of natural and organic ingredients or increase the prices of those ingredients. Such natural disasters and adverse weather conditions can be caused or exacerbated by climate change, and the spate of recent extreme weather events, including historic droughts, heatwaves, extreme cold and flooding, presents an alarming trend. If our supplies of natural and organic ingredients are reduced, we may not be able to find enough supplemental supply sources on favorable terms, if at all, which could impact our ability to supply products to our customers and adversely affect our business, financial condition and results of operations.
We also compete with other manufacturers in the procurement of natural and organic product ingredients, which may be less plentiful in the open market than conventional product ingredients. This competition may increase in the future if consumer demand for natural and organic products increases. This could cause our expenses to increase or could limit the amount of products that we can manufacture and sell.
15
We are subject to risks associated with our international sales and operations, including foreign currency, compliance and trade risks.
For the fiscal years ended June 30, 2022, 2021 and 2020, approximately 45%, 52% and 51%, respectively, of our consolidated sales were generated outside the United States. Sales from outside our U.S. markets may continue to represent a significant portion of our consolidated sales in the future.
Our non-U.S. sales and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including:
•difficulties in managing a global enterprise, including differing labor standards and design and implementation of effective control environment processes across our diverse operations and employee base;
•compliance with U.S. laws affecting operations outside of the United States, such as the U.S. Foreign Corrupt Practices Act and the Office of Foreign Assets Control trade sanction regulations and anti-boycott regulations;
•difficulties associated with operating under a wide variety of complex foreign laws, treaties and regulations, including compliance with antitrust and competition laws, anti-modern slavery laws, anti-bribery and anti-corruption laws, data privacy laws, including the European Union General Data Protection Regulation (“GDPR”), tax laws and regulations and a variety of other local, national and multi-national regulations and laws;
•tariffs, quotas, trade barriers or sanctions, other trade protection measures and import or export licensing requirements imposed by governments that might negatively affect our sales, including, but not limited to, Canadian and European Union tariffs imposed on certain U.S. food and beverages;
•currency exchange rate fluctuations;
•pandemics, such as COVID-19 or the flu, which may adversely affect our workforce as well as our local suppliers and customers;
•varying abilities to enforce intellectual property and contractual rights;
•periodic economic downturns and the instability of governments, including default or deterioration in the credit worthiness of local governments, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, public corruption, expropriation and other economic or political uncertainties; and
•greater risk of uncollectible accounts and longer collection cycles.
We have outsourced certain functions in our North American business to third-party service providers, and any service failures or disruptions related to these outsourcing arrangements could adversely affect our business.
We recently completed the process of outsourcing certain functions in our North American business, including order management, billing, accounts receivable and accounts payable, to third-party service providers. We also implemented new procurement technology solutions as part of this initiative.
We face risks associated with third parties managing these functions for us. For example, we have diminished control over the quality and timeliness of the outsourced services, including the cyber security protections implemented by these third parties. As a result of these outsourcing arrangements, we may experience interruptions or delays in our order-to-cash and procure-to-pay processes, loss or theft of sensitive data or other cyber security issues, compliance issues, challenges in maintaining and reporting financial and operational information, and increased costs to remediate any unanticipated issues that arise, any of which could materially and adversely affect our business, financial condition and results of operations.
We may not be successful in achieving savings and efficiencies from cost reduction initiatives and related strategic initiatives.
Our strategy includes identifying areas of cost savings and operating efficiencies to expand profit margins and cash flow. As part of our identification of operating efficiencies, we may continue to seek to dispose of businesses and brands that are less profitable or are otherwise less of a strategic fit within our core portfolio.
We may not be successful in fully implementing our productivity plans or realizing our anticipated savings and efficiencies, including potentially as a result of factors outside our control. Additionally, we may not be able to identify or negotiate divestiture opportunities on terms acceptable to us. If we are unable to fully realize the anticipated savings and efficiencies of our cost reduction initiatives and related strategic initiatives, our profitability may be materially and adversely impacted.
Our business, operating results and financial condition may be adversely affected by the failure to successfully execute acquisitions or dispositions or to successfully integrate completed acquisitions.
16
From time to time, we evaluate potential acquisitions or dispositions that align with our strategic objectives. The success of those initiatives depends upon our ability to identify suitable acquisition targets or buyers and successfully negotiate contract terms, among other factors. These initiatives may present operational risks, including diversion of management’s attention from other matters, difficulties integrating acquired businesses into our existing operations or separating businesses from our operations, and challenges presented by acquisitions that may not achieve intended results. If we are not successful in executing acquisitions or divestitures or in integrating completed acquisitions, our business, operating results and financial condition could be adversely affected.
We rely on independent certifications for a number of our products.
We rely on independent third-party certifications, such as certifications of our products as “organic,” “Non-GMO” or “kosher,” to differentiate our products from others. We must comply with the requirements of independent organizations or certification authorities in order to label our products as certified organic. For example, we can lose our “organic” certification if a manufacturing plant becomes contaminated with non-organic materials, or if it is not properly cleaned after a production run. In addition, all raw materials must be certified organic. Similarly, we can lose our “kosher” certification if a manufacturing plant and raw materials do not meet the requirements of the appropriate kosher supervision organization. The loss of any independent certifications could adversely affect our market position as an organic and natural products company, which could harm our business.
Risks Related to Our Reputation, Brands and Intellectual Property
If the reputation of our Company or our brands erodes significantly, including as a result of concerns regarding product quality or safety or perceptions about our ESG practices, it could have a material impact on our business.
Our financial success is directly dependent on the perception of our Company and our brands among our customers, consumers, employees and other constituents. Our results could be negatively impacted if our Company or one or more of our brands suffers substantial damage to its reputation due to real or perceived issues related to the quality or safety of our products. Further, the success of our brands may suffer if our marketing plans or product initiatives do not have the desired impact on a brand’s image or its ability to attract consumers.
In addition, customers and consumers are increasingly expressing their expectations that companies and brands act responsibly in their ESG practices. Any failure to meet such customer or consumer expectations, or any negative publicity regarding our ESG practices, could impact our reputation with customers, consumers and other constituents, which could have a material impact on our business.
Our inability to use our trademarks or the trademarks we license from third parties could have a material adverse effect on our business.
We believe that brand awareness is a significant component in a consumer’s decision to purchase one product over another in the highly competitive food, beverage and personal care industries. Although we endeavor to protect our trademarks and tradenames, these efforts may not be successful, and third parties may challenge our right to use one or more of our trademarks or tradenames. We believe that our trademarks and tradenames are significant to the marketing and sale of our products and that the inability to utilize certain of these names and marks, and/or the inability to prevent third parties from using similar names or marks, could have a material adverse effect on our business, results of operations and financial condition.
In addition, we market products under brands licensed under trademark license agreements, including Linda McCartney’s®, Rose’s®, the Sesame Street name and logo and other Sesame Workshop intellectual property on certain of our Earth’s Best® products. We believe that these trademarks have significant value and are instrumental in our ability to market and sustain demand for those product offerings. These trademark license agreements may not remain in effect or be enforceable, and our license agreements, upon expiration, may not be renewed on acceptable terms or at all.
Risks Related to Economic and Political Considerations
Disruptions in the worldwide economy and the financial markets may adversely impact our business and results of operations.
Adverse and uncertain economic and market conditions, particularly in the locations in which we operate, may impact customer and consumer demand for our products and our ability to manage normal commercial relationships with our customers, suppliers and creditors. Consumers may shift purchases to lower-priced or other perceived value offerings during economic downturns, which may adversely affect our results of operations. Consumers may also reduce the number of organic and natural
17
products that they purchase where there are conventional alternatives, given that organic and natural products generally have higher retail prices than do their conventional counterparts. In addition, consumers may choose to purchase private label products rather than branded products, which generally have lower retail prices than do their branded counterparts. Distributors and retailers may also become more conservative in response to these conditions and seek to reduce their inventories.
Prolonged unfavorable economic conditions may have an adverse effect on any of these factors and, therefore, could adversely impact our sales and profitability.
Currency exchange rate fluctuations could adversely affect our consolidated financial results and condition.
We are subject to risks related to fluctuations in currency exchange rates. Our consolidated financial statements are presented in United States Dollars, requiring us to translate our assets, liabilities, revenue and expenses into United States Dollars. As a result, changes in the values of currencies may unpredictably and adversely impact our consolidated operating results, our asset and liability balances and our cash flows in our consolidated financial statements even if their value has not changed in their original currency.
A significant portion of our business has exposure to continued uncertainty and burdens in the United Kingdom following its exit from the European Union, commonly referred to as “Brexit.”
In fiscal years 2022 and 2021, approximately 26% and 31%, respectively, of our consolidated sales were generated in the United Kingdom, which continues to experience economic and market uncertainty following Brexit. Brexit has caused and may continue to cause disruptions to and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers and suppliers, which could have an adverse effect on our business, financial results and operations. In addition to ongoing general market uncertainty caused by Brexit, the importing and exporting of goods and ingredients now involves additional administrative burdens, adding friction and cost to trade between the United Kingdom and member countries of the European Union.
Risks Related to Information Security and Technology
A cybersecurity incident or other technology disruptions could negatively impact our business and our relationships with customers.
We depend on information systems and technology, including public websites and cloud-based services, in substantially all aspects of our business, including communications among our employees and with suppliers, customers and consumers. Such uses of information systems and technology give rise to cybersecurity risks, including system disruption, security breach, ransomware, theft, espionage and inadvertent release of information. We have become more reliant on mobile devices, remote communication and other technologies as part of the recent change in office working patterns, enhancing our cybersecurity risk. Our business involves the storage and transmission of numerous classes of sensitive and/or confidential information and intellectual property, including customers’ and suppliers’ information, private information about employees, and financial and strategic information about the Company and its business partners. Further, as we pursue new initiatives that improve our operations and cost structure, we are also expanding and improving our information technologies, resulting in a larger technological presence and increased exposure to cybersecurity risk. If we fail to assess and identify cybersecurity risks associated with new initiatives, we may become increasingly vulnerable to such risks.
We have experienced cyber security threats and vulnerabilities in our systems and those of our third party providers. Although, to date, such prior events have not had a material impact on our financial condition, results of operations or financial condition, the potential consequences of a future material cybersecurity attack could be significant and could include reputational damage, litigation with third parties, government enforcement actions, penalties, disruption to systems, unauthorized release of confidential or otherwise protected information, corruption of data and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness, results of operations and financial condition. Due to the evolving nature of such security threats, the potential impact of any future incident cannot be predicted.
Our business operations could be disrupted if our information technology systems fail to perform adequately.
The efficient operation of our business depends on our information technology systems. We rely on our information technology systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies and the loss of sales and customers, causing our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from
18
circumstances beyond our control, including fire, natural disasters, system failures and viruses. Any such damage or interruption could have a material adverse effect on our business.
Risks Related to ESG Considerations
Climate change may negatively affect our business and operations.
There is concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. The spate of recent extreme weather events, including historic droughts, heatwaves, extreme cold and flooding, presents an alarming trend.
In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as vegetables, fruits, grains, beans and nuts. As a result of climate change, we may also be subjected to decreased availability of water, deteriorated quality of water or less favorable pricing for water, which could adversely impact our manufacturing and distribution operations.
Liabilities, claims or new laws or regulations with respect to environmental matters could have a significant negative impact on our business.
As with other companies engaged in similar businesses, the nature of our operations exposes us to the risk of liabilities and claims with respect to environmental matters, including those relating to the disposal and release of hazardous substances. Furthermore, our operations are governed by laws and regulations relating to workplace safety and worker health, which, among other things, regulate employee exposure to hazardous chemicals in the workplace. Any material costs incurred in connection with such liabilities or claims could have a material adverse effect on our business, results of operations and financial condition.
The increasing global focus on climate change and the need for corporate change may lead to new environmental laws and regulations that impact our business. For example, there are a growing number of laws and regulations regarding product packaging, particularly in Europe. Our compliance with such existing laws and regulations and any new laws or regulations enacted in the future, or any changes in how existing laws or regulations will be enforced, administered or interpreted, may lead to an increase in compliance costs, cause us to change the way we operate or expose us to additional risk of liabilities and claims, which could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to Litigation, Government Regulation and Compliance
We may be subject to significant liability should the consumption of any of our products cause illness or physical harm.
The sale of products for human use and consumption involves the risk of injury or illness to consumers. Such injuries may result from inadvertent mislabeling, tampering by unauthorized third parties or product contamination or spoilage. Under certain circumstances, we may be required to recall or withdraw products, suspend production of our products or cease operations, which may lead to a material adverse effect on our business. In addition, customers may cancel orders for such products as a result of such events. Even if a situation does not necessitate a recall or market withdrawal, product liability claims might be asserted against us. While we are subject to governmental inspection and regulations and believe our facilities and those of our co-manufacturers and suppliers comply in all material respects with all applicable laws and regulations, if the consumption of any of our products causes, or is alleged to have caused, an illness or physical harm, we may become subject to claims or lawsuits relating to such matters. For example, as discussed in Note 18, Commitments and Contingencies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K, we are subject to consumer class actions, and other lawsuits alleging some form of personal injury, relating to our Earth’s Best® baby food products. Even if a claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products were mislabeled, unsafe or caused illness or physical harm could adversely affect our reputation with existing and potential customers and consumers and our corporate and brand image. Although we maintain product liability and product recall insurance in an amount that we believe to be adequate, we may incur claims or liabilities for which we are not insured or that exceed the amount of our insurance coverage. A product liability judgment against us or a product recall could have a material adverse effect on our business, results of operations and financial condition.
Government regulation could subject us to civil and criminal penalties, and any changes in the legal and regulatory frameworks in which we operate could make it more costly or challenging to manufacture and sell our products.
We operate in a highly regulated environment with constantly evolving legal and regulatory frameworks. Consequently, we are subject to a heightened risk of legal claims, government investigations and other regulatory enforcement actions. We are subject
19
to extensive regulations in the United States, United Kingdom, Canada, Europe, Asia, including India, and any other countries where we manufacture, distribute and/or sell our products. Our products are subject to numerous product safety and other laws and regulations relating to the registration and approval, sourcing, manufacturing, storing, labeling, marketing, advertising and distribution of these products. Enforcement of existing laws and regulations, changes in legal or regulatory requirements and/or evolving interpretations of existing requirements may result in increased compliance costs or otherwise make it more costly or challenging to manufacture and sell our products, which could materially adversely affect our business, financial condition or operating results.
Moreover, a failure to maintain effective control processes could lead to violations, unintentional or otherwise, of laws and regulations. Legal claims, government investigations or regulatory enforcement actions arising out of our failure or alleged failure to comply with applicable laws and regulations could subject us to civil and criminal penalties that could materially and adversely affect our product sales, reputation, financial condition and operating results. In addition, the costs and other effects of defending potential and pending litigation and administrative actions against us may be difficult to determine and could adversely affect our financial condition and operating results.
Pending and future litigation may lead us to incur significant costs.
We are, or may become, party to various lawsuits and claims arising in the normal course of business, which may include lawsuits or claims relating to contracts, intellectual property, product recalls, product liability, the marketing and labeling of products, employment matters, environmental matters, data protection or other aspects of our business as well as any securities class action and stockholder derivative litigation. For example, as discussed in Note 18, Commitments and Contingencies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K, we are currently subject to class actions and derivative complaints arising out of or related to the Company’s prior internal accounting review. Certain of our former officers and former members of our Board of Directors, as individual defendants, are also subject to lawsuits related to such accounting review, and we may have an obligation to indemnify them in relation to these matters. Additionally, as discussed further in Note 18, we are subject to consumer class actions, and other lawsuits alleging some form of personal injury, relating to our Earth’s Best® baby food products.
Even when not merited, the defense of these lawsuits may divert our management’s attention, and we may incur significant expenses in defending these lawsuits. The results of litigation and other legal proceedings are inherently uncertain, and adverse judgments or settlements in some or all of these legal disputes may result in monetary damages, penalties or injunctive relief against us, which could have a material adverse effect on our results of operations and financial condition. Any claims or litigation, even if fully indemnified or insured, could damage our reputation and make it more difficult to compete effectively or to obtain adequate insurance in the future.
Compliance with data privacy laws may be costly, and non-compliance with such laws may result in significant liability.
Many jurisdictions in which the Company operates have laws and regulations relating to data privacy and protection of personal information, including the European Union GDPR and the California Consumer Privacy Act of 2018 (“CCPA”). Other U.S. states have, in recent years, begun to adopt their own omnibus, industry-neutral privacy statutes, such as Colorado, Connecticut, Utah and Virginia. Failure to comply with GDPR or CCPA requirements or other data privacy laws could result in litigation, adverse publicity and significant penalties and damages. The law in this area continues to develop, and the changing nature of privacy laws could impact the Company’s processing of personal information related to the Company’s employees, consumers, customers and vendors. The enactment of more restrictive laws, rules or regulations or future enforcement actions or investigations could impact us through increased costs or restrictions on our business, and noncompliance could result in regulatory penalties and significant liability.
Risks Related to Our Credit Agreement
Any default under our credit agreement could have significant consequences.
Our credit agreement contains covenants imposing certain restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The credit agreement contains restrictive covenants including, with specified exceptions, limitations on our ability to engage in certain business activities, incur debt and 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 us to satisfy certain financial covenants, such as maintaining a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio.
20
Our ability to comply with these covenants under the credit agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these covenants could result in a default, which would permit the lenders to declare all outstanding debt to be due and payable, together with accrued and unpaid interest. Our obligations under the credit agreement are guaranteed by certain existing and future domestic subsidiaries of the Company and are secured by liens on assets of the Company and its material domestic subsidiaries, including the equity interest in each of their direct subsidiaries and intellectual property, subject to agreed upon exceptions. Any default by us under the credit agreement could have a material adverse effect on our business and financial condition.
We may be adversely impacted by the discontinuation of the London Interbank Offered Rate, or LIBOR.
We have loans under our credit facility and interest rate swap agreements that are indexed to LIBOR, which is being replaced.
While we have sought to reduce future interest rate volatility by entering into floating rate to fixed rate swap agreements with respect to a substantial portion of our outstanding indebtedness, the transition away from LIBOR may nonetheless cause us to incur increased costs and additional risk. Following the transition, interest rates will generally be based on an alternative variable rate specified in the documentation governing our indebtedness or swaps or as otherwise agreed upon. The alternative variable rate could be higher and more volatile than LIBOR prior to its discontinuance.
Certain risks arise in transitioning contracts to an alternative variable rate. The method of transitioning to an alternative rate may be challenging and may require substantial negotiation with the counterparty to each contract. If a contract is not transitioned to an alternative variable rate, the impact is likely to vary by contract.
Risks Related to Corporate Governance
Our ability to issue preferred stock may deter takeover attempts.
Our Board of Directors is empowered to issue, without stockholder approval, preferred stock with dividends, liquidation, conversion, voting or other rights, which could decrease the amount of earnings and assets available for distribution to holders of our common stock and adversely affect the relative voting power or other rights of the holders of our common stock. In the event of issuance, the preferred stock could be used as a method of discouraging, delaying or preventing a change in control. Our amended and restated certificate of incorporation authorizes the issuance of up to 5 million shares of “blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our Board of Directors. Although we have no present intention to issue any shares of our preferred stock, we may do so in the future under appropriate circumstances.
General Risk Factors
We may be subject to significant liability that is not covered by insurance.
While we believe that the extent of our insurance coverage is consistent with industry practice, such coverage does not cover all losses we may incur, even in areas for which we have coverage. Our insurance policies are subject to coverage exclusions, deductibles and caps, and any claim we make under our insurance policies may be subject to such limitations. Any claim we make may not be honored fully, in a timely manner, or at all, and we may not have purchased sufficient insurance to cover all losses incurred. If we were to incur substantial liabilities or if our business operations were interrupted for a substantial period of time, we could incur costs and suffer losses. Additionally, in the future, insurance coverage may not be available to us at commercially acceptable premiums, or at all.
An impairment in the carrying value of goodwill or other acquired intangible assets could materially and adversely affect our consolidated results of operations and net worth.
As of June 30, 2022, we had goodwill of $933.8 million and trademarks and other intangibles assets of $477.5 million, which in the aggregate represented 57% of our total consolidated assets. The net carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date (or subsequent impairment date, if applicable). The net carrying value of trademarks and other intangibles represents the fair value of trademarks, customer relationships and other acquired intangibles as of the acquisition date (or subsequent impairment date, if applicable), net of accumulated amortization. Goodwill and other acquired intangibles expected to contribute indefinitely to our cash flows are not amortized, but must be evaluated by management at least annually for impairment. Amortized intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. Impairments to goodwill and other intangible assets may be caused by factors outside our control, such as increasing competitive pricing pressures, changes in discount rates based on changes in cost of capital (interest rates, etc.),
21
lower than expected sales and profit growth rates, changes in industry Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) multiples, the inability to quickly replace lost co-manufacturing business, or the bankruptcy of a significant customer. We have in the past recorded, and may in the future be required to record, significant charges in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets is determined. The incurrence of impairment charges could negatively affect our results of operations and adversely impact our net worth and our consolidated earnings in the period of such charge.
Item 1B. Unresolved Staff Comments
None.
22
Item 2. Properties
Our principal facilities, which are leased except where otherwise indicated, are as follows:
| Primary Use | Location | Approximate Square Feet | Expiration of Lease | |||||||||||||||||
| North America: | ||||||||||||||||||||
| Headquarters office | Lake Success, NY | 86,000 | 2029 | |||||||||||||||||
| Distribution - All brands | Allentown, PA | 497,000 | 2032 | |||||||||||||||||
Distribution center (Grocery, snacks, and personal care products) | Ontario, CA | 373,000 | 2023 | |||||||||||||||||
| Manufacturing and distribution center (Snack products) | Mountville, PA | 161,000 | 2040 | |||||||||||||||||
| Manufacturing and offices (Tea) | Boulder, CO | 158,000 | Owned | |||||||||||||||||
| Distribution (Dry goods) | Mississauga, ON, Canada | 136,000 | 2029 | |||||||||||||||||
| Manufacturing and distribution (Personal care) | Bell, CA | 125,000 | 2028 | |||||||||||||||||
| Manufacturing and distribution (Snack products) | Lancaster, PA | 119,000 | 2031 | |||||||||||||||||
| Distribution (Personal care) | Mississauga, ON, Canada | 81,000 | 2029 | |||||||||||||||||
| Manufacturing (Plant-based foods) | Vancouver, BC, Canada | 76,000 | Owned | |||||||||||||||||
| Manufacturing and distribution (Snack products) | York, PA | 71,000 | 2030 | |||||||||||||||||
| Manufacturing and offices (Personal care) | Mississauga, ON, Canada | 61,000 | 2025 | |||||||||||||||||
| Distribution (Tea) | Boulder, CO | 57,000 | 2031 | |||||||||||||||||
| Manufacturing (Plant-based foods) | Trenton, ON, Canada | 47,000 | 2028 | |||||||||||||||||
| International: | ||||||||||||||||||||
| Manufacturing and offices (Ambient grocery products) | Histon, England | 303,000 | Owned | |||||||||||||||||
| Manufacturing, distribution and offices (Plant-based beverages) | Troisdorf, Germany | 131,000 | 2037 | |||||||||||||||||
| Manufacturing | Oberwart, Austria | 117,000 | At will | |||||||||||||||||
| Distribution | Loipersdorf, Austria | 74,000 | At will | |||||||||||||||||
| Distribution | Gent, Belgium | 64,000 | At will | |||||||||||||||||
| Distribution | Niederziers, Germany | 54,000 | At will | |||||||||||||||||
| Manufacturing (Chilled soups) | Grimsby, England | 54,000 | 2029 | |||||||||||||||||
| Manufacturing (Plant-based frozen and chilled products) | Fakenham, England | 52,000 | Owned | |||||||||||||||||
| Distribution (Soups, hot desserts, chilled products, grocery) | Peterborough, England | 43,000 | 2024 | |||||||||||||||||
| Manufacturing (Hot-eating desserts) | Clitheroe, England | 42,000 | 2031 | |||||||||||||||||
| Manufacturing and distribution (Plant-based foods and beverages) | Schwerin, Germany | 36,000 | Owned | |||||||||||||||||
We also lease space for other smaller offices and facilities in the United States, United Kingdom, Canada, Europe and other parts of the world.
In addition to the foregoing distribution facilities operated by us, we also utilize bonded public warehouses from which deliveries are made to customers.
For further information regarding our lease obligations, see Note 7, Leases, in the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K. For further information regarding the use of our properties by segments, see Item 1, “Business - Production” of this Form 10-K.
23
Item 3. Legal Proceedings
The information called for by this item is incorporated herein by reference to Note 18, Commitments and Contingencies, in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
24
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Outstanding shares of our common stock, par value $0.01 per share, are listed on The Nasdaq Stock Market LLC under the ticker symbol “HAIN”.
Holders
As of August 18, 2022, there were 222 holders of record of our common stock.
Dividends
We have not paid any cash dividends on our common stock to date. The payment of all dividends will be at the discretion of our Board of Directors and will depend on, among other things, future earnings, operations, capital requirements, contractual restrictions, including restrictions under our credit facility, our general financial condition and general business conditions.
Issuance of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The table below sets forth information regarding repurchases by the Company of its common stock during the periods indicated.
| Period | (a) Total number of shares purchased (1) | (b) Average price paid per share | (c) Total number of shares purchased as part of publicly announced plans | (d) Approximate dollar value of shares that may yet be purchased under the plans (in millions) (2) | |||||||||||||||||||
| April 1, 2022 - April 30, 2022 | 213 | $ | 33.54 | — | $ | 186.6 | |||||||||||||||||
| May 1, 2022 - May 31, 2022 | 292 | 24.78 | — | 186.6 | |||||||||||||||||||
| June 1, 2022 - June 30, 2022 | 500,713 | 26.13 | 500,000 | 173.5 | |||||||||||||||||||
| Total | 501,218 | $ | 28.15 | 500,000 | |||||||||||||||||||
(1)Includes shares surrendered for payment of employee payroll taxes due on shares issued under stock-based compensation plans and shares repurchased under share repurchase programs approved by the Board of Directors. See (2) below for further details.
(2)In June 2017, August 2021 and January 2022, the Company's Board of Directors authorized the repurchase of up to $250 million, $300 million and $200 million of the Company’s issued and outstanding common stock, respectively. Share repurchases under each of the 2021 and 2022 authorizations commenced after the previous authorizations were fully utilized. Repurchases may be made from time to time in the open market, pursuant to pre-set trading plans, in private transactions or otherwise. The current 2022 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. During the quarter ended June 30, 2022, the Company repurchased 500,000 shares under the repurchase program for a total of $13 million, excluding commissions, at an average price of $26.13 per share. As of June 30, 2022, the Company had $174 million of remaining authorization under the share repurchase program.
25
Stock Performance Graph
The following graph compares the performance of our common stock to the S&P 500 Index, the S&P Smallcap 600 Index and the S&P Packaged Foods & Meats Index (in which we are included) for the period from June 30, 2017 through June 30, 2022.
Item 6. [Reserved]
26
Item 7. 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 (this “MD&A”) should be read in conjunction with Item 1A and the Consolidated Financial Statements and the related notes thereto for the period ended June 30, 2022 included in Item 8 of this Form 10-K. Forward-looking statements in this Form 10-K are qualified by the cautionary statement included under the heading, “Forward-Looking Statements” at the beginning of this Form 10-K.
This MD&A generally discusses fiscal 2022 and fiscal 2021 items and year-to-year comparisons between fiscal 2022 and fiscal 2021. Discussions of fiscal 2020 items and year-to-year comparisons between fiscal 2021 and fiscal 2020 that are not included in this Form 10-K can be found in “Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations” of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2021, which was filed with the SEC on August 26, 2021 and is available on the SEC’s website at www.sec.gov.
Overview
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. The Company continues to be a 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 75 countries worldwide.
The Company manufactures, markets, distributes and sells organic and natural products, providing consumers with the opportunity to lead A Healthier Way of Life®. The Company’s food and beverage brands include Celestial Seasonings®, Clarks™, Cully & Sully®, Earth’s Best®, Ella’s Kitchen®, Frank Cooper’s®, Garden of Eatin’®, Hartley’s®, Health Valley®, Imagine®, Joya®, Lima®, Linda McCartney’s® (under license), MaraNatha®, Natumi®, New Covent Garden Soup Co.®, ParmCrisps®, Robertson’s®, Rose’s® (under license), Sensible Portions®, Spectrum®, Sun-Pat®, Terra®, The Greek Gods®, Thinsters®, Yorkshire Provender® and Yves Veggie Cuisine®. The Company’s personal care brands include Alba Botanica®, Avalon Organics®, JASON®, Live Clean®, and Queen Helene®.
Our previous strategy, which we refer to as Hain 2.0, was executed under four key pillars—(1) simplify our portfolio; (2) strengthen our capabilities; (3) expand profit margins and cash flow; and (4) reinvigorate profitable topline growth. This strategy has laid the foundation for Hain 3.0, our vision and strategy for the next several years, which is about building a global healthy food and beverage company with industry-leading top line growth. We believe Hain 3.0 positions us as an advantaged and differentiated company, as compared to others in the food industry, for several reasons:
•we are primarily focused on health and wellness,
•we are a global company in high-growth categories with opportunities for expansion in existing and new channels and geographies,
•we have unique and advantaged brands with strong points of difference, and
•given our size, small wins can drive material incremental growth.
We have re-segmented the brand portfolio with a more global view to where we have the most growth potential. As a result, we have migrated from a strategy focused on rejuvenating North America behind a construct of “Get Bigger" and "Get Better” brand categories to one that focuses on growing global brands in categories where we think we have the most potential. The categories we have identified are called Turbocharge, Targeted Investment, and Fuel:
•The Turbocharge brands are leading-share brands in what we believe to be very high-growth categories. The Turbocharge brands are made up of snacks as well as plant-based meat and non-dairy beverages. Our snacks businesses include brands both within the United States and in International, while our meat and dairy alternatives are concentrated outside the United States.
•The Targeted Investment brands are made up of leading-share brands in lower-growth categories. To date, we have demonstrated our ability to drive market share and reinvigorate these categories, and we expect that we can continue to do this in the future. The Targeted Investment brands are made up of tea, baby, yogurt, and personal care products.
27
•The Fuel brands are stable brands that will be leveraged to fuel investment in the Turbocharge and Targeted Investment categories. Fuel brands are made up of premium pantry brands with scale, in categories such as soup, cooking oils and nut butters.
We refer to the Turbocharge brands and Targeted Investment brands together as our Growth brands.
Additionally, as part of Hain 3.0, we will continue to simplify our brand portfolio as we continue to identify brands that are declining and have low margins, which we refer to as Simplify brands. We view Simplify brands to be subscale declining businesses that have limited long-term potential for the Company, and therefore will manage such brands for profit until they are potentially divested, likely over the course of the next several years. Acquisitions are expected to play a role in Hain 3.0, and part of our capital allocation strategy is focused on actively looking for appropriate targets in the market. As we continue to simplify and stabilize the organization and consolidate sales into fewer priority categories, we believe we are well-positioned and expect to make targeted acquisitions supported by our borrowing capacity to help us further strengthen our position in those categories.
Increased Supply Chain Disruptions
During fiscal year 2022, we experienced increased disruption in our supply chain network, including the supply of certain ingredients, packaging, and other sourced materials, which has resulted in higher than expected inflation, including escalating transportation and other supply chain costs. We expect these inflationary cost increases to continue, although we expect they will be partially mitigated by pricing actions implemented in fiscal year 2022 and the pricing actions that we plan to implement in fiscal year 2023. It is possible that more significant disruptions to our supply chain could occur.
Russia-Ukraine War
Although we have no material assets in Russia, Belarus or Ukraine, our supply chain was adversely impacted by the Russia-Ukraine war during the fiscal year ended June 30, 2022, and we continue to face other challenges and risks arising from the war. In particular, the war has added significant costs to existing inflationary pressures through increased fuel and raw material prices and labor costs. Further, beyond increased costs, labor challenges and other factors have led to supply chain disruptions. While, to date, we have been able to identify replacement raw materials where necessary, we have incurred increased costs in doing so. For example, the supply of sunflower oil has become constrained, compelling us to identify and procure alternative oils. The war has also negatively impacted consumer sentiment, particularly in Europe, with some consumers shifting to lower-priced products, which has somewhat affected demand for our products. Additionally, we face increased cybersecurity risks, as companies based in the United States and its allied countries have become targets of malicious cyber activity. While we are continuing to monitor and manage the impacts of the war on our business, the extent to which the Russia-Ukraine war and the related economic impact may affect our financial condition or results of operations remains uncertain.
COVID-19
The COVID-19 pandemic continues to contribute to challenging and unprecedented conditions. Challenges exacerbated by the ongoing effects of the pandemic include but are not limited to:
•manufacturing and supply chain challenges, including labor market shortages;
•a shifting demand environment as a result of changing consumer behaviors amid uncertain economic conditions; and
•increased costs of operating our business and managing our supply chain.
If we are unable to successfully manage our business through the continued challenges and uncertainty related to the COVID-19 pandemic, our business and operating results could be materially adversely affected.
Acquisition
On December 28, 2021, the Company acquired all outstanding stock of Proven Brands, Inc. (and its subsidiary That's How We Roll LLC) and KTB Foods Inc., collectively doing business as "That's How We Roll" ("THWR"), the producer and marketer of ParmCrisps® and Thinsters®. We believe the acquisition of these two fast-growing, better-for-you brands deepens the Company's position in the snacking category and represents a significant step in establishing the Company as a high-growth, global, healthy food company. See Note 4, Acquisitions and Dispositions, in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional details.
Discontinued Operations
28
On August 27, 2019, the Company and Ebro Foods S.A. (the “Purchaser”) entered into, and consummated the transactions contemplated by, an agreement relating to the sale and purchase of the entities comprising the Company’s Tilda operating segment and certain other assets of the Tilda business.
Results of Operations
Comparison of Fiscal Year Ended June 30, 2022 to Fiscal Year Ended June 30, 2021
Consolidated Results
The following table compares our results of operations, including as a percentage of net sales, on a consolidated basis, for the fiscal years ended June 30, 2022 and 2021 (amounts in thousands, other than percentages which may not add due to rounding):
| Fiscal Year Ended June 30, | Change in | ||||||||||||||||||||||||||||||||||
| 2022 | 2021 | Dollars | Percentage | ||||||||||||||||||||||||||||||||
| Net sales | $ | 1,891,793 | 100.0 | % | $ | 1,970,302 | 100.0 | % | $ | (78,509) | (4.0) | % | |||||||||||||||||||||||
| Cost of sales | 1,464,352 | 77.4 | % | 1,478,687 | 75.0 | % | (14,335) | (1.0) | % | ||||||||||||||||||||||||||
| Gross profit | 427,441 | 22.6 | % | 491,615 | 25.0 | % | (64,174) | (13.1) | % | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | 300,665 | 15.9 | % | 302,368 | 15.3 | % | (1,703) | (0.6) | % | ||||||||||||||||||||||||||
| Amortization of acquired intangible assets | 10,214 | 0.5 | % | 8,931 | 0.5 | % | 1,283 | 14.4 | % | ||||||||||||||||||||||||||
Productivity and transformation costs | 10,174 | 0.5 | % | 15,608 | 0.8 | % | (5,434) | (34.8) | % | ||||||||||||||||||||||||||
| Proceeds from insurance claims | (196) | — | % | (592) | — | % | 396 | (66.9)% | |||||||||||||||||||||||||||
| Long-lived asset and intangibles impairment | 1,903 | 0.1 | % | 57,920 | 2.9 | % | (56,017) | (96.7) | % | ||||||||||||||||||||||||||
| Operating income | 104,681 | 5.5 | % | 107,380 | 5.4 | % | (2,699) | (2.5) | % | ||||||||||||||||||||||||||
| Interest and other financing expense, net | 12,570 | 0.7 | % | 8,654 | 0.4 | % | 3,916 | 45.3 | % | ||||||||||||||||||||||||||
| Other income, net | (11,380) | (0.6) | % | (10,067) | (0.5) | % | (1,313) | 13.0% | |||||||||||||||||||||||||||
| Income from continuing operations before income taxes and equity in net loss of equity-method investees | 103,491 | 5.5 | % | 108,793 | 5.5 | % | (5,302) | (4.9) | % | ||||||||||||||||||||||||||
| Provision for income taxes | 22,716 | 1.2 | % | 41,093 | 2.1 | % | (18,377) | (44.7) | % | ||||||||||||||||||||||||||
| Equity in net loss of equity-method investees | 2,902 | 0.2 | % | 1,591 | 0.1 | % | 1,311 | 82.4 | % | ||||||||||||||||||||||||||
| Net income from continuing operations | $ | 77,873 | 4.1 | % | $ | 66,109 | 3.4 | % | $ | 11,764 | 17.8 | % | |||||||||||||||||||||||
| Net income from discontinued operations, net of tax | — | — | % | 11,255 | 0.6 | % | (11,255) | (100.0)% | |||||||||||||||||||||||||||
| Net income | $ | 77,873 | 4.1 | % | $ | 77,364 | 3.9 | % | $ | 509 | 0.7% | ||||||||||||||||||||||||
| Adjusted EBITDA | $ | 200,616 | 10.6 | % | $ | 258,938 | 13.1 | % | $ | (58,322) | (22.5) | % | |||||||||||||||||||||||
Net Sales
Net sales in fiscal 2022 were $1.89 billion, a decrease of $78.5 million, or 4.0%, from net sales of $1.97 billion in fiscal 2021 as a result of a decrease in sales in the International reportable segment partially offset by an increase in sales in the North America reportable segment. On a constant currency basis, adjusted for the impact of acquisitions, divestitures and discontinued brands, net sales decreased approximately 0.4% from the prior comparable period. On an adjusted basis, net sales decreased in the International reportable segment, which was partially offset by an increase in the North America reportable segment. Further details of changes in adjusted net sales by segment are provided below in the Segment Results section.
29
Gross Profit
Gross profit in fiscal 2022 was $427.4 million, a decrease of $64.2 million, or 13.1%, from gross profit of $491.6 million in fiscal 2021. Gross profit margin was 22.6% of net sales, compared to 25.0% in the prior year. The decrease in gross profit margin was due to both the North America and International reportable segments. The North America reportable segment had a decrease in gross profit mainly due to inflationary and supply chain challenges, such as continued industry-wide distribution and warehousing cost pressures driven by labor shortages, freight carrier availability and other freight cost issues, as well as lower net sales in the Canada operating segment when compared with the prior year. The decrease in the International reportable segment was mainly due to lower net sales in the United Kingdom and Europe operating segments, coupled with higher energy and supply chain costs when compared to the prior year, partially offset by higher net sales in the Ella's Kitchen UK operating segment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $300.7 million in fiscal 2022, a decrease of $1.7 million, or 0.6%, from $302.4 million in fiscal 2021. The decrease was mainly due to the International reportable segment as a result of lower people-related expenses in the Europe and United Kingdom operating segments, partially offset by higher selling expenses in the Ella’s Kitchen UK operating segment. The decrease was partially offset by an increase in the North America reportable segment due to the acquisition of THWR in the United States operating segment as well as an increase in Corporate and Other as a result of higher transaction costs incurred in fiscal year 2022 including costs related to the acquisition of THWR, advisory costs related to the divestiture by affiliates of Engaged Capital, LLC of their shares of the Company's common stock, as well as higher litigation expenses related to the baby food litigation described in Note 18, Commitments and Contingencies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Selling, general and administrative expenses as a percentage of net sales was 15.9% in the twelve months ended June 30, 2022 compared to 15.3% in the prior year, attributable to the aforementioned items.
Amortization of Acquired Intangibles
Amortization of acquired intangibles was $10.2 million in fiscal 2022, an increase of $1.3 million, or 14.4%, from $8.9 million in fiscal 2021 due to the acquisition of THWR in the current fiscal year, partially offset by lower amortization expense in the current year as a result of prior year dispositions that occurred in the latter part of fiscal 2021.
Productivity and Transformation Costs
Productivity and transformation costs were $10.2 million in fiscal 2022, a decrease of $5.4 million or 34.8% from $15.6 million in fiscal 2021. The decrease was due to reduced spending related to productivity and transformation initiatives as the current transformation effort approaches its conclusion.
Proceeds from Insurance Claims
During fiscal 2021, the Company received $0.6 million as payment from an insurance claim related to a litigation described in Note 18, Commitments and Contingencies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. During fiscal year 2022, the Company received $0.2 million as payment from an insurance claim.
Long-Lived Asset and Intangibles Impairment
During fiscal 2022, the Company recorded an impairment of $1.6 million related to an indefinite-lived intangible asset as described in Note 8, Goodwill and Other Intangible Assets, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. During fiscal 2021, the Company recorded a pre-tax impairment charge of $57.9 million, of which $56.1 million related to the reserve recorded against the assets of the Company's United Kingdom Fruit business (see Note 4, Acquisitions and Dispositions, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K) and $1.6 million related to impairment of property, plant and equipment and other non-current assets.
Operating Income
Operating income in fiscal 2022 was $104.7 million compared to operating income of $107.4 million in fiscal 2021 due to the items described above.
Interest and Other Financing Expense, Net
30
Interest and other financing expense, net totaled $12.6 million in fiscal 2022, an increase of $3.9 million, or 45.3%, from $8.7 million in the prior year. The increase resulted primarily from a higher outstanding debt balance driven primarily by the acquisition of THWR in the current fiscal year as well as share repurchase activity and an increase in interest rates. See Note 10, Debt and Borrowings, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Other Income, Net
Other income, net totaled $11.4 million in fiscal 2022, an increase of $1.3 million from $10.1 million in the prior year. The change was primarily attributable to a higher gain on sale of assets in the current year than in the prior year.
Income from Continuing Operations Before Income Taxes and Equity in Net Loss of Equity-Method Investees
Income before income taxes and equity in the net loss of our equity-method investees for fiscal 2022 was $103.5 million compared to $108.8 million in fiscal 2021. The decrease was due to the items discussed above.
Provision for Income Taxes
The provision for income taxes includes federal, foreign, state and local income taxes. Our income tax expense from continuing operations was $22.7 million and $41.1 million for fiscal 2022 and 2021, respectively.
The effective income tax rate from continuing operations was 21.9% and 37.8% of pre-tax income for the twelve months ended June 30, 2022 and 2021, respectively. The effective income tax rate from continuing operations for the twelve months ended June 30, 2022 was primarily impacted by reversal of uncertain tax position accruals based on filing and approval of certain elections by taxing authorities, deductions related to stock-based compensation, non-deductible transaction costs related to the acquisition of THWR (see Note 4, Acquisitions and Dispositions), the reversal of a valuation allowance due to the utilization of a capital loss carryover, and the finalization of prior fiscal year income tax returns.
The effective income tax rate from continuing operations for the twelve months ended June 30, 2021 was primarily impacted by various discrete items including the tax impact of the Fruit business impairment and disposal, and the enacted change in the United Kingdom’s corporate income tax rate from 19% to 25%.
Our 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.
See Note 11, Income Taxes, in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information.
Equity in Net Loss of Equity-Method Investees
Our equity in the net loss from our equity method investments for fiscal 2022 was $2.9 million compared to $1.6 million for fiscal 2021. See Note 14, Investments, in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Net Income from Continuing Operations
Net income from continuing operations for fiscal 2022 was $77.9 million compared to net income of $66.1 million for fiscal 2021. Net income per diluted share was $0.83 in fiscal 2022 compared to net income per diluted share of $0.65 in fiscal 2021. The increase was attributable to the factors noted above as well as the year-over-year reduction in outstanding shares.
Net Income from Discontinued Operations, Net of Tax
Net income from discontinued operations, net of tax, was nil for fiscal 2022 and $11.3 million or $0.11 per diluted share for fiscal 2021.
During the twelve months ended June 30, 2021, the Company recognized an $11.3 million adjustment to the Tilda business primarily related to the recognition of a deferred tax benefit. See Note 4, Acquisitions and Dispositions, in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
31
Net Income
Net income for fiscal 2022 was $77.9 million compared to $77.4 million for fiscal 2021. Net income per diluted share was $0.83 in fiscal 2022 compared to $0.76 in 2021. The change was attributable to the factors noted above as well as the year-over-year reduction in shares.
Adjusted EBITDA
Our consolidated Adjusted EBITDA was $200.6 million and $258.9 million for fiscal 2022 and 2021, respectively, as a result of the factors discussed above. See Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures following the discussion of our results of operations for definitions and a reconciliation of our net income to Adjusted EBITDA.
Segment Results
The following table provides a summary of net sales and operating income (loss) by reportable segment for the fiscal years ended June 30, 2022 and 2021:
| (dollars in thousands) | North America | International | Corporate and Other | Consolidated | |||||||||||||||||||
Fiscal 2022 net sales | $ | 1,163,132 | $ | 728,661 | $ | — | $ | 1,891,793 | |||||||||||||||
Fiscal 2021 net sales | $ | 1,104,128 | $ | 866,174 | $ | — | $ | 1,970,302 | |||||||||||||||
| $ change | $ | 59,004 | $ | (137,513) | n/a | $ | (78,509) | ||||||||||||||||
| % change | 5.3 | % | (15.9) | % | n/a | (4.0) | % | ||||||||||||||||
Fiscal 2022 operating income (loss) | $ | 93,732 | $ | 79,076 | $ | (68,127) | $ | 104,681 | |||||||||||||||
Fiscal 2021 operating income (loss) | $ | 129,010 | $ | 38,036 | $ | (59,666) | $ | 107,380 | |||||||||||||||
| $ change | $ | (35,278) | $ | 41,040 | $ | (8,461) | $ | (2,699) | |||||||||||||||
| % change | (27.3) | % | 107.9 | % | (14.2) | % | (2.5) | % | |||||||||||||||
Fiscal 2022 operating income margin | 8.1 | % | 10.9 | % | n/a | 5.5 | % | ||||||||||||||||
Fiscal 2021 operating income margin | 11.7 | % | 4.4 | % | n/a | 5.4 | % | ||||||||||||||||
North America
Our net sales in the North America reportable segment for fiscal 2022 were $1.16 billion, an increase of $59.0 million, or 5.3%, from net sales of $1.10 billion in fiscal 2021. On a constant currency basis, adjusted for the impact of acquisitions, divestitures and discontinued brands, net sales increased by 3.5%. The increase of 3.5% was mainly due to price increases that occurred in the latter half of the fiscal year as well as stronger sales in snacks, baby, personal care and other product categories in the United States operating segment. In the Canada operating segment, adjusted sales decreased compared to the prior year primarily due to lower sales in personal care and meat-free product categories. Operating income in North America in fiscal 2022 was $93.7 million, a decrease of $35.3 million, or 27.3%, from $129.0 million in fiscal 2021. The decrease was driven by inflationary and supply chain challenges such as continued industry-wide distribution and warehousing cost pressures driven by labor shortages, freight carrier availability and other freight cost issues, as well as lower net sales in the Canada operating segment when compared with the prior year; this is partially offset by incremental operating income generated by THWR, which was acquired in the current fiscal year.
International
Net sales in the International reportable segment for fiscal 2022 were $728.7 million, a decrease of $137.5 million, or 15.9%, from net sales of $866.2 million in fiscal 2021. On a constant currency basis, and adjusted for the impact of divestitures and discontinued brands, net sales decreased by 5.6% from fiscal 2021. The decrease in adjusted net sales was due to a decline in sales in the Europe and United Kingdom operating segments, partially offset by an increase in sales in the Ella's Kitchen UK operating segment. The net sales decrease in the Europe operating segment was primarily due to the loss of a large non-dairy co-manufacturing customer. The net sales decrease in the United Kingdom was due to lower sales volume and the impact of shipment halts during the price increase negotiations with certain customers. The net sales increase in the Ella's Kitchen UK operating segment was due to higher sales coming out of the COVID-19 pandemic, since Ella's Kitchen UK sales were
32
negatively impacted in the prior year due to a slow-down in consumer demand for baby food as a result of the COVID-19 pandemic stay-at-home requirements. Operating income in our International reportable segment in fiscal 2022 was $79.1 million, an increase of $41.0 million from operating income of $38.0 million in fiscal 2021. The increase mainly reflected non-recurring charges associated with the Fruit business impairment that were recognized in the prior year period. In addition, the International reportable segment incurred lower selling, general and administrative expenses for the reasons noted above.
Corporate and Other
Our Corporate and Other category consists of expenses related to the Company’s centralized administrative functions, which do not specifically relate to an operating segment. Such Corporate and Other expenses are comprised mainly of compensation and related expenses of certain of the Company’s senior executive officers and other employees who perform duties related to our entire enterprise, litigation expense and expenses for certain professional fees, facilities, and other items which benefit the Company as a whole. Our Corporate and Other expenses for fiscal 2022 were $68.1 million, an increase of $8.5 million, or 14.2%, from $59.7 million in fiscal 2021. This change was primarily related to higher transaction costs incurred in fiscal year 2022 including costs related to the acquisition of THWR and advisory costs related to the divestiture by affiliates of Engaged Capital, LLC of their shares of the Company's common stock, as well as higher litigation expenses related to the baby food litigation described in Note 18, Commitments and Contingencies, partially offset by lower executive bonus payout related to fiscal 2022.
Refer to Note 20, Segment Information, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for additional details.
Liquidity and Capital Resources
We finance our operations and growth primarily with the cash flows we generate from our operations and from borrowings available to us under our Amended Credit Agreement. See Note 10, Debt and Borrowings, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Amended and Restated Credit Agreement
On December 22, 2021, the Company refinanced its revolving credit facility by entering into a Fourth Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for senior secured financing of $1.1 billion in the aggregate, consisting of (1) $300.0 million in aggregate principal amount of term loans (the "Term Loans") and (2) an $800.0 million senior secured revolving credit facility (which includes borrowing capacity available for letters of credit, and is comprised of a $440.0 million U.S. revolving credit facility and $360.0 million global revolving credit facility) (the "Revolver"). Both the Revolver and the Term Loans mature on December 22, 2026.
Our cash and cash equivalents balance decreased by $10.4 million at June 30, 2022 to $65.5 million compared to $75.9 million at June 30, 2021. Our working capital, which excludes assets held for sale, was $329.0 million at June 30, 2022, an increase of $44.2 million from $284.7 million at the end of fiscal 2021.
Liquidity is affected by many factors, some of which are based on normal ongoing operations of the Company’s business and some of which arise from fluctuations related to global economics and markets. Our cash balances are held in the United States, the United Kingdom, Canada, Europe, the Middle East, and India. The Company continues to reinvest $809.2 million of undistributed earnings of its foreign subsidiaries and may be subject to additional foreign withholding taxes and U.S. state income taxes if it reverses its indefinite reinvestment assertion on these foreign earnings in the future. All other outside basis differences not related to earnings were impractical to account for at this point in time and are currently considered as being permanent in duration.
33
We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of June 30, 2022, all of our investments were expected to mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. Cash provided by (used in) operating, investing and financing activities is summarized below.
| Fiscal Year Ended June 30, | |||||||||||
| (amounts in thousands) | 2022 | 2021 | |||||||||
| Cash flows provided by (used in): | |||||||||||
| Operating activities from continuing operations | $ | 80,241 | $ | 196,759 | |||||||
| Investing activities from continuing operations | (288,309) | (2,364) | |||||||||
| Financing activities from continuing operations | 212,787 | (162,443) | |||||||||
| Increase in cash from continuing operations | 4,719 | 31,952 | |||||||||
| Effect of exchange rate changes on cash | (15,078) | 6,148 | |||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (10,359) | $ | 38,100 | |||||||
Cash provided by operating activities from continuing operations was $80.2 million for the fiscal year ended June 30, 2022, compared to $196.8 million in fiscal 2021. The decrease in cash provided by operating activities in fiscal 2022 compared to fiscal 2021 resulted primarily from a reduction of $49.6 million in net income adjusted for non-cash charges in the current year and lower cash generation of $66.9 million from our working capital accounts which was mainly due to a refund of $53.8 million received by the Company in the prior year from the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").
Cash used in investing activities from continuing operations was $288.3 million for the fiscal year ended June 30, 2022, an increase of $285.9 million from $2.4 million in fiscal 2021 primarily due to the acquisition of THWR in the current year, partially offset by $12.3 million in proceeds from the sale of assets in the current year, which was primarily related to the sale of undeveloped land plots in Boulder, Colorado.
Cash provided by financing activities from continuing operations was $212.8 million for the fiscal year ended June 30, 2022 and included $659.3 million of net borrowings of our Revolver and Term Loans, $410.5 million of share repurchases and $32.7 million of employee shares withheld for taxes. Cash used in financing activities from continuing operations was $162.4 million for fiscal 2021 and primarily included net repayments of $50.0 million on our revolving credit facility, $106.1 million of share repurchases and $4.3 million of employee shares withheld for taxes.
Operating Free Cash Flow from Continuing Operations
Our operating free cash flow was $40.3 million for fiscal 2022, a decrease of $84.9 million from fiscal 2021. The decrease in operating free cash flow primarily resulted from lower net income adjusted for non-cash items of $49.6 million and cash used within working capital accounts of $66.9 million, due to a tax refund receivable of $52.5 million that was received in fiscal 2021; the receivable resulted from the carryback of net operating losses (“NOLs”) under the CARES Act. This was partially offset by a decrease in our capital expenditures of $31.6 million. Refer to the Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures following the discussion of our results of operations for definitions and a reconciliation from our net cash provided by operating activities from continuing operations to operating free cash flow from continuing operations.
Capital Expenditures
During fiscal 2022, our aggregate capital expenditures used in continuing operations were $40.0 million, which was lower than expected primarily due to supply chain challenges and labor availability. We expect to spend approximately 3% of net sales for capital projects in fiscal 2023.
Share Repurchase Program
In June 2017, August 2021 and January 2022, the Company's Board of Directors authorized the repurchase of up to $250.0 million, $300.0 million and $200.0 million of the Company’s issued and outstanding common stock, respectively. Share repurchases under each of the 2021 and 2022 authorizations commenced after the previous authorizations were fully utilized. Repurchases may be made from time to time in the open market, pursuant to pre-set trading plans, in private transactions or otherwise. The current 2022 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. In
34
November 2021, the Company entered into a share repurchase agreement with affiliates of Engaged Capital, LLC (collectively, the “Selling Stockholders”), pursuant to which the Company repurchased 1.7 million shares directly from the Selling Stockholders at a price of $45.00 per share (see Note 21, Related Party Transactions). During fiscal 2022, the Company repurchased 10.6 million shares under the repurchase program, inclusive of the shares repurchased from the Selling Stockholders, for a total of $408.9 million, excluding commissions, at an average price of $38.48 per share. As of June 30, 2022, the Company had $173.5 million of remaining authorization under the share repurchase program. During fiscal 2021, the Company repurchased 3.1 million shares under the repurchase program for a total of $107.4 million, excluding commissions, at an average price of $34.87 per share. Of that amount, $1.4 million is included in accrued expenses and other current liabilities on the Company’s Consolidated Balance Sheet as of June 30, 2021 pending settlement of trade.
Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures
We have included in this report measures of financial performance that are not defined by U.S. Generally Accepted Accounting Principles (“GAAP”). We believe that these measures provide useful information to investors and include these measures in other communications to investors.
For each of these non-U.S. GAAP financial measures, we are providing below a reconciliation of the differences between the non-U.S. GAAP measure and the most directly comparable U.S. GAAP measure, an explanation of why our management and Board of Directors believes the non-U.S. GAAP measure provides useful information to investors and any additional purposes for which our management and Board of Directors uses the non-U.S. GAAP measure. These non-U.S. GAAP measures should be viewed in addition to, and not in lieu of, the comparable U.S. GAAP measure.
Net Sales - Constant Currency Presentation
We believe that this measure provides useful information to investors because it provides transparency to underlying performance in our consolidated net sales by excluding the effect that foreign currency exchange rate fluctuations have on year-to-year comparability given the volatility in foreign currency exchange markets. To present this information for historical periods, current period net sales for entities reporting in currencies other than the U.S. Dollar are translated into U.S. Dollars at the average monthly exchange rates in effect during the corresponding period of the prior fiscal year, rather than at the actual average monthly exchange rate in effect during the current period of the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.
Net Sales - Acquisitions, Divestitures and Discontinued Brands
We also exclude the impact of acquisitions, divestitures and discontinued brands when comparing net sales to prior periods, which results in the presentation of certain non-U.S. GAAP financial measures. The Company's management believes that excluding the impact of acquisitions, divestitures and discontinued brands when presenting period-over-period results of net sales aids in comparability.
35
A reconciliation between reported and adjusted net sales increase (decrease) in fiscal 2022 is as follows:
| (amounts in thousands) | North America | International | Hain Consolidated | ||||||||||||||
| Net sales - Twelve months ended 6/30/22 | $ | 1,163,132 | $ | 728,661 | $ | 1,891,793 | |||||||||||
| Acquisitions, divestitures and discontinued brands | (55,393) | — | (55,393) | ||||||||||||||
| Impact of foreign currency exchange | (1,454) | 17,318 | 15,864 | ||||||||||||||
| Net sales on a constant currency basis adjusted for acquisitions, divestitures and discontinued brands - Twelve months ended 6/30/22 | $ | 1,106,285 | $ | 745,979 | $ | 1,852,264 | |||||||||||
| Net sales - Twelve months ended 6/30/21 | $ | 1,104,128 | $ | 866,174 | $ | 1,970,302 | |||||||||||
| Divestitures and discontinued brands | (35,314) | (75,543) | (110,857) | ||||||||||||||
| Net sales adjusted for divestitures and discontinued brands - Twelve months ended 6/30/21 | $ | 1,068,814 | $ | 790,631 | $ | 1,859,445 | |||||||||||
| Net sales increase (decrease) | 5.3 | % | (15.9) | % | (4.0) | % | |||||||||||
| Impact of acquisitions, divestitures and discontinued brands | (1.7) | % | 8.3 | % | 2.8 | % | |||||||||||
| Impact of foreign currency exchange | (0.1) | % | 2.0 | % | 0.8 | % | |||||||||||
| Net sales increase (decrease) on a constant currency basis adjusted for acquisitions, divestitures and discontinued brands | 3.5 | % | (5.6) | % | (0.4) | % | |||||||||||
Adjusted EBITDA
Adjusted EBITDA is defined as net income (loss) before income taxes, net interest expense, depreciation and amortization, impairment of long-lived and intangible assets, equity in the earnings of equity-method investees, stock-based compensation, productivity and transformation costs, and other non-recurring items such as litigation related to a specific non-recurring matter. The Company’s management believes that this presentation provides useful information to management, analysts and investors regarding certain additional financial and business trends relating to its results of operations and financial condition. In addition, management uses this measure for reviewing the financial results of the Company and as a component of performance-based executive compensation. Adjusted EBITDA is a non-U.S. GAAP measure and may not be comparable to similarly titled measures reported by other companies.
We do not consider Adjusted EBITDA in isolation or as an alternative to financial measures determined in accordance with U.S. GAAP. The principal limitation of Adjusted EBITDA is that it excludes certain expenses and income that are required by U.S. GAAP to be recorded in our consolidated financial statements. In addition, Adjusted EBITDA is subject to inherent limitations as this metric reflects the exercise of judgment by management about which expenses and income are excluded or included in determining Adjusted EBITDA. In order to compensate for these limitations, management presents Adjusted EBITDA in connection with U.S. GAAP results.
36
A reconciliation of net income (loss) to Adjusted EBITDA is as follows:
| Fiscal Year Ended June 30, | |||||||||||
| (amounts in thousands) | 2022 | 2021 | |||||||||
| Net income | $ | 77,873 | $ | 77,364 | |||||||
| Net income from discontinued operations, net of tax | — | 11,255 | |||||||||
| Net income from continuing operations | $ | 77,873 | $ | 66,109 | |||||||
| Depreciation and amortization | 46,849 | 49,569 | |||||||||
| Equity in net loss of equity-method investees | 2,902 | 1,591 | |||||||||
| Interest expense, net | 10,226 | 5,880 | |||||||||
| Provision for income taxes | 22,716 | 41,093 | |||||||||
| Stock-based compensation, net | 15,611 | 15,659 | |||||||||
| Unrealized currency (gains) losses | (2,259) | 752 | |||||||||
| Litigation and related costs | |||||||||||
| Litigation expenses | 7,883 | 1,587 | |||||||||
| Proceeds from insurance claims | (196) | (592) | |||||||||
| Restructuring activities | |||||||||||
| Plant closure related costs, net | 929 | 58 | |||||||||
| Productivity and transformation costs | 8,803 | 12,572 | |||||||||
| Warehouse/manufacturing consolidation and other costs | 2,721 | 11,374 | |||||||||
| Acquisitions, divestitures and other | |||||||||||
| Transaction and integration costs, net | 14,055 | 3,291 | |||||||||
| Gain on sale of assets | (9,049) | (4,900) | |||||||||
| Gain on sale of businesses | — | (2,604) | |||||||||
| Impairment charges | |||||||||||
| Inventory write-down | (351) | (421) | |||||||||
| Long-lived asset and intangible impairments | 1,903 | 57,920 | |||||||||
| Adjusted EBITDA | $ | 200,616 | $ | 258,938 | |||||||
Operating Free Cash Flow from Continuing Operations
In our internal evaluations, we use the non-U.S. GAAP financial measure “operating free cash flow from continuing operations.” The difference between operating free cash flow from continuing operations and cash flow provided by or used in operating activities from continuing operations, which is the most comparable U.S. GAAP financial measure, is that operating free cash flow from continuing operations reflects the impact of capital expenditures. Since capital spending is essential to maintaining our operational capabilities, we believe that it is a recurring and necessary use of cash. As such, we believe investors should also consider capital spending when evaluating our cash provided by or used in operating activities. We view operating free cash flow from continuing operations as an important measure because it is one factor in evaluating the amount of cash available for discretionary investments. We do not consider operating free cash flow from continuing operations in isolation or as an alternative to financial measures determined in accordance with U.S. GAAP.
37
A reconciliation from net cash provided by operating activities to operating free cash flow is as follows:
| Fiscal Year Ended June 30, | |||||||||||
| (amounts in thousands) | 2022 | 2021 | |||||||||
| Net cash provided by operating activities | $ | 80,241 | $ | 196,759 | |||||||
| Purchases of property, plant and equipment | (39,965) | (71,553) | |||||||||
| Operating free cash flow | $ | 40,276 | $ | 125,206 | |||||||
As of June 30, 2022, we had non-current unrecognized tax benefits of $21.9 million for which we are not able to reasonably estimate the timing of future cash flows. As a result, this amount has not been included in the table above.
We believe that our cash on hand of $65.5 million at June 30, 2022 as well as projected cash flows from operations and availability under our Credit Agreement are sufficient to fund our working capital needs in the ordinary course of business, anticipated fiscal 2023 capital expenditures and other expected cash requirements for at least the next 12 months.
Contractual Obligations
We are party to contractual obligations involving commitments to make payments to third parties, which impact our short-term and long-term liquidity and capital resource needs. Our contractual obligations primarily consist of long-term debt and related interest payments, purchase commitments and operating leases. See Note 7, Leases, and Note 10, Debt and Borrowings, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies and Practices, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. The policies below have been identified as the critical accounting policies we use which require us to make estimates and assumptions and exercise judgment that affect the reported amounts of assets and liabilities at the date of the financial statements and amounts of income and expenses during the reporting periods presented. We believe in the quality and reasonableness of our critical accounting estimates; however, materially different amounts might be reported under different conditions or using assumptions, estimates or making judgments different from those that we have applied. Our critical accounting policies, including our methodology for estimates made and assumptions used, are as follows:
Variable Consideration
In addition to fixed contract consideration, many of the Company’s contracts include some form of variable consideration. The Company offers various trade promotions and sales incentive programs to customers and consumers, such as price discounts, slotting fees, in-store display incentives, cooperative advertising programs, new product introduction fees and coupons. The expenses associated with these programs are accounted for as reductions to the transaction price of products and are therefore deducted from sales to determine reported net sales. Trade promotions and sales incentive accruals are subject to significant management estimates and assumptions. The critical assumptions used in estimating the accruals for trade promotions and sales incentives include the Company’s estimate of expected levels of performance and redemption rates. The Company exercises judgment in developing these assumptions. These assumptions are based upon historical performance of the retailer or distributor customers with similar types of promotions adjusted for current trends. The Company regularly reviews and revises, when deemed necessary, estimates of costs to the Company for these promotions and incentives based on what has been incurred by the customers. The terms of most of the promotion and incentive arrangements do not exceed a year and therefore do not require highly uncertain long-term estimates. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorization process for deductions taken by a customer from amounts otherwise due to the Company. Differences between estimated expense and actual promotion and incentive costs are recognized in earnings in the period such differences are determined. Actual expenses may differ if the level of redemption rates and performance were to vary from estimates. During the year ended June 30, 2022, the Company revised its estimates for trade promotion expense incurred in the prior year based on new information that was not available at the time that the June 30, 2021 accrual was established. This change in estimate was due to unique circumstances, such as the implementation of bracket pricing in North America and less expense incurred from retail resets, both leading to lower-than-expected customer deductions on the outstanding promotional accrual. This change in estimate caused an increase in net sales of 0.2%.
38
Valuation of Accounts and Chargeback Receivable
We perform routine credit evaluations on existing and new customers. We apply reserves for delinquent or uncollectible trade receivables based on a specific identification methodology and also apply an additional reserve based on the experience we have with our trade receivables aging categories. As credit losses have been within our expectations in recent years and as only one customer represented more than 10% of accounts receivable, net at June 30, 2022, we believe there is no significant or unusual credit exposure at this time.
Based on cash collection history and other statistical analysis, we estimate the amount of unauthorized deductions that our customers have taken that we expect will be collectible and repaid in the near future and record a chargeback receivable. Differences between estimated collectible receivables and actual collections are recognized in earnings in the period such differences are determined.
We may not have the same experience with our receivables during different economic conditions, or with changes in business conditions, such as consolidation within the food industry and/or a change in the way we market and sell our products.
Valuation of Long-lived Assets
Fixed assets and amortizable intangible assets are reviewed for impairment as events or changes in circumstances occur indicating that the carrying value of the asset may not be recoverable. Undiscounted cash flow analyses are used to determine if impairment exists. If impairment is determined to exist, the loss is calculated based on estimated fair value.
Goodwill and Intangible Assets
Goodwill and intangible assets deemed to have indefinite lives are not amortized but rather are tested at least annually for impairment, or more often if events or changes in circumstances indicate that more likely than not the carrying amount of the asset may not be recoverable.
Goodwill is tested for impairment at the reporting unit level. A reporting unit represents an operating segment or a component of an operating segment. Goodwill is tested for impairment by either performing a qualitative evaluation or a two-step quantitative test. The qualitative evaluation is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We may elect not to perform the qualitative assessment for some or all reporting units and perform a two-step quantitative impairment test. The estimate of the fair values of our reporting units are based on the best information available as of the date of the assessment. We generally use a blended analysis of the present value of discounted cash flows and the market valuation approach. The discounted cash flow model uses the present values of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and external economic factors in estimating our future cash flows. The assumptions we use in our evaluations include projections of growth rates and profitability, our estimated working capital needs, as well as our weighted average cost of capital. The market valuation approach indicates the fair value of a reporting unit based on a comparison to comparable publicly traded firms in similar businesses. Estimates used in the market value approach include the identification of similar companies with comparable business factors. Changes in economic and operating conditions impacting the assumptions we made could result in additional goodwill impairment in future periods. If the carrying value of the reporting unit exceeds fair value, goodwill is considered impaired. The amount of the impairment is the difference between the carrying value of the goodwill and the “implied” fair value, which is calculated as if the reporting unit had just been acquired and accounted for as a business combination.
Indefinite-lived intangible assets consist primarily of acquired tradenames and trademarks. We first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. We measure the fair value of these assets using the relief from royalty method. This method assumes that the tradenames and trademarks have value to the extent their owner is relieved from paying royalties for the benefits received. We estimate the future revenues for the associated brands, the appropriate royalty rate and the weighted average cost of capital.
The Company completed its annual goodwill impairment analysis in the fourth quarter of fiscal 2022, in conjunction with its budgeting and forecasting process for fiscal year 2023, and concluded that no indicators of impairment existed at any of its reporting units.
As of June 30, 2022, the carrying value of goodwill was $933.8 million. For the fiscal 2022 impairment analysis, the Company performed the qualitative assessment for all of its reporting units with the exception of the United Kingdom and Europe
39
reporting units where a quantitative assessment was performed. The estimated fair value of each reporting unit exceeded its carrying value based on the analysis performed. For the United Kingdom and Europe reporting units, the quantitative analysis was performed. Holding all other assumptions used in the 2022 fair value measurement constant, a 100-basis-point increase in the weighted average cost of capital would not result in the carrying value of the reporting units to be in excess of the fair value. The fair values were based on significant management assumptions including an estimate of future cash flows. If assumptions are not achieved or market conditions decline, potential impairment charges could result. The Company will continue to monitor impairment indicators and financial results in future periods.
Indefinite-lived intangible assets are evaluated on an annual basis in conjunction with the Company’s evaluation of goodwill, or on an interim 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 payments” methodology. This approach involves two steps: (i) estimating the royalty rates for each trademark and (ii) applying these royalty rates to a projected net sales stream and discounting the resulting cash flows to determine fair value. If the carrying value of the indefinite-lived intangible assets exceeds the fair value of the assets, the carrying value is written down to fair value in the period identified. The result of the annual assessment for the year ended June 30, 2022 indicated that the fair value of the Company’s tradenames exceeded their carrying values and no indicators of impairment with one exception that is discussed in Note 8, Goodwill and Other Intangible Assets, in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
See also Note 8, Goodwill and Other Intangible Assets, in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K, for additional information.
Business Combinations
During the year ended June 30, 2022, the Company completed the acquisition of THWR for total consideration of $260.4 million, net of cash acquired. The transaction was accounted for under the acquisition method of accounting whereby the total purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities.
Accounting for the acquisition of THWR required estimation in determining the fair value of identified intangible assets for acquired customer relationships and tradenames. Estimation was utilized as it relates to inputs to the valuation techniques used to measure the fair value of these intangible assets as well as the sensitivity of the respective fair values to the underlying assumptions. The significant assumptions used to estimate the fair value of the acquired intangible assets included discount rates, revenue growth rates, and operating margins. These assumptions are forward-looking and could be affected by future economic and market conditions.
Stock-based Compensation
The Company uses the fair market value of the Company’s common stock on the grant date to measure fair value for service-based and performance-based awards and a Monte Carlo simulation model to determine the fair value of market-based awards. The use of the Monte Carlo simulation model requires the Company to make estimates and assumptions, such as expected volatility, expected term and risk-free interest rate. The fair value of stock-based compensation awards is recognized as an expense over the vesting period using the straight-line method. For awards that contain a market condition, expense is recognized over the defined or derived service period using a Monte Carlo simulation model.
For restricted stock awards which include performance criteria, compensation expense is recorded when the achievement of the performance criteria is probable and is recognized over the performance and vesting service periods. Compensation expense is recognized for only that portion of stock-based awards that are expected to vest.
40
Valuation Allowances for Deferred Tax Assets
Deferred tax assets arise when we recognize expenses in our financial statements that will be allowed as income tax deductions in future periods. Deferred tax assets also include unused tax net operating losses and tax credits that we are allowed to carry forward to future years. Accounting rules permit us to carry deferred tax assets on the balance sheet at full value as long as it is “more likely than not” that the deductions, losses or credits will be used in the future. A valuation allowance must be recorded against a deferred tax asset if this test cannot be met. Our determination of our valuation allowances is based upon a number of assumptions, judgments and estimates, including forecasted earnings, future taxable income and the relative proportions of revenue and income before taxes in the various jurisdictions in which we operate. Concluding that a valuation allowance is not required is difficult when there is significant negative evidence that is objective and verifiable, such as cumulative losses in recent years.
We have deferred tax assets related to foreign net operating losses, primarily in the United Kingdom and to a lesser extent in Belgium, against which we have recorded valuation allowances. Under current tax law in these jurisdictions, our carryforward losses have no expiration.
During fiscal 2020, we recorded a valuation allowance against a majority of our state deferred tax assets and state net operating loss carryforwards as it was not more likely than not that the state tax attributes will be realized. In fiscal 2021, the Company had positive results in the United States and, thus, state-level taxable income. This resulted in an expected utilization of certain of the state deferred tax assets which were previously reserved. Valuation allowances reversed were based on this positive evidence, in addition to other positive evidence, which justified the release of an additional amount of the state valuation allowance.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies and Practices, in the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for information regarding recent accounting pronouncements.
Seasonality
Certain of our product lines have seasonal fluctuations. Hot tea, hot-eating desserts and soup sales are stronger in colder months, while sales of snack foods, sunscreen and certain of our personal care products are stronger in the warmer months. As such, our results of operations and our cash flows for any particular quarter are not indicative of the results we expect for the full year, and our historical seasonality may not be indicative of future quarterly results of operations. In recent years, net sales and diluted earnings per share in the first fiscal quarter have typically been the lowest of our four quarters.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
The principal market risks (i.e., the risk of loss arising from adverse changes in market rates and prices) to which the Company is exposed are:
•interest rates on debt and cash equivalents;
•foreign exchange rates, generating translation and transaction gains and losses; and
•ingredient inputs.
Interest Rates
We centrally manage our debt and cash equivalents, considering investment opportunities and risks, tax consequences and overall financing strategies. Our cash equivalents consist primarily of money market funds or their equivalent. As of June 30, 2022, we had $889 million of variable rate debt outstanding under our Credit Agreement. During fiscal 2021, the Company used interest rate swaps to hedge a portion of the interest rate risk related its outstanding variable rate debt. As of June 30, 2022, the notional amount of the interest rate swaps was $630 million. Of this amount, $230 million has a weighted average fixed rate of 1.77% with a maturity date in February 2023. The remaining amount of $400 million relates to derivatives for which fixed rate payments of 4.85% will start from February 2023. Assuming current cash equivalents, variable rate borrowings and the effects of the interest rate swaps, a hypothetical change in average interest rates of one percentage point would have no impact to net interest expense.
41
Foreign Currency Exchange Rates
Operating in international markets involves exposure to movements in currency exchange rates, which are volatile at times, and the impact of such movements, if material, could cause adjustments to our financing and operating strategies.
During fiscal 2022, approximately 45% of our consolidated net sales were generated from sales outside the United States, while such sales outside the United States were 52% of net sales in fiscal 2021 and 51% of net sales in fiscal 2020. These revenues, along with related expenses and capital purchases, were conducted primarily in British Pounds Sterling, Euros and Canadian Dollars. Sales and operating income would have decreased by approximately $42.3 million and $4.2 million, respectively, if average foreign exchange rates had been lower by 5% against the U.S. Dollar in fiscal 2022. These amounts were determined by considering the impact of a hypothetical foreign exchange rate on the sales and operating income of the Company’s international operations.
Fluctuations in currency exchange rates may also impact the Stockholders’ Equity of the Company. Amounts invested in our non-United States subsidiaries are translated into United States Dollars at the exchange rates as of the last day of each reporting period. Any resulting cumulative translation adjustments are recorded in Stockholders’ Equity as Accumulated Other Comprehensive Loss. The cumulative translation adjustments component of Accumulated Other Comprehensive Loss decreased by $102.1 million during the fiscal year ended June 30, 2022.
To reduce that risk, the Company may enter into certain derivative financial instruments, when available on a cost-effective basis, to manage such risk. We had approximately $131.8 million in notional amounts of cross-currency swaps and foreign currency exchange contracts at June 30, 2022. See Note 16, Derivatives and Hedging Activities, in the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Ingredient Inputs Price Risk
The Company purchases ingredient inputs such as vegetables, fruits, oils, grains, beans, nuts, tea and herbs, spices, dairy products, plant-based surfactants, glycerin and alcohols, as well as packaging materials, to be used in its operations. These inputs are subject to price fluctuations that may create price risk. Although we sometimes hedge against fluctuations in the prices of the ingredients by using future or forward contracts or similar instruments, the majority of our future purchases of these items are subject to changes in price. We may enter into fixed purchase commitments in an attempt to secure an adequate supply of specific ingredients. These agreements are tied to specific market prices. Market risk is estimated as a hypothetical 10% increase or decrease in the weighted average cost of our primary inputs as of June 30, 2022. Based on our cost of goods sold during the fiscal year ended June 30, 2022, such a change would have resulted in an increase or decrease to cost of sales of approximately $101 million. We attempt to offset the impact of input cost increases with a combination of cost savings initiatives and efficiencies and price increases.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of The Hain Celestial Group, Inc. and subsidiaries are included in Item 8:
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 )
Consolidated Balance Sheets - June 30, 2022 and 2021
Consolidated Statements of Operations - Fiscal Years ended June 30, 2022, 2021 and 2020
Consolidated Statements of Comprehensive Income (Loss) - Fiscal Years ended June 30, 2022, 2021 and 2020
Consolidated Statements of Stockholders’ Equity - Fiscal Years ended June 30, 2022, 2021 and 2020
Consolidated Statements of Cash Flows - Fiscal Years ended June 30, 2022, 2021 and 2020
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of The Hain Celestial Group, Inc. and subsidiaries is included in Item 15(a):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.
42
43
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
The Hain Celestial Group, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Hain Celestial Group, Inc. and Subsidiaries (the Company) as of June 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2022, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated August 25, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
44
| Revenue Recognition | |||||
| Description of the Matter | For the year ended June 30, 2022, the Company’s reported net sales was $1.9 billion. As described in Note 2 of the 2022 consolidated financial statements, the Company provides certain retailers and distributors with trade and promotional incentive programs, which results in variable consideration and the Company having to estimate the expected costs of these programs that are often settled in a period after the sale taking place. The estimated costs of these programs are recorded as a reduction to revenue at the time a product is sold to the customer. The measurement of trade promotions and sales incentive programs involves the use of judgment related to estimates of expected levels of performance and redemption rates. Auditing the estimate of trade promotions and sales incentives is complex because the revenue recognized is determined based on significant management estimates. In particular, estimates are made for expected levels of performance and redemption rates. These estimates are based on historical performance of the retailer or distributor, types and levels of promotions, and expected deviations from historical trends. Changes in these assumptions can have a significant impact on the amount of the revenue recognized. The completeness of the trade promotions and sales incentives estimate could also be impacted by any undisclosed side arrangements with customers. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s trade and promotional incentive program process. For example, we tested controls over management’s review of significant assumptions, such as expected sales and consumption activity, management’s validation of the completeness and accuracy of the data used in making their estimates, and other controls such as their retrospective review analysis. Among other tests, we tested the results of the Company's retrospective review analyses performed on their prior year and current year trade and promotional incentive program reserves, evaluated the assumptions used by comparing them to historical trends and third-party source information, and performed detailed transactional testing of customer deduction data. Additionally, we obtained confirmations from Company sales representatives to assess the completeness of incentive programs. | ||||
45
Valuation of Intangible Assets from the That’s How We Roll Acquisition | |||||
| Description of the Matter | As described in Note 4 to the consolidated financial statements, during the year ended June 30, 2022, the Company completed the acquisition of Proven Brands, Inc. (and its subsidiary That's How We Roll LLC) and KTB Foods Inc., collectively doing business as "That's How We Roll" for total consideration of $260.4 million, net of cash acquired. The transaction was accounted for under the acquisition method of accounting whereby the total purchase price was allocated to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities. Auditing the Company's accounting for its acquisition of That’s How We Roll required complex auditor judgment due to the significant estimation uncertainty inherent in determining the fair value of identified intangible assets for acquired customer relationships and trade names. The significant estimation uncertainty was primarily due to the judgmental nature of the inputs to the valuation techniques used to measure the fair value of these intangible assets as well as the sensitivity of the respective fair values to the underlying significant assumptions. The significant assumptions used to estimate the fair value of the acquired intangible assets included discount rates, revenue growth rates, and operating margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions. | ||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over the valuation of intangible assets from the That’s How We Roll acquisition. For example, we tested controls over management’s review of the valuation models and significant assumptions described above. To test the estimated fair value of the acquired customer relationships and trade names, we performed audit procedures that included, among others, assessing the appropriateness of the valuation methodologies and testing the significant assumptions discussed above and the completeness and accuracy of the underlying data used by the Company. For example, we compared the revenue growth rates and operating margins to the historical results of the acquired business. We further performed sensitivity analyses to evaluate the changes in the fair value of the acquired intangible assets that would result from changes in the significant assumptions. In addition, we involved internal valuation specialists to assist us in our evaluation of the valuation methodologies and certain significant assumptions used by the Company. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1994.
We have served as the Company’s auditor since 1994.
August 25, 2022
46
THE HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2022 AND JUNE 30, 2021
(In thousands, except par values)
| June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, less allowance for doubtful accounts of $ | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Assets held for sale | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Trademarks and other intangible assets, net | |||||||||||
| Investments and joint ventures | |||||||||||
| Operating lease right-of-use assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, less current portion | |||||||||||